<PAGE> 1
As filed with the Securities and Exchange Commission on October 15, 1997
Registration No. 333-34971
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
YOUNG INNOVATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<C> <C> <C>
MISSOURI 3843 43-1718931
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
13705 SHORELINE COURT
EARTH CITY, MISSOURI 63045
(314) 344-0010
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GEORGE E. RICHMOND
PRESIDENT AND CHIEF EXECUTIVE OFFICER
YOUNG INNOVATIONS, INC.
13705 SHORELINE COURT
EARTH CITY, MISSOURI 63045
(314) 344-0010
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<C> <C>
JOHN L. GILLIS, JR., ESQ. THOMAS J. MURPHY, ESQ.
ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS MCDERMOTT, WILL & EMERY
ONE METROPOLITAN SQUARE, SUITE 2600 227 WEST MONROE STREET
ST. LOUIS, MISSOURI 63102-2740 CHICAGO, ILLINOIS 60606
(314) 621-5070 (312) 372-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997
PROSPECTUS
2,000,000 SHARES
YOUNG INNOVATIONS, INC.
[LOGO OF SILVER STAR WITH COMPANY NAME IN BLUE]
COMMON STOCK
------------------------
All 2,000,000 shares of Common Stock offered hereby (the "Offering") are
being sold by Young Innovations, Inc. (the "Company"). Prior to the Offering,
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $10.00 and $12.00 per
share. See "Underwriting" for information relating to the determination of the
initial public offering price.
Application has been made to have the Common Stock approved for listing on
the Nasdaq National Market under the symbol "YDNT."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION DISCUSSED
UNDER THE CAPTION "RISK FACTORS" AT PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
=============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, estimated to be $450,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock, on the same terms and conditions
set forth above, to cover over-allotments, if any. If the Underwriters
exercise the over-allotment option in full, the total Price to Public, the
total Underwriting Discount and the total Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the certificates representing shares of Common Stock will be made on
or about , 1997 through The Depository Trust Company or at the offices
of Robert W. Baird & Co. Incorporated, Milwaukee, Wisconsin.
<TABLE>
<S> <C>
ROBERT W. BAIRD & CO. CLEARY GULL REILAND & MCDEVITT
INCORPORATED INC.
</TABLE>
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
[PHOTO OF YOUNG DENTAL PRODUCT LINE SHOWING OVER FORTY PRODUCTS]
YOUNG DENTAL PRODUCTS INCLUDE A VARIETY OF HIGH QUALITY
PREVENTIVE PROPHY PRODUCTS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SYNDICATE SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
[LINE DRAWING OF DISPOSABLE PROPHY ANGLE
ATTACHING TO LOW SPEED HANDPIECE]
THE DISPOSABLE PROPHY ANGLE IS ATTACHED TO A LOW SPEED HANDPIECE.
[PHOTO OF DISPOSABLE
PROPHY ANGLE IN USE ON TEETH]
THE PROPHY CUP IS FILLED WITH A PROPHY PASTE AND USED TO POLISH TEETH.
[LINE DRAWING
OF RIGHT ANGLE
STYLE DISPOSABLE
PROPHY ANGLE
LINE DRAWING
OF CONTRA ANGLE
STYLE DISPOSABLE
PROPHY ANGLE]
DISPOSABLE PROPHY ANGLES ARE AVAILABLE IN RIGHT OR CONTRA ANGLE STYLES.
<PAGE> 5
[PHOTO OF LORVIC PRODUCT LINE SHOWING OVER THIRTY PRODUCTS]
LORVIC PRODUCTS INCLUDE A FULL LINE OF POLISHING PASTES, INFECTION CONTROL
PRODUCTS AND ASPIRATORS.
[PHOTO OF DENTICATOR PRODUCT LINE SHOWING OVER THIRTY PRODUCTS]
DENTICATOR PRODUCTS INCLUDE DISPOSABLE PREVENTIVE PRODUCTS
INCLUDING PROPHY AND HOME CARE PRODUCTS.
<PAGE> 6
PROSPECTUS SUMMARY
Young Innovations, Inc. was incorporated in July 1995 to serve as the
parent corporation for Young Dental Manufacturing Company ("Young Dental"),
founded at the turn of the century, and Lorvic Holdings, Inc. ("Lorvic") and its
operating subsidiary, The Lorvic Corporation, founded in 1953; Lorvic was
acquired by Young Dental in May 1995. Denticator International, Inc.
("Denticator") was acquired by the Company in July 1996. Young Dental
International, Inc. ("YDI") was organized as an indirect, wholly-owned
subsidiary in February 1996 to serve as a foreign sales corporation. Unless
otherwise indicated, all references in this Prospectus to the "Company" include
Young Dental, YDI, Lorvic and Denticator and all information is adjusted to
reflect the 1.2 for one stock split of the Common Stock effected in the form of
a stock dividend on October 15, 1997 and assumes no exercise of the
Underwriters' over-allotment option. The following summary is qualified in its
entirety by the detailed information and the Consolidated Financial Statements
of the Company, Lorvic and Denticator, including the Notes thereto, included
elsewhere in this Prospectus. With respect to information stated on a pro forma
basis for 1996, such information includes the results of operations of
Denticator as if the acquisition occurred on January 1, 1996.
THE COMPANY
The Company is a leading designer, manufacturer and marketer of single-use
supplies, autoclavable instruments and other products used by dental
professionals, primarily in preventive dentistry and infection control. The
Company has a leading market share in certain segments of the preventive
dentistry market which it believes is due to its (i) longstanding reputation for
high quality, innovative and reliable products; (ii) widespread name recognition
and ability to leverage the Young and Denticator brands; and (iii) consummation
of strategic acquisitions. Through the successful implementation of the
Company's business strategy and the acquisitions of Lorvic and Denticator, the
Company's net sales, income from operations and net income (pro forma for 1992)
have grown at compound annual rates of 21.4%, 30.7% and 21.9%, respectively,
from 1992 through 1996.
The Company's disposable and metal prophy angles, cups and brushes
(collectively, "Prophy Products"), which are integral components used in the
cleaning and polishing of teeth by dental professionals, represented 77.7% of
the Company's pro forma net sales in 1996. The Company's branded Prophy Products
currently have an estimated domestic market share of 53%, up from 22% in 1990.
Additionally, the Company has developed and acquired aspiration and infection
control products, as well as complementary preventive products such as pastes,
fluorides and fluoride applicators.
The Company markets its full line of products to dental professionals
worldwide through a network of medical and dental product distributors. The
Company actively supports its distributor relationships through Company sales
personnel in the United States, independent sales representatives in Canada and
exclusive sales representatives in 13 countries outside of North America. The
Company also uses non-exclusive distributors to service markets in 40 other
countries. All major distributors of dental products in North America sell the
Company's products, including Patterson Dental Company ("Patterson"), Henry
Schein, Inc. ("Schein"), Sullivan Dental Products, Inc. ("Sullivan") and H. Meer
Dental Supply Company, Inc. ("Meer"). The Company's product development,
manufacturing and marketing capabilities and its relationships with distributors
allow the Company to provide a broad range of high quality, innovative and
reliable products to dental professionals. Additionally, these capabilities and
relationships enable the Company to quickly and efficiently offer new products
or product extensions to its existing customer base and new markets.
The Company's objective is to profitably establish the number one or two
market share position for professional dental products in each of the market
segments in which it competes. The Company strives to achieve its objective by
enhancing and leveraging its name recognition and reputation; augmenting its
proprietary manufacturing capabilities with additional automation, capacity and
technology in order to maintain its low cost structure; and expanding its
established lines of single-use products which generate a significant stream of
recurring revenues and cash flows. The Company believes that its gross and
operating profit margins of 55.6% and 27.3% of 1996 pro forma net sales,
respectively, are the result of the successful implementation of these
strategies. The Company plans to capitalize on its established market position
by (i) pursuing strategic acquisitions of complementary businesses, product
lines and key technologies;
3
<PAGE> 7
(ii) actively developing new dental products and product lines; and (iii)
pursuing targeted international expansion.
The Company's established position in the professional dental products
industry has enabled it to acquire successfully Lorvic in May 1995 and
Denticator in July 1996. The Lorvic acquisition added complementary lines of
aspiration and infection control products, as well as complementary preventive
products such as pastes, fluorides and fluoride applicators. The Denticator
acquisition built on the Company's market position by adding Prophy Product
lines aimed at the popular price segment of the market, which the Company
traditionally had not targeted.
Preventive dentistry, including regular professional cleaning and polishing
of teeth ("prophy" or "prophylaxis"), is effective in reducing the incidence of
cavities, gingivitis and periodontal disease and, due to its cost effectiveness,
is increasingly emphasized by private dental insurers, managed care providers
and consumers. Based on data compiled by the Health Care Financing
Administration ("HCFA"), total spending on dental products and services
increased from $31.6 billion to $45.8 billion from 1990 to 1995, or 7.7% per
annum, and is estimated to increase by 5.6% per annum from 1995 to 2005. The
Company believes that the cost effectiveness of preventive dentistry, the
increasing proportion of dental services paid for by third parties and the
continued emphasis on infection control by dental professionals have led to and
will continue to result in an increase in the sales of preventive dental and
infection control products, particularly the Company's single-use products. In
1996, single-use products represented 92.9% of the Company's pro forma net
sales.
The Company believes that the dental industry is presently undergoing
consolidation at three different levels. Dental service providers are combining
as dental practice management companies acquire specialty and general dental
practices. Professional dental product distributors are also undergoing
consolidation as evidenced by Schein recently announcing its agreement to
acquire Sullivan. The professional dental product manufacturing industry is
highly fragmented with over 400 companies, many of which are small in size. The
Company believes that many small manufacturers will be at an increasing
disadvantage in the marketplace due to limited manufacturing and distribution
resources, increasing regulatory requirements and pricing pressures resulting
from the consolidation of distributors and dental service providers. As a
result, the Company anticipates increasing consolidation among manufacturers and
believes it is well positioned to make additional acquisitions due to its
acquisition experience and approach, name recognition, manufacturing
capabilities and established distribution network.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,000,000 shares
Common Stock to be outstanding after the Offering...
6,410,296 shares(1)
Use of Proceeds.....................................
To repay indebtedness, for working capital
needs and general corporate purposes,
including potential acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..............
YDNT
</TABLE>
- ---------------
(1) Does not include 350,000 shares reserved for issuance under the Company's
1997 Stock Option Plan, of which options to purchase 226,000 shares of
Common Stock will be issued immediately after the completion of the Offering
at an exercise price equal to the initial public offering price. Also does
not include an amount of shares not to exceed an aggregate value of $800,000
based upon the market value of the Common Stock on July 22, 1998, that may
be issued to the President and Chief Executive Officer of Denticator in July
1998 in connection with the Denticator acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management -- Stock Option Plan and -- Employment Agreements."
4
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1996(1) 1996(2) 1996 1997 1997(2)
------- ------- ------- ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................ $ 9,932 $11,604 $12,036 $17,496 $21,580 $24,568 $15,087 $18,214 $18,214
Cost of goods sold....... 5,126 5,609 5,457 7,379 9,470 10,896 6,430 7,343 7,343
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 4,806 5,995 6,579 10,117 12,110 13,672 8,657 10,871 10,871
Selling, general and
administrative
expenses............... 2,640 2,825 3,063 4,494 5,790 6,976 3,989 5,490 5,490
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations... 2,166 3,170 3,516 5,623 6,320 6,696 4,668 5,381 5,381
Interest expense......... 75 268 189 741 974 -- 700 895 --
Other expense (income),
net.................... (257) 29 (124) (320) 123 119 258 (17) (17)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 2,348 2,873 3,451 5,202 5,223 6,577 3,710 4,503 5,398
Provision for income
taxes.................. -- 700 1,270 2,044 1,955 2,459 1,367 1,716 2,056
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income............... $ 2,348 $ 2,173 $ 2,181 $ 3,158 $3,268 $ 4,118 $ 2,343 $ 2,787 $ 3,342
======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings per share(3).... $ 0.49 $ 0.71 $ 0.74 $ 0.66 $ 0.53 $ 0.63 $ 0.54
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 4,450 4,450 4,450 4,450 4,444 6,274 4,450 4,410 6,240
Pro forma net
income(4).............. $ 1,479 $ 1,805
======= =======
Pro forma earnings per
share(4)............... $ 0.33 $ 0.41
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
---------------------
AS
ACTUAL ADJUSTED(5)
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $(5,905) $ 9,470
Total assets.............................................. 32,566 38,856
Total debt (including current maturities)................. 13,741 21
Stockholders' equity...................................... 13,098 34,744
</TABLE>
- ---------------
(1) On July 22, 1996, the Company acquired Denticator. The income statement data
for the year ended December 31, 1996, include results of operations for
Denticator from July 22, 1996, through December 31, 1996. The balance sheet
data as of December 31, 1996, include Denticator as of that date.
(2) Pro forma as adjusted to give effect to (i) the acquisition of Denticator,
including the incurrence of additional indebtedness related thereto as if
the acquisition was completed on January 1, 1996; and (ii) the application
of $18.3 million of the net proceeds of the Offering to repay all
indebtedness of the Company which would have been outstanding as of January
1, 1996. Pro forma earnings per share assumes 4,444,003 and 4,409,914
weighted average shares outstanding for 1996 and the nine months ended
September 30, 1997, respectively, plus 1,830,000 shares, representing those
shares of Common Stock offered hereby at an assumed initial public offering
price of $11.00 per share (net of underwriting discount and Offering
expenses), sufficient to repay $18.3 million of indebtedness which would
have been outstanding as of January 1, 1996. The pro forma information is
not necessarily indicative of the results that actually would have been
achieved if the Denticator acquisition had been consummated on January 1,
1996, or that may be achieved in the future. See "Use of Proceeds" and
"Young Innovations, Inc. and Denticator International, Inc. Unaudited Pro
Forma Financial Information."
(See footnotes on following page)
5
<PAGE> 9
(Footnotes from preceding page)
- ---------------
(3) The Company plans to retire substantially all of its outstanding
indebtedness using a portion of the net proceeds from the Offering. Assuming
the Company's revolving line of credit and long-term borrowings were retired
as of January 1, 1996, supplementary earnings per share would be $0.50 and
$0.57 for the nine months ended September 30, 1996, and 1997, respectively,
reflecting the elimination of interest expense, net of income taxes, of
$441,000 for 1996 and $555,000 for 1997. Supplementary earnings per share
assumes 4,450,210 and 4,409,914 weighted average shares outstanding for the
nine months ended September 30, 1996 and 1997, respectively, plus 1,170,000
and 1,460,000 shares, representing those shares of Common Stock sold at an
assumed initial public offering price of $11.00 per share (net of
underwriting discount and Offering expenses) and the application of the net
proceeds therefrom sufficient to retire $11.5 million and $14.4 million of
average outstanding borrowings for the nine months ended September 30, 1996
and 1997, respectively.
(4) Until February 28, 1993, Young Dental had elected to be treated as an S
Corporation for income tax purposes. Effective March 1, 1993, Young Dental
terminated its S Corporation status and became a taxable entity. Assuming
Young Dental was a C Corporation, the estimated additional pro forma
provision for income taxes would have been $869,000 for 1992 and $368,000
for 1993, assuming an income tax rate of 37.0%.
(5) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
6
<PAGE> 10
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Future events and the Company's actual results
could differ materially from those contemplated by such forward-looking
statements. It should be recognized that risks, including those set forth below,
may be significant, presently or in the future, and may materially affect the
Common Stock or the Company.
HIGHLY COMPETITIVE MARKETS
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 and reliability, name recognition, distribution network,
customer service and, to a lesser extent, price. The relative speed with which
the Company can develop, complete testing of, obtain regulatory approval for and
sell commercial quantities of new products is also an important competitive
factor. Failure of the Company to offer products which either contain features
similar to or more desirable than products offered by its competitors or, in
certain cases, to meet the prices offered by its competitors, could have a
material adverse effect on the business, financial condition and results of
operations of the Company. Some of the Company's competitors have greater
financial, research, manufacturing and marketing resources than the Company. The
Company's inability to compete effectively against existing or future
competitors could result in a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."
DEPENDENCE ON KEY DISTRIBUTORS; CONSOLIDATION OF KEY DISTRIBUTORS AND DENTAL
SERVICE PROVIDERS
Patterson, Schein and Sullivan, three distributors of the Company's
products, accounted for 17.3%, 16.8% and 9.8% of the Company's net sales for the
nine months ended September 30, 1997, respectively, and 17.9%, 19.1% and 7.7% of
the Company's net sales for the year ended December 31, 1996, respectively.
Increasingly, there has been consolidation of dental and medical products
distributors and dental service providers. In August 1997, Schein announced it
had agreed to acquire Sullivan; Schein and Sullivan collectively accounted for
26.6% and 26.8% of the Company's net sales for the nine months ended September
30, 1997 and for the year ended December 31, 1996, respectively. The Company has
no formal agreements with its distributors, which generally purchase products
from the Company by purchase order. The inability or unwillingness of any of
these distributors to continue to purchase the Company's products could
adversely affect the Company's business, financial condition and results of
operations. Additionally, as distributors and dental service providers
consolidate and become larger, their ability to negotiate more favorable terms
for the Company's products, including lower prices, may increase. See "Business
- -- Marketing and Distribution."
