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Young Innovations 10-K 2007

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-K

(Mark One)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2006

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

 

Commission File Number 000-23213

YOUNG INNOVATIONS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Missouri

43-1718931

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

13705 Shoreline Court East,

63045

Earth City, Missouri

(Zip Code)

(Address of Principal Executive Offices)

 

 

 

Registrant's telephone number, including area code: 314-344-0010

 

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value per share

The Nasdaq Stock Market LLC

(Title of Class)

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

 

The aggregate market value of the registrant's common stock held by non-affiliates based on the Nasdaq National Market closing price as of June 30, 2006 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $198 million. (For purposes of this calculation only, directors and executive officers have been deemed affiliates.)

 

Number of shares outstanding of the Registrant's Common Stock at February 19, 2007:

 

8,995,866 shares of Common Stock, par value $.01 per share

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant's definitive Proxy Statement to be filed for its 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

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PART I

 

Item 1. Business (All items in thousands).

General Overview

Young Innovations, Inc. and its subsidiaries (“the Company”) develop, manufacture, and market supplies and equipment used to facilitate the practice of dentistry and to promote oral health. The Company’s product offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, prophy pastes, microapplicators, panoramic X-ray machines, dental handpieces (drills) and related components, home care kits, orthodontic and children’s toothbrushes, flavored examination gloves, infection control products, ultrasonic cleaning systems, ultrasonic scaling and endodontic systems, and obturation systems used in endodontic surgery (root canal procedures). These products are primarily marketed to dental professionals, principally dentists, endodontists, orthodontists, dental hygienists and dental assistants.

The Company’s manufacturing and distribution facilities are located in Missouri, California, Indiana, Tennessee, Texas, Canada, Wisconsin and Ireland.

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 2006.

The Company is a Missouri corporation with its principal executive office located at 13705 Shoreline Court East, Earth City, Missouri 63045, in the St. Louis, Missouri metropolitan area; its telephone number is (314) 344-0010.

Background

The Company was founded as Young Dental in the early 1900s. As one of many small suppliers to the dental profession, Young Dental’s strength was manufacturing consistently reliable dental products. As dentistry evolved, Young Dental employees worked with practicing dentists and academics to identify clinical problems. Young Dental staff used their engineering and manufacturing expertise to create solutions to those problems. Young Dental established a strong reputation and leading market position in disposable and metal prophy angles, the core products utilized by the dentist in the typical biannual teeth cleaning.

In 1995, following the acquisition of The Lorvic Corporation, the Company incorporated as Young Innovations, Inc. in the state of Missouri. Since then, Young has acquired a number of complementary businesses, and introduced a variety of new products. Through these acquisitions and new product introductions, the Company has expanded its preventive and infection control product offerings, and entered a number of new product areas, including dental diagnostic imaging, handpieces, home care products, and 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:

 

Developing New Products. Product development has been a core element of the Company’s growth strategy, and continues to play a role in the pursuit of internal growth. The evolution of the Company’s product offering is driven by the needs of clinicians and patients, which often require modifications to existing products rather than new designs. The Company maintains an active dialogue with practicing clinicians to identify product improvements that enhance patient comfort and improve patient care, and/or improve practice productivity.

 

Improving Operating Efficiency. The Company strives to reduce costs and rationalize expenses across its operations in an effort to maximize profitability. In order to improve operating efficiency, the Company seeks cost savings through manufacturing and process improvements, administrative and marketing synergies, and facility consolidation, where appropriate.

 

 

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Acquiring Complementary Products and Businesses. The Company is experienced in acquiring and integrating complementary products and businesses. The Company continuously evaluates acquisition opportunities, and pursues opportunities that increase the breadth of its product and service offerings and provide opportunities to enhance the growth prospects and profitability of the overall business through manufacturing and marketing synergies. The following table provides a summary of our acquisition history.

 

Select Acquisitions

Company Name

Acquisition Year

Key Product Additions

The Lorvic Corporation

1995

Infection control products.

Denticator International, Inc.

1996

Popular-priced disposable prophy angles.

Panoramic Corporation

1998

Panoramic X-ray equipment and supplies.

Athena Technology, Inc.

1999

Dental handpieces and related components.

Plak Smacker, Inc.

2000

Home care products and flavored gloves.

Biotrol and Challenge

(subsidiaries of Pro-Dex, Inc.)

2001

Infection control products, prophy pastes and other preventive products.

Obtura Corporation &

Earth City Technologies, Inc.

 

D&N Microproducts, Inc.

 

Microbrush, Inc. and Microbrush International Ltd.

2003

 

2006

2006

Endodontic products.

 

Panoramic X-ray equipment.

Dental microapplicators.

Products

The Company’s $90,805 in sales for 2006 were derived from the manufacture and sale of the products described below. The Company has grouped these products by core function within the dental office.

Preventive. The Company believes it is a leading supplier of preventive products to the U.S. professional dental market. Preventive products include:

 

 

Prophy Angles. The Company offers a broad line of prophy products. The prophy angle, in combination with prophy paste, is used in the typically biannual “teeth cleaning treatment” that helps remove plaque and polishes teeth. The Company offers a variety of pre-assembled Classic and Contra disposable prophy angles with cups or brushes attached under both the Young Dental (premium-priced) and Denticator (popular-priced) brand names, as well as through private-label relationships. The Company believes it is the market leader in disposable prophy angles, with its extensive line of prophy products that suit the wide variety of customer needs and desires.

 

The Company also offers metal prophy angles, which are sealed to help prevent damage to the internal components of the angle and help it withstand repeated sterilizations. The metal prophy angles are marketed together with an assortment of cups and brushes specifically designed to work together, which encourages recurring purchases of these products.

 

Prophy pastes. D-Lish, Festival and ProCare are some of the brand names of the Company’s prophy pastes. Most pastes are available in a variety of textures (grits) and flavors, and some are sold in powder form. Important functional features of prophy paste include stain removal, flavor and splatter control.

 

Fluorides. The Company has a variety of flavors of fluorides in gel formulation. Fluorides are used to help prevent tooth decay.

 

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.

 

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Microapplicators. The Company manufactures a variety of disposable microapplicators and bristle brush applicators designed specifically for fast application of minute amounts of material in areas of limited access. The products are used in dental procedures such as the application of tooth whitening products, sealants, disclosing products, orthodontic brackets, topical analgesics, bonding agents and other restorative materials.

 

Infection Control. The Company markets a broad line of infection control products to the dental practice. Infection control products include:

 

Surface disinfectants. BIREX is one of the leading liquid surface disinfectants in the U.S. Surface disinfectants are used to clean surfaces in the dental operatory, such as a dental chair or countertop that may be contaminated with bioburden. BIREX is a concentrated solution that is diluted with water prior to use, which makes it easier to ship and store.

 

Evacuation system cleaners. The evacuation system is designed to remove debris from the patient’s mouth during a dental procedure. Vacusol and NeutraVac, the Company’s evacuation system cleaners, remove debris that collects in the evacuation line. When used with the Company’s atomizer, the solution is mixed with room air and flows through the evacuation lines. Due to the unique air/liquid solution, the stress on the vacuum pump used in the evacuation system is minimized, which helps to extend pump life.

 

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.

 

Ultrasonic cleaning systems. The Company, under the Healthsonics brand name, manufactures and markets a line of ultrasonic cleaning systems primarily used to clean and disinfect dental hand instruments. The Company also sells a line of solutions and accessories that are used in connection with these systems.

 

Instrument disinfectants. The Company offers a full line of solutions designed for disinfecting dental instruments, including Multicide Ultra and Biozyme LT. Certain of these cleaners may also be used with ultrasonic cleaners.

 

Diagnostic. The Company believes it is a leading provider of panoramic dental X-ray systems and supplies in the U.S., marketed under the Panoramic brand name. The Company’s diagnostic products include:

 

Panoramic PC-1000 System. The PC-1000 is a fully equipped panoramic X-ray machine which produces a high-quality image of the entire dental arch. All teeth, the entire lower jaw, joints and a portion of the sinuses are seen on one resulting X-ray film. A single exposure from the PC-1000 lasts only 12 seconds, resulting in far less radiation exposure when compared to a set of bite-wings or a full mouth series taken with traditional intraoral X-ray machines. The PC-1000 is shipped essentially fully assembled and is freestanding. As a result, this machine requires only a few hours to install, which is much less than most competitive products.

 

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.

 

Digital. The Company’s PC-1000 and PC-1000/Laser-1000 provide the platform which produces the X-ray image. The Company offers direct digital solutions for its X-ray machines which can be purchased with a new panoramic X-ray machine or added to a dentist’s current panoramic machine.

 

Supplies and Service. The Company offers its customers dental X-ray supplies, including film, film cassettes and intensifying screens, processing chemicals, and darkroom supplies. The Company also offers service on all of its systems through a network of more than 200 independent nationwide service technicians.

 

Panoramic X-ray systems can be a significant investment for a dentist. In addition to outright purchase and traditional financing options, the Company established a rental program whereby dentists pay on a per-use basis for the system (i.e., per X-ray image taken). The system is installed free of charge, and the dentist pays a monthly fee based on usage. Rental customers have the option to purchase their equipment at any time.

Home Care. The Company markets a line of products to dentists, pediatric dentists and orthodontists that are prescribed,

 

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sold or given to patients for use at home. The Company’s home care products include:

 

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.

 

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.

 

Fluorides. The Company sells a variety of flavors of fluorides in a gel formulation. Fluorides are used to help prevent the development of tooth decay.

Endodontic. The Company sells endodontic products under the Obtura and Spartan brand names. Endodontics is the part of dentistry associated with the treatment of tooth root, dental pulp and surrounding tissue. The most common therapy in endodontics is the root canal procedure, which involves removing the organic root canal tissue and subsequently filling the empty canal with gutta percha, a rubber-like filling material. Endodontic procedures are performed by both general dentists and specialists (endodontists). The Company’s endodontic products include:

 

Obturation. The Obtura family of endodontic units are gun-type, heat-softened gutta percha delivery systems. This unique dispensing unit allows the dentist to deliver a consistent flow of warm gutta percha directly into the canal, similar to extruding hot glue from a glue gun, facilitating the canal-filling procedure. Additionally, the Obtura systems help practitioners effectively seal the canal, which is an important component of the root canal procedure.

 

Ultrasonic systems. Under the Spartan brand name, ultrasonic units and handpieces are marketed together with a variety of tips for different clinical applications. BUCtm tips are used for, among other things, gaining and refining access to the tooth root, while CPRtm tips are more often used in retreatment cases. KiStm tips, used for microsurgery, offer a rough diamond coating for improved cutting. The Company also offers additional ultrasonic tips for use in periodontal applications.

Sales and Marketing of Professional Products

The Company markets its preventive, infection control and certain home care products to dental professionals worldwide primarily through a network of non-exclusive relationships with dental product distributors. All major distributors of dental products in North America sell the Company's products, including Henry Schein, Inc. and Patterson Companies, Inc., which accounted for 15.0% and 13.2%, respectively, of the Company's sales in 2006. 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. and Canada, independent sales representatives in Mexico, and sales representatives in countries outside of North America. These sales representatives teach the Company’s distributors about the quality, reliability and features of its products. The Company also advertises its products through industry publications. To supplement its other marketing efforts, the Company provides product samples to dental professionals and exhibits its products at industry trade shows. In addition, the Company seeks to generate interest in its products by providing information and marketing materials to influential lecturers and consultants in the dental industry.

The Company’s diagnostic, certain home care and endodontic products are marketed in the U.S. and Canada directly to the end user, primarily by direct mail, telemarketing, trade shows, and a limited amount of advertising in trade and professional journals. The Company also sponsors seminars hosted by industry thought leaders.

 

Product Development

The Company’s engineers and chemists are focused on developing innovative professional dental products and are actively involved in improving the Company’s manufacturing processes. Frequently, these products are designed and developed in response to needs articulated to the Company by dental professionals. For example, the Company designed a short prophy cup for its line of prophy angles to allow for easier access to the back of the patient’s mouth. The Company has various patents and trademarks but does not consider its business to be materially dependent upon any individual patent or trademark.

Research and development costs are expensed when incurred and totaled $915, $752, and $715, for 2006, 2005 and 2004, respectively.

 

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Manufacturing and Supply

 

The Company manufactures most of its products and product components other than certain infection control products, fluorides, children’s home care products, orthodontic kits and related supplies, and examination gloves.

 

Prophy and Related Products. The Company manufactures prophy and related products in its Earth City, Missouri, and Brownsville, Texas facilities. The primary processes involved in manufacturing the Company's prophy and related products include precision metal turning and milling, rubber molding, plastic injection molding, component parts assembly and finished goods packaging. In these processes, the Company uses a variety of computer numerically controlled (CNC) machining centers, injection molding machines and robotic assembly machines, and continues to invest in new and more efficient equipment and production lines.