RISKS ASSOCIATED WITH ACQUISITIONS
In pursuing its acquisition strategy, the Company will face risks commonly
encountered with growth through acquisitions. These risks include the incurrence
of significantly higher than anticipated capital expenditures and operating
expenses, disruption to the Company's ongoing business, dissipation of the
Company's management resources, failure to assimilate the operations and
personnel of acquired companies, inability to maintain uniform standards,
controls and policies and impairment of relationships with employees and
customers as a result of changes in management. There can be no assurance that
the Company will be successful in overcoming these risks or any other problems
encountered with acquisitions, including the Company's acquisitions of Lorvic
and Denticator. To the extent the Company does not successfully avoid or
overcome the risks or problems related to acquisitions, the Company's results of
operations and financial condition could be adversely affected. Future
acquisitions also will have a significant impact on the Company's financial
position and capital needs. Acquisitions could include significant goodwill and
intangible assets, resulting in substantial amortization charges to the Company
that may reduce stated earnings following such acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Growth Strategy."
7
<PAGE> 11
AVAILABILITY OF ACQUISITION CANDIDATES; NEED FOR ADDITIONAL CAPITAL
The Company's ability to grow through acquisitions will be dependent upon
(i) the availability of suitable acquisition candidates at an acceptable cost;
(ii) the Company's ability to compete effectively for available acquisition
candidates; and (iii)the availability of capital to complete acquisitions. The
Company intends to finance such acquisitions with cash generated from
operations, the incurrence or assumption of indebtedness and issuances of Common
Stock, as appropriate. Using cash to finance acquisitions could substantially
limit the Company's financial flexibility, using debt could result in financial
covenants that limit the Company's operating and financial flexibility and using
Common Stock may result in significant dilution of the interest in the Company
of the stockholders at that time. There can be no assurance that the Company
will be able to obtain additional capital on acceptable terms. If the Company is
unable to obtain additional capital on acceptable terms, the Company's
acquisition activities may be limited. To the extent the Company is limited in
its ability to make acquisitions for any reason, the Company's growth, financial
condition and results of operations could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Growth
Strategy."
ABILITY TO MANAGE GROWTH
The Company has grown significantly in recent years and is expected to
continue to grow through acquisitions and internal growth. Management has
expended, and expects to continue to expend, significant time and effort in
evaluating, completing and integrating acquisitions and supporting internal
growth, including product development activities. There can be no assurance that
the Company's systems, procedures and controls will be adequate to support the
Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. Any inability by the Company to manage
its growth or to attract and retain additional qualified management could result
in a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Growth Strategy."
TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE; DEPENDENCE ON NEW
PRODUCTS
The market for the Company's products is characterized by frequent product
improvements, evolving technology and the development of new products, including
increasingly effective preventive dental products designed for home use. The
development of new, improved or alternative methods for performing prophylaxis
treatments could render obsolete or reduce the need for certain of the Company's
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's future
growth and profitability are dependent upon its timely ability to continue to
develop new and improved products. There can be no assurance that the Company
will be able to develop such new or improved products in a timely manner or that
such new or improved products will achieve market acceptance. See "Business --
Product Development."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the continued services of
certain key employees, including George E. Richmond, President and Chief
Executive Officer, Alfred E. Brennan, Senior Vice President and Chief Operating
Officer, Michael W. Eggleston, Vice President, Treasurer and Chief Financial
Officer, Richard G. Richmond, Secretary of the Company and President of Young
Dental, and Jose L. Mendoza, President and Chief Executive Officer of
Denticator. The loss of the services of any one of these individuals could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company does not maintain any "key man" insurance
policies on its key employees. Additionally, the future success of the Company
will depend, among other factors, on the Company's ability to continue to hire
and retain the necessary qualified technical and managerial personnel. The
Company competes for such personnel with numerous other companies, academic
institutions and other organizations. See "Management."
8
<PAGE> 12
RISKS ASSOCIATED WITH CHANGE IN MARKETING STRATEGY
The Company has traditionally marketed its products in the United States
through independent sales representatives and a small number of Company sales
personnel. In July 1997, the Company terminated contracts with all of its
independent sales representatives in the United States and increased the size of
its employee sales force in order to refocus its sales efforts. The Company's
sales could be adversely affected by these changes, particularly in the early
stages of implementation of the new sales strategy. The fixed costs associated
with the Company's sales personnel may exceed the variable costs previously
associated with the independent sales representatives who were compensated
solely on a commission basis. All of these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Marketing and Distribution."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT
The Company's success is dependent upon its patented and proprietary
technologies. In addition to the Company's patents and pending patent
applications, the Company relies upon copyright, trademark and trade secret laws
and licenses and confidentiality and non-disclosure agreements to protect its
intellectual property and proprietary technology. There can be no assurance that
the steps taken by the Company to protect its 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 on the Company's
business, financial condition and results of operations. In September 1995,
judgment was entered in the Federal District Court for the Eastern District of
Missouri holding two of the Company's patents on its original disposable prophy
angle to be invalid. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Business -- Product
Development and -- Legal Proceedings."
GOVERNMENT REGULATION
The development, manufacture and marketing of the Company's products are
subject to extensive and rigorous regulation by the United States Food and Drug
Administration (the "FDA") and by other governmental agencies and relevant
foreign agencies. Although the Company's current products are sold in the United
States under 510(k) clearances, over-the-counter ("OTC") drug monographs, and
exemptions from FDA drug and device clearance and approval requirements, the
process of obtaining and maintaining FDA and other required regulatory approvals
for dental device and related products is generally lengthy and expensive, and
the outcome is often unpredictable. There can be no assurance that the Company's
current market clearances can be maintained or that approvals will be granted
for future products on the basis of 510(k) clearances or that products can be
marketed under an OTC monograph or exemptions from FDA approval requirements.
The regulatory process may delay the marketing of new products for lengthy
periods, may result in substantial additional costs and may provide advantages
to certain competitors. Moreover, regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed. The FDA also actively regulates the uses for which products may be
promoted and the claims that may be made in promotional materials.
The Company is also subject to FDA Quality System Requirements and Good
Manufacturing Practices and extensive recordkeeping and reporting requirements
for device and drug product sales in the United States. The Company's
manufacturing facilities are subject to periodic inspections by United States
federal agencies, as well as state and local agencies. The Company contracts for
the assembly of approximately 72% of its disposable prophy angles in Mexico with
third parties. While the Company frequently audits these operations, there can
be no assurance that they will continue to meet FDA Quality System Requirements
and Good Manufacturing Practices. Failure to comply with applicable regulatory
requirements can result in, among other things, import detentions, fines, civil
penalties, suspensions or losses of approvals, recalls or seizures of products,
operating restrictions and criminal prosecutions.
9
<PAGE> 13
PRODUCT LIABILITY; RISK OF RECALL
The Company is subject to potential product liability claims as a result of
the design, manufacture and marketing of its products. Claims alleging product
liability may involve large potential damages and significant defense costs. The
Company currently maintains insurance coverage for such claims in the aggregate
amount of $5.0 million, but there can be no assurance that the Company's
insurance coverage will be adequate or that all such claims will be covered by
the Company's insurance. While the Company has been able to obtain product
liability insurance in the past, such insurance varies in cost, can be difficult
to obtain and may not be available in the future on terms acceptable to the
Company. A product liability claim could adversely affect the Company's
reputation. A successful claim against the Company in excess of the available
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the FDA and similar governmental authorities in other
countries have the authority to require the recall of products in the event of
material deficiencies or defects in design or manufacture. Although the Company
adheres to strict quality control procedures, a government mandated or voluntary
product recall by the Company could occur as a result of material deficiencies,
component failures, manufacturing errors or design defects caused by the Company
or any of its suppliers. Any recall of products could have a material adverse
effect on the Company's reputation, business, financial condition and results of
operations.
POSSIBLE REDUCTION OR ELIMINATION OF DENTAL INSURANCE COVERAGE
The cost of dental care, including preventive dental care, is increasingly
funded by third party payors, including private and corporate dental insurance
plans. A reduction or elimination of insurance coverage for dental care
generally, or for preventive dental care in particular, would adversely affect
the Company's ability to sell its products and have a material adverse effect on
the Company's business, financial condition and results of operations.
CONCENTRATION OF OPERATIONS IN SINGLE FACILITY
The Company currently has three operating facilities, one in Earth City,
Missouri, one in Brownsville, Texas and one in Sacramento, California. However,
a substantial majority of the Company's administrative, manufacturing,
marketing, customer service, product development, information systems, product
ordering and product shipping activities are conducted from the Earth City
facility. While Earth City has not been affected by floods in recent years,
including the record floods in the summer of 1993, it is located in a former
flood plain of the Missouri River. The Company believes that dikes protecting
Earth City are sufficient to prevent flooding in the future. However, there can
be no assurance that future floods will not affect the Company's Earth City
facility and cause interruption of the Company's business. Although the Company
carries business interruption insurance and believes that in an emergency it
could continue to operate by moving a part of its production to its Texas and
California facilities and contracting with third parties to fabricate certain
products, a substantial interruption of business at the Company's Earth City
facility, whether resulting from flood, fire or other causes, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Properties."
CONCENTRATION OF SUPPLIERS
The Company has two suppliers for the rubber used to produce its prophy
cups. The Company relies on proprietary rubber formulations that were
independently developed and are owned by these suppliers. In 1996 and the first
nine months of 1997, respectively, the Company's expenditures for rubber
aggregated $184,000 and $152,000. The Company does not have formal agreements
with these suppliers and purchases rubber by purchase order. If the Company is
no longer able to obtain its rubber or the formula from either supplier, it
would be forced to obtain a rubber formulation from another source. There can be
no assurance that another supplier would be able to develop an acceptable
formulation or be able to provide the Company with sufficient amounts of rubber.
If the Company is unable to obtain a satisfactory rubber formulation, the
quality of its
10
<PAGE> 14
prophy cups could be negatively impacted and the Company could suffer a loss of
reputation and a decline in sales of Prophy Products. These factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PENDING LEGAL PROCEEDINGS
On May 30, 1997, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") filed a Petition against Young Dental in
the Circuit Court for the City of St. Louis, Missouri (the "Current Action").
The Current Action results from an action brought in 1993 by Young Dental
against the Adverse Parties in the Federal District Court for the Eastern
District of Missouri (the "Prior Action"), alleging, among other things, patent
infringement and misappropriation of trade secrets. The Prior Action was
resolved in favor of the Adverse Parties. In the Current Action, consisting of
three counts alleging malicious prosecution and three counts alleging abuse of
process related to the Prior Action, the Adverse Parties seek actual damages in
unspecified amounts in excess of $25,000 and, in a separate count, seek punitive
damages. While the Current Action is in its very early stages, the Company
believes it has adequate defenses to each of plaintiffs' claims and intends to
defend the Current Action vigorously.
The Internal Revenue Service (the "IRS") examined Lorvic's federal income
tax returns for the years ended March 31, 1992 through 1995 and proposed
deficiencies in federal income taxes for those years in an aggregate amount of
$766,000 due to classification of certain intangible assets. Lorvic has filed
two petitions with the United States Tax Court contesting these proposed
deficiencies. The petitions have been consolidated and are scheduled for trial
in January 1998. In accordance with the stock purchase agreement pursuant to
which the Company acquired Lorvic in May 1995, the previous stockholders of
Lorvic are responsible for the settlement of this matter to the extent of
$700,000 held in an escrow fund, together with earnings thereon, plus an
additional $200,000 to cover any interest and penalties related to such matters.
While there can be no such assurance, the Company believes the escrowed amounts
will be sufficient to satisfy these deficiencies in full for all affected years
if required. See "Certain Transactions."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, the Company's President and Chief
Executive Officer, George Richmond, will own or have the right to vote an
aggregate of 51.4% of the outstanding shares of Common Stock (49.1% if the
Underwriters' over-allotment option is exercised in full). As a result, Mr.
Richmond will be in a position to control the management and policies of the
Company, including, but not limited to, electing or removing the Company's Board
of Directors and controlling any other actions requiring stockholder approval.
See "Certain Transactions," "Principal Stockholders" and "Description of Capital
Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock will suffer an immediate and substantial
dilution of $8.43 per share in the net tangible book value per share from the
assumed initial public offering price of $11.00. See "Dilution."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that a trading market will develop and
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price will be determined through negotiations between the Company and
representatives of the Underwriters and may not be indicative of the market
price of the Common Stock following the Offering. The stock market has, in the
past, experienced price and volume fluctuations that at times have been
unrelated to corporate operating performance. Such market volatility may
adversely affect the market price of the Common Stock. Additionally, other
factors such as variations in the Company's financial results, announcements of
technological innovations or new products by its competitors, government
regulation, developments with respect to patents, proprietary rights or
litigation, and general market conditions may have a material adverse effect on
the market price of the Common Stock. See "Underwriting."
11
<PAGE> 15
DIVIDEND POLICY
The Company currently anticipates that, after completion of the Offering,
all of its earnings will be retained for development and expansion of the
Company's business and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have 6,410,296 shares of Common
Stock outstanding. Of these shares, the 2,000,000 shares of Common Stock sold in
the Offering will be freely tradeable in the market, except for shares purchased
by "affiliates" of the Company which will be subject to the resale limitations
(excluding the holding period requirement) of Rule 144 under the Securities Act
of 1933, as amended (the "Act"). Substantially all of the remaining 4,410,296
shares may be sold immediately following the Offering subject to compliance with
the volume and manner of sale limitations of Rule 144. All of the officers,
Directors and stockholders of the Company and the Company have agreed not to
sell any of their shares of Common Stock for a period of 180 days after the date
of the Prospectus without the prior written consent of Robert W. Baird & Co.
Incorporated. See "Shares Eligible for Future Sale."
12
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated to be approximately $20.0 million
($23.1 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share. The Company
intends to use the proceeds (i) to repay borrowings of approximately $13.7
million under the Revolving Credit and Term Loan Agreement dated July 22, 1996
between the Company and NationsBank, N.A., as amended (the "Credit Agreement")
and (ii) for working capital and general corporate purposes, including making
strategic acquisitions. Indebtedness to be repaid under the Credit Agreement
includes a term loan maturing on December 1, 1999, which had an outstanding
principal balance of $8.5 million and bore interest at 8.2% per annum as of
September 30, 1997, and a revolving line of credit maturing on December 1, 1999,
which had an outstanding principal balance of $5.2 million and bore interest at
8.0% per annum as of September 30, 1997. Loans under the Credit Agreement were
made in July 1996 and used to acquire Denticator and repay other existing debt,
including debt incurred in connection with the Lorvic acquisition. As of the
date of this Prospectus, there are no agreements or understandings with respect
to specific acquisitions. Pending such uses, the Company will invest the net
proceeds from the sale of the Common Stock offered hereby in short-term,
investment-grade, interest-bearing marketable securities.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
inception. The Company currently intends to retain earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Payment of cash dividends, if any, will be at the discretion
of the Company's Board of Directors and will be dependent upon the earnings and
financial condition of the Company and any other factors deemed relevant by the
Board of Directors and will be subject to any applicable restrictions contained
in the Company's then existing credit arrangements. In addition, the Credit
Agreement prohibits the payment of dividends without the bank's consent.
13
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents,
short-term debt and capitalization of the Company as of September 30, 1997 and
as adjusted to reflect (i) the sale of 2,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share; (ii) the
application of the net proceeds therefrom; and (iii) the termination of certain
stockholder agreements that will eliminate the put rights related to shares of
puttable Common Stock. See "Use of Proceeds" and "Certain Transactions." The
table should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 98 $ 6,388
======= =======
Short-term debt -- Revolving line of credit................. $ 5,268 $ --
======= =======
Long-term obligations (including current maturities)
Bank term loan............................................ $ 8,452 $ --
Other long-term obligations............................... 21 21
------- -------
Total long-term obligations............................ 8,473 21
------- -------
Puttable Common Stock, 201,996 shares issued and
outstanding(1)............................................ 1,636 --
------- -------
Stockholders' equity
Common Stock, $.01 par value, 25,000,000 shares
authorized, 4,208,300 shares issued and outstanding,
6,410,296 shares issued and outstanding, as
adjusted(1)(2)......................................... 42 64
Additional paid-in capital................................ -- 19,990
Unrealized gain on marketable securities, net of tax...... 12 12
Retained earnings......................................... 13,353 14,987
Common Stock in treasury.................................. (309) (309)
------- -------
Total stockholders' equity............................. 13,098 34,744
------- -------
Total capitalization................................. $23,207 $34,765
======= =======
</TABLE>
- ---------------
(1) The puttable Common Stock, all of which is held by employees of the Company,
is subject to agreements giving holders the right, and upon termination of
employment the obligation, to sell their shares to the Company's majority
stockholder or the Company at an appraised value. Upon consummation of the
Offering, such agreements will terminate and all outstanding shares of
puttable Common Stock will be reflected in stockholders' equity. See
"Certain Transactions."
(2) Does not include 350,000 shares reserved for issuance under the Company's
1997 Stock Option Plan, of which options to purchase 226,000 shares of
Common Stock will be issued immediately after the completion of the Offering
at an exercise price equal to the initial public offering price. Also does
not include an amount of shares not to exceed an aggregate value of $800,000
based upon the market value of the Common Stock on July 22, 1998, that may
be issued to the President and Chief Executive Officer of Denticator in July
1998 in connection with the Denticator acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management -- Stock Option Plan and -- Employment Agreements."
14
<PAGE> 18
DILUTION
The Company's net tangible book value was $(5.2) million, or $(1.23) per
share, based on 4,208,300 shares of Common Stock outstanding as of September 30,
1997 (excluding 201,996 shares of puttable Common Stock). Net tangible book
value per share represents the amount of the Company's total tangible assets
less its total liabilities, divided by the total number of shares of Common
Stock outstanding. After giving effect to (i) the sale of the 2,000,000 shares
of Common Stock being offered hereby at an assumed initial public offering price
of $11.00 per share; (ii) the application of the estimated net proceeds
therefrom; and (iii) the elimination of all put rights related to 201,996 shares
of puttable Common Stock, the pro forma net tangible book value of the Company
as of September 30, 1997 would have been $16.5 million or $2.57 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $3.80 per share to existing stockholders and an immediate dilution of $8.43
per share to new investors purchasing shares of Common Stock in the Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share before the Offering..... $ (1.23)
Increase per share attributable to new investors.......... 3.80
-------
Pro forma net tangible book value per share after the
Offering.................................................. 2.57(2)
------
Dilution of net tangible book value per share to new
investors(1).............................................. $ 8.43(2)
======
</TABLE>
- ---------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the assumed initial public offering price per
share.
(2) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share and the dilution per share to
purchasers of the shares would be $2.91 and $8.09, respectively.
15
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical consolidated financial
data for the Company for each of the five years in the period ended December 31,
1996 and the nine months ended September 30, 1996 and 1997. The Income Statement
Data set forth below for the years ended December 31, 1994, 1995 and 1996 and
the Balance Sheet Data as of December 31, 1995 and 1996 are derived from the
audited consolidated financial statements of the Company included elsewhere in
this Prospectus. The Income Statement Data for the years ended December 31, 1992
and 1993 and the Balance Sheet Data as of December 31, 1992, 1993 and 1994 of
the Company are derived from audited financial statements not included herein.
The Income Statement Data for the nine months ended September 30, 1996 and 1997
and the Balance Sheet Data as of September 30, 1997 of the Company are derived
from unaudited consolidated financial statements that include, in the opinion of
management, all adjustments, consisting only of normal, recurring adjustments,
necessary for the fair presentation of the information set forth herein. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1997. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the "Young Innovations, Inc. and Denticator International, Inc.
Unaudited Pro Forma Financial Information" and the Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996(1) 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $9,932 $11,604 $12,036 $17,496 $21,580 $15,087 $18,214
Cost of goods sold............... 5,126 5,609 5,457 7,379 9,470 6,430 7,343
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 4,806 5,995 6,579 10,117 12,110 8,657 10,871
Selling, general and
administrative expenses....... 2,640 2,825 3,063 4,494 5,790 3,989 5,490
------- ------- ------- ------- ------- ------- -------
Income from operations........... 2,166 3,170 3,516 5,623 6,320 4,668 5,381
Interest expense................. 75 268 189 741 974 700 895
Other expense (income), net...... (257) 29 (124) (320) 123 258 (17)
------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes.................. 2,348 2,873 3,451 5,202 5,223 3,710 4,503
Provision for income taxes....... -- 700 1,270 2,044 1,955 1,367 1,716
------- ------- ------- ------- ------- ------- -------
Net income....................... $2,348 $2,173 $2,181 $3,158 $3,268 $2,343 $ 2,787
======= ======= ======= ======= ======= ======= =======
Earnings per share(2)............ $ 0.49 $ 0.71 $ 0.74 $ .53 $ .63
======= ======= ======= ======= =======
Weighted average common shares
outstanding................... 4,450 4,450 4,450 4,450 4,444 4,450 4,410
Pro forma net income(3).......... $1,479 $1,805
======= =======
Pro forma earnings per
share(3)...................... $ 0.33 $ 0.41
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996(1) 1997
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $1,908 $ (580) $1,559 $(3,111) $(5,772) $(5,905)
Total assets...................... 8,012 8,545 7,711 22,107 32,481 32,566
Total debt (including current
maturities).................... 960 4,223 472 10,773 16,406 13,741
Stockholders' equity.............. 5,928 3,207 5,253 7,121 10,311 13,098
</TABLE>
(See footnotes on following page)
16
<PAGE> 20
(Footnotes from preceding page)
- ---------------
(1) On July 22, 1996, the Company acquired Denticator. The income statement data
for the year ended December 31, 1996, include results of operations for
Denticator from July 22, 1996, through December 31, 1996. The balance sheet
data as of December 31, 1996, include Denticator as of that date.
(2) The Company plans to retire substantially all of its outstanding
indebtedness using a portion of net proceeds from the Offering. Assuming the
Company's revolving line of credit and long-term borrowings were retired as
of January 1, 1996, supplementary earnings per share would be $0.50 and
$0.57 for the nine months ended September 30, 1996, and 1997, respectively,
reflecting the elimination of interest expense, net of income taxes, of
$441,000 for 1996 and $555,000 for 1997. Supplementary earnings per share
assumes 4,450,210 and 4,409,914 weighted average shares outstanding for the
nine months ended September 30, 1996 and 1997, respectively, plus 1,170,000
and 1,460,000 shares, representing those shares of Common Stock sold at an
assumed initial public offering price of $11.00 per share (net of
underwriting discount and Offering expenses) and the application of the net
proceeds therefrom sufficient to retire $11.5 million and $14.4 million of
average outstanding borrowings for the nine months ended September 30, 1996
and 1997, respectively.
(3) Until February 28, 1993, Young Dental had elected to be treated as an S
Corporation for income tax purposes. Effective March 1, 1993, Young Dental
terminated its S Corporation status and became a taxable entity. Assuming
Young Dental was a C Corporation, the estimated additional pro forma
provision for income taxes was $869,000 for 1992 and $368,000 for 1993,
assuming an income tax rate of 37.0%.
17
<PAGE> 21
YOUNG INNOVATIONS, INC.
AND
DENTICATOR INTERNATIONAL, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma financial information combines the
operations of Young Innovations, Inc. and Denticator (acquired by the Company in
July 1996) for the year ended December 31, 1996 as if the following had occurred
on January 1, 1996: (i) the acquisition of Denticator and the incurrence of
indebtedness related thereto under the assumptions set forth in the accompanying
notes; and (ii) the sale of a portion of the Common Stock offered hereby and the
application of the net proceeds therefrom sufficient to retire $18.3 million of
borrowings. The unaudited pro forma financial information is not necessarily
indicative of the results of operations of the combined companies as they may be
in the future or as they might have been had the sale of Common Stock and the
acquisition been effective January 1, 1996. The unaudited pro forma financial
information should be read in conjunction with the historical financial
statements and notes thereto of the Company and Denticator included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY FOR DENTICATOR FOR THE
THE PERIOD FROM
YEAR ENDED JANUARY 1, 1996 PRO FORMA OFFERING PRO FORMA
DECEMBER 31, 1996 THROUGH JULY 22, 1996 ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------------- --------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............. $21,580 $2,988 $ -- $24,568 $ -- $24,568
Cost of goods sold..... 9,470 1,426 -- 10,896 -- 10,896
-------- ------ ------ ------- ------ -------
Gross profit........... 12,110 1,562 -- 13,672 -- 13,672
Selling, general and
administrative
expenses............. 5,790 1,504 (318)(1) 6,976 -- 6,976
-------- ------ ------ ------- ------ -------
Income from
operations........... 6,320 58 318 6,696 -- 6,696
Interest expense....... 974 50 338(2) 1,362 (1,362)(3) --
Other expense (income),
net.................. 123 (4) -- 119 -- 119
-------- ------ ------ ------- ------ -------
Income before provision
for income taxes..... 5,223 12 (20) 5,215 1,362 6,577
Provision for income
taxes................ 1,955 7 (7)(4) 1,955 504(4) 2,459
-------- ------ ------ ------- ------ -------
Net income............. $ 3,268 $ 5 $ (13) $ 3,260 $ 858 $ 4,118
======== ====== ====== ======= ====== =======
Earnings per share..... $ 0.73 $ 0.66
======= =======
Weighted average common
shares
outstanding(5)....... 4,444 6,274
======= =======
</TABLE>
- ---------------
(1) To reflect: (i) additional amortization of goodwill of $106,000; (ii)
additional expense for incentive compensation to an officer of Denticator to
be earned over a period of 24 months from the date of acquisition of
$224,000; and (iii) reduction in royalty expense of $648,000 payable to Bio
Dental Technologies Corp. under a royalty agreement with Denticator that was
terminated in connection with the acquisition. Incentive compensation to the
officer of Denticator is in the form of an amount of shares of Common Stock
not to exceed an aggregate value of $800,000 based upon the market value of
the Common Stock on July 22, 1998, which is being accrued for at $100,000
per quarter. See "Management -- Employment Agreements."
(2) To reflect additional interest expense of $338,000 on additional borrowings
of $7.6 million used to finance the acquisition.
(3) To reflect the elimination of interest expense as a result of application of
$18.3 million of the net proceeds from the sale of Common Stock sufficient
to retire indebtedness which would have been outstanding as of January 1,
1996.
(4) Represents the income tax effect of the adjustments described above at an
assumed rate of 37.0%.
(5) Pro forma as adjusted weighted average shares outstanding include an
additional 1,830,000 shares, representing those shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share (net of underwriting discount and Offering expenses) and the
application of $18.3 million of the net proceeds therefrom sufficient to
retire indebtedness which would have been outstanding as of January 1, 1996.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements that are based
on the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. Such statements
include those regarding successfully implementing and continuing the Company's
business strategies and growth strategies. Because such statements involve risks
and uncertainties, actual actions and strategies and the timing and expected
results thereof may differ materially from those expressed or implied by such
forward-looking statements, and the Company's future results, performance or
achievements could differ materially from those expressed in, or implied by, any
such forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, those discussed under
"Risk Factors." The following presentation of management's discussion and
analysis of the Company's financial condition and results of operations should
be read in conjunction with the Company's Consolidated Financial Statements, the
Notes thereto and other financial information included elsewhere in this
Prospectus.
OVERVIEW
Through its Young Dental and recently acquired Lorvic and Denticator
brands, the Company provides one of the broadest lines of supplies and
instruments to the preventive dentistry and infection control segments of the
professional dental products market.
The Company's net sales, income from operations and net income (pro forma
for 1992) have grown to $21.6 million, $6.3 million and $3.3 million
respectively, in 1996 from $9.9 million, $2.2 million and $1.5 million,
respectively, in 1992, representing compound annual growth rates of
approximately 21.4%, 30.7% and 21.9%, respectively. The Company's growth has
been driven by three principal factors: (i) the successful introduction of a
line of highly reliable disposable prophy angles; (ii) the increase in its
market share of metal prophy angles, cups and brushes; and (iii) the
acquisitions of Lorvic and Denticator. The Company's estimated domestic share of
the branded Prophy Products market has increased to 53% in 1996 from 22% in
1990, a significant portion of which is attributable to the introduction of its
line of disposable prophy angles, a maintenance free metal prophy angle and
several newly designed cups and brushes for its prophy angles. Additionally,
approximately 42.5% of the Company's pro forma net sales in 1996 resulted from
new products introduced by Young Dental since 1990. The Company has also
benefited from growth in private label arrangements with certain of its key
distributors and from increased market share resulting from product promotional
activities, such as price promotions organized around industry conventions,
volume purchase rebate programs and national promotions targeted to dental
professionals. Typically, the Company's national promotions provide for a free
product for each purchase of a designated number of products. During such
national promotions, customers tend to increase their purchases, thus increasing
their inventories and reducing their purchases in subsequent quarters. While the
Company infrequently conducts national promotions, it conducted such a promotion
in the first quarter of 1997 which increased net sales in that quarter by
approximately $600,000 and decreased net sales in the second quarter of 1997 by
approximately $300,000, in each case as compared to normalized levels. The
national promotion may also impact comparisons with comparable future quarters.
In addition, the Company offers annual rebate programs in which a portion of the
purchase price of products is rebated to customers who meet certain annual
volume purchase levels. In order to qualify for these rebate programs, customers
tend to increase purchases in the fourth quarter. The Company pays rebates for
the prior year in the first quarter of the subsequent year.
A principal component of the Company's growth strategy is to expand through
strategic acquisitions. On May 5, 1995, the Company acquired the common stock of
Lorvic for approximately $13.4 million. Lorvic provided the Company with lines
of aspiration, infection control and preventive dental products that directly
complement its strong position in Prophy Products. The Company borrowed $13.5
million to fund the Lorvic acquisition. On July 22, 1996, the Company acquired
the assets and liabilities of Denticator for $7.6 million in cash and an
obligation to provide approximately $900,000 of Company products deliverable to
Bio Dental Technologies Corp. over approximately a 24 month period following the
acquisition. As of September 30, 1997, $267,000 of these products remained to be
delivered within the next 12 months. Denticator's line of
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<PAGE> 23
popular priced disposable prophy angles enabled the Company to extend its line
of Prophy Products, which the Company believes is the broadest Prophy Product
offering available, and significantly increase its share of the domestic Prophy
Product market. The Company borrowed $16.5 million to fund the Denticator
acquisition and to repay debt incurred in connection with the Lorvic
acquisition. Lorvic's and Denticator's results of operations are included since
the acquisition dates. The acquisitions were accounted for using the purchase
method of accounting, resulting in goodwill of $11.6 million and $7.6 million,
respectively, which are being amortized over 40 years from the dates of the
respective acquisitions.
The most significant components of the Company's cost of goods sold are
manufacturing overhead and material purchases. Due to the high level of
automation of the Company's manufacturing processes, it has been able to
maintain a relatively low level of direct labor, as a percentage of net sales.
Additionally, the Company maintains low direct labor costs by contracting for
the assembly of approximately 72% of its disposable prophy angles with third
party maquiladora operations located in Mexico. Prior to its acquisition by the
Company, Lorvic's gross margin was higher than Young Dental's while Denticator's
gross margin was lower than Young Dental's primarily as a result of Denticator
outsourcing its injection molding needs. To further improve its gross margin,
the Company initiated manufacturing activities at Denticator in April 1997 by
acquiring injection molding equipment for the production of Denticator's
disposable prophy angles. See "Certain Transactions." The Company believes its
manufacturing strengths, including certain proprietary molding and vulcanizing
processes, provide it with a competitive advantage and are key factors in its
ability to generate a high gross margin and operating profit margin which, in
1996, were 55.6% and 27.3% of pro forma net sales, respectively.
The Company's selling, general and administrative expenses ("SG&A") consist
of selling and marketing expenses, research and development expenses,
administrative expenses and goodwill amortization, among other expenses. Given
the Company's recent conversion in the United States from independent sales
representatives to Company employees, selling expenses will be primarily fixed
in the future as compared with the variable expense associated with its
independent sales representative organization. The Company believes this
conversion will result in reduced selling expense as a percent of net sales and
enable it to have more focused sales coverage of its domestic customers.
Goodwill amortization also represents an increasing component of selling,
general and administrative expenses as a result of the Company's use of purchase
accounting for the Lorvic and Denticator acquisitions. Additionally, as part of
an employment agreement with Denticator's President and Chief Executive Officer,
the Company agreed, subject to his continued employment, to deliver shares of
Common Stock of the Company having a value, in the aggregate, of $800,000 on
July 22, 1998. See "Management -- Employment Agreements." The Company is
amortizing the value of this deferred compensation by $100,000 per quarter, with
the final amortization to occur in the third quarter of 1998. During 1995,
litigation expense of $688,000 associated with the Company's patent infringement
lawsuit also represented a meaningful component of selling, general and
administrative expense.
Other expenses include gain and loss on disposition of fixed assets, sale
of scrap and other miscellaneous income and expense items, all of which are not
directly related to the Company's principal business activities. In 1996, other
expenses included approximately $322,000 of deferred offering costs expensed as
a result of the Company withdrawing its registration statement in 1996 with
respect to its proposed public offering in 1995.