 

Pastes. The Company blends and mixes all of its pastes at the Earth City, Missouri, facility. The Company also owns equipment used to form and die-cut expanded polyethylene foam and extruded plastic into packaging materials, and equipment used to package its products in a variety of container sizes, including prophy paste in unit-dose containers.

 

Microapplicators. The Company manufactures microapplicators and related products in its Grafton, Wisconsin and Dungarvan, Ireland facilities. The primary processes involved in the manufacture of these products include plastic injection molding, application of adhesive and flocking, and packaging of finished goods. The Company uses injection molding machines and robotic assembly machines in these manufacturing processes.

 

Handpieces and Components. The Company uses a variety of CNC machines to manufacture a number of the components required to produce its high-speed and low-speed handpieces. Certain other handpiece component parts are sourced from a variety of Original Equipment Manufacturers (OEMs). The Company assembles and provides repair services for its handpieces, and offers repair services for a number of other handpiece brands.

 

Infection Control Products. The Company manufactures and packages a variety of infection control products, sterilants and cleaners, at the Earth City, Missouri facility. Additionally, certain of the Company’s infection control products are sourced from domestic manufacturers.

 

X-Ray Equipment. X-ray equipment is manufactured and assembled at the Company’s premises in Fort Wayne, Indiana. The Company also manufactures its own X-ray generators, a critical system component. Prior to January 2006, a contract manufacturer manufactured and assembled the X-ray equipment at the Company’s premises in Fort Wayne, Indiana. In January 2006, the Company acquired the contract manufacturer and began manufacturing and assembling its own X-ray equipment.

 

Home Care Products. The Company sources most of its home care kit components, toothbrushes, and examination gloves from manufacturers in Asia, principally China, Thailand and Malaysia. Certain other toothbrush and toothpaste products are sourced from domestic manufacturers.

 

Endodontic Products. Obturation and ultrasonic systems are manufactured at the Company’s facility in Fenton, Missouri. A variety of components and subassemblies are sourced domestically.

 

Supply. The Company purchases a wide variety of raw materials, including bar steel, brass, rubber and plastic resins from numerous suppliers. The majority of the Company's purchases are commodities readily available at competitive prices. The Company also purchases certain additional miscellaneous products from other manufacturers for resale.

Competition

The Company competes with manufacturers of both branded and private-label dental products. The Company believes it is the market leader in disposable prophy angles and liquid surface disinfectants used in the professional dental market in the U.S. The Company also believes it is a leading provider of panoramic X-ray systems and supplies in the U.S. In addition, the Company believes it is a leader in systems designed for warm, vertical condensation obturation, as well as a leader in the U.S. 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

 

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regulatory approval and sell commercial quantities of new products is also an important competitive factor. Some of the Company’s competitors have greater financial, research, manufacturing, and marketing resources than the Company. The Company’s competitors include DENTSPLY International Inc.; Danaher Corporation; Sultan Dental Products; Sultan Chemists, Inc.; Preventive Technologies, Inc.; John O. Butler Company; Instrumentarium; Planmeca OY; StarDental, a division of DentalEZ Group; Proctor and Gamble Co. and Colgate-Palmolive Co.

 

FDA Regulation

 

The Company’s products are subject to regulation by, among other governmental entities, the U.S. Food and Drug Administration (FDA). To the extent the products are marketed abroad, they are also subject to government regulation in the various foreign countries in which the products are produced or sold. Some of these regulatory requirements are more stringent than those applicable in the United States. They also vary from country to country.

 

Medical Device Regulation. Pursuant to the Federal Food, Drug, and Cosmetic Act (“Act”), and the FDA’s implementing regulations, FDA regulates the development, manufacture, sale, and distribution of medical devices, including their introduction into interstate commerce, as well as their testing, labeling, packaging, marketing, distribution, recordkeeping and reporting. In general, if a dental device is subject to FDA regulation, compliance with the FDA requirements constitutes compliance with corresponding state regulations. Medical devices are classified for FDA regulatory purposes as Class I, Class II or Class III, depending on the degree of control necessary to provide a reasonable assurance of safety and effectiveness for the labeled use. The Company’s dental device products are classified as either Class I or Class II devices. Class I devices are subject to "general controls," such as labeling, good manufacturing practices (GMP), and a prohibition against adulteration and misbranding. Class II devices are subject to general and "special controls," including premarket notification (510(k)), and other general and device-specific requirements. All of the Company’s dental device products are subject to ongoing regulatory oversight by the FDA to ensure compliance with, among other things, product labeling, GMP, the quality system regulation (QSR), recordkeeping, and medical device (adverse reaction) reporting requirements. The Company’s facilities are further subject to periodic inspection by the FDA, as well as state and local agencies. Failure to satisfy FDA requirements can result in FDA enforcement actions, including product seizure, injunction and/or criminal or civil proceedings. In the medical device arena, the FDA may also request repair, replacement, or refund of the cost of any medical device manufactured or distributed by the Company.

 

Drug Regulation. The Company also markets drug products, such as fluorides, which are subject to regulation by the FDA and the counterpart agencies of the foreign countries where the products are sold. The FDA regulates the development, manufacture, sale, and distribution of drugs, including their introduction into interstate commerce as well as their testing, labeling, packaging, marketing, distribution, recordkeeping and reporting. In general, unless a drug product falls within an over-the-counter (OTC) monograph, is generally recognized as safe and effective for the labeled use, or is entitled to grandfather status, the drug must be approved by FDA before it may be legally marketed. Failure to comply with the FDA’s drug regulatory requirements can result in issuance of an FDA Form 483 Inspectional Observations, Warning Letter, or another enforcement action or penalty.

 

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)

 

Certain of our infection prevention products are classified as pesticides and are subject to regulation by the United States Environmental Protection Agency (EPA) under FIFRA, and by various state agencies under the laws of those states. Generally, under FIFRA and state law, no one may sell or distribute a pesticide unless it is registered with the EPA and each state in which the product is sold. Registrations must be renewed annually. Registration includes approval by the EPA of the product’s label, including its claims and directions for use, which must be supported by data. EPA or states may at any time require additional testing to determine whether a pesticide could cause adverse effects on the environment, including people, and whether it is efficacious. The pesticide laws also require registrants to report adverse effects associated with their products to the EPA and the corresponding state agency. Failure to pay annual registration fees or to provide necessary testing data, or new information regarding adverse effects of product, as well as other conduct, could result in fines and/or the cancellation of a pesticide registration.

 

Environmental, Health and Safety Matters

 

Our operations involve production processes and the use and handling of materials that are subject to federal, state, and local environmental laws and regulations relating to, among other things, solid and hazardous waste disposal, air emissions, and waste water discharge. We are also required to comply with federal and state laws and regulations relating to occupational health and safety. If violations of any of these laws and regulations occur, or if toxic or hazardous

 

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materials are released into the environment as a result of our operations, the Company could be exposed to significant liability.

 

The Company believes it is in compliance in all material respects with respect to the laws and regulations applicable to it and its operations.

Other

The Company maintains a credit agreement with a borrowing capacity of $75,000, which expires in April 2010. As of December 31, 2006, the Company had $21,810 in outstanding borrowings under this agreement and $53,190 available for borrowing. The Company expects to fund working capital requirements from a combination of available cash balances and internally generated funds, and from the borrowing arrangement mentioned above.

Some seasonality exists in the business driven by timing of price increases, rebate incentives, tax incentives, and holiday buying patterns and promotions.

Employees

As of December 31, 2006, the Company employed approximately 400 people, none of whom were covered by collective bargaining agreements. The Company believes its relations with its employees are good.

Website Access to Company Reports and Corporate Governance Materials

 

The Company makes available free of charge through our website, www.ydnt.com, (1) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission; and (2) the Audit Committee, Compensation Committee and Nominating Committee charters and its Code of Ethics. The Company’s website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

 

 

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Executive Officers of the Registrant

 

The executive officers of the Company, their ages and their positions with the Company are set forth below. All officers serve at the pleasure of the board.

 

Name

Age

Position

Principal Occupation During Past 5 Years

George E. Richmond

73

Chairman of the Board and Director

Chairman of the Board since 1997, Chief Executive Officer from 1995 to 2002, Director of the Company since its organization in 1995, President of Young Dental Manufacturing Company ("Young Dental") (predecessor to the Company) from 1961 until 1997.

 

 

 

 

Alfred E. Brennan

54

Vice Chairman of the Board, Chief Executive Officer and Director

Chief Executive Officer since January 2002, and Vice Chairman since July 2004, President from July 1998 to July 2004, and Director of the Company since August 1997, Chief Operating Officer of the Company from October 1997 until May 2002.

 

 

 

 

Arthur L. Herbst, Jr.

43

President

President since July 2004, Chief Operating Officer from May 2002 until July 2004, Chief Financial Officer from February 1999 until July 2004, and Director from November 1997 to July 2004.

 

 

 

 

Stephen T. Yaggy

 

34

 

Vice President

Vice President of the Company since July 2005, General Manager of Panoramic since May 2003, Corporate Controller of the Company from June 1998 to May 2005.

 

Daniel J. Tarullo

47

Vice President

Vice President of Business Development since July 2004, Director of Business Development from September 2003 to July 2004. Over the previous 20 years, experience in marketing, product management, sales, clinical affairs and operations within or connected to the oral healthcare industry.

 

Christine R. Boehning

 

36

 

Vice President, Chief Financial Officer and Secretary

 

Secretary of the Company since May 2005, Chief Financial Officer since July 2004, Vice President of Finance since May 2004, Vice President of Investment Banking at Robert W. Baird from August 1998 to January 2004.

 

 

 

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Item 1A. Risk Factors

 

Forward Looking Statements

This Annual Report (including, without limitation, Item 1 — "Business" and Item 7 — "Management's Discussion and Analysis of Financial Condition and Results of Operations") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included herein are "forward-looking statements." Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions and which include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," or similar expressions. These statements are not guaranties of future performance, and the Company makes no commitment to update or disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and expected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in this Annual Report and other reports filed with the Securities and Exchange Commission.

 

The Company makes no commitment to update these factors or to revise any forward-looking statements for events or circumstances occurring after the statement is issued.

 

At any time when the Company makes forward-looking statements, it desires to take advantage of the safe harbor which is afforded such statements under the Private Securities Litigation Reform Act of 1995.

 

Risk Factors

We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below, together with the cautionary statement under the caption “Forward Looking Statements” described above and other information contained in this Annual Report and our other filings with the Securities and Exchange Commission before purchasing our securities. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.

 

Acquisitions have been and continue to be an important part of our growth strategy; failure to consummate acquisitions could limit our growth and failure to successfully integrate acquisitions could adversely impact our results.

Our business strategy includes continued growth through strategic acquisitions, which depends upon our ability to identify potential acquisitions, the availability of suitable acquisition candidates at reasonable prices and the availability of financing on acceptable terms. In addition, our growth strategy is dependent upon our ability to negotiate and consummate acquisitions and effectively integrate the acquisitions into our business. Acquisitions involve integrating product lines, employees and manufacturing facilities and include risks relating to employee turnover and sales channel tension. We can not be certain that we will successfully manage all of these challenges and risks in the future and there can be no assurance that our future acquisitions will be successful. Failure to consummate appropriate acquisitions would adversely impact our growth and failure to successfully integrate them would adversely affect our results.

 

We operate in a highly competitive industry and can not be certain that we will be able to compete effectively.

The markets for our products are highly competitive. We compete with manufacturers of both branded and private-label dental products. Some of our competitors have greater financial, research, manufacturing, marketing and other resources which could allow them to compete more successfully. As a result we may not be able to achieve, maintain or increase market share or margins, or compete effectively against these companies. In addition, new competitors are constantly entering the markets in which we participate.

 

If we are unable to successfully manage growth, our results could be materially adversely affected.

Our future performance will depend, in large part, upon our ability to implement and manage our growth effectively. Our growth in the future will continue to place a significant strain on our management, administrative, operational, and financial resources. We anticipate that, if we are successful in expanding our business, we will be required to recruit and hire a substantial number of new managerial and support personnel. Failure to retain and attract additional management

 

11

 


personnel who can manage our growth effectively would have a material adverse effect on our performance. To manage our growth successfully, we will also have to continue to consolidate our operations and improve and upgrade operational, financial and accounting systems, controls and infrastructure as well as expand, train and manage our employees. Our failure to manage the future expansion of our business could have a material adverse effect on our revenues and profitability.

 

Our future performance is materially dependent upon our senior management.

Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Alfred E. Brennan, Chief Executive Officer, and Arthur L. Herbst, Jr., President, among others. The loss of the services of either Mr. Brennan or Mr. Herbst could have a material adverse effect on our business. We have employment agreements with each of Messrs. Brennan and Herbst. We do not currently have “key man” life insurance policies on any of our employees. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel.

 

We rely heavily on key distributors, and if any of them stop doing business with us it would significantly impact our operating results.

In fiscal 2006, approximately 30% of our sales were made through two distributors. If either of these two distributors were to materially change the timing of their order patterns, our financial results in any given short-term period could be adversely affected. Additionally, the loss of either distributor as a customer, or a material change in our relationship with either distributor would have a material adverse effect on our results of operations or financial condition until we find an alternative means to distribute our products.