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<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statement of income and pro forma historical information
expressed as a percentage of net sales. See "Young Innovations, Inc. and
Denticator International, Inc. Pro Forma Financial Information."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
-------------------------------------------- ENDED
PRO FORMA SEPTEMBER 30,
AS ADJUSTED ------------------
1994 1995 1996 1996 1996 1997
------ ------ ------ ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................. 45.3 42.2 43.9 44.4 42.6 40.3
----- ----- ----- ----- ----- -----
Gross profit....................... 54.7 57.8 56.1 55.6 57.4 59.7
Selling, general and administrative
expenses......................... 25.5 25.7 26.8 28.3 26.4 30.1
----- ----- ----- ----- ----- -----
Income from operations............. 29.2 32.1 29.3 27.3 31.0 29.6
Interest expense................... 1.6 4.2 4.5 -- 4.7 4.9
Other expense (income), net........ (1.1) (1.8) 0.6 0.5 1.8 --
----- ----- ----- ----- ----- -----
Income before income taxes......... 28.7 29.7 24.2 26.8 24.5 24.7
Provision for income taxes......... 10.6 11.7 9.1 10.0 9.1 9.4
----- ----- ----- ----- ----- -----
Net income......................... 18.1% 18.0% 15.1% 16.8% 15.4% 15.3%
===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales increased $3.1 million, or 20.7%, to $18.2 million in
1997 from $15.1 million in 1996. Sales of Prophy Products represented
approximately $2.7 million of the increase in net sales which was primarily
attributable to the Denticator acquisition. Sales of the Company's disposable
prophy angle products contributed approximately $2.4 million of the increase
with the remainder primarily attributable to increases in sales of prophy cups
and metal prophy angles. Additionally, sales of polishing pastes and powders
contributed approximately $100,000 and aspiration products contributed
approximately $83,000 to the increase.
Gross Profit. Gross profit increased $2.2 million, or 25.6%, to $10.9
million in 1997 from $8.7 million in 1996. Gross margin increased to 59.7% of
net sales in 1997 from 57.4% in 1996. Gross profit benefited from increased
sales by Denticator, which represented approximately $1.9 million of such
increase. The Company's gross margin improved as a result of Denticator
initiating injection molding operations in April 1997.
Selling, General, and Administrative Expenses. SG&A expenses increased $1.5
million, or 37.6%, to $5.5 million in 1997 from $4.0 million in 1996. As a
percent of net sales, SG&A expenses increased to 30.1% in 1997 from 26.4% in
1996. Denticator added $941,000 to 1997 SG&A as a result of its inclusion for
the full period of 1997. Approximately $225,000 of the increase attributable to
Denticator related to a deferred stock compensation agreement with its President
and Chief Executive Officer, which will end in July 1998. The Company also
incurred additional expenses of $316,000 related to a first quarter 1997
national disposable prophy angle promotion to dental professionals. In addition,
the Company added certain key personnel and accounting staff during 1997 in
preparation for and contemplation of going public.
Income from Operations. Income from operations increased $713,000, or
15.3%, to $5.4 million in 1997 from $4.7 million in 1996.
Interest Expense. Interest expense increased $195,000 to $895,000 in 1997
from $700,000 in 1996. The increase was due to the additional debt borrowed to
fund the acquisition of Denticator in July 1996.
Other Expense (Income). Other expense (income) decreased $275,000 to
$(17,000) in 1997 from $258,000 in 1996 primarily due to inclusion in 1996 of a
write-off of deferred initial public offering costs.
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<PAGE> 25
Provisions for Income Taxes. Provision for income taxes increased $349,000
for 1997 to $1.7 million from $1.4 million for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $4.1 million, or 23.3%, to $21.6 million in
1996 from $17.5 million in 1995. Disposable prophy angle sales increased 30.4%,
or approximately $2.8 million, with the Denticator disposable prophy angle line
contributing approximately $2.4 million from the date of the acquisition. The
Company's contra disposable prophy angle, which was introduced in 1995,
continued to penetrate the disposable prophy angle market, increasing
approximately $500,000 in 1996. The increase in sales of the contra disposable
prophy angles partially offset slight decreases in sales of the Company's
traditional disposable prophy angle lines, prophy cups and metal prophy angles.
Aspiration and infection control products increased net sales by approximately
$623,000 and $384,000, respectively, in 1996 as compared to 1995.
Gross Profit. Gross profit increased $2.0 million, or 19.7%, to $12.1
million in 1996 from $10.1 million in 1995. Gross margin decreased to 56.1% of
net sales in 1996 from 57.8% in 1995. Gross margin was negatively impacted by
lost production and inefficiencies during a major addition and renovation of the
Company's Earth City facility which consolidated two other St. Louis facilities.
The Denticator acquisition added approximately $1.2 million to gross profit, but
at a lower gross margin than Young branded disposable prophy angles. The
$800,000 balance of the increase in gross profit was primarily attributable to
the full year inclusion of Lorvic and an increase in sales of the contra
disposable prophy angle line.
Selling, General and Administrative Expenses. SG&A expenses increased $1.3
million, or 28.8%, to $5.8 million in 1996 from $4.5 million in 1995. As a
percent of net sales, SG&A expenses increased to 26.8% in 1996 from 25.7% in
1995. The increase was primarily attributable to the addition of Denticator
which added $1.2 million to SG&A for 1996, including a one-time $290,000 signing
bonus and $176,000 of deferred stock compensation expense to Denticator's
President and Chief Executive Officer. SG&A also increased due to additional (i)
amortization expense of $185,000 resulting from goodwill associated with the
partial year inclusion of Denticator and full year inclusion of Lorvic; (ii)
research and development expenses of $226,000 due to staff additions and
increased product development projects; (iii) dealer rebate programs of
$105,000; (iv) product sampling expenses of $77,000; and (v) commissions to
independent sales representatives of $71,000 due to higher sales. These
increases were offset by a $673,000 reduction in legal expenses in 1996 as
compared to 1995 when the Company's patent infringement lawsuit was being
litigated.
Income from Operations. Income from operations increased $697,000, or
12.4%, to $6.3 million in 1996 from $5.6 million in 1995.
Interest Expense. Interest expense increased $233,000 to $974,000 in 1996
from $741,000 in 1995. The increase was due to the additional debt borrowed to
fund the acquisition of Denticator in July 1996 and the full year inclusion of
interest expense from the acquisition of Lorvic which was acquired in May 1995.
Other Expense. Other expense for 1996 included $322,000 from charges
related to inclusion of a write-off of deferred initial public offering costs.
Provision for Income Taxes. Provision for income taxes decreased $89,000 in
1996 to $2.0 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased $5.5 million, or 45.4%, to $17.5 million in
1995 from $12.0 million in 1994. Disposable prophy angle sales increased
approximately $1.8 million primarily attributable to increased sales of Young
branded disposable prophy angles in 1995 as compared to 1994. Sales of
disposable prophy angles in 1994 were adversely impacted due to a successful
national promotion to dental professionals, which resulted in increased sales
and build-up of customer inventories in the fourth quarter of 1993. In the
second quarter of 1995, the Company introduced its contra disposable prophy
angle which contributed $185,000 to disposable prophy angle sales in 1995. Sales
of metal prophy angles, along with prophy cups and brushes, increased
approximately $331,000 in 1995 as compared to 1994. In addition, significant
sales increases
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<PAGE> 26
occurred as a result of the acquisition of Lorvic in May 1995, which added
product lines such as aspiration and infection control products, adding sales of
$1.1 million and $785,000 in 1995, respectively.
Gross Profit. Gross profit increased $3.5 million, or 53.8%, to $10.1
million in 1995 from $6.6 million in 1994. Gross margin increased to 57.8% of
net sales in 1995 from 54.7% in 1994. The increase in gross margin was primarily
attributed to the increase in sales of disposable prophy angles and the addition
of new higher margin products as a result of the Lorvic acquisition. The
addition of Lorvic accounted for $1.9 million of the increase in gross profit
and the remaining $1.6 million was primarily due to increased sales of
disposable prophy angles.
Selling, General and Administrative Expenses. SG&A expenses increased $1.4
million, or 46.7%, to $4.5 million in 1995 from $3.1 million in 1994. As a
percent of net sales, SG&A expenses increased to 25.7% in 1995 from 25.5% in
1994. The acquisition of Lorvic added $589,000 to SG&A in 1995, including
$184,000 of goodwill amortization expense. Professional fees increased $440,000
primarily due to legal expenses resulting from the trial of a patent
infringement lawsuit initiated by the Company. Research and development costs
increased $193,000, or 121.4%, as a result of additional staffing and product
development projects.
Income from Operations. Income from operations increased $2.1 million, or
59.9%, to $5.6 million in 1995 from $3.5 million in 1994.
Interest Expense. Interest expense increased $552,000 to $741,000 in 1995
from $189,000 in 1994. The increase was due to the additional debt borrowed to
fund the acquisition of Lorvic.
Other Expense. There was no significant other expense in 1995 or 1994.
Provision for Income Taxes. Provision for income taxes increased $774,000
to $2.0 million in 1995 from $1.3 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash flow from
operating activities and, to a lesser extent, through borrowings under its
credit facilities. During the first nine months of 1997, net cash flow from
operating activities was $3.0 million, compared to $4.5 million for the same
period in 1996. Net cash flow from operating activities in 1996 was $4.5
million, compared to $3.5 million in 1995.
Capital expenditures for property, plant and equipment were $508,000 in the
first nine months of 1997, compared to $2.1 million for the same period in 1996.
In 1996, capital expenditures increased significantly to $3.2 million compared
to $992,000 in 1995 primarily as a result of the expansion of the Earth City
facility which consolidated two other St. Louis facilities to that location. The
Company estimates capital expenditures for the last quarter of 1997 and for 1998
will aggregate approximately $1.2 million. Consistent with the Company's
historical capital expenditures, future capital expenditures are expected to
include injection molding equipment, computer numeric controlled equipment and
upgrades to production machinery and data processing.
Concurrent with the Denticator acquisition in July 1996, the Company
entered into a Credit Agreement, which, as amended, consists of a $12.0 million
term loan maturing on December 1, 1999 bearing interest at a per annum interest
rate of 0.25% above the prime rate of the lending bank in effect on any day or
at a LIBOR rate plus 2.5% for a set period through maturity collateralized by
all assets and subsidiary stock of the Company, together with a revolving loan
facility of $7.0 million which matures on December 1, 1999, with interest at the
prime rate of the lending bank minus 0.5%. The Company's Chief Executive Officer
has pledged 2,391,285 shares of Common Stock as additional collateral which will
be released upon repayment of borrowings under the Credit Agreement. The Credit
Agreement replaced a $13.5 million secured credit facility which had slightly
higher interest rates. In July 1996, the Company borrowed $16.5 million under
the Credit Agreement to fund the purchase of Denticator and to repay the prior
credit facility. On September 30, 1997, the outstanding balances under the
Credit Agreement aggregated $13.7 million, which balances will be repaid with a
portion of the net proceeds of the Offering. The Company's lending bank has
provided a letter which indicates its willingness to make available to the
Company, upon completion of the Offering, a five-year
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<PAGE> 27
secured revolving loan facility of $25.0 million bearing interest at the bank's
prime rate, subject to negotiation of final terms, including loan covenants and
review of financial information and no significant changes in circumstances. The
bank's letter does not constitute a binding commitment to make the facility
available.
The IRS examined Lorvic's federal income tax returns for the years ended
March 31, 1992 through 1995 and proposed deficiencies in federal income taxes
for those years in an aggregate amount of $766,000 due to classification of
certain intangible assets. Lorvic has filed two petitions with the United States
Tax Court contesting these proposed deficiencies. The first of these petitions,
which relates to the years ended March 31, 1992 and 1993, is scheduled for trial
in October 1997. In accordance with the stock purchase agreement pursuant to
which the Company acquired Lorvic in May 1995, the previous stockholders of
Lorvic are responsible for the settlement of this matter to the extent of
$700,000 held in an escrow fund, together with earnings thereon, plus an
additional $200,000 to cover any interest and penalties related to such matters.
While there can be no such assurance, the Company believes the escrowed amounts
will be sufficient to satisfy these deficiencies in full for all affected years
if required. See "Certain Transactions."
Anticipated internal cash flows, borrowings under the Company's existing
and anticipated credit facilities and the net proceeds of the Offering are
expected to provide sufficient liquidity for working capital needs, capital
expenditures and potential acquisitions through 1998.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which establishes standards for computing and presenting earnings per
share. SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires the dual presentation
of basic and diluted earnings per share on the face of the income statements for
all entities with complex capital structures and requires a reconciliation of
the numerator and the denominator of the basic and diluted earnings per share
computations. The Company is required to adopt the provisions of SFAS 128 during
the quarter ending December 31, 1997, and all prior earnings per share data
presented must be restated. The adoption of SFAS 128 is not expected to have a
significant impact on the Company's previously reported or prospective earnings
per share amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and displaying comprehensive income and its components.
The Company is required to adopt the provisions of SFAS 130 no later than the
quarter ending March 31, 1998. The adoption of SFAS 130 is not expected to have
a material effect on the Company's financial position or results of operations.
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<PAGE> 28
BUSINESS
GENERAL
The Company is a leading designer, manufacturer and marketer of single-use
supplies, autoclavable instruments and other products used by dental
professionals, primarily in preventive dentistry and infection control. The
Company has a leading market share in certain segments of the preventive
dentistry market which the Company believes is due to its (i) longstanding
reputation for high quality, innovative and reliable products; (ii) widespread
name recognition and ability to leverage the Young and Denticator brands; and
(iii) consummation of strategic acquisitions. Through the successful
implementation of the Company's business strategy and the acquisitions of Lorvic
and Denticator, the Company's net sales, income from operations and net income
(pro forma for 1992) have grown at compound annual rates of 21.4%, 30.7% and
21.9%, respectively, from 1992 through 1996.
The Company's Prophy Products, which are integral components used in the
cleaning and polishing of teeth by dental professionals, represented 77.7% of
the Company's pro forma net sales in 1996. The Company's branded Prophy Products
currently have an estimated domestic market share of 53%, up from 22% in 1990.
Additionally, the Company has developed and acquired aspiration and infection
control products, as well as complementary preventive products such as pastes,
fluorides and fluoride applicators.
The Company was incorporated in July 1995 to serve as the parent
corporation for Young Dental, founded at the turn of the century, and Lorvic and
its operating subsidiary, The Lorvic Corporation, founded in 1953; Lorvic was
acquired by Young Dental in May 1995. Denticator was acquired by the Company in
July 1996. The Company is a Missouri corporation with its principal executive
office located at 13705 Shoreline Court, Earth City, Missouri 63045, located in
the St. Louis, Missouri metropolitan area; its telephone number is (314)
344-0010.
INDUSTRY BACKGROUND
Based on data compiled by HCFA, total spending on dental products and
services increased from $31.6 billion to $45.8 billion from 1990 to 1995,
representing a compound annual growth rate of 7.7%. HCFA reported that this
aggregate domestic market represented approximately 4.6% of total health care
expenditures in 1995. HCFA has projected that dental expenditures will reach
$79.1 billion by the year 2005, representing a compound annual growth rate of
approximately 5.6%.
There is a general awareness in North America, the Scandinavian countries
and certain other parts of the world that preventive dentistry, including
regular cleaning and polishing of teeth, is effective in reducing the incidence
of cavities, gingivitis and periodontal disease, thereby enabling people to keep
their natural teeth longer, obtain cosmetic benefits and improve their oral
health. Since prophylaxis procedures and treatments are generally less expensive
than treatment of dental diseases, an increasing number of consumers and third
party payors have recognized the cost effectiveness of preventive dentistry. For
example, the National Institute of Dental Research estimates that Americans
saved nearly $100 billion in dental expenditures during the 1980s because of
dentistry's emphasis on preventive oral health.
Publicity concerning exposure to and possible transmission of communicable
diseases, including HIV and hepatitis, through contact with blood, saliva and
other bodily fluids in the dental office has led to the establishment of
regulations and guidelines by OSHA, the Center for Disease Control and
Prevention, the American Dental Association and state regulatory authorities.
The Company believes that these regulations and guidelines have resulted in a
continued emphasis by dental professionals on the use of single-use products in
the dental office.
The Company believes that the cost effectiveness of preventive dentistry,
the increasing proportion of dental services paid for by third parties and the
continued emphasis on infection control have led to and will continue to result
in an increase in the sales of preventive dental and infection control products,
particularly the Company's single-use products. Third party payors paid
approximately $16.1 billion in 1990 and $24.0 billion in 1995 for dental
services, which represented approximately 50.9% and 52.4%, respectively, of
total domestic dental products and services expenditures in those years. The
Company also believes demand will
25
<PAGE> 29
continue to grow for preventive dental products, as parents, who have grown up
benefiting from preventive dentistry obtain such services for their children.
Finally, continued growth in the United States population should continue to
drive demand for preventive dentistry and infection control products.
The Company believes that the dental industry is presently undergoing
consolidation at three levels. Dental service providers are combining as dental
practice management companies acquire specialty and general dental practices.
Professional dental product distributors are also undergoing consolidation as
evidenced by Schein announcing it has agreed to acquire Sullivan. Similarly, the
Company anticipates increasing consolidation among manufacturers in the highly
fragmented professional dental products industry for a number of reasons,
including the consolidation of distributors and dental service providers.