 

Our business is subject to quarterly variations in operating results due to factors outside of our control.

Our business is subject to quarterly variations in operating results caused by a number of factors, including business and industry conditions, the timing of acquisitions, the buying patterns of our largest customers, technology changes, timing of sales promotions and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period.

 

Certain of our products and manufacturing facilities are subject to regulation, and our failure to comply with applicable laws and regulations and obtain or maintain the required regulatory approvals for these products could hinder or prevent their sale and increase our costs of regulatory compliance. In addition, there can be no assurance we will be able to successfully reintroduce our recalled products.

Our ability to continue manufacturing and selling those of our products that are subject to regulation by the United States Food and Drug Administration, the Environmental Protection Agency, state, local or foreign laws or other federal, state or foreign governmental bodies or agencies is subject to a number of risks, including the promulgation of stricter laws or regulations, or the withdrawal of the approval needed to sell one or more of our products. We are also subject to regulation by the Occupational Safety and Health Administration and the Securities and Exchange Commission, among others. The failure to comply with existing or future laws and regulations could have a material adverse affect on our operations. The costs of complying with these regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements may force us to recall products, increase our costs of regulatory compliance, prevent us from selling a product or hinder our growth. To the extent that we recall products, there can be no assurance that we will be able to timely and successfully reintroduce these recalled products into the market.

 

Changes in standard of care relating to dental health may impact future results.

The demand for dental products is impacted by the dental health care standards. If the industry standards were to shift to a standard of care that changed the frequency or type of procedures performed or if third-party insurance coverage were to substantially change, the market for our company’s products could be adversely affected.

 

Technological change could result in loss of market share, product obsolescence and dependence on new products.

Our future success depends on the ability to anticipate and adapt to changes in technology, industry standards and customers’ changing demands. If we do not timely acquire, develop, complete testing, obtain regulatory approval and sell commercial quantities of new products in response to a technological change or the changing demands of customers, we could lose market share and our products could become obsolete.

 

Difficulty in obtaining goods and services from our vendors and suppliers could adversely affect our business.

We are dependent on certain of our vendors and suppliers. We believe we have good relationships with and are generally able to obtain attractive pricing and other terms from our vendors and suppliers. When possible, we attempt to have

 

12

 


multiple sources for key materials and supplies. If our vendors and suppliers were no longer able to supply product, we could face difficulty in immediately obtaining needed goods and services, which could adversely affect our business for a temporary period.

 

Prices and availability of raw materials may fluctuate which may adversely affect our margins.

If our raw material products, such as resin, were to increase in price significantly, the cost of manufacturing products would increase. If we were unable to pass the increased cost along to customers, this could adversely affect our business. In addition, if our raw materials were not available for a period of time, this would impair our ability to obtain necessary materials which could adversely affect our revenue.

 

Overall economic conditions could have a material effect on our results.

Our business and earnings are sensitive to general business and economic conditions, primarily in the U.S. Changing economic conditions, including unemployment, a decline in dental insurance coverage, health care reform, or government regulation could result in a lower demand for our products.

 

Loss of intellectual property protection and related disputes could negatively affect our results.

Our company maintains copyright, trademark and trade secret laws, licenses and confidentiality and non-disclosure agreements to protect our intellectual property and proprietary technology. There can be no assurance that the steps taken to protect our intellectual property or proprietary technology will be adequate or enforceable to prevent misappropriation. In addition, the cost of prosecuting and defending such actions can be significant and have a material adverse effect our results.

 

We rely upon others to assist in the education and promotion of our products, and the loss of the participation of these individuals could adversely affect our net sales.

We work with various dental clinicians to educate the dental community on the features and benefits of our products. Some clinicians are a key component to our strategy for growing our sales. The inability or unwillingness of one or more of these clinicians to continue to assist us could negatively impact the sales of certain significant products.

 

We are subject to potential product liability claims as a result of the design, manufacture and marketing of our products. Claims alleging product liability may involve large potential damages and significant defense costs. We currently maintain insurance coverage for such claims but there can be no assurance that our insurance coverage will be adequate or that all such claims will be covered by our insurance. A product liability claim could adversely affect our reputation. A successful claim against us in excess of the available insurance coverage could have a material adverse effect on our results.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

13

 


Item 2. Properties.

 

The Company's principal facilities are as follows:

 

 

Description

Square Feet

Location

Owned/Leased

Corporate Headquarters and Manufacturing

113,000

Earth City, Missouri

Owned

Manufacturing

12,000

Brownsville, Texas

Owned

Office and Manufacturing

39,000

Fort Wayne, Indiana

Owned

Office and Manufacturing

8,000

Fort Wayne, Indiana

Leased, on month to month terms

Office and Manufacturing

16,000

Fenton, Missouri

Leased, expires November 2008

Manufacturing

32,900

Fort Wayne, Indiana

Leased, expires July 2008

Office and Distribution

33,000

Corona, California

Owned

Distribution

23,000

Morristown, Tennessee

Leased on month-to-month terms

Office

7,500

Algonquin, Illinois

Leased, expires May 2007

Office

5,000

Chicago, Illinois

Leased, expires August 2011

Office and Manufacturing

25,400

Grafton, Wisconsin

Leased, expires July 2009

Office and Manufacturing

29,700

Dungarven, Ireland

Owned

 

 

The Company believes that its facilities are generally in good condition.

 

Item 3. Legal Proceedings.

 

The Company and its subsidiaries from time to time are parties to various legal proceedings arising in the normal course of business. Management believes that none of these proceedings, if determined adversely, would have a material adverse effect on the Company’s financial position, results of operations or liquidity.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

 

14

 


PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Prices and Dividends

 

The Company’s Common Stock is listed on The Nasdaq Stock Market LLC under the symbol "YDNT."

 

The following table sets forth the high and low prices of the Company’s Common Stock as reported by The Nasdaq Stock Market LLC and cash dividends declared during the last eight quarters.

 

 

Market Price

Cash Dividends Declared

Quarter

High

Low

 

2005

 

 

 

First

$36.72

$32.00

$0.04

Second

$41.94

$35.44

$0.04

Third

$37.95

$32.08

$0.04

Fourth

$39.00

$31.45

$0.04

 

 

 

 

2006

 

 

 

First

$37.50

$31.80

$0.04

Second

$37.00

$30.62

$0.04

Third

$36.97

$31.73

$0.04

Fourth

$36.85

$32.72

$0.04 

 

 

 

 

 

On January 31, 2007, there were approximately 140 holders of record of the Company's Common Stock.

 

The Company has paid quarterly dividends on its Common Stock since the third quarter of 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 also be subject to any applicable restrictions contained in the Company's then existing credit arrangements.

 

 

15

 


 

ISSUER PURCHASES OF EQUITY SECURITIES (in 000’s) (1)

 

 

 

 

 

 

 

 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Program

Maximum Number of Shares that May Yet Be Purchased Under the Program

October 2006

8

$35.63

0

316

Total Fourth Quarter 2006

8

$35.63

0

316

 

 

(1)

The share repurchase program authorizing the purchase of up to 500 shares was announced May 6, 2004 and was originally scheduled to expire in July 2005. In May 2005, the Board of Directors extended the authorization through July 2006. In July 2006, the Board of Directors extended the authorization through July 2007.

 

16

 


Item 6. Selected Financial Data.

 

The following table presents selected financial data of the Company. This historical data should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Item 8, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. All amounts except per share data are expressed in thousands.

 

 

Year Ended December 31

 

2006 (1)

2005

2004

2003(2)

2002

Income Statement Data:

 

 

 

 

 

Net sales

$ 90,805

$ 84,766

$ 79,201

$ 72,562

$ 67,147

Cost of goods sold

41,694

38,851

35,851

32,129

30,025

Gross profit

49,111

45,915

43,350

40,433

37,122

Selling, general and administrative expenses

25,628

22,090

22,219

19,025

18,562

Income from operations

23,483

23,825

21,131

21,408

18,560

Interest (income) expense and other, net

(28)

(485)

(144)

(109)

286

Income from operations before

provision for income taxes

23,511

24,310

21,275

21,517

18,274

Provision for income taxes

8,732

8,972

8,138

8,231

7,127

Income from continuing operations

14,779

15,338

13,137

13,286

11,147

Income (loss) from discontinued operations

0

0

797

(85)

264

Net income

$14,799

$ 15,338

$ 13,934

$ 13,201

$ 11,411

 

=====

======

======

======

======

Basic earnings per share

$ 1.65

$ 1.71

$   1.54

$     1.46

$     1.29

 

======

======

======

======

======

Basic earnings per share from continuing

operations

$ 1.65

$ 1.71

$   1.45

$     1.47

$     1.26

 

======

======

======

======

======

Basic earnings (loss) per share from discontinued

operations

$ 0.00

 

$ 0.00

$    0.09

$   (0.01)

$     0.03

 

======

======

======

======

======

Basic weighted average common shares

outstanding

8,954

8,957

9,040

9,017

8,876

Diluted earnings per share

$ 1.61

$ 1.65

$     1.48

$     1.40

$     1.22

 

======

======

======

======

======

Diluted earnings per share from continuing

operations

$ 1.61

$ 1.65

$     1.40

$     1.41

$     1.19

 

======

======

======

======

======

Diluted earnings (loss) per share from discontinued

operations

$ 0.00

$ 0.00

$     0.08

$   (0.01)

$     0.03

 

======

======

======

======

======

Diluted weighted average common shares

outstanding

 

9,182

 

9,312

 

9,409

 

9,431

 

9,331

Cash dividends declared per common share

$ 0.16

$ 0.16

$ 0.16

$ 0.06

n/a

 

======

=======

=======

=======

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31

 

2006

2005

2004

2003(2)

2002

Balance Sheet Data:

 

 

 

Working capital

$ 25,982

$ 28,186

$ 19,428

$ 12,676

$ 12,645

Total assets

156,588

118,089

109,829

101,484

84,988

Total debt (including current maturities)

21,810

-

-

2,852

4,304

Stockholders' equity

117,498

103,564

95,137

82,963

67,670

 

 

 

__________

(1)

On July 31, 2006 and August 18, 2006, the Company acquired substantially all of the assets of Microbrush, Inc. and Microbrush International Ltd., respectively (collectively “Microbrush”). The income statement data for the year ended December 31, 2006 includes results of operations for Microbrush, Inc. from August 1, 2006 through December 31, 2006 and Microbrush International Ltd. from August 18, 2006 through December 31, 2006. The balance sheet data as of December 31, 2006 includes the Microbrush acquisition.

 

(2)

On December 1, 2003, the Company acquired substantially all of the assets of Obtura Corporation and Earth City Technologies (collectively “Obtura Spartan”). The income statement data for the year ended December 31, 2003 includes results of operations for Obtura Spartan from December 1, 2003 through December 31, 2003. The balance sheet data as of December 31, 2003 includes the Obtura Spartan acquisition.

 

17

 


Item 7. Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operation (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 offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, prophy pastes, microapplicators, panoramic X-ray machines, dental handpieces (drills) and related components, home care kits, orthodontic and children’s toothbrushes, flavored examination gloves, infection control products, ultrasonic cleaning systems, ultrasonic scaling and endodontic systems, and obturation systems used in endodontic surgery (root canal procedures). These products are primarily marketed to dental professionals, principally dentists, endodontists, orthodontists, dental hygienists and dental assistants. The Company’s manufacturing and distribution facilities are located in Missouri, California, Indiana, Tennessee, Texas, Canada, Wisconsin and Ireland.

The Company operates in one reporting segment, which is the development and manufacture of a broad line of products marketed to dental professionals. 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 2006, 2005 and 2004.

In December 2004, the Company completed the sale of the retail division of its Plak Smacker subsidiary. The retail division, which was previously reported as a distinct reporting segment, sold toothbrushes, children’s toothpastes and dental accessories to mass merchandisers under the Plak Smacker brand name. As a result of the disposition, we have reclassified our financial statements to reflect the retail segment as discontinued operations.

 

Critical Accounting Policies

 

The SEC has requested that all registrants include in their MD&A a description of 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 39% of its December 31, 2006 accounts receivable balance with two large customers (see footnote 6 of the notes to consolidated financial statements set forth in Item 8) with the remaining balance comprised of amounts due from 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 (FIFO) basis. Inventory values are based upon standard costs, which approximate historical costs. Management regularly reviews inventory quantities on hand and records a provision for excess or obsolete inventory based primarily on estimated product demand and other information related to the inventory including planned introduction of new products and changes in technology. If demand for the Company’s products is significantly different than management’s expectations, the reserve could be materially impacted. Charges to the reserves are included in cost of goods sold.

 

Goodwill and other intangible assets – In accordance with the Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets,” effective January 1, 2002, goodwill and other intangible 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, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

18

 


 

Contingencies – The Company and its subsidiaries from time to time are subject to various contingencies, including legal proceedings arising in the normal course of business. Management, with the assistance of external legal counsel, performs an analysis of current litigation, and will record liabilities if a loss is probable and can be reasonably estimated. The Company believes the reserve is adequate; however, it cannot guarantee that costs will not be incurred in excess of current estimates.

 

Assets and Liabilities Acquired in Business Combinations – The Company periodically acquires businesses. All business acquisitions completed subsequent to 2002 were accounted for under the provisions of SFAS No. 141, “Business Combinations,” which requires the use of the purchase method. All business acquisitions completed in years prior to 2002 were accounted for under the purchase method as set forth in Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations.” The purchase method requires the Company to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The allocation of acquisition cost to assets acquired includes the consideration of identifiable intangible assets. The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. The Company’s measurement of fair values and certain preacquisition contingencies may impact the Company’s cost allocation to assets acquired and liabilities assumed for a period of up to one year following the date of an acquisition. The Company utilizes a variety of information sources to determine the value of acquired assets and liabilities. For larger acquisitions, third-party appraisers are utilized to assist the Company in determining the fair value and useful lives of identifiable intangibles, including the determination of intangible assets that have an indefinite life. The valuation of the acquired assets and liabilities and the useful lives assigned by the Company will impact the determination of future operating performance of the Company.

 

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.

 

Years Ended December 31

 

 

2006

2005

2004

 

Net sales

100.0%

100.0%

100.0%

 

Cost of goods sold

45.9

45.8

45.3

 

Gross profit

54.1

54.2

54.7

 

Selling, general and administrative expenses

28.2

26.1

28.1

 

Income from operations

25.9

28.1

26.6

 

Interest expense (income) and other, net

(.0)

(.6)

(.2)

 

Income from operations before provision

for income taxes

25.9

28.7

26.8

 

Provision for income taxes

9.6

10.6

10.2

 

Income from continuing operations

16.3

18.1

16.6

 

Income from discontinued operations

0

0

1.0

 

Net income

16.3%

18.1%

17.6%

 

 

=====

=====

====

 

 

 

 

 

 

 

 

19

 


Year Ended December 31, 2006, Compared to Year Ended December 31, 2005

 

Net Sales - Net sales for the year ended December 31, 2006 were $90,805, up 7.1% or $6,039 from $84,766 in the prior year. Sales for the year were positively impacted by the acquisition of Microbrush, which contributed approximately $5,000 in sales. Sales were negatively impacted by weak sales of our X-ray product line. Although total domestic unit shipments of X-ray systems were higher in 2006 than they were in the prior year, an increase in shipments of units rented was offset by a decline in shipments of units sold. Sales were also negatively impacted by lower-than-expected sales from the reintroduction of fluoride products which were discontinued in 2005. The Company discontinued approximately $2,400 in chemical product sales in 2005. Certain fluoride products were reintroduced in August 2006; however, these products only generated approximately $90 in sales in 2006.

 

Gross Profit - Gross profit increased $3,196, or 7.0%, from $45,915 in 2005 to $49,111 in 2006. The additional gross profit was primarily a result of the increased net sales resulting from the Microbrush acquisition and production efficiencies. Gross margin was relatively unchanged at 54.1% in 2006 when compared to 54.2% in 2005. The one-time impact of Microbrush purchase accounting as well as various costs of consolidation activity decreased gross margins. These decreases were offset by increased operating efficiencies, product mix benefits and increased sales volume.

 

Selling, General and Administrative Expenses (SG&A) - SG&A expenses increased by $3,538, or 16.0%, to $25,628 in 2006 from $22,090 in 2005. SG&A costs increased approximately $2,000 as a result of the acquisitions of Microbrush and D&N Microproducts, Inc. The remaining SG&A increase was primarily due to increased personnel costs to support the growth of the business. As a percentage of net sales, SG&A expenses increased to 28.2% in 2006 from 26.1% in 2005 as a result of the factors explained above.

 

Income from Operations - Income from operations in 2006 was $23,483 compared to $23,825 in 2005, a decrease of 1.4%. The change was a result of the factors described above.

 

Interest Expense (Income), net – Interest expense (income), net increased to $28 versus $(195) in 2005. This increase was primarily attributable to additional interest expense resulting from borrowings on the Company’s credit facility to finance the Microbrush acquisition.

 

Other Expense (Income), net – Other expense (income), net decreased to $(56) versus $(290) in 2005. This decrease was due to lower levels of miscellaneous income.

 

Provision for Income Taxes - During the year ended 2006, the Company’s provision for income taxes decreased to $8,732 versus $8,972 in 2005 as a result of lower pre-tax income. The effective tax rate in 2006 was 37.1% compared to 36.9% in 2005.

 

Year Ended December 31, 2005, Compared to Year Ended December 31, 2004

 

Net Sales - Net sales from continuing operations for the year ended December 31, 2005 were $84,766, up 7.0% or $5,565 from $79,201 in the prior year. The sales increase was largely a result of favorable comparisons due to a significant decrease in sales experienced in the second quarter of 2004 as a result of a restructuring of certain sales incentive programs to dealers in May 2004. Strong dealer response to targeted marketing initiatives in 2005 and solid end-user demand for a majority of the Company’s products also contributed to the increase. These increases were partially offset by the suspension, in the third quarter, of manufacturing and sales of certain chemical products, which represented approximately $2,400 of annual sales. The Company also experienced a decline in sales in the diagnostic product line in the last month of the year.

 

The sales incentive programs that were restructured by the Company in 2004 principally consisted of off-invoice pricing discounts (i.e., a discount reflected directly on the billing and requiring no performance obligation on the part of the customer). For accounting purposes, these discounts were recorded in the net sales account at the time of sale. During the second quarter of 2004, the Company eliminated certain of these promotional pricing incentives, which reduced customer orders and sales in that quarter. The reason for this second quarter change was to transition to product line based pricing promotions from the brand based promotions that had been run in previous periods. These changes were made to facilitate certain new product introductions and facilities consolidation efforts, while providing for improved service levels to the Company’s distributors.

 

 

20

 


Gross Profit - Gross profit increased $2,565, or 5.9%, from $43,350 in 2004 to $45,915 in 2005. The additional gross profit was primarily a result of the increased net sales. Gross margin decreased slightly from 54.7% in 2004 to 54.2% in 2005. The increase in sales volume as well as changes in product mix had a positive impact on the gross profit margin. These margin improvements were offset by the effects of temporary production inefficiencies related to facility consolidation activity and the impact of the voluntary recall of certain chemical products in the third quarter of 2005.

 

Selling, General and Administrative Expenses (SG&A) - SG&A expenses remained relatively consistent, decreasing by $129, or 0.6%, to $22,090 in 2005 from $22,219 in 2004. The decrease in SG&A is primarily attributable to headcount reductions related to facility consolidations, reduced management incentive compensation consistent with our results and solid expense control. These decreases were partially offset by increased costs related to the growth in infrastructure of the business, such as regulatory and facilities costs. As a percentage of net sales, SG&A expenses decreased to 26.1% in 2005 from 28.1% in 2004 as a result of the factors explained above.

 

Income from Operations - Income from operations in 2005 was $23,825 compared to $21,131 in 2004, an increase of 12.8%. The increase is a result of the factors described above.

 

Interest (income) expense and other, net – Other income, net increased to $485 versus $144 in 2004. This increase was primarily attributable to lower interest expense in the current year as no borrowings were outstanding on the Company’s credit facility during 2005.

 

Provision for Income Taxes - During the year ended 2005, the Company’s provision for income taxes increased to $8,972 versus $8,138 in 2004 as a result of higher pre-tax income partially offset by a decrease in the effective tax rate. The effective tax rate in 2005 was 36.9% compared to 38.25% in 2004. The lower effective tax rate in 2005 is primarily attributable to recognition of a tax benefit associated with a non-recurring capital loss, which created a $.03 per share benefit in the Company’s third quarter results. The 2005 rate also reflected the estimated impact of the IRC Section 199 manufacturing deduction.

 

Discontinued Operations – The results of operations and gain from the sale of our retail segment, which was sold in December 2004, were reflected as discontinued operations in the results of that year. The 2004 results include sales of $3,086 and related operating income of $1,292, including a pre-tax gain on the sale of $1,156, net of certain transaction costs.

 

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 $13,711, $17,843, and, $12,531, for 2006, 2005 and 2004, respectively. The decrease in operating cash flow in 2006 is attributable to higher levels of prepaid expenses as well as higher accounts receivable at December 31, 2006, as the Company also experienced higher levels of sales at the end of 2006, resulting in a larger accounts receivable balance compared to 2005.

 

The Company maintains a credit agreement with a borrowing capacity of $75,000, which expires in April 2010. Borrowings under the agreement bear interest at rates ranging from LIBOR + .75% to LIBOR + 1.50%, or Prime, depending on the Company’s level of indebtedness. Commitment fees for this agreement range from .125% to .15% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of December 31, 2006, the Company was in compliance with all of these covenants. During 2006, the Company borrowed under the credit facility to finance the acquisition of Microbrush, investments in facilities and for working capital needs. At December 31, 2006, the Company had $21,810 in outstanding borrowings under this agreement and $53,190 available for borrowing. Management believes through its operating cash flows as well as borrowing capabilities, the Company has adequate liquidity and capital resources to meet its needs on a short and long-term basis.

 

Uses of Cash

Consistent with historical spending, the Company’s uses of cash primarily relate to acquisition activity, capital expenditures, dividend distributions to shareholders, and stock repurchases. Specific significant uses of cash over the three years are as follows:

 

2006

Net capital expenditures for property, plant and equipment were $7,189 in 2006. Significant capital expenditures included

 

21

 


land, facility improvements, panoramic X-ray machines and new equipment purchases. Consistent with the Company’s historical capital expenditures, future capital expenditures are expected to include facility development and improvements, panoramic X-ray machines for the Company’s rental program, production machinery and information systems. In January 2006, YI Ventures LLC (a wholly owned subsidiary) acquired D&N Microproducts, Inc., a contract manufacturer of the Company’s diagnostic product line. The Company paid approximately $2,800 in cash. On July 31, 2006, the Company acquired substantially all of the assets of Microbrush, Inc. and Microbrush International, Ltd. for approximately $32,000 in cash. The purchase price was principally financed with borrowings on the Company's credit facility and cash generated from operations. Quarterly dividends of $0.04 per share were paid March 15, June 15, September 15, and December 15, 2006, for a total payment of $1,457.

 

2005

Capital expenditures for property, plant and equipment were $1,807 in 2005. Significant capital expenditures included new equipment purchases and facility improvements. During the third quarter of 2005, the Company acquired the assets of a product line for $986 that primarily consisted of patents. The Company also repurchased 179 shares of its Common Stock from various stockholders for $6,514, including 100 shares from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725. Quarterly dividends of $0.04 per share were paid March 15, June 15, September 15, and December 15, 2005, for a total payment of $1,455.

 

2004

Capital expenditures for property, plant and equipment were $5,577 in 2004. Significant capital expenditures included the purchase of a new distribution facility in California, office and meeting space in Illinois, and new tooling and equipment for our manufacturing facilities. In February 2004, YI Ventures LLC (a wholly owned subsidiary) acquired a small ultrasonic cleaning systems product line. In the fourth quarter of 2004, the Company repurchased 77 shares of its Common Stock from various stockholders for $2,511. Quarterly dividends of $0.04 per share were paid March 15, June 15, September 15, and December 15, 2004, for a total payment of $1,476.

 

 

 

 

Contractual Obligations

Payments due by period


 

Total

Less than

1 Year

 

1-3 years

 

4-5 years

Beyond 5 years

 

 

 

 

 

 

Operating Leases (including buildings)

$ 1,355

$ 548

$ 633

$ 174

$ --

Long-Term Debt

$ 21,810

$ --

$ --

$ 21,810

$ --

Total

$ 23,165

$ 548

$ 633

$ 21,984

$ --

 

======

=====

=====

=======

=====

 

As of December 31, 2006 and 2005, management was aware of no relationships with any other unconsolidated entities, financial partnerships, structured finance entities, or special purpose entities that were established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes.

 

Recent Financial Accounting Standards Board Statements

 

In June 2006, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is does not expect the impact of adopting this interpretation to be material to the financial statements.

 

In 2006, the Company adopted the disclosure requirements of Emerging Issues Task Force (the “EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement” (that is, gross versus net presentation) for tax receipts on the face of their income statements. The scope of this guidance includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). The Company has historically presented such taxes on a net basis.

 

22

 


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 $110, $0, and $31 of additional interest expense in the years ended December 31, 2006, 2005 and 2004, 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, 19% are denominated in Euros and 9% in Canadian dollars. 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.

 

 

 

24

 


Item 8. Financial Statements and Supplementary Data.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Young Innovations, Inc.:

 

We have audited the accompanying consolidated balance sheets of Young Innovations, Inc. and subsidiaries (“the Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Young Innovations, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Young Innovations, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2007, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

 

/s/ KPMG LLP

Chicago, IL

March 2, 2007

 

25

 


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Young Innovations, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures that:

 

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

 

provide reasonable assurance that receipts and expenditures of the Company are being made in accordance with authorization of management and directors of the Company; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

 

Internal control over financial reporting includes the controls themselves, monitoring and testing, and actions taken to correct deficiencies as identified.