BUSINESS STRATEGY
The Company's objective is to profitably establish the number one or number
two market share position in each of the market segments in which it competes.
In order to achieve this objective, the Company's business strategy comprises
the following elements: (i) expand its market position in preventive and
infection control products by leveraging its strong brand names; (ii) enhance
its strong manufacturing capabilities; and (iii) emphasize recurring revenue
streams and cash flows from single-use products.
Leverage Branded Products. The Company believes that its name recognition
and reputation among distributors and dental professionals for quality products,
depth of product offerings and responsiveness to customer needs provide it with
opportunities to increase market share for its branded and recently acquired
product lines. Specifically, the Company plans to leverage its leadership
position in Prophy Products, where the Young and Denticator brands are well
established, in order to increase market penetration of its complementary
preventive and infection control products. The Company intends to accomplish
this by (i) packaging complementary products with its well-known metal and
disposable prophy angles; (ii) frequently providing sample products to
distributors and dental professionals; (iii) increasing distributor education
and training with regard to the Company's complete product line; and (iv)
selectively increasing marketing efforts to dental professionals. The Company
believes that its name recognition and strong relationships with its key
distributors provide a significant opportunity to leverage the Company's brand
names across a broader set of products.
Enhance Strong Manufacturing Capabilities. The Company strives to be the
low cost producer in each market segment in which it competes, while also
maintaining its reputation for high quality, innovative and reliable products.
Since 1990, the Company has and continues to operate under a continuous
improvement initiative that empowers all of its employees to improve the quality
and efficiency of its manufacturing operations, marketing and administrative
functions. In addition, the Company employs several proprietary molding,
vulcanizing and other manufacturing processes that allow for highly efficient
and automated manufacturing. The Company's manufacturing strengths, including
its continuous improvement program and proprietary processes, are key factors in
its ability to generate a high gross margin, which, in 1996, was 55.6% of pro
forma net sales. The Company is currently implementing its continuous
improvement strategies with Lorvic and Denticator, and will do so with future
acquisitions when appropriate.
Emphasize Recurring Revenue Streams. The Company is focused on continuing
to develop and emphasize products that generate recurring streams of revenue.
These products include disposable prophy angles, consumables, such as pastes and
fluorides and disposables, such as prophy cups and brushes that are required for
the Company's metal prophy angles to work properly and which also work on its
competitors' metal prophy angles. Single-use products represented 92.9% of the
Company's 1996 pro forma net sales.
GROWTH STRATEGY
The Company competes effectively in the rapidly changing professional
dental product industry and capitalizes on its strong name recognition and
responsiveness to customer needs. The Company's net sales have increased at a
compound annual growth rate of 19.3% over the last 10 years and 21.4% since
1992. These increases have been achieved through strong internal growth
complemented recently by two recent acquisitions.
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<PAGE> 30
Pursue Strategic Acquisitions. The Company aggressively pursues
acquisitions of complementary businesses, product lines and key technologies in
preventive dentistry and infection control. In 1995, the Company's product lines
expanded significantly with the acquisition of Lorvic, a manufacturer of
aspiration, infection control and preventive dental products including
preventive pastes, fluorides and fluoride applicators and plaque disclosure
products. Additionally, in 1996, the acquisition of Denticator expanded the
Company's line of Prophy Products. In general, the professional dental products
manufacturing industry is fragmented and comprised of small and medium size
companies. Limited manufacturing and distribution resources, increasing
regulatory requirements and pricing pressures resulting from the consolidation
of distributors and dental service providers make it increasingly difficult for
these companies to operate effectively on a stand-alone basis, thus presenting a
significant opportunity for the Company to make acquisitions. In addition, the
Company intends to explore selective strategic acquisitions of dental product
companies outside of the preventive dentistry and infection control markets.
Develop New Products. An important element of the Company's growth strategy
is to develop high value-added products for specific professional dental
products markets based on its existing core capabilities and technologies. New
products or product extensions introduced by Young Dental since 1990 represented
42.5% of the Company's pro forma net sales in 1996. In the early 1990's,
responding to concerns of cross-contamination resulting from multiple-use
products, Young Dental developed a number of plastic disposable prophy angles
designed for single-use and broadened its existing line of sealed metal angles
designed to prevent the intake of blood, saliva and other matter. Young Dental
introduced the industry's first contra disposable prophy angle in early 1995 and
eight other new products or product extensions from 1993 through 1996. The
Company introduced six new products through September 30, 1997, and plans to
introduce 14 new products or extensions in the remainder of 1997 and 1998.
Expand Internationally. The Company intends to continue to expand its
presence in several international markets, including Europe, South America,
Central America and the Pacific Rim. International sales represented
approximately 4.6% of the Company's total net sales in 1996. Outside North
America, Scandinavia, Australia and New Zealand, the benefits of preventive
dentistry have not been widely emphasized or covered under government or private
health insurance. However, awareness of the importance and cost effectiveness of
preventive dentistry is generally increasing worldwide. The Company plans to
continue to foster its relationships with international distributors and to
closely monitor changing trends in preventive dentistry throughout the world.
The Company will not undertake broad expansionary activities until significant
change in the recognition of the benefits of preventive dentistry, the
reimbursement policy of third party payors with respect to preventive dentistry
procedures or increased customer demand occurs, at which time the Company plans
to be in a strategic position to capitalize quickly on these market
opportunities.
PRODUCTS
The Company primarily markets disposable and metal prophy angles, cups and
brushes, complementary preventive products, including pastes, fluorides and
fluoride applicators, as well as aspiration and infection control products. In
1996, 77.7% of the Company's pro forma net sales were derived from the sale of
Prophy Products.
Prophy Products. The Company believes it manufactures and sells the
broadest line of Prophy Products in the domestic professional dental products
market. The Company is able to achieve its substantial share of the Prophy
Product market by providing Prophy Products at both premium and popular prices.
The Company generally prices its Young branded Prophy Products at premium levels
and its Denticator branded Prophy Products at popular price levels. The
Company's broad range of Prophy Products enables it to be a single-source
supplier to its distributors.
The Company's Prophy Products include several configurations of sealed
metal autoclavable prophy angles and several disposable plastic prophy angles
designed for single-use. Prophy Products consist of two components: an angle
which is attached to and extends from a standard, low-speed dental handpiece and
a rubber cup or brush which is attached to the angle and performs the cleaning
function. During the prophylaxis process, the cup or brush is filled with
abrasive paste, which is applied to the teeth as the prophy cup rotates.
27
<PAGE> 31
The dental professional polishes both the visible portion of the tooth and the
subgingival portion (below the gum line). The prophy angle may be a disposable
or a reusable instrument; prophy cups and brushes are sold as single-use items.
Disposable prophy angles are sold as assembled units with a cup or brush already
attached. The Company produces and markets a number of different disposable
prophy angles, including the traditional, contra and Universal Disposable Angle.
Virtually all of the Company's metal prophy angles are sealed against
penetration of matter from patients' mouths (thus reducing the risk of
cross-contamination and damage to the prophy angle) and are designed for ease of
maintenance. Because such metal prophy angles function correctly only when used
with the Company's cups and brushes, most dentists who purchase the Company's
metal prophy angles also purchase the Company's cups and brushes.
Other Preventive Products. The Company's other preventive products include
38 polishing pastes and powders, which are abrasive agents used for cleaning and
polishing teeth; 12 fluorides used in dental offices and at home to reduce
cavities and tooth sensitivity; six applicators used by dental professionals to
apply fluoride to patients' teeth; and four plaque disclosants, which are
liquids or tablets that identify the presence of plaque when applied to tooth
surfaces. The Company markets certain of its pastes and fluoride products in
single-use containers, the demand for which has grown in response to infection
control concerns.
Infection Control Products. The Company's line of infection control
products includes products such as indicator tape and tabs used to verify the
effectiveness of a sterilizer; Nyclave wrap used to wrap instruments during
sterilization so that sterility is maintained until use; barrier products used
to wrap operatory knobs, handles and other devices that cannot be sterilized;
and surgical milk and instrument care products used to inhibit corrosion, remove
rust and lubricate hinged instruments in connection with the autoclave process.
Autoclaving is the sterilization of instruments and equipment through the use of
steam.
Assisting and Other Products. The Company's assisting and other products
include disposable aspiration products used to remove blood, saliva and other
matter during dental procedures; cotton roll substitutes used to control saliva
and moisture during dental procedures; matrix bands used for tooth restorations;
rubber dam frames used to isolate teeth during dental procedures; and etching
gels and bonding prep used to condition tooth surfaces for bonding.
Private Label and OEM Products. In addition to branded products, the
Company designs, develops and produces a limited number of proprietary private
label and OEM products under contracts with dental distributors and other
professional dental product manufacturers where the Company is able to use its
expertise and excess manufacturing capacity.
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<PAGE> 32
Product Table. The following is a summary of the Company's primary products
by type, and, in the case of Prophy Products, the suggested retail price ranges
in which they are currently offered to dental professionals.
<TABLE>
<CAPTION>
YOUNG LORVIC DENTICATOR YOUNG DENTICATOR
PRODUCT BRAND BRAND BRAND PRICES/UNIT PRICES/UNIT
------- ---------- ---------- ---------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Prophy Products
Disposable Prophy Angles........ X X $0.38 to $0.50 $0.30 to $0.46
Autoclavable Metal Prophy
Angles....................... X X $24.00 to $100.00 $25.00 to 30.00
Prophy Cups..................... X X $0.07 to $0.24 $0.08 to $0.12
Prophy Brushes.................. X X $0.35 to $0.45 $0.36
Other Preventive Products
Polishing Pastes & Powders...... X X X
Fluorides....................... X
Fluoride Applicators............ X
Plaque Disclosing Agents........ X
Infection Control Products
Sterilization Products.......... X
Instrument Care Products........ X
Assisting and Other Products
Aspiration Products............. X
Cotton Roll Substitutes......... X
Matrix Bands.................... X
Rubber Dam Frames............... X
Etching Gel..................... X
Bonding Prep.................... X
Miscellaneous Products.......... X X
</TABLE>
MARKETING AND DISTRIBUTION
The Company markets its full line of products to dental professionals
worldwide using a network of medical and dental product distributors. The
Company actively supports its distributor relationships with Company sales
personnel in the United States, independent sales representatives in Canada and
exclusive sales representatives in 13 countries outside of North America. The
Company also uses non-exclusive distributors to service markets in 40 other
countries. All major distributors of dental products in North America sell the
Company's products, including Patterson, Schein, Sullivan and Meer. The Company
has no formal agreements with its distributors which generally purchase products
from the Company by purchase order. The Company believes these arrangements are
customary in the industry. The Company's product development, manufacturing and
marketing capabilities and its relationships with distributors allow the Company
to provide a broad range of high quality, innovative and reliable products to
dental professionals. Additionally, these capabilities and relationships enable
the Company to quickly and efficiently offer new products or product extensions
to its existing customer base and new markets. In addition to marketing through
distributors in the United States, the Company sells products directly to dental
and dental hygiene schools, Veterans Administration healthcare facilities and
United States military bases.
The Company's products are marketed by five employees in the United States
and by three independent sales representatives in Canada. The Company also
supports its marketing activities to smaller distributors through use of the
Company's inside sales personnel. Until July 1997, the Company used 19
independent non-exclusive sales representatives and two Company employees for
its marketing and sales efforts in the United States. In an effort to more
efficiently market its products, the Company decided to switch from independent
sales representatives to Company employees who exclusively focus on selling the
Company's products.
The Company expends considerable effort educating its distributors about
the quality, reliability and features of its products. The Company also
advertises its products through industry publications and direct
29
<PAGE> 33
mail. To supplement its other marketing efforts, the Company provides product
samples to dental professionals and exhibits its products at industry trade
shows. In addition, the Company seeks to stimulate interest in its products by
providing information and marketing materials to influential lecturers and
prominent experts and consultants in the dental industry.
PRODUCT DEVELOPMENT
The Company's engineers and chemists are focused on developing innovative
professional dental products and are actively involved in improving the
Company's manufacturing processes. Frequently, these products are designed and
developed in response to needs articulated to the Company by dental
professionals. For example, the Company designed the contra disposable prophy
angle to improve the ease with which dental professionals can reach and clean
patients' teeth. The Company believes that the contra disposable prophy angle
reduces the risk of carpal tunnel syndrome by reducing the flexion of dental
hygienists' wrists during prophy procedures. Additionally, many of the new
products or product improvements developed by the Company are patented. The
Company currently has 28 patents and 14 patent applications pending.
All of Young Dental's disposable prophy angles have been developed since
1990. In June 1997, Young Dental introduced its new Junior Cup, a short
prophylaxis cup designed to reach surfaces in small mouths that are difficult to
reach with the Company's conventionally sized cups. In June 1997, Denticator
introduced the Universal Disposable Angle which was designed to compete with a
number of popular priced branded and private label disposable prophy angles
manufactured by the Company's competitors. In 1997, the Company plans to
introduce two metal prophy angles, including an improved version designed for
smoother and more durable operation and a Denticator branded version designed to
compete with popular priced metal prophy angles.
In addition to its Prophy Product development efforts, the Company actively
seeks to introduce new and innovative products in other segments of the
professional dental product market. In the remainder of 1997 and 1998, the
Company intends to introduce a newly formulated prophy paste and a new line of
fluorides and fluoride applicators.
MANUFACTURING AND SUPPLY
The Company manufactures virtually all of its products. The consolidation
of the Company's two St. Louis facilities into the expanded Earth City facility,
which was substantially completed in December 1996, provides the Company with
sufficient manufacturing capacity for anticipated growth in the foreseeable
future. The Company contracts for the assembly of approximately 72% of its
disposable prophy angles in Mexico due to its cost effectiveness.
Prophy and Other Products. The Company has developed a number of
proprietary manufacturing processes and has designed specialized automated
equipment which allow it to produce quality products rapidly and efficiently.
The Company believes its equipment and proprietary processes provide it with a
competitive advantage. The Company uses a variety of state-of-the-art computer
numerically controlled machining centers, injection molding machines and robotic
assembly machines and continues to invest in new and more efficient equipment
and production lines. The primary processes involved in manufacturing the
Company's products consist of precision metal turning and milling, rubber
molding, plastic injection molding, component parts assembling and finished
goods packaging.
Denticator converted from a repackaging operation to an injection molding
and manufacturing operation in April 1997. Since Denticator principally
manufactures disposable prophy angles, the primary processes involved in its
manufacturing process include plastic injection molding and finished goods
packaging.
Pastes, Liquids and Gels. Lorvic blends and mixes all of its pastes,
liquids and gels at the Earth City facility. The Company owns equipment used to
form and dye-cut expanded polyethylene foam and to dye-cut extruded plastic into
finished products and equipment used to package its products in a variety of
container sizes, including prophy paste in unit-dose containers.
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<PAGE> 34
Total Quality Management. The Company has implemented, where appropriate,
manufacturing techniques to increase product quality and minimize operating
costs. Products are statistically monitored during the manufacturing process in
order to maintain a high level of quality and reduce scrap. Young Dental also
undertakes extensive cross-training of its employees, allowing the employees to
understand the entire manufacturing process and encouraging them to introduce
manufacturing improvements. The Company has, where appropriate, implemented
Young Dental's manufacturing techniques into Lorvic's operations and is in the
process of implementing these techniques into Denticator's operations. The
Company believes these techniques will further increase Denticator's
manufacturing efficiencies, thereby improving its gross margin.
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 has two sources of supply for the rubber
formulation used to produce its prophy cups. The rubber formulations were
developed independently and are owned by each of the suppliers. The Company also
purchases certain of its products from other manufacturers for resale.
COMPETITION
The Company competes with manufacturers of both branded and private label
dental products in each of the markets it serves. According to Strategic Dental
Marketing, Inc., an independent market research firm, Young Dental has the
largest domestic market share of distributor sales in Prophy Products.
Dental professionals place major importance on the proven reliability of
the Company's products and are generally not price-sensitive. The Company
believes that Young Dental and Lorvic compete on the basis of the quality and
reliability of their products as well as their reputations. As a result, Young
Dental and Lorvic typically charge premium prices for their products. By
contrast, Denticator's products are targeted to more price-sensitive dental
service providers.
The markets for the Company's products are highly competitive. The Company
believes that the principal competitive factors in all of its markets are
product features, reliability, name recognition, established distribution
network, customer service and, to a lesser extent, price. The relative speed
with which the Company can develop, complete testing, obtain regulatory approval
and sell commercial quantities of new products is also an important competitive
factor. Some of the Company's competitors have greater financial, research,
manufacturing and marketing resources than the Company and include DENTSPLY
International, Inc., Oral-B Laboratories, a subsidiary of The Gillette Company,
and Allegheny Teledyne Incorporated.
PROPERTIES
The Company's facilities are as follows:
<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION OWNED/LEASE
----------- ----------- -------- -----------
<S> <C> <C> <C>
Corporate Headquarters and
Manufacturing...................... 54,000 Earth City, Missouri Owned
Manufacturing........................ 12,000 Brownsville, Texas Owned
Manufacturing........................ 21,000 Sacramento, California Lease expires December 31,
2001; the Company has an
option to purchase the
property
</TABLE>
The Company's owned facilities are pledged as collateral to the Company's
principal lender. The Company believes that its facilities are generally in good
condition and are adequate for its operations for the foreseeable future.
EMPLOYEES
As of September 30, 1997, the Company employed approximately 168 people,
none of whom were covered by collective bargaining agreements. The Company
believes that its relations with its employees are good.
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<PAGE> 35
GOVERNMENT REGULATIONS
The Company's products are subject to regulation by the FDA because they
meet the statutory definition for medical devices. The FDA has the authority to
regulate the design, manufacture, packaging, labeling and distribution of
medical devices.
For a medical device to be properly in commercial distribution, it must (i)
qualify as a "preenactment" device, (ii) have in effect a premarket notification
(a "510(k)") or a premarket approval application, (iii) qualify for an exemption
from such requirements, or (iv) be so similar to a product with an effective
premarket notification that no separate filing is necessary. The Company has no
products that meet the criteria for a premarket approval application. Many of
the Company's products are preenactment devices, products that have been in
distribution since prior to May 28, 1976. Several other devices have effective
510(k)s or are so similar to products that do have them that filings are not
necessary under the FDA's current guidelines for filings involving product
modifications. The balance of the Company's medical devices have been exempted
from the need to file 510(k)s by regulations presently in effect.
Products which the Company presently has in development may require a
510(k) before they can be sold. The FDA normally has 90 days to review the
510(k) and grant or deny clearance to market on the basis that it is
substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(k) may be significantly
delayed. Certain devices under development may qualify to be exempt from the
510(k) premarket notification requirement and if so, the Company may proceed to
market without any submission to the FDA.
The Company's products are generally subject to ongoing regulatory
oversight by the FDA to ensure compliance with regulatory requirements,
including, but not limited to, product labeling requirements and limitations,
including those related to promotion and marketing efforts, current good
manufacturing practice requirements, recordkeeping and medical device (adverse
reaction) reporting.
The introduction and sale of the Company's products are also subject to
government regulation in the various foreign countries in which they are sold.
Some of these regulatory requirements are more stringent than those applicable
in the United States. Beginning in June 1998, all products imported into and
distributed in the European Common Market are required to have a CE mark and
meet the regulatory requirements of the European Economic Community. The Company
is presently taking all steps required for the certifications necessary to
comply with such requirements and expects to be approved prior to the June 1998
deadline.
The Company also uses small amounts of hazardous substances in its
manufacturing processes. As a result, the Company is subject to a variety of
governmental regulations relating to the use, storage, discharge, handling and
disposal of toxic or other hazardous substances, chemicals, materials or waste.
The Company has engaged a third party contractor to handle the removal of such
hazardous substances.
LEGAL PROCEEDINGS
For a description of legal proceedings in which the Company's subsidiaries
are parties, see "Risk Factors -- Pending Legal Proceedings."
The Company is not involved in any other legal proceedings but, from time
to time, does become involved in legal proceedings in the ordinary course of its
business.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information regarding the Company's
executive officers, Directors and certain key personnel.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George E. Richmond................... 63 Chairman of the Board, President, Chief Executive
Officer and Director
Alfred E. Brennan.................... 44 Senior Vice President, Chief Operating Officer and
Director
Michael W. Eggleston................. 42 Vice President, Treasurer, Chief Financial Officer and
Director
Richard G. Richmond.................. 43 Secretary and Director; President of Young Dental
Richard P. Conerly(1)................ 73 Director
Craig E. LaBarge(1).................. 46 Director
Jose L. Mendoza...................... 51 President and Chief Executive Officer of Denticator
Richard C. Nemanick, Sr. ............ 55 Senior Vice President of Corporate Affairs of Young
Dental; President and Chief Executive Officer of Lorvic
</TABLE>
- ---------------
(1) Member of audit and compensation committees.
George Richmond purchased Young Dental in 1961, at which time he became a
Director and its President and Chief Executive Officer. Mr. Richmond served as
President of Young Dental from 1961 until 1997. He has been President and Chief
Executive Officer of the Company since its organization in 1995 and Chairman of
the Board since 1997. Mr. Richmond is a former Chairman of the American Dental
Trade Association ("ADTA"), Manufacturers Section, and a former Chairman of the
ADTA World Trade Committee. Mr. Richmond is a Director of UMB Bank of St. Louis,
National Association. Mr. Richmond holds a B.S.B.A. degree in accounting from
Washington University.
Alfred Brennan became a Director in August 1997 and Senior Vice President
and Chief Operating Officer of the Company in October 1997. From 1995 until
October 1997, Mr. Brennan was a Senior Associate of Dewar Sloan, a market
research and strategy development consulting firm. From 1991 to 1994, Mr.
Brennan served as President of the Dental Instrument Division of DENTSPLY
International, Inc. He has also served as Vice President of Marketing with
Gendex Corporation, a manufacturer of dental x-ray equipment, and has served as
an executive officer of various other corporations including Midwest Dental
Products Corporation. He is a director of Unico Systems Inc., a manufacturer of
heating and air conditioning systems.
Michael Eggleston joined Young Dental in 1978 and has been the Company's
Vice President, Treasurer, Chief Financial Officer and a Director since its
organization in 1995. Previously, Mr. Eggleston served as Assistant Controller
from 1978 until 1980 and became the Controller, Secretary, Chief Financial
Officer and a Director of Young Dental in 1980. Mr. Eggleston holds a B.S.B.A.
degree in finance from the University of Missouri, St. Louis.
Richard Richmond joined Young Dental in 1989 and has served as President of
Young Dental since 1997, Secretary and a Director of the Company since 1995 and
a Director of Young Dental since 1989. He previously served as Assistant to the
President and in 1990 was elected Vice President of Manufacturing of Young
Dental. Mr. Richmond is George Richmond's son.
Richard Conerly became a Director in August 1997. Mr. Conerly, presently
retired, was formerly Chairman and Chief Executive Officer of Orion Capital
Inc., a private investment company, from 1987 to 1994, President of Pott
Industries Inc., a marine services company, from 1969 to 1987, and Vice Chairman
of Coal-Marine, Houston Natural Gas Corporation, parent company of Pott
Industries Inc., from 1979 to 1985. Mr. Conerly is a Director of LaBarge, Inc.
("LaBarge").
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<PAGE> 37
Craig LaBarge became a Director in August 1997. Mr. LaBarge has served as
Chief Executive Officer of LaBarge, a manufacturer of sophisticated electronic
systems and devices and interconnect systems, since 1991 and President since
1986. He has served LaBarge in various executive capacities since 1975. Mr.
LaBarge is also a Director of LaBarge and TALX Corporation, an employment
verification service provider.
Jose Mendoza joined the Company in July 1996 and has been President and
Chief Executive Officer of Denticator since its acquisition by the Company in
July 1996. Previously he served in the same positions with Denticator's
predecessor corporation from 1991 until the date of its acquisition by the
Company. Prior thereto, Mr. Mendoza served in various executive positions with
the Denticator Division of Bio Dental Technologies Corporation from 1987 to
1991. Mr. Mendoza holds a law degree from the Universidad National Autonoma de
Mexico, and is a former Professor of International Law and Dean of the Law
School at Iberoamere Americana University.
Richard Nemanick joined the Company in May 1995 upon Young Dental's
acquisition of Lorvic and has served as Senior Vice President of Corporate
Affairs of Young Dental since May 1995. He had been employed by Lorvic since
1969 and has been President and Chief Executive Officer of Lorvic since 1986; he
was part of the investor group that acquired Lorvic in a leveraged buyout in
1989. Mr. Nemanick holds an A.B. degree from the University of Missouri,
Columbia, a J.D. degree from St. Louis University and an L.L.M. degree from
Washington University.
The Directors are elected annually and hold office until their successors
are duly elected and qualified. Officers serve at the discretion of the Board of
Directors. Within twelve months after completion of the Offering, the Company
intends to increase the size of its Board of Directors to seven and appoint an
independent director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Company's Board of Directors did not have a compensation
committee. During such period, Mr. George Richmond, the President and Chief
Executive Officer of the Company, and Messrs. Richard Richmond and Michael
Eggleston, executive officers of the Company, participated as members of the
Board in deliberations concerning the compensation of executive officers.
DIRECTOR COMPENSATION
Immediately after completion of the Offering, the Company will issue
options to purchase 5,000 shares of Common Stock to each of the non-employee
members of the Board of Directors at an exercise price equal to the initial
public offering price. See "Management -- Stock Option Plan." Following this
Offering, the Company anticipates compensating each non-employee Director with:
(i) fees in a not yet determined amount; (ii) additional grants of options to
purchase Common Stock; or (iii) a combination of fees and options.
EXECUTIVE COMPENSATION
The following table summarizes compensation earned or awarded to the
Company's Chief Executive Officer and each of the Company's other most highly
compensated executive officers who earned more than $100,000 during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- -------- --------
<S> <C> <C>
George E. Richmond, President and Chief Executive Officer... $213,812 $ 23,191
Michael W. Eggleston, Vice President, Treasurer and Chief
Financial Officer......................................... 92,818 10,641
Richard G. Richmond, Secretary; President of Young Dental... 92,818 10,741
</TABLE>
34
<PAGE> 38
EMPLOYMENT AGREEMENTS
In connection with the acquisition of Lorvic in May 1995, Young Dental
executed an employment agreement with Richard Nemanick, Lorvic's President. The
employment agreement has a term of three years expiring in May 1998, provides
for a base annual salary of $85,000, an annual payment of $55,000 attributable
to the non-competition provisions of the employment agreement, participation in
Young Dental's bonus plan and participation in any stock option plan that may be
adopted. The employment agreement also provides that Mr. Nemanick will serve as
a Board member, Executive Committee member and Senior Vice President of
Corporate Affairs of Young Dental and as President of Lorvic during the term of
the employment agreement. Mr. Nemanick has agreed not to compete with the
Company for a period of two years after termination of the employment agreement.
Young Dental also executed a Consulting Agreement with Mr. Nemanick, to be
effective after expiration of the employment agreement, and which will provide
for annual payments of $32,000 until his 65th birthday.
Richard Nemanick, as one of the former stockholders of Lorvic, has
indemnified Young Dental to the extent of funds held in escrow against losses
resulting from breaches of certain representations and warranties relating to
certain tax matters involving the classification of Lorvic intangibles set forth
in the stock purchase agreement pursuant to which Young Dental acquired Lorvic.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Legal Proceedings."
In connection with the acquisition of Denticator in July 1996, Denticator
executed an employment agreement with Jose Mendoza, Denticator's President and
Chief Executive Officer for the previous five years. The employment agreement
has a term of three years expiring in July 1999 and provides for an annual base
salary of $120,000. The Company paid Mr. Mendoza a signing bonus of $290,000 and
a payment of $15,000 attributable to the noncompetition provisions of the
employment agreement. Subject to his continued employment, the Company has also
agreed to deliver to Mr. Mendoza shares of Common Stock (the "Bonus Stock")
having a market value, in the aggregate, of $800,000 on July 22, 1998. Mr.
Mendoza has the right to require the Company to repurchase up to 40% of the
Bonus Stock by providing ten days advance written notice before the Granting
Date. Mr. Mendoza has agreed not to compete with the Company for a period of two
years after expiration or termination of the employment agreement.
In October 1997, the Company entered into an employment agreement with
Alfred E. Brennan by which Mr. Brennan agreed to serve as the Company's Senior
Vice President and Chief Operating Officer. The employment agreement initially
expires December 31, 1998 but is automatically renewable for an indefinite
number of successive one year terms until cancelled by either party. Mr.
Brennan's annual base salary under the agreement will be at least $180,000.
STOCK OPTION PLAN
The Company has adopted the 1997 Stock Option Plan (the "Option Plan") to
be effective as of the closing of the Offering. A total of 350,000 shares of
Common Stock are reserved for issuance under the Option Plan. The compensation
committee of the Board of Directors (the "Committee") will administer the Option
Plan. Participants in the Option Plan will be those employees of the Company or
its subsidiaries as the Committee may select from time to time and those
non-employee directors of the Company as the Company's Board of Directors may
select from time to time.
Unless otherwise determined by the Committee or provided in the stock
option agreement relating to a particular option, employee options will
terminate upon the participant's termination of employment to the extent not
then exercisable, and options that have become exercisable on or prior to the
date of termination of employment will terminate at the earlier of: (i) the
expiration date of the option; or (ii) where such termination is by the Company
for cause, as defined in the Option Plan, the time of such termination; or (iii)
where such termination occurs as a result of death or disability, one year after
termination of employment; or (iv) where such termination occurs other than as a
result of termination for cause or death or disability, three months after
termination of employment. Options granted under the Option Plan are not
transferable by the grantee other than by will or the laws of descent and
distribution. Unless otherwise determined by the Committee, options granted
under the Option Plan will become exercisable in full in the
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<PAGE> 39
event of a change in control, as defined in the Option Plan. All other terms,
including the time or times at which an option becomes exercisable, are
determined by the Committee in its discretion.
Pursuant to the Option Plan, the Company has granted options for a total of
226,000 shares of Common Stock, all at an exercise price equal to the initial
public offering price of the Common Stock sold in the Offering. An option was
granted to Alfred E. Brennan for 60,000 shares of Common Stock as provided by
his employment agreement, to certain other officers and employees for a total of
156,000 shares of Common Stock, and to its two non-employee Directors for a
total of 10,000 shares of Common Stock. Mr. Brennan's option is immediately
exercisable as to 25% of the shares subject to option and becomes exercisable as
to an additional 25% on January 1 of each year from 1999 to 2001. Options
granted to the Company's non-employee Directors are immediately exercisable.
Each of the other options first becomes exercisable as to 25% of the shares
subject to the options on January 1, 1999 and becomes exercisable as to an
additional 25% on January 1 of each year from 2000 to 2002.
OTHER BENEFIT PLANS
The Company has a nonqualified bonus plan under which 5% of base
compensation is annually paid to full-time employees in Missouri and Texas who
are at least 25 years of age and have at least three years of service with the
Company. The Company also has a nonqualified profit sharing plan for its
full-time employees in Missouri and Texas under which contributions are based on
the overall profitability of the Company, excluding Denticator.
Effective January 1998, certain senior managers of Denticator will
participate in a nonqualified bonus plan under which a percentage of pretax
income of Denticator in excess of targeted amounts will be paid to such
employees.
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<PAGE> 40
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus, regarding the ownership of Common Stock by each person known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, by each of the executive officers and Directors of the Company and by all
executive officers and Directors of the Company as a group prior to the
Offering, and as adjusted to give effect to the sale by the Company of the
Common Stock offered hereby. The address of each person listed below is Young
Innovations, Inc., 13705 Shoreline Court, Earth City, Missouri 63045.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)(2)
---------------------------------
PERCENTAGE
--------------------
BEFORE AFTER
NAME OF BENEFICIAL OWNERS SHARES OFFERING OFFERING
- ------------------------- --------- -------- --------
<S> <C> <C> <C>
George E. Richmond(3)....................................... 3,298,065 74.8% 51.4%
Alfred E. Brennan(4)........................................ 15,000 -- *
Michael W. Eggleston(5)..................................... 58,047 1.3 *
Richard G. Richmond(5)(6)................................... 616,194 14.0 9.6
Richard P. Conerly(7)....................................... 5,000 -- *
Craig E. LaBarge(7)......................................... 5,000 -- *
Executive officers and Directors as a group (6
persons)(3)(4)(7)......................................... 3,997,306 90.4 62.1
</TABLE>
- ---------------
* Less than 1.0%.
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission rules, includes shares as to which a
person has or shares sole voting power and/or investment power. Except as
otherwise indicated, all shares are held of record with sole voting and
investment power.
(2) Excludes shares that may be purchased in the Offering. See "Underwriting."
(3) Includes 2,391,285 shares held in a revocable trust as to which Mr. Richmond
has sole voting and dispositive power and 906,780 shares held in a trust as
to which Mr. Richmond is a co-trustee and has sole voting power and shared
dispositive power subject to his pledge of the 2,391,285 shares held in the
revocable trust as additional collateral for the Company's borrowings, which
pledge will be released upon repayment of such borrowings under the Credit
Agreement. Excludes 600 shares owned by Mr. Richmond's spouse and 201,996
shares owned by employees of the Company which are subject to agreements
with Mr. George Richmond and the Company giving the employees the right and,
upon termination of employment the obligation, to sell such shares to Mr.
Richmond or the Company. The agreements will terminate upon consummation of
the Offering. See "Certain Transactions."
(4) Includes 15,000 shares of Common Stock issuable to Mr. Brennan upon exercise
of stock options which will become immediately exercisable upon completion
of the Offering at an exercise price equal to the initial public offering
price. Excludes 45,000 shares of Common Stock issuable to Mr. Brennan which
will become exercisable ratably over the following three years at an
exercise price equal to the initial public offering price.