 

All internal control systems, no matter how well designed, have inherent limitations, including the possibility that controls can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, conditions in our business change over time, and, therefore, internal control effectiveness may vary over time.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this assessment, management believes that, as of December 31, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

 

During the year ended December 31, 2006, the Company acquired D&N Microproducts, Inc. and substantially all of the assets of Microbrush, Inc. and Microbrush International Ltd. (collectively “the Acquired Businesses”). Management excluded the Acquired Businesses from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. The Acquired Businesses have total assets of $36,100 and total revenues of $5,300 included in the consolidated financial statements of the Company as of and for the year ended December 31, 2006.

 

The Company’s independent registered public accounting firm, KPMG LLP, has issued an attestation report on our assessment of the Company’s internal control over financial reporting. This report appears on the following page.

 

 

26

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Young Innovations, Inc.:

 

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Young Innovations, Inc. and subsidiaries (“the Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Young Innovations, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. p>

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management's assessment that Young Innovations, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Young Innovations, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

During the year ended December 31, 2006, the Company acquired D&N Microproducts, Inc. and substantially all of the assets of Microbrush, Inc. and Microbrush International Ltd. (collectively “the Acquired Businesses”). Management excluded the Acquired Businesses from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. The Acquired Businesses have total assets of $36,100 and total revenues of $5,300 included in the consolidated financial statements of the Company as of and for the year ended December 31, 2006. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the Acquired Businesses.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Young Innovations, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 2, 2007 expressed an unqualified opinion on those consolidated financial statements.

 

 

27

 


/s/KPMG LLP

Chicago, Illinois

March 2, 2007

 

 

29

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

December 31

 


 

2006

2005

 

 

 

Assets

 

 

 

Current assets:

 

 

Cash and cash equivalents

$ 1,017

$ 10,227

Trade accounts receivable, net of allowance for doubtful accounts of $478 and $435 in 2006 and 2005, respectively

 

13,057

 

9,538

Inventories

14,111

10,796

Other current assets

5,546

3,796

Total current assets

33,731

34,357

Property, plant and equipment, net

29,178

21,567

Goodwill

78,233

52,690

Other intangible assets

11,140

7,074

Other assets

4,306

2,401

Total assets

$156,588

$118,089

 

======

======

Liabilities and Stockholders’ Equity

 

Current liabilities:

 

 

Accounts payable and accrued liabilities

$ 7,749

$ 6,171

Total current liabilities

7,749

6,171

Long-term debt

21,810

--

Deferred income taxes

9,531

8,354

Total liabilities

39,090

14,525

Stockholders’ equity:

Common stock, voting, $.01 par value, 25,000 shares authorized; 8,996 and 8,917 shares issued and outstanding, net of treasury stock, in 2006 and 2005, respectively

 

90

 

90

Additional paid-in capital

29,214

28,922

Retained earnings

111,089

97,767

Common stock in treasury, at cost 1,229 and 1,292 shares in 2006 and 2005, respectively

(22,939)

(23,215)

Accumulated other comprehensive income

44

-

Total stockholders’ equity

117,498

103,564

Total liabilities and stockholders’ equity

$ 156,588

$ 118,089

 

        =======

          =======

 

 

 

 

The accompanying notes are an integral part of these statements.

 

29

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

 

 

Years Ended December 31

 


 

2006

2005

2004

 

 

 

 

Net sales

$    90,805

$    84,766

$    79,201

Cost of goods sold

41,694

38,851

35,851

Gross profit

49,111

45,915

43,350

Selling, general and administrative expenses

25,628

22,090

22,219

Income from operations

23,483

23,825

21,131

Interest (income) expense, net

28

(195)

18

Other income

(56)

(290)

(162)

Income from operations before provision for income taxes

23,511

24,310

21,275

Provision for income taxes

8,732

8,972

8,138

Income from continuing operations

14,779

15,338

13,137

Income from discontinued operations

-

--

797

Net income

$    14,779

$      15,338

$      13,934

 

=======

========

========

Basic earnings per share

    $       1.65

    $       1.71

    $       1.54

 

      =======

      ========

      ========

Basic earnings per share from continuing operations

    $       1.65

    $       1.71

    $       1.45

 

      =======

      ========

      ========

Basic earnings per share from discontinued operations

    $       ---

    $       ---

    $       0.09

 

      =======

      ========

      ========

Diluted earnings per share

    $       1.61

    $       1.65

    $       1.48

 

      =======

      ========

      ========

Diluted earnings per share from continuing operations

    $       1.61

    $       1.65

    $       1.40

 

      =======

      ========

      ========

Diluted earnings per share from discontinued operations

    $        --

    $        --

    $        0.08

 

      =======

      ========

      ========

Basic weighted average shares outstanding

8,954

8,957

9,040

 

====

====

====

Diluted weighted average shares outstanding

9,182

9,312

9,409

 

====

====

====

 

 

The accompanying notes are an integral part of these statements.

 

30

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

 

 

Common

Stock

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

Common

Stock in

Treasury

 

Deferred Stock

Compensation

Accumulated Other Comprehensive Income

 

 

 

Total

 

 

 

Comprehensive

Income

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2003

 

$ 90

 

$ 28,367

 

$ 71,426

 

$ (15,985)

 

$ (935)

 

-

 

$ 82,963

 

 

Net income

-

-

13,934

-

-

-

13,934

 

$13,934

Common stock purchased

 

-

 

-

 

-

 

(1,924)

 

-

 

(1,924)

 

 

Stock options exercised

 

-

 

666

 

-

 

637

 

-

-

 

1,303

 

 

Amortization of deferred stock compensation

 

-

 

-

 

-

 

-

 

337

-

 

337

 

 

 

Cash dividends, ($0.06 per share)

 

-

 

 

(1,476)

 

 

-

(1,476)

 

 

Comprehensive income

 

 

 

 

 

 

 

 

$13,934

 

_______

_______

_________

_________

___________

___________

__________

 

=======

BALANCE, December 31, 2004

 

90

 

29,033

 

83,884

 

(17,272)

 

(598)  

-

 

95,137

 

 

Net income

-

-

15,338

-

-

 

15,338

 

$ 15,338

Common stock purchased

-

 

-

 

-

(6,039)

-

-

(6,039)

 

 

Stock options exercised

-

151

 

-

96

 

 

-

247

 

 

Amortization of deferred stock compensation

-

 

-

 

-

 

-

 

336

-

 

336

 

 

Cash dividends, ($0.16 per share)

-

 

(1,455)

 

 

-

(1,455)

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$15,338

 

_______

_______

_________

_________

___________

___________

__________

 

=====

BALANCE, December 31, 2005

 

90

 

29,184

 

97,767

 

(23,215)

 

(262)  

 

-

 

103,564

 

 

Net income

-

-

14,779

-

-

-

14,779

 

$ 14,779

Eliminate remaining deferred stock compensation

Common stock purchased

 

 

 

-

 

 

(262)

-

 

 

 

-

 

 

 

(1,669)

 

 

262

-

 

 

 

-

 

-

(1,669)

 

 

Stock options exercised

-

(936)

-

1,809

-

-

873

 

 

Issuance of restricted stock

-

(136)

-

136

-

-

-

 

 

Share-based compensation

-

294

-

-

-

-

294

 

 

Excess income tax benefit from stock options.

-

1,070

-

-

-

-

1,070

 

 

Cash dividends, ($0.16 per share)

-

-

(1,457)

-

-

-

(1,457)

 

 

Other comprehensive income-

Foreign currency translation

adjustments

-

-

-

-

-

 

44

44

 

44

Comprehensive income

 

 

 

 

 

 

 

 

 

 

$14,823

 

_______

_______

_______

_______

_______

__________

__________

 

======

BALANCE, December 31, 2006

 

$ 90

 

$ 29,214

 

$ 111,089

 

$ (22,939)

 

$ --

 

$ 44

 

$ 117,498

 

 

The accompanying notes are an integral part of these statements.

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Years Ended December 31

 


 

2006

2005

2004

Cash flows from operating activities:

 

 

 

Net income

$14,779

$15,338

$13,934

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

Gain from sale of discontinued operations, net of tax

--

--

(714)

Depreciation and amortization

3,724

3,110

3,166

Deferred income taxes

1,177

1,344

383

Loss on disposal of property, plant and equipment

--

--

113

Loss on private equity investment fund

Changes in assets and liabilities, net of effects of acquisitions

and divestitures:

83

--

--

Trade accounts receivable

(2,137)

418

1,388

Inventories

(340)

(28)

(2,024)

Other current assets

(1,673)

(156)

(180)

Other assets

(1,114)

(873)

(1,340)

Accounts payable and accrued liabilities

(788)

(1,310)

(2,195)

Total adjustments

(1,068)

2,505

(1,403)

Net cash flows from operating activities

 

13,711

17,843

12,531

Cash flows from investing activities:

 

 

 

Payments for acquisitions of businesses and intangible assets, net of cash acquired

 

(35,622)

 

(986)

 

(1,254)

Proceeds from sale of discontinued operations

--

--

1,800

Purchases of property, plant and equipment

(7,189)

(1,807)

(5,577)

Proceeds from sale of IAI

--

200

--

Purchases of private equity investment

(750)

--

--

Net cash flows from investing activities

(43,561)

(2,593)

(5,031)

Cash flows from financing activities:

 

 

 

Payments on long-term debt

(8,473)

--

(12,420)

Borrowings on long-term debt

30,283

--

9,568

Excess tax benefit from stock option exercises

1,070

--

--

Proceeds from stock options exercised

1,176

394

953

Purchases of treasury stock

(1,975)

(6,514)

(2,511)

Payment of cash dividends

(1,457)

(1,455)

(1,476)

Net cash flows from financing activities

20,624

(7,575)

(5,886)

Effect of exchange rate changes on cash

16

--

--

Net increase (decrease) in cash and cash equivalents

(9,210)

7,675

1,614

Cash and cash equivalents, beginning of period

10,227

2,552

938

Cash and cash equivalents, end of period

$ 1,017

$ 10,227

    $ 2,552

 

=====

======

    ======

 

The accompanying notes are an integral part of these statements.

 

 

32

 


YOUNG INNOVATIONS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

(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 offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, prophy pastes, microapplicators, panoramic X-ray machines, dental handpieces (drills) and related components, home care kits, orthodontic and children’s toothbrushes, flavored examination gloves, infection control products, ultrasonic cleaning systems, ultrasonic scaling and endodontic systems, and obturation systems used in endodontic surgery (root canal procedures). The Company’s manufacturing and distribution facilities are located in Missouri, California, Indiana, Tennessee, Texas, Wisconsin, Canada, and Ireland. Export sales were less than 10% of total net sales for 2006, 2005 and 2004. Sales denominated in Euros and Canadian dollars approximated 2% and 1%, respectively of total sales in 2006.

 

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, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue 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

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess of cost over fair value of net assets of businesses acquired. The Company adopted the

 

34

 


provisions of Financial Accounting Standards Board (FASB) Statement No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002. Pursuant to Statement 142, goodwill and indefinite life intangible assets acquired in a purchase business combination are not amortized, but are instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” Intangible assets primarily consist of trademarks, license agreements, core technology, patents and patent applications, product formulas, and supplier and customer relationships. Trademarks have been determined to have indefinite useful lives, and therefore the carrying value is reviewed at least annually for recoverability in accordance with the requirements of Statement No. 142. Other intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, generally between 5 and 40 years, and tested for impairment whenever conditions indicate that an asset may be impaired.

 

Impairment of Long-Lived Assets

 

The Company assesses and measures any impairments of long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (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 2006, 2005 and 2004.

 

Fair Value of Financial Instruments

 

Financial instruments consist principally of cash, accounts receivable, notes receivable, accounts payable and debt. The estimated fair value of these instruments approximates their carrying value. Due to the short term nature of the notes receivable, book value approximates fair value.

 

Revenue Recognition

 

Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped, as the Company’s shipping terms are customarily FOB shipping point. Revenue from the rental of equipment to others is recognized on a month-to-month basis as the revenue is earned. The Company generally warrants its products against defects, and its most generous policy 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.

 

Advertising Costs

 

Advertising costs are expensed when incurred. Advertising costs were approximately $2,142, $2,159, and $2,347 for 2006, 2005 and 2004, respectively.

 

Research and Development Costs

 

Research and development costs are expensed when incurred and totaled $915, $752, and $715 for 2006, 2005 and 2004, respectively.

 

Interest (Income) Expense, net

 

Interest (income) expense, net includes interest paid related to borrowings on the Company’s credit facility, as well as interest income earned on various investments and notes receivable. In 2006, 2005 and 2004, interest income totaled $633, $326 and $76, respectively.

 

Other Income

 

Other income includes rental income from leased space and other miscellaneous income, all of which are not directly related to the Company’s primary business.

 

36

 


 

Income Taxes

 

The Company has accounted for income taxes under SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to accounting for and reporting 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 using rates which are expected to apply in the period the differences are estimated to reverse.

 

Share-Based Compensation

 

Prior to fiscal 2006, as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for awards made under the Plan. No compensation cost was recognized in prior periods for the stock options granted, as exercise prices were not less than the fair value of the underlying stock on the date of grant. Compensation expense was recognized under APB 25 for restricted stock awards based on the fair market value of the stock on the date of grant.

 

As of January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which requires recognition of expense related to the fair value of share-based compensation awards. The Company has elected the modified prospective transition method as permitted by SFAS No. 123(R); accordingly, results from prior periods have not been restated. Under this transition method, compensation cost must be recognized in the financial statements for all awards granted after the date of adoption as well as for existing stock awards for which the requisite service has not been rendered as of the date of adoption. Due to the fact that all of the Company’s options were issued prior to the date SFAS No. 123(R) was adopted and were vested as of January 1, 2006, the adoption of SFAS No. 123(R) did not have a material impact on the Company’s financial statements. No stock option grants were made in 2006.

 

Had the Company determined employee share-based compensation cost based on a fair value model at the grant date for its stock options under SFAS 123, the Company's net earnings per share for the years ended December 31, 2005 and 2004 would have been adjusted to the pro forma amounts as follows ($ in thousands, except per share amounts):

 

 

Year Ended

December 31, 2005

 

Year Ended

December 31, 2004

 


 


 

As

Reported

Pro

Forma

 

As

Reported

Pro

Forma

 

 

 

 

Net income

$ 15,338

$11,424

 

$13,934

$13,267

Income from continuing operations

15,338

11,424

 

13,137

12,470

Income from discontinued operations

 

--

 

--

 

 

797

 

797

Earnings per share:

 

 

 

 

 

Basic

$ 1.71

$ 1.28

 

$ 1.54

$ 1.47

Basic earnings per share from continuing operations

 

$ 1.71

 

$ 1.28

 

 

$ 1.45

 

$ 1.38

Basic earnings per share from discontinued earnings

 

--

 

--

 

 

$ 0.09

 

$ 0.09

Diluted

$ 1.65

$ 1.23

 

$ 1.48

$ 1.41

Diluted earnings per share from continuing operations

 

$ 1.65

 

$ 1.23

 

 

$ 1.40

 

$ 1.33

Diluted earnings per share from discontinued operations

 

--

 

--

 

 

$ 0.08

 

$ 0.08

Amount of restricted share compensation included

in determination of net income:

$

336

$

337

 

On March 1, 2005, the Company granted 320 options to employees and nonemployee directors. All options were vested immediately. No additional grants were made in 2005, and no stock options were granted in 2004.

 

 

37

 


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:

 

 

2005

Dividend yield (1)

0.49%

Expected volatility (2)

38.8%

Risk-free interest rate (3)

4.5%

Expected life (4)

8.0

 

(1) Represents cash dividends paid as a percentage of the average share price over the prior four quarters.

(2) Based on historical volatility of the Company’s common stock.

(3) Represents the Treasury bill rate.

(4) The period of time that options granted are expected to be outstanding based upon historical evidence.

 

Supplemental Cash Flow Information

 

Cash flows from operating activities include $7,464, $7,525, and $6,545 for the payment of federal and state income taxes and $552, $75 and $81 for the payment of interest related to borrowings on the Company’s credit facility during 2006, 2005 and 2004, respectively.

 

Foreign Currency Translation

The translation of financial statements into U.S dollars has been performed in accordance with SFAS No. 52, “Foreign Currency Translation.” The local currency for all entities included in the consolidated financial statements has been designated as the functional currency. Non-U.S. dollar denominated assets and liabilities have been translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date. Revenues and expenses have been translated at the weighted average of exchange rates in effect during the year. Translation adjustments are recorded as a separate component of shareholders’ equity. Net currency transaction losses (gains) included in other expense, net were $(25), $(18) and $3 for 2006, 2005 and 2004.

 

3.

ACQUISITIONS:

 

On July 31, 2006, the Company entered into an agreement, through its wholly-owned subsidiaries Young Microbrush, LLC and Young Microbrush Ireland Ltd., with Microbrush, Inc., a Wisconsin corporation, and Microbrush International Ltd., a Republic of Ireland private limited company, (collectively, “Microbrush”), to acquire substantially all of Microbrush’s assets related to the manufacture, development and distribution of dental products. The acquisition of U.S. purchased assets was completed on July 31, 2006. The acquisition of Irish purchased assets was completed on August 18, 2006. The Company paid approximately $32,777 in cash, including direct transaction costs, in connection with the acquisition. An additional $3,000 in purchase price may be paid by the Company (“Earnout Payments”) if certain performance targets are achieved over the next two years. Of the purchase price, $3,000 was paid into an escrow account pending settlement of any indemnification claims the Company may have pursuant to the transaction documents. Amounts paid or received by the Company in future periods, if any, in connection with escrow account settlements and Earnout Payments discussed above will be accounted for as an adjustment to purchase price when the related contingencies are resolved. The acquisition further establishes the Company as a leader in the category of consumable dental products, enabling the Company to expand its product offerings in this area.

 

The acquisition was financed through a combination of cash generated from operations as well as debt, and was accounted for as a purchase transaction. Debt incurred to finance the acquisition totaled $20,060. Upon initial allocation of the purchase price at the time of the acquisition, goodwill was determined to be $23,737. During the fourth quarter of 2006, goodwill increased by $90 due to adjustments to the purchase price allocation.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the 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.

 

 

Purchase Price

$

32,777

Less:

 

Current assets

3,295

 

 

39

 


 

Property, plant and equipment

2,857

 

Identifiable intangible assets, net

4,325

Plus:

 

Current liabilities

(1,527)

 

Goodwill

$

23,827

 

The Company has accrued liabilities of approximately $350 for costs to exit certain activities of Microbrush that existed on the date of acquisition. Liabilities recorded primarily represent costs related to contractual obligations and restructuring.

 

The preliminary allocation of the purchase price to identifiable intangible assets, along with their respective useful lives, is as follows:

 

Amortizable intangible assets:

 

Patents (10-12 years)

$

854

 

Non-compete agreement (5 years)

111

 

Customer relationships (8 years)

494

 

1,459

Indefinite-lived intangible asset (not subject to amortization):

 

 

Trademark/Trade Name

2,866

 

 

$

4,325

=======

 

The results of operations for the U.S. and the Irish components of Microbrush are included in the consolidated financial statements since July 31, 2006 and August 18, 2006, respectively.

 

The following unaudited pro forma condensed combined income statement information has been prepared as if Microbrush had been acquired on January 1, 2005 and 2006, respectively. The unaudited pro forma condensed combined financial information has been derived from the Company’s historical consolidated financial statements and those of Microbrush.

 

 

                 ProForma

 

 

 

Year ended

December 31,

 

 

2006

 

2005

 

 

(unaudited)

 

(unaudited)

Net sales

 

$98,186

 

$96,445

 

 

 

 

 

Operating income

 

$25,723

 

$26,316

 

 

 

 

 

Net income

 

$15,727

 

$15,755

 

 

 

 

 

Basic earnings per share

 

$1.76

 

$1.76

Diluted earnings per share

 

$1.71

 

$1.69

Basic weighted average shares outstanding

 

8,954

 

8,957

Diluted weighted average shares outstanding

 

9,182

 

9,312

 

During the first quarter of 2006, YI Ventures LLC acquired substantially all of the assets and assumed a portion of the liabilities of D&N Microproducts, Inc., a contract manufacturer of the Company’s diagnostic product line. The Company paid approximately $2,800 in cash, including transaction costs. Upon initial allocation of the purchase price at the time of the acquisition, goodwill was determined to be $1,582 and $269 of supplier relationships was recognized. During 2006 goodwill increased $340, which was primarily related to changes in estimates related to severance liabilities and adjustments to the fair value estimates of the assets and liabilities. The results of operations for D&N Microproducts, Inc. are included in the consolidated financial statements since January 2006.

 

4.

DISCONTINUED OPERATIONS:

 

 

40

 


In December 2004, the Company completed the sale of the retail division of its Plak Smacker subsidiary. The retail division, which has previously been reported as a separate segment, sold toothbrushes, children’s toothpaste and dental accessories to mass merchandisers under the Plak Smacker brand name. The retail operations were accounted for as discontinued operations and accordingly, operating results and net assets were segregated in the accompanying Consolidated Statements of Income and Consolidated Balance Sheets. Results for discontinued operations are as follows (in thousands):

 

 

 

Year Ended

December 31, 2004

 


Net sales

$    3,086

Income before income taxes

1,292

Provision for income taxes

495

Net income

797

 

5. INVESTMENTS:

 

On February 21, 2006, the Company invested in a private equity investment fund. At December 31, 2006, the Company has an unfunded capital commitment of up to $2,250. As of December 31, 2006, the total capital commitment paid by the Company was $750. The investment is accounted for under the equity method of accounting and included in other assets on the Consolidated Balance Sheet. The investment value recorded approximates fair value. Equity income (loss) is recorded using a three-month lag. The Company’s loss attributed to this private equity investment was included in other income, net and totaled $83 for the year ended December 31, 2006.

 

On May 17, 1999, the Company acquired a one-third interest in International Assembly, Inc., a Texas corporation (IAI). The investment was accounted for under the equity method of accounting and included in other assets on the Consolidated Balance Sheets. Equity income (loss) was recorded using a three-month lag. The Company’s losses attributed to IAI were included in other expense, net and totaled $0 and $10 for 2005 and 2004, respectively. The Company purchased certain services from IAI at amounts less than would be paid to unrelated parties. The amounts paid for these services totaled $112 and $244 in 2005 and 2004, respectively. During the second quarter of 2005, the Company sold its interest in IAI for $200, which approximated the book value of the asset.

 

6.

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 39% and 38% of accounts receivable at December 31, 2006 and 2005, respectively.

 

The percentage of net sales made to major distributors of the Company’s continuing operations were as follows:

 

 

Years Ended

December 31

 


Distributor

2006

2005

2004

 

 

 

 

Henry Schein, Inc.

15.0%

14.2%

16.2%

Patterson Companies, Inc.

13.2%

13.5%

13.7%

 

 

7. NOTES RECEIVABLE:

 

The Company offers various financing options to its equipment customers, including notes payable to the Company. The equipment is used to secure the notes. Total revenue from sales of equipment financed by the Company was $5,118, $4,770 and $4,215 during 2006, 2005 and 2004, respectively. These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-

 

41

 


financed sales. Interest on these notes is accrued as earned and recorded as interest income.

 

Notes receivable consist of the following:

 

December 31

 


 

2006

2005

 

 

 

Notes receivable, short-term

$2,276

$2,160

Notes receivable, long-term

3,443

2,328

 

 

 

Total notes receivable

$5,719

$4,488

 

=====

=====

Notes receivable are included in other current assets and other assets in the accompanying Consolidated Balance Sheets.

 

The Company expanded the financing program during 2006, which lead to an increased notes receivable balance compared to December 31, 2005. Notes bear interest at rates ranging from 0% to 11%, and have a weighted average maturity of 32 months. Interest income related to the notes is included in the Consolidated Income Statement caption “interest (income) expense, net.”

 

8.

INVENTORIES:

 

Inventories consist of the following:

 

December 31

 


 

2006

2005

 

 

 

Finished products

$6,654

$ 6,742

Work in process

2,732

1,808

Raw materials and supplies

4,725

2,246

Total inventories

$14,111

$ 10,796

 

======

======

9.

PROPERTY, PLANT AND EQUIPMENT:

 

Property, plant and equipment consist of the following:

 

December 31

 


 

2006

2005

 

 

 

Land

$3,147

$ 1,611

Buildings and improvements

13,210

11,479

Machinery and equipment

22,266

19,256

Equipment rented to others

7,621

6,158

Construction in progress

3,262

991

 

$ 49,506

$ 39,495

 

 

 

Less - Accumulated depreciation

(20,328)

(17,928)

Total property, plant and equipment, net

$ 29,178

$ 21,567

 

======

======

 

The Company has no machinery and equipment under capital lease. At December 31, 2006, $1,882 of net property, plant and equipment was located outside of the U.S. Depreciation expense was $2,907, $2,427, and $2,603, for 2006, 2005, and 2004, respectively.

 

42

 


10. OTHER ASSETS:

 

Other assets consist of the following:

 

December 31

 


 

2006

2005

 

 

 

Notes receivable, long-term

$3,443

$2,328

Investments

667

--

Other

196

73

Total other assets

$4,306

$2,401

 

=====

=====

 

11.