(5) Excludes 32,000 shares of Common Stock issuable to each of Messrs. Eggleston
and R. Richmond upon the exercise of stock options which will be exercisable
at an exercise price equal to the initial public offering price. See
"Management -- Stock Option Plans."
(6) Includes 87,549 shares owned directly by Mr. Richard Richmond, 176,215
shares held in a trust for his benefit of which Mr. Richmond is a co-trustee
and has shared voting and dispositive powers, and 352,430 shares held in two
other trusts in which Mr. Richmond is not a beneficiary but is a co-trustee,
and has shared voting and dispositive powers. Mr. Richmond disclaims
beneficial ownership in the 352,430 shares held in the trusts in which he is
not a beneficiary.
(7) Includes 5,000 shares of Common Stock issuable to each of Messrs. Conerly
and LaBarge upon exercise of stock options which will become immediately
exercisable upon completion of the Offering at an exercise price equal to
the initial public offering price.
37
<PAGE> 41
CERTAIN TRANSACTIONS
Solutions in 3D, Inc. ("3D"), a manufacturer of plastic resin prototypes,
leases space from the Company at its premises in Earth City at a rental of $750
per month. George Richmond and Michael Eggleston own 52.5% and 15.0%,
respectively, of the outstanding common stock of 3D. The Company has, from time
to time, loaned money to 3D which, as of September 30, 1997, aggregated $48,000
with interest payable monthly at the prime rate of a local bank; the note
evidencing the loan has no maturity date and is unsecured. The highest principal
balance of the loan at any time was $90,000. 3D's business is primarily with
unrelated third parties. In 1994, 1995, 1996 and the nine months ending
September 30, 1997, respectively, the Company paid an aggregate of $9,000,
$14,000, $10,000 and $10,000 to 3D for plastic resin prototyping services
provided to the Company. Following completion of the Offering, 3D will continue
to lease space from the Company and the Company may continue to loan 3D money
from time to time and purchase services from 3D. The Company has adopted a
policy that all transactions between the Company and any affiliated party will
be approved by a majority of all members of the Company's Board of Directors and
by a majority of the independent and disinterested Directors and will continue
to be on terms no less favorable to the Company than terms the Company believes
would be available from unaffiliated third parties.
George Richmond is a 40% minority stockholder and former officer and
director of Earth City Technologies ("Technologies"), a company located in
Fenton, Missouri. Technologies repairs damaged scalers for the Company returned
by its customers and sells scaler parts. Total amounts paid to Technologies for
repairs in 1994, 1995, 1996 and the first nine months of 1997, respectively,
were $27,000, $38,000, $41,000 and $10,000. Prior to February 1997, the date the
distribution arrangements were terminated, Technologies distributed Young Dental
products in the St. Louis metropolitan area, at the same price and on the same
terms as the Company's other distributors. Technologies purchases certain
products and components from the Company from time to time. Total amounts billed
to Technologies in 1994, 1995, 1996 and the nine months ending September 30,
1997, respectively, were $47,000, $15,000, $34,000 and $66,000. Mr. Richmond is
currently not an officer, director or employee of Technologies and plays no role
in its management. The Company believes that arrangements with Technologies are
on terms to the Company as favorable as could be obtained from unaffiliated
third parties. Following completion of the Offering, Technologies will continue
to provide repair services to the Company.
The Company, George Richmond and certain employee stockholders of the
Company are parties to agreements (the "Stock Plan") pursuant to which Mr.
Richmond sold on two separate occasions an aggregate of 242,512 shares of Common
Stock at appraised values to employees under an arrangement giving the employees
the right and, upon termination of employment, the obligation to sell their
Common Stock at an appraised value either to Mr. Richmond or to the Company. The
last such sale by Mr. Richmond took place in 1993. In addition, the Company is a
party to agreements (the "Buy-Sell Agreement") with five trusts for the benefit
of children of George Richmond, including a trust for the benefit of Richard
Richmond, pursuant to which the non-selling trusts and the Company have rights
of first refusal to purchase Common Stock held by the trusts desiring to sell
their Common Stock. Each of the Stock Plans and the Buy-Sell Agreements will
terminate upon completion of the Offering.
Mr. Richmond has pledged 2,391,285 shares of Common Stock as additional
collateral for the Company's borrowings, which pledge will be released upon
repayment of such borrowings under the Credit Agreement.
Jose Mendoza and five other Denticator employees organized Hot Plastics
Technologies, Inc. ("HPT"), which performed injection molding for Denticator
between January and April, 1997. Mr. Mendoza held 75% of the equity of HPT. In
April 1997, Denticator purchased the assets of HPT; the sole consideration paid
by Denticator for the acquisition was the assumption of HPT's liabilities, which
aggregated $606,000 and included a note payable to Mr. Mendoza of $104,000. The
terms of the acquisition were negotiated for Denticator by the Chief Executive
Officer of the Company. Denticator paid HPT an aggregate of $213,000 for
injection molding services performed prior to the acquisition.
In February 1994, Young Dental repaid notes issued to the stockholders of
Young Dental representing all undistributed income of Young Dental during the
period it was an S Corporation.
38
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, par value $.01 per
share, of which 6,410,296 shares will be outstanding. As of the date of this
Prospectus, the Company had a total of 13 holders of shares of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of legally available funds. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this Offering will be, fully
paid and nonassessable. The holders of Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
The holders of Common Stock do not have cumulative voting rights in the election
of directors.
TRANSFER AGENT AND REGISTER
UMB Bank, N.A. is the transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 6,410,296 shares of
Common Stock outstanding. Of these shares, 2,000,000 shares of Common Stock sold
in the Offering will be freely tradeable without restrictions under the Act,
except for shares purchased by an "affiliate" of the Company which will be
subject to the resale limitations (but not holding period requirements) of Rule
144 thereunder. The remaining 4,410,296 shares of Common Stock were issued and
sold by the Company in private transactions in reliance upon various exemptions
under the Act. Substantially all of such shares will be eligible for public sale
following the Offering subject to compliance with the volume and manner of sale
limitations of Rule 144. In general, under Rule 144 a person (or persons whose
shares are aggregated) including a person who may be deemed an "affiliate" of
the Company, who has beneficially owned his shares for at least one year is
entitled to sell within any three-month period that number of shares which does
not exceed the greater of 1% of the outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks preceding each such
sale. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not and has not been deemed an "affiliate" of the Company for at least
three months and who has beneficially owned his shares for at least two years is
entitled to sell such shares under Rule 144(k) without regard to the limitations
discussed above. All of the officers, Directors and stockholders of the Company
and the Company have agreed not to sell any of their shares of Common Stock to
the public for a period of 180 days after the date of the Prospectus without the
prior written consent of Robert W. Baird & Co. Incorporated.
The preceding description does not give effect to the shares of Common
Stock which may be offered and sold pursuant to the Option Plan. See "Management
- -- Stock Option Plan". The Company intends to file a registration statement on
Form S-8 under the Act not earlier than 90 days after the date of this
Prospectus to register the shares of Common Stock issuable under the Option
Plan, which shares, after registration, will be immediately available for sale
in the public market, subject to the volume and other limitations of Rule 144
for shares held by affiliates and the terms of the Option Plan.
Since there has been no public market for the Common Stock prior to the
Offering, no predictions can be made as to the effect, if any, that market sales
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock.
39
<PAGE> 43
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters listed
below, and the Underwriters, for whom Robert W. Baird & Co. Incorporated and
Cleary Gull Reiland & McDevitt Inc. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite their names
below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Robert W. Baird & Co. Incorporated..........................
Cleary Gull Reiland & McDevitt Inc..........................
---------
Total.................................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to certain dealers at such price, less a concession of not in excess of
$ per share and that the Underwriters and such dealers may reallow a
concession of not in excess of $ per share to certain brokers or other
dealers. The public offering price and concessions and reallowances to dealers
may be changed by the Representatives after the commencement of the Offering.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of the Offering, to purchase up to an additional 300,000
shares of Common Stock to cover over-allotments, at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase such additional shares pursuant to this option, each of
the Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments, if any, in
connection with the Offering.
The Underwriting Agreement provides that each of the Company and the
Underwriters have agreed to indemnify, or to contribute to payments made by,
each other with respect to certain civil liabilities, including certain civil
liabilities under the Act.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. The factors considered
in determining the initial public offering price include the history of and
prospects for the industry in which the Company operates, past and present
operations, revenues and earnings of the Company and the trend of such earnings,
the prospects for such earnings, the Company's capital requirements, percentage
of ownership to be held by investors following the Offering, the general
condition of the securities markets at the time of the Offering and the demand
for similar securities of reasonably comparable companies.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the
40
<PAGE> 44
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Underwriters to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
securities to be higher than it would otherwise be in the absence of such
transactions.
The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.
The Company and its officers, Directors and stockholders have agreed not to
sell, contract to sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of the Prospectus without the prior written
consent of Robert W. Baird & Co. Incorporated.
The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this Prospectus
forms a part. See "Additional Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Armstrong, Teasdale, Schlafly & Davis, St. Louis,
Missouri. Certain legal matters will be passed upon for the Underwriters by
McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Young Innovations, Inc. and
subsidiaries as of December 31, 1995 and 1996, and for each of the three years
in the period ended December 31, 1996, and the consolidated financial statements
of Lorvic Holdings, Inc. and subsidiary for the period from April 1, 1995,
through May 4, 1995, included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
The financial statements of Denticator International, Inc. for the period
from April 1, 1996 through July 22, 1996, included in this Prospectus have been
audited by John J. Eckle, independent public accountant, as indicated in his
report with respect thereto, and are included herein in reliance upon the
authority of said individual as an expert in accounting and auditing in giving
said report.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 (of which this Prospectus is a part),
including amendments thereto, relating to the Common Stock offered hereby has
been filed by the Company with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
and the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement and the exhibits and schedules thereto may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such documents may be obtained from the Commission at the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon the payment of certain fees prescribed by the
41
<PAGE> 45
Commission. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each year.
42
<PAGE> 46
YOUNG INNOVATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
YOUNG INNOVATIONS, INC. -- CONSOLIDATED FINANCIAL STATEMENTS
--
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996, September 30, 1997 and September 30, 1997 (pro
forma)................................................. F-3
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996, and the nine months
ended September 30, 1996 and 1997...................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996, and the
nine months ended September 30, 1997................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996, and the nine months
ended September 30, 1996 and 1997...................... F-6
Notes to Consolidated Financial Statements................ F-7
LORVIC HOLDINGS, INC. -- CONSOLIDATED FINANCIAL STATEMENTS
--
Report of Independent Public Accountants.................. F-18
Consolidated Statement of Income for the period from April
1, 1995 through May 4, 1995............................ F-19
Consolidated Statement of Changes in Stockholders' Equity
for the period from April 1, 1995 through May 4,
1995................................................... F-20
Consolidated Statement of Cash Flows for the period from
April 1, 1995
through May 4, 1995.................................... F-21
Notes to Consolidated Financial Statements................ F-22
DENTICATOR INTERNATIONAL, INC. -- FINANCIAL STATEMENTS --
Report of Independent Public Accountant................... F-24
Statement of Operations and Accumulated Deficit for the
period April 1, 1996
through July 22, 1996.................................. F-25
Statement of Cash Flows for the period April 1, 1996
through July 22, 1996.................................. F-26
Notes to Financial Statements............................. F-27
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. (a Missouri corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Young Innovations, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 31, 1997 (except with respect to
matters discussed in Note 20, as to which the date
is October 15, 1997)
F-2
<PAGE> 48
YOUNG INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $ 51 $ 98 $ 98 $ 98
Trade accounts receivable, net of allowance for
doubtful accounts of $32, $54, $75 and $75,
respectively................................. 2,274 3,207 2,494 2,494
Inventories..................................... 1,448 1,733 2,338 2,338
Other current assets............................ 454 860 1,182 1,182
------- ------- ------- -------
Total current assets......................... 4,227 5,898 6,112 6,112
------- ------- ------- -------
Property, plant and equipment..................... 5,194 7,082 7,436 7,436
Marketable securities............................. 419 204 102 102
Other assets...................................... 1,068 680 656 656
Intangible assets................................. 11,199 18,617 18,260 18,260
------- ------- ------- -------
Total assets................................. $22,107 $32,481 $32,566 $32,566
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving line of credit........................ $ 2,700 $ 5,270 $ 5,268 $ 5,268
Current maturities of long-term debt............ 3,173 3,617 3,817 3,817
Accounts payable and accrued liabilities........ 1,465 2,783 2,932 2,932
------- ------- ------- -------
Total current liabilities.................... 7,338 11,670 12,017 12,017
Long-term debt.................................... 4,900 7,519 4,656 4,656
Noncurrent liability.............................. 450 631 450 450
Deferred income taxes............................. 420 729 709 709
Puttable common stock, 242,512, 200,076, 201,996
and -0- shares issued and outstanding,
respectively.................................... 1,878 1,621 1,636 --
------- ------- ------- -------
Total liabilities............................ 14,986 22,170 19,468 17,832
------- ------- ------- -------
Stockholders' equity
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,207,698, 4,208,300, 4,208,300
and 4,410,296 shares issued and outstanding,
respectively................................. 42 42 42 44
Unrealized gain on marketable securities, net of
tax.......................................... 23 12 12 12
Retained earnings............................... 7,056 10,581 13,353 14,987
Common stock in treasury, at cost, -0-, 41,834,
39,914 and 39,914 shares, respectively....... -- (324) (309) (309)
------- ------- ------- -------
Total stockholders' equity................... 7,121 10,311 13,098 14,734
------- ------- ------- -------
Total liabilities and stockholders' equity... $22,107 $32,481 $32,566 $32,566
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 49
YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $12,036 $17,496 $21,580 $15,087 $18,214
Cost of goods sold...................... 5,457 7,379 9,470 6,430 7,343
--------- --------- --------- --------- ---------
Gross profit.......................... 6,579 10,117 12,110 8,657 10,871
Selling, general and administrative
expenses.............................. 3,063 4,494 5,790 3,989 5,490
--------- --------- --------- --------- ---------
Income from operations................ 3,516 5,623 6,320 4,668 5,381
--------- --------- --------- --------- ---------
Other expense (income)
Interest expense...................... 189 741 974 700 895
Other expense (income), net........... (124) (320) 123 258 (17)
--------- --------- --------- --------- ---------
65 421 1,097 958 878
--------- --------- --------- --------- ---------
Income before provision for income
taxes.............................. 3,451 5,202 5,223 3,710 4,503
Provision for income taxes.............. 1,270 2,044 1,955 1,367 1,716
--------- --------- --------- --------- ---------
Net income............................ $ 2,181 $ 3,158 $ 3,268 $2,343 $ 2,787
========= ========= ========= ========= =========
Earnings per share...................... $.49 $.71 $.74 $.53 $.63
========= ========= ========= ========= =========
Weighted average shares outstanding..... 4,450,210 4,450,210 4,444,003 4,450,210 4,409,914
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 50
YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON COMMON
COMMON MARKETABLE RETAINED STOCK IN
STOCK SECURITIES EARNINGS TREASURY TOTAL
------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................... $42 $ -- $ 3,165 $ -- $ 3,207
Net income.................................. -- -- 2,181 -- 2,181
Change in unrealized gain (loss) on
marketable securities, net of tax........ -- 24 -- -- 24
Distributions to stockholders ($.01 per
share)................................... -- -- (20) -- (20)
Increase in value of puttable common
stock.................................... -- -- (139) -- (139)
--- ---- ------- ----- -------
Balance, December 31, 1994.................... 42 24 5,187 -- 5,253
Net income.................................. -- -- 3,158 -- 3,158
Change in unrealized gain (loss) on
marketable securities, net of tax........ -- (1) -- -- (1)
Increase in value of puttable common
stock.................................... -- -- (1,289) -- (1,289)
--- ---- ------- ----- -------
Balance, December 31, 1995.................... 42 23 7,056 -- 7,121
Net income.................................. -- -- 3,268 -- 3,268
Change in unrealized gain (loss) on
marketable securities, net of tax........ -- (11) -- -- (11)
Common stock redeemed....................... -- -- -- (329) (329)
Common stock in treasury, reissued.......... -- -- -- 5 5
Change in shares and value of puttable
common stock............................. -- -- 257 -- 257
--- ---- ------- ----- -------
Balance, December 31, 1996.................... 42 12 10,581 (324) 10,311
Net income.................................. -- -- 2,787 -- 2,787
Common stock in treasury, reissued.......... -- -- -- 15 15
Increase in shares of puttable common
stock.................................... -- -- (15) -- (15)
--- ---- ------- ----- -------
Balance, September 30, 1997 (unaudited)....... $42 $ 12 $13,353 $(309) $13,098
=== ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 51
YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income...................................... $ 2,181 $ 3,158 $ 3,268 $ 2,343 $ 2,787
------- -------- ------- ------- -------
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation and amortization................ 886 1,083 1,025 779 939
Deferred income taxes........................ 99 (242) 279 -- --
Loss (gain) on sale of equipment............. -- (242) (219) (10) 5
Changes in assets and liabilities
Trade accounts receivable.................... (134) (159) (511) 564 713
Inventories.................................. (104) (227) 196 (251) (581)
Other current assets......................... 107 252 (327) (125) (322)
Other assets................................. (26) (334) 445 366 24
Accounts payable and accrued liabilities..... 239 221 105 539 (29)
Other........................................... 82 -- 212 290 (523)
------- -------- ------- ------- -------
Total adjustments.......................... 1,149 352 1,205 2,152 226
------- -------- ------- ------- -------
Net cash flows from operating activities... 3,330 3,510 4,473 4,495 3,013
------- -------- ------- ------- -------
Cash flows from investing activities
Payments for acquisitions, net of cash
acquired..................................... -- (13,372) (7,566) (7,566) --
Purchases of property, plant and equipment...... (620) (992) (3,152) (2,133) (508)
Proceeds from sale of property, plant and
equipment.................................... -- 253 802 11 33
Purchases of marketable securities.............. (1,023) -- -- -- --
Proceeds from sale of marketable securities..... 1,056 -- 204 204 102
Payments on notes receivable.................... 306 14 18 14 10
------- -------- ------- ------- -------
Net cash flows from investing activities... (281) (14,097) (9,694) (9,470) (363)
------- -------- ------- ------- -------
Cash flows from financing activities
Borrowings from long-term debt.................. -- 9,000 12,000 12,000 --
Payments of long-term debt...................... (118) (1,399) (8,978) (8,933) (2,663)
Change in revolving line of credit.............. -- 2,700 2,570 1,973 (2)
Payments of notes to stockholders............... (3,633) -- -- -- --
Distributions to stockholders................... (20) -- -- -- --
Redeemed common stock........................... -- -- (329) -- --
Reissuance of common stock in treasury.......... -- -- 5 -- 15
------- -------- ------- ------- -------
Net cash flows from financing activities... (3,771) 10,301 5,268 5,040 (2,650)
------- -------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents..................................... (722) (286) 47 65 --
Cash and cash equivalents, beginning of period.... 1,059 337 51 51 98
------- -------- ------- ------- -------
Cash and cash equivalents, end of period.......... $ 337 $ 51 $ 98 $ 116 $ 98
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 52
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
1. DESCRIPTION OF BUSINESS:
Young Innovations, Inc. and its subsidiaries (the Company) designs,
manufactures and markets single-use supplies, autoclavable instruments and other
products used by dental professionals, primarily in preventive dentistry and
infection control. The Company manufactures and markets metal and disposable
prophy angles, cups and brushes that are integral components used in the
cleaning and polishing of teeth by dental professionals. The Company's
manufacturing facilities are located in Missouri, California and Texas. The
Company markets its products to dental professionals worldwide through a network
of medical and dental product distributors. Export sales were less than 10% of
total net sales for 1994, 1995 and 1996.