GOODWILL AND OTHER INTANGIBLE ASSETS:

 

Goodwill activity is as follows:

 

December 31

 

2006

2005

 

 

 

 

 

Balance, beginning of the year

$57,488

$57,415

 

Goodwill acquired during year

25,749

--

 

Changes to purchase price allocation

(206)

73

 

Balance, end of the year

$83,031

$57,488

 

Less: Accumulated amortization

(4,798)

(4,798)

 

Goodwill, net

$78,233

$52,690

 

 

=====

=====

 

 

 

On July 31, 2006, the Company acquired Microbrush (see footnote 3). The acquisition resulted in preliminary goodwill of approximately $23,737 and $4,325 of intangible assets. During the fourth quarter of 2006, goodwill increased by $90 due to adjustments to the purchase price allocation.

 

During the first quarter of 2006, YI Ventures LLC acquired substantially all of the assets and assumed a portion of the liabilities of D&N Microproducts, Inc., a contract manufacturer of the Company’s diagnostic product line. The Company paid approximately $2,800 in cash, including transaction costs. Upon initial allocation of the purchase price at the time of the acquisition, goodwill was determined to be $1,582 and $269 of supplier relationships was recognized. During 2006 goodwill increased $340, which was primarily related to changes in estimates related to severance liabilities and adjustments to the fair value estimates of the assets and liabilities.

 

During the first quarter of 2004, YI Ventures LLC (a wholly owned subsidiary) acquired substantially all of the assets of Healthsonics Corporation for $1,500. The final Healthsonics allocation of the purchase price resulted in an adjustment to the goodwill balance in the first quarter of 2006, which was primarily related to changes in estimates related to severance liabilities.

 

There have been no changes in goodwill related to impairment losses or write-offs due to sales of businesses during the years ended December 31, 2006 and 2005.

 

During the third quarter of 2005, the Company acquired the assets of a preventative dental product line, which primarily consisted of $846 in patents, $90 of customer relationships and $50 in fixed assets.

 

Other intangibles consist of the following:

 

43

 


 

As of December 31, 2006

 


 

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Amortized intangible assets

 

 

 

License agreements

$ 1,200

$ 185

$ 1,015

Core technology

591

92

499

Patents

2,197

476

1,721

Product formulas

430

60

370

Customer relationships

834

147

687

Non-compete agreements

498

296

202

Supplier relationships

399

170

229

Total

$ 6,149

$ 1,426

$ 4,723

 

 

 

 

Intangible assets not subject to amortization

 

 

 

Trademarks

$ 6,417

 

$ 6,417

Total intangible assets

$ 12,566

$ 1,426

$ 11,140

 

 

As of December 31, 2005

 

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Amortized intangible assets

 

 

 

License agreements

$ 1,200

$ 125

$ 1,075

Core technology

591

62

529

Patents

1,343

339

1,004

Product formulas

430

48

382

Customer relationships

339

59

280

Non-compete agreements

391

161

230

Supplier relationships

130

111

19

Total

$ 4,424

$ 905

$ 3,519

 

 

 

 

 

Intangible assets not subject to amortization

 

 

 

Trademarks

$ 3,555

 

$ 3,555

Total intangible assets

$ 7,979

$ 905

$ 7,074

 

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: 10 to 20 years for patents, license agreements and core technology; 40 years for product formulations; and 5 to 8 years for supplier and customer relationships. Non-compete agreements are amortized over the length of the signed agreement. The weighted average life for amortizable intangible assets is 16 years. Aggregate amortization expense for the years ended December 31, 2006, 2005 and 2004 was $523, $347, and $226, respectively. Estimated amortization expense for each of the next five years is as follows:

 

 

For the year ended 12/31/07

$

533

 

For the year ended 12/31/08

533

 

For the year ended 12/31/09

533

 

For the year ended 12/31/10

474

 

For the year ended 12/31/11

394

 

 

44

 


12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

 

Accounts payable and accrued liabilities consist of the following:

 

December 31

 


 

2006

2005

 

 

 

Accounts payable

$ 2,409

$ 2,617

Accrued compensation and benefits

1,714

1,225

Accrued rebate and discount payments

771

438

Accruals related to Microbrush acquisition

526

--

Accrued taxes

384

366

Accrued warranty

293

285

Accrued expenses and other

1,652

1,240

Total accounts payable and accrued liabilities

$ 7,749

$ 6,171

 

======

=====

 

 

13.

CREDIT ARRANGEMENTS AND NOTES PAYABLE:

 

The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $75,000. The Company had $53,190 unused line of credit at December 31, 2006. Borrowings under the arrangement bear interest at rates ranging from LIBOR +.75% to LIBOR +1.50%, or Prime, depending on the Company’s level of indebtedness. Commitment fees for this arrangement range from .125% to .15% of the unused balance. The agreement is unsecured and contains various financial and other covenants. As of December 31, 2006, the Company was in compliance with these covenants.

 

Long-term debt was as follows:

 

December 31

 


 

2006

2005

 

 

 

Revolving credit facility due 2010 with a weighted-average interest rate of 6.16%

 

$ 21,810

 

$ --

Less – current portion

--

--

$ 21,810

$ --

 

======

=====

 

Aggregate debt maturities are: 2007-$0; 2008-$0; 2009-$0; and 2010-$21,810.

 

14.

COMMON STOCK:

 

During 2006, the Company repurchased 51 shares of its Common Stock from various stockholders for $1,669. The purchases were financed through cash generated from operations. The Company also reissued 114 shares of its Common Stock in conjunction with stock option exercises for $1,176. In addition, the restrictions on 24 previously issued shares of Common Stock lapsed during 2006 and 8 were repurchased by the Company for $269 (see footnote 15). The Company also issued 8 shares of its Common Stock pursuant to a restricted stock award.

 

During 2005, the Company repurchased 166 shares of its Common Stock from various stockholders for $6,039, including 100 shares of its common stock from a trust controlled by George E. Richmond, its Chairman and principal stockholder, for an aggregate purchase price of $3,725. The purchases were financed through cash generated from operations. The Company also reissued 34 shares of its Common Stock in conjunction with stock option exercises for $394. In addition, the restrictions on 24 previously issued shares of Common Stock lapsed during 2005 and 13 were repurchased by the Company for $475 (see footnote 15).

 

During 2004, the Company repurchased 60 shares of its Common Stock from various stockholders for $1,924. The purchases were financed through cash generated from operations. The Company also reissued 87 shares of its Common

 

44

 


Stock in conjunction with stock option exercises for $953. In addition, the restrictions on 24 previously issued shares of Common Stock lapsed during 2004 and 17 were repurchased by the Company for $587 (see footnote 15).

 

15.

SHARE BASED COMPENSATION:

 

The Company adopted the 1997 Stock Option Plan (the 1997 Plan) effective in November 1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common Stock were reserved for issuance under this plan which is administered by the compensation committee of the Board of Directors (Compensation Committee). The Company adopted the 2006 Long-Term Incentive Plan (the 2006 Plan) effective in May 2006. The 2006 Plan is intended to be a successor to the 1997 Plan. A total of 700 shares are available for grant under the 2006 Plan. Awards under the 2006 Plan may be stock options, stock appreciation rights, restricted stock, non-vested equity share units, and other equity awards.

 

Any employee of the Company or its affiliates, any consultant whom the Compensation Committee determines is significantly responsible for the Company’s success and future growth and profitability, and any member of the Board of Directors, may be eligible to receive awards under the 2006 Plan. The purpose of the 2006 Plan is to: (a) attract and retain highly competent persons as employees, directors, and consultants of the Company; (b) provide additional incentives to such employees, directors, and consultants by aligning their interests with those of the Company’s shareholders; and (c) promote the success of the business of the Company. The Compensation Committee of the Board of Directors establishes vesting schedules for each option issued under the Plan. Outstanding options generally vested over a period up to four years. All outstanding options expire 10 years from the grant date. Under the 1997 and 2006 Plans, non-vested equity share units and restricted stock may be awarded or sold to participants under terms and conditions established by the Compensation Committee. For non-vested equity shares, compensation expense is based upon the grant date market price and is recorded over the vesting period.

 

Accounting for Share-Based Compensation

 

Prior to fiscal 2006, as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for awards made under the Plan. No compensation cost was recognized in prior periods for the stock options granted, as exercise prices were not less than the fair value of the underlying stock on the date of grant. Compensation expense was recognized under APB 25 for restricted stock awards based on the fair market value of the stock on the date of grant.

 

As of January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which requires recognition of expense related to the fair value of stock-based compensation awards. The Company has elected the modified prospective transition method as permitted by SFAS No. 123(R); accordingly, results from prior periods have not been restated. Under this transition method, compensation cost must be recognized in the financial statements for all awards granted after the date of adoption as well as for existing stock awards for which the requisite service has not been rendered as of the date of adoption. Due to the fact that all of the Company’s options were issued prior to the date SFAS No. 123(R) was adopted and were vested as of January 1, 2006, the adoption of SFAS No. 123(R) did not have a material impact on the Company’s financial statements. No stock option grants were made in 2006.

Stock Option Activity  

The following table summarizes stock option activity for the year ended December 31, 2006:

Options

Shares

(000)

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

Aggregate
Intrinsic Value

($000)

 

 

Outstanding at January 1, 2006

928

$22.24

 

 

 

 

Granted

--

--

 

 

 

 

Exercised

113

$10.37

 

 

 

 

Forfeited or expired

--

--

 

 

 

 

Outstanding at December 31, 2006

815

$23.89

6.06 yrs

$8,330

 

 

 

===

 

 

 

 

 

Exercisable at December 31, 2006

815

$23.89

6.06 yrs

$8,330

 

 

 

===

 

 

 

 

 

 

 

45

 


 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended December 31, 2006 and the exercise price, multiplied by the number of in-the-money options). All stock options were vested on or before January 1, 2006.

 

On March 1, 2005, the Company granted 320 stock options and all options were vested immediately. The weighted-average grant date fair value of stock options granted during the quarter ended March 31, 2005 was $18.52.

 

The total aggregate intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $2,730, $818 and $1,959, respectively. Payments received upon the exercise of stock options for the years ended December 31, 2006, 2005 and 2004 totaled $1,176, $394 and $953, respectively. The tax benefit realized related to these exercises was $1,070, $328 and $1,950 for the years ended December 31, 2006, 2005 and 2004, respectively. The Company issues shares from treasury upon share option exercises.

Non-Vested Equity Shares Activity

In October 2001, the Company granted 120 non-vested equity shares to certain executive officers of the Company. No monetary consideration was paid by the officers who received the non-vested equity shares. These shares vest 20% each year for five years starting in October 2002. In May 2006, the Company granted 7.5 shares of non-vested equity shares. No monetary consideration was paid by the employees who received the non-vested equity shares. These shares vest 20% each year for five years starting in May 2007. Until the restricted shares vest they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. The Company calculates compensation cost for restricted stock grants by using the fair market value of its common stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period. The following table details the status and changes in non-vested equity shares for the year ended December 31, 2006:

 

 

 

Shares

(000)

 

Weighted-Average

Grant Date

Fair Value

Non-vested equity shares, December 31, 2005

24

$14.02

Granted

8

$33.77

Vested

(24)

$14.02

Forfeited

--

--

Non-vested equity shares, December 31, 2006

8

$33.77

 

==

 

 

 

 

During the year ended December 31, 2006, the Company recorded pretax compensation expense of $294 related to the Company’s restricted stock. As of December 31, 2006, there was approximately $221 of unrecognized compensation cost related to non-vested equity shares, which will be amortized over the weighted-average remaining requisite service period of 4.4 years. The Company issues share grants from treasury.

 

16. INCOME TAXES:

 

Components of the provision for income taxes:

 

 

Years Ended December 31

 


 

2006

2005

2004

 

 

 

 

Current

$7,556

$7,810

$7,384

Deferred

1,176

1,162

1,249

Total provision for income taxes

$8,732

$8,972

$ 8,633

 

=====

=====

=====

 

Reconciliation of U.S. federal statutory income tax rate to the Company’s effective tax rate:

 

 

46

 


 

 

Years Ended December 31

 


 

2006

2005

2004

 

 

 

 

Income from continuing operations before provision for income taxes

$23,511

$24,310

$21,275

U.S. federal income tax rate

35%

35%

35%

 

Computed income taxes

8,229

8,509

7,446

 

Sale of investment in International Assembly, Inc. (IAI)

-

(235)

-

 

Deduction for Domestic Production Activities

(279)

(123)

-

 

Other

(77)

(73)

73

 

Provision for federal income taxes on continuing operations

7,873

8,078

7,519

 

State income taxes from continuing operations, net of federal tax benefit

859

894

619

 

Provision for income taxes on continuing operations

$8,732

$8,972

$ 8,138

 

Effective tax rate on continuing operations

37.14%

36.90%

38.25%

 

Provision for income taxes on discontinued operations

-

-

495

 

Total provision for income taxes

$8,732

$8,972

$ 8,633

 

 

=====

=====

=====

 

 

 

 

 

 

 

 

 

 

 

Temporary differences that gave rise to deferred income tax assets and liabilities are as follows:

 

 

December 31

 


 

2006

2005

Deferred income tax assets:

 

 

Trade accounts receivable

$ 172

$ 175

Inventories

432

323

Accrued liabilities

138

319

Other

239

163

Total deferred income tax assets

981

980

Deferred income tax liabilities:

 

 

Property, plant and equipment

(2,490)

(2,723)

Intangibles

(6,954)

(5,637)

Other

(87)

6

Total deferred income tax liabilities

(9,531)

(8,354)

Net deferred income tax liability

$(8,550)

$(7,374)

 

=====

=====

 

Current deferred income tax assets of $981 and $980 are included in other current assets as of December 31, 2006 and 2005, respectively.

 

17.

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 $1,452, $1,623, and $1,679 for 2006, 2005 and 2004, respectively, and gross profit from these sales was $716, $806 and $783 for 2006, 2005 and 2004, respectively.

 

18.

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 $406, $224, and $255, for 2006, 2005 and 2004, respectively. The Company also offers certain healthcare insurance benefits for substantially all employees.

 

19.

RELATED-PARTY TRANSACTIONS:

 

 

48

 


 

During 2006 and 2005, the Company paid consulting fees of $50 and $54, respectively, to a corporation which is wholly owned by George E. Richmond, the Company’s Chairman.

 

During 2006 and 2005, the Company paid fees of $89 and $123, respectively, to a corporation which is wholly owned by George E. Richmond, the Company’s Chairman, for corporate use of an aircraft owned by that corporation.

 

In May 2005, the Company purchased 100 shares of its common stock from a trust controlled by George E. Richmond, the Company’s Chairman and principal stockholder, for an aggregate purchase price of $3,725.

 

20.

EARNINGS PER SHARE:

 

Basic earnings per share (Basic EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share (Diluted EPS) includes the dilutive effect of stock options and restricted stock, if any, using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

 

 

Years Ended December 31

 


 

2006

2005

2004

 

 

 

 

Net income

$14,779

$15,338

$13,934

Income from continuing operations

14,779

15,338

13,137

Income from discontinued operations

--

--

797

Weighted average shares outstanding for basic earnings per share

8,954

8,957

 

9,040

Dilutive effect of stock options and restricted stock

228

355

 

369

Weighted average shares outstanding for diluted earnings per share

9,182

9,312

 

9,409

Basic earnings per share

$1.65

$1.71

$ 1.54

Basic earnings per share from continuing operations

$1.65

$1.71

$ 1.45

Basic earnings (loss) per share from discontinued operations

--

--

$ 0.09

Diluted earnings per share

$1.61

$1.65

$ 1.48

Diluted earnings per share from continuing operations

$1.61

$1.65

$ 1.40

Diluted earnings (loss) per share from discontinued operations

--

--

$ 0.08

 

21. QUARTERLY FINANCIAL DATA (UNAUDITED):

 

 

1st Qtr.

2nd Qtr.

3rd Qtr.

4th Qtr.

Year

 






2006

 

 

 

 

 

Net sales

$20,683

$21,466

$23,811

$24,845

$90,805

Gross profit

11,478

11,585

12,766

13,282

49,111

Income from operations

5,584

5,535

6,188

6,176

23,483

Net income

3,587

3,548

3,948

3,696

14,779

Basic earnings per share

$ .40

$ .40

$ .44

$ .41

$ 1.65

Diluted earnings per share

$ .39

$ .39

$ .43

$ .40

$ 1.61

 

 

 

 

 

 

 

 

1st Qtr.

2nd Qtr.

3rd Qtr.

4th Qtr.

Year

 






2005

 

 

 

 

 

Net sales

$20,634

$20,906

$21,616

$21,610

$84,766

Gross profit

10,884

11,538

11,805

11,688

45,915

Income from operations

5,507

5,622

6,148

6,548

23,825

Net income

3,470

3,560

4,168

4,140

15,338

 

 

49

 


 

Basic earnings per share

$ .38

$ .40

$ .47

$ .46

$ 1.71

Diluted earnings per share

$ .37

$ .38

$ .45

$ .45

$ 1.65

22.

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 $951, $887, and $1,001 for 2006, 2005 and 2004, respectively. Rental commitments amount to: $548 for 2007, $434 for 2008, $199 for 2009, $130 for 2010 and $44 for 2011.

 

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.

 

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 $293 and $285 at December 31, 2006 and 2005, respectively.

 

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, 2006 and 2005, respectively, approximately $20 and $98 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.

 

23. SUBSEQUENT EVENTS:

 

On January 31, 2007, the Board of Directors declared a quarterly dividend of $0.04 per share, payable March 15, 2007 to shareholders of record on February 15, 2007.

 

On January 31, 2007, the Company entered into new employment agreements with Alfred E. Brennan, its Chief Executive Officer, and Arthur L. Herbst, Jr., its President.

 

On February 16, 2007, the Compensation Committee of the Board of Directors issued an aggregate of 125.2 shares of restricted stock and options to purchase an aggregate of 93.3 shares of common stock, to certain employees.

 

24.

NEW ACCOUNTING STANDARDS:

 

In June 2006, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)," which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not expect the impact of this interpretation to be material to the financial statements.

 

In 2006, the Company adopted the disclosure requirements of Emerging Issues Task Force (the “EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (that is, gross versus net presentation)" for tax receipts on the face of their income statements. The scope of this guidance includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). The Company has historically presented such taxes on a net basis.

 

50

 


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer, President, and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer, President, and Chief Financial Officer, to allow timely decisions regarding required disclosure and that the information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Management’s Report on Internal Control Over Financial Reporting.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this assessment, management believes that, as of December 31, 2006, the Company’s internal control over financial reporting is effective based on those criteria. KPMG LLP, the Company’s independent registered public accounting firm, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting which is included herein.

 

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal controls over financial reporting that occurred during the year ended December 31, 2006 that have materially affected, or that are reasonably likely to materially affect our internal control over financial reporting, except as disclosed below. During the year ended December 31, 2006, the Company acquired D&N Microproducts, Inc. and substantially all of the assets of Microbrush, Inc. and Microbrush International Ltd. (collectively “the Acquired Businesses”). Management excluded the Acquired Businesses from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. The Acquired Businesses have total assets of $36,100 and total revenues of $5,300 included in the consolidated financial statements of the Company as of and for the year ended December 31, 2006. The scope of management’s assessment of the effectiveness of internal control over financial reporting during 2006 does not include the Microbrush or D&N Microproducts businesses. This exclusion is in accordance with the general guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting in the year of acquisition. As with any acquisition, there are inherent risks in the timing, development and implementation of internal controls that could negatively impact us; however, we do not believe they will have a material impact on our financial statements.

 

Item 9B. Other Information.

 

None.

 

51

 


 

PART III

 

Item 10. Directors, Officers and Corporate Governance.

 

 

(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 2007 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 Board of Directors has determined that Brian F. Bremer, Chairman of the Audit Committee of the Board of Directors qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, and that Messrs. Bremer and Dr. Patrick J. Ferrillo, also a member of the Audit Committee of the Board of Directors, are “independent” as the term is used in Item 407 (a)(1) of Regulation S-K.

 

 

 

(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 principal executive officer, principal financial officer and principal accounting officer of the Company. The Company’s Code of Ethics Policy is available on the Company’s website at www.ydnt.com under “Corporate Governance.” The Company intends to post on its website any amendments to, or waivers from, its Code of Ethics applicable to Senior Financial Executives. The Company will provide shareholders with a copy of its Code of Ethics upon written request directed to the Company’s Secretary at the Company’s address.

 

Item 11. Executive Compensation.

 

Information concerning this item will be included under the captions “Executive Compensation,” “Compensation and Discussion Analysis,” “Summary Compensation Table,”Outstanding Equity Awards at 2006 Fiscal Year-end,” “Option Exercises and Stock Vested in Fiscal Year 2006,” “Compensation Committee Interlocks and Insider Participation,” “Corporate Governance,” and “Relationships and Related Person Transactions” in the Company's definitive Proxy Statement prepared in connection with the 2007 Annual Meeting of Shareholders, and is incorporated herein by reference. Such proxy statement will be filed with the Commission within 120 days after the close of the Company’s fiscal year.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information concerning this item will be included under the captions “Securities Beneficially Owned by Management and Principal Shareholders,” “Equity Compensation Plan Information," and “Compensation and Discussion Analysis” in the Company's definitive Proxy Statement prepared in connection with the 2007 Annual Meeting of Shareholders, and is incorporated herein by reference. Such proxy statement will be filed with the Commission within 120 days after the close of the Company’s fiscal year.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Information concerning this item will be included under the caption “Relationships and Related Person Transactions” in the Company's definitive Proxy Statement prepared in connection with the 2007 Annual Meeting of Shareholders, and is incorporated herein by reference. Such proxy statement will be filed with the Commission within 120 days after the close of the Company’s fiscal year.

 

Item 14. Principal Accountant Fees and Services.

Information concerning this item will be included under the caption “Independent Auditors” in the Company's definitive Proxy Statement prepared in connection with the 2007 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.

 

52

 


 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

(a)(1) Financial Statements — Reference is made to Item 8 hereof:

 

Consolidated Balance Sheets – December 31, 2006 and 2005

 

Consolidated Statements of Income – Years ended December 31, 2006, 2005, and 2004

 

Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2006, 2005, and 2004

 

Consolidated Statements of Cash Flows – Years ended December 31, 2006, 2005, and 2004

 

Notes to Consolidated Financial Statements – December 31, 2006

 

(a)(2) Financial Statement Schedule — The following financial statement schedule of the Company is included for the years ended December 31, 2006, 2005, and 2004:

 

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(a)

Agreement for Purchase and Sale of Assets, dated July 31, 2006, by and among Young Microbrush, LLC and Young Microbrush Ireland, Ltd., Microbrush, Inc., Microbrush International, Ltd., Phillip Mark, and Gunnar Wallin.

 

2.2(r)

Amendment to Agreement for Purchase and Sale of Assets, by and among Young Microbrush, LLC and Young Microbrush Ireland, Ltd., Microbrush, Inc., Microbrush International, Ltd., Phillip Mark, and Gunnar Wallin, dated February 5, 2007.

 

 

3.1(b)

Articles of Incorporation of Registrant and Statement of Correction

 

 

 

3.2(c)

Amended and Restated By-Laws of Registrant, effective as of March 2002

 

 

 

4.1(p)

Amended and Restated Credit Agreement, by and among Bank of America, N.A., as Administrative Agent, and Bank of America, N.A. as Lender and the Letter of Credit Issuer, and the Other Lenders and Registrant, dated November 28, 2006

 

 

 

10.1(c)

Amended and Restated 1997 Stock Option Plan

 

 

 

10.2(g)

Employment Agreement dated April 1, 2002, by and between the Registrant and George E. Richmond

 

 

 

10.3(c)

Stock Repurchase Agreement dated November 9, 2001, by and between the Registrant and George E. Richmond

 

 

 

10.4(c)

Form of the Registrant’s Restricted Stock Award Agreement with schedule of grantees

 

 

 

10.5(g)

Consulting Agreement dated April 1, 2002, by and between the Registrant and GER Consulting, Inc.

 

 

 

10.6(g)

Form of Indemnity Agreement entered into with each member of the Registrant's Board of Directors

 

 

 

10.7(i)

Amendment to George E. Richmond Employment Agreement dated May 14, 2002

 

 

53

 


 

 

10.8(i)

Amendment to GER Consulting, Inc. Consulting Agreement dated May 14, 2002

 

 

 

10.9(j)

Amendment to George E. Richmond Employment Agreement dated March 28, 2003

 

 

 

10.10(j)

Amendment to GER Consulting, Inc. Consulting Agreement dated March 28, 2003

 

 

 

10.11(j)

Amendment to Stock Repurchase Agreement dated March 28, 2003, between the Registrant and George E. Richmond.

 

 

10.12 (l)

2006 Long-Term Incentive Plan

 

10.13(m)

Employment Agreement dated June 2, 2006, by and between the Registrant and Christine Boehning

 

10.14(m)

Employment Agreement dated June 2, 2006, by and between the Registrant and Daniel Tarullo

 

10.15(m)

Employment Agreement dated June 2, 2006, by and between the Registrant and Stephen T. Yaggy

 

 

10.16(n)

Employment Agreement dated January 31, 2007, by and between the Registrant and Alfred E. Brennan, Jr.

 

 

 

10.17(n)

Employment Agreement dated January 31, 2007, by and between the Registrant and Arthur L. Herbst, Jr.

 

 

 

10.18(o)

Form of Non-employee Director Stock Option under the Amended and Restated 1997 Stock Option Plan

 

 

 

10.19(o)

Form of Employee Stock Option under the Amended and Restated 1997 Stock Option Plan

 

 

 

10.20(q)

Retention Bonus Agreement dated February 22, 2007, by and between the Registrant and Alfred E. Brennan

 

 

 

10.21(q)

Retention Bonus Agreement dated February 22, 2007, by and between the Registrant and Arthur L. Herbst