The accompanying consolidated balance sheet as of September 30, 1997, and
related consolidated statements of income and cash flows for the nine months
ended September 30, 1996 and 1997, and consolidated statement of stockholders'
equity for the nine months ended September 30, 1997, and related disclosures,
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments necessary (consisting only of normal, recurring adjustments) for
the fair presentation of financial position, results of operations and cash
flows. The results of operations for the nine months ended September 30, 1997,
are not necessarily indicative of the results which may be expected for the year
ending December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young
Innovations, Inc., formed in July 1995, and its direct and indirect wholly owned
subsidiaries, Young Dental Manufacturing Company (Young Dental), Lorvic
Holdings, Inc., The Lorvic Corporation, Young Dental International, Inc. and
Denticator International, Inc. (Denticator). Lorvic Holdings, Inc. and The
Lorvic Corporation (Lorvic) are included since their acquisition on May 5, 1995.
Young Dental International, Inc., a Foreign Sales Corporation, is included since
its inception on February 1, 1996, and Denticator is included since its
acquisition on July 22, 1996. All significant intercompany accounts and
transactions are eliminated in consolidation. The Company operates in one
business segment.
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
initial maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (which includes material, labor
and manufacturing overhead) or market. Cost is determined by the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for repairs
and maintenance are charged to expense as incurred, and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
disposition, cost and accumulated depreciation are eliminated from the related
accounts and
F-7
<PAGE> 53
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
any gain or loss is reflected in other income or expense. The Company provides
depreciation using the straight-line method over the estimated useful lives of
the assets. Estimated useful lives for buildings and improvements range from 15
to 39 years and for machinery and equipment from three to ten years. Effective
October 1, 1995, the Company changed the estimated useful lives of certain
equipment that had the effect of reducing depreciation expense by approximately
$132 for 1995.
MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, the Company's marketable debt
securities consisting of municipal bonds, are classified as "available for sale"
and accordingly, are reflected at fair value with the corresponding impact
included as a component of stockholders' equity designated "unrealized gain on
marketable securities, net of tax." As of December 31, 1995 and 1996, there were
no unrealized losses on any individual security. As of December 31, 1996, the
marketable securities have contractual maturities varying from 2009 to 2019.
OTHER ASSETS
Other assets include costs related to patents issued to the Company and
pending patent applications. Capitalized patent costs are amortized on a
straight-line basis over the estimated useful lives of the patents, generally 17
years.
INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated amortization.
Amortization is determined using the straight-line method over 40 years.
LONG-LIVED ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the carrying value
of the asset will not be recovered, as determined based on projected
undiscounted cash flows related to the asset over its remaining life, the
carrying value of the asset is reduced to its estimated fair value.
ADVERTISING COSTS
Advertising costs are expensed when incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and totaled $159
for 1994, $352 for 1995 and $597 for 1996.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time of passage of
title, when the products are shipped.
OTHER EXPENSE (INCOME)
Other expense (income) includes gain and loss on disposition of fixed
assets, sale of scrap, and other miscellaneous income and expense items, all of
which are not directly related to the Company's primary business. In 1995 and
1996, net gains on the sale of equipment and other fixed assets totaled $242 and
$219,
F-8
<PAGE> 54
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. Other 1996 expenses include approximately $322 of deferred
offering costs expensed as a result of the Company withdrawing its registration
statement in 1996 with respect to its efforts to go public in 1995.
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, an asset and
liability approach to accounting and reporting for income taxes. Deferred income
taxes are provided for temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $1,036, $1,851 and $1,898 for
the payment of federal and state income taxes and $189, $741 and $931 for the
payment of interest during 1994, 1995 and 1996, respectively. Interest paid to
stockholders was $147 during 1994.
3. ACQUISITIONS:
On July 22, 1996, the Company acquired the assets and liabilities of
Denticator from Bio Dental Technologies Corp. (Bio Dental) and an individual.
The purchase price was financed principally through bank debt. The acquisition
of Denticator was accounted for as a purchase transaction. The purchase price
was allocated based upon estimates of fair value. Differences between the
amounts included herein, if any, and final allocations of purchase price are not
expected to have a material effect on the Company's financial statements.
The excess of purchase price over the fair value of net assets acquired was
$7,575 and is being amortized over 40 years. The purchase price allocation is as
follows:
<TABLE>
<S> <C>
Trade accounts receivable................................... $ 422
Inventories................................................. 481
Other current assets........................................ 97
Property, plant and equipment............................... 210
Other assets................................................ 57
Intangible assets (goodwill)................................ 7,575
Current liabilities......................................... (1,249)
Noncurrent liability........................................ (27)
------
Payments, net of cash acquired......................... $7,566
======
</TABLE>
The results of operations for Denticator are included in the consolidated
financial statements since July 22, 1996.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Denticator as if the
acquisition had occurred at the beginning of 1996, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects. The
unaudited pro forma information does not purport
F-9
<PAGE> 55
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be indicative of the results of operations had these transactions been
completed as of the assumed date or which may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
Net sales............................................... $24,568
Net income.............................................. 3,260
Earnings per share...................................... .73
</TABLE>
On May 5, 1995, the Company acquired the common stock of Lorvic. The
purchase price was financed through bank debt.
In accordance with the Lorvic stock purchase agreement, the Company paid
part of the purchase price to various escrow funds totaling $2,350. The
representations and warranties made by the former stockholders of Lorvic for
which the general contingencies escrow fund has been established will survive
until May 5, 1997. The income tax contingencies amount of $900 will survive
until the dispute described in Note 18 is resolved and the remaining $500 will
survive until the applicable limitation periods have elapsed. The escrow funds
are maintained for the following matters:
<TABLE>
<CAPTION>
AS OF
----------------------------
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Income tax contingencies.................... $1,200 $1,400
General contingencies....................... 1,000 525
------ ------
Total amounts in escrow................ $2,200 $1,925
====== ======
</TABLE>
The acquisition of Lorvic was accounted for as a purchase transaction. The
purchase price was allocated based upon estimates of fair value. The excess of
purchase price over the fair value of net assets acquired was $11,581 and is
being amortized over 40 years. The final purchase price allocation is as
follows:
<TABLE>
<S> <C>
Trade accounts receivable.................................. $ 679
Inventories................................................ 457
Other current assets....................................... 219
Property, plant and equipment.............................. 911
Other assets............................................... 450
Intangible assets (goodwill)............................... 11,581
Current liabilities........................................ (239)
Noncurrent liability....................................... (450)
Deferred income taxes...................................... (236)
-------
Payments, net of cash acquired........................ $13,372
=======
</TABLE>
The results of operations for Lorvic are included in the consolidated
financial statements since May 5, 1995.
4. CONCENTRATIONS OF CUSTOMERS AND SUPPLIERS:
The Company generates trade accounts receivable in the normal course of
business. The Company grants credit to distributors throughout the world and
generally does not require collateral to secure the accounts receivable. The
Company's credit risk is concentrated among three distributors accounting for
41% and 45% of accounts receivable as of December 31, 1995 and 1996,
respectively.
F-10
<PAGE> 56
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has two suppliers for the rubber used to produce its prophy
cups. The Company relies on proprietary rubber formulations that were
independently developed and are owned by these suppliers. If the Company is no
longer able to obtain its rubber or the formula from either supplier, it would
be forced to obtain a rubber formulation from another source. There can be no
assurance that another supplier would be able to develop an acceptable
formulation or be able to provide the Company with sufficient amounts of rubber.
If the Company is unable to obtain a satisfactory rubber formulation, the
quality of its prophy cups could be negatively impacted and the Company could
suffer a loss of reputation and a decline in sales.
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Finished products................................ $ 249 $ 515 $ 915
Work in process.................................. 895 711 975
Raw materials and supplies....................... 344 550 551
------ ------ -------
1,488 1,776 2,441
Reserve for obsolete and excess inventories...... (40) (43) (103)
------ ------ -------
Total inventories........................... $1,448 $1,733 $ 2,338
====== ====== =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................ $ 441 $ 348 $ 348
Buildings and improvements...................... 2,249 3,365 3,573
Machinery and equipment......................... 7,002 8,266 9,015
Construction in progress........................ 54 -- --
------ ------- -------
9,746 11,979 12,936
Less -- Accumulated depreciation................ (4,552) (4,897) (5,500)
------ ------- -------
Total property, plant and equipment, net... $5,194 $ 7,082 $ 7,436
====== ======= =======
</TABLE>
7. OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred initial public offering costs.......... $ 302 $ -- $ --
Escrow receivable............................... 450 450 450
Other........................................... 316 230 206
------ ------- -------
Total other assets......................... $1,068 $ 680 $ 656
====== ======= =======
</TABLE>
F-11
<PAGE> 57
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill....................................... $11,386 $19,172 $19,172
Less -- Accumulated amortization............... (187) (555) (912)
------- ------- -------
Total intangible assets................... $11,199 $18,617 $18,260
======= ======= =======
</TABLE>
Amortization of goodwill totaled $187 for 1995 and $368 for 1996.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Payable to Bio Dental......................... $ -- $ 660 $ 267
Accounts payable.............................. 347 599 445
Accrued salaries and bonuses.................. 497 722 1,199
Accrued expenses and other.................... 347 602 1,021
Bank overdraft................................ 274 200 --
------ ------ ------
Total accounts payable and accrued
liabilities............................ $1,465 $2,783 $2,932
====== ====== ======
</TABLE>
10. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Term Loan, due December 1999, payable in two quarterly
installments of $450 in 1996, $850 for the first two
quarters and $950 for the second two quarters in 1997
and $950 per quarter thereafter until maturity,
interest at either the prime rate plus .25% in effect
on any day or at a LIBOR rate plus 2.5% for a set
period (8.1% at December 31, 1996), collateralized by
all assets of the Company, stock of its subsidiaries
and a pledge of stock by its majority stockholder..... $ -- $11,100
Term Loan, due May 1998, payable in quarterly
installments, interest at the prime rate plus .5%
(9.5% at December 31, 1995), collateralized by
property and equipment, including the stock of
Lorvic................................................ 7,700 --
Note to bank, due July 1996, payable in monthly
installments of $11 including interest at the lower of
prime or a preestablished ceiling rate determined for
the following year on May 1 (9.0% at December 31,
1995), secured by a first deed of trust on real
estate................................................ 373 --
------- -------
8,073 11,100
Lease obligations...................................... -- 36
Less -- Current maturities of long-term debt........... (3,173) (3,617)
------- -------
Total long-term debt............................ $ 4,900 $ 7,519
======= =======
</TABLE>
F-12
<PAGE> 58
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 22, 1996, under the terms of a Revolving Credit and Term Loan
Agreement (Loan Agreement) with a bank, the Company borrowed $16.5 million to
acquire Denticator and to pay off other existing debt. The Loan Agreement
consisted of a term loan of $12.0 million and a revolving line of credit with a
maximum borrowing capacity of $6.5 million. On April 1, 1997, the Loan Agreement
was amended to increase the revolving line of credit capacity to $7.0 million.
Borrowings bear interest at prime minus .5%, payable monthly and are
collateralized by all assets of the Company, stock of its subsidiaries and a
pledge of stock by its majority stockholder. As of December 31, 1996, the unused
portion of the line of credit amounted to $1.2 million. Although the line of
credit is due and payable on December 1, 1999, the Company may retire some or
all of the outstanding borrowings during 1997 and therefore, the Company's line
of credit borrowings are classified as a current liability.
The Company is limited under the terms of the Loan Agreement in its ability
to make loans and investments, incur additional debt, pay dividends and sell
significant assets, among other things, without the consent of the bank.
As of December 31, 1996, maturities of long-term debt including future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997 ............................................................ $ 3,617
1998 ............................................................ 3,819
1999 ............................................................ 3,700
-------
$11,136
=======
</TABLE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's borrowings under its Loan Agreement
and other long-term debt approximate fair values since the interest rates are
based on current market rates.
12. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current............................................... $1,171 $2,286 $1,676
Deferred.............................................. 99 (242) 279
------ ------ ------
Total provision for income taxes................. $1,270 $2,044 $1,955
====== ====== ======
</TABLE>
F-13
<PAGE> 59
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The income tax provisions are different from the amount computed by
applying the U.S. federal income tax rates to income before provision for income
taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Income before provision for income taxes........... $3,451 $5,202 $5,223
U.S. federal income tax rate....................... 34% 34% 34%
------ ------ ------
Computed income taxes......................... 1,173 1,769 1,776
Goodwill amortization.............................. -- 58 97
Other.............................................. 27 78 (19)
------ ------ ------
Provision for federal income taxes............ 1,200 1,905 1,854
State income taxes, net of federal tax benefit..... 70 139 101
------ ------ ------
Provision for income taxes.................... $1,270 $2,044 $1,955
====== ====== ======
Effective tax rate................................. 37% 39% 37%
====== ====== ======
</TABLE>
Temporary differences that gave rise to deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
----- -----
<S> <C> <C>
Deferred income tax assets
Trade accounts receivable................................. $ 12 $ 20
Inventories............................................... 43 33
Intangibles............................................... 9 --
Accrued liabilities....................................... 141 186
----- -----
Total deferred income tax assets..................... 205 239
----- -----
Deferred income tax liabilities
Property, plant and equipment............................. (406) (669)
Marketable securities..................................... (14) (10)
Intangibles............................................... -- (50)
----- -----
Total deferred income tax liabilities................ (420) (729)
----- -----
Net deferred income tax liability........................... $(215) $(490)
===== =====
</TABLE>
Total current deferred income tax assets of $205 and $239 are included in
other current assets as of December 31, 1995 and 1996, respectively.
13. PUTTABLE COMMON STOCK:
In accordance with the provisions of certain stockholder agreements,
employees who have purchased common stock from a stockholder at an appraised
value are obligated to sell their shares upon cessation of employment or may
sell during employment to either the majority stockholder of the Company or the
Company. The price at which the stock is repurchased is based on the appraised
value of the Company as of the latest fiscal year-end. During 1996, the Company
purchased 42,434 shares for $329 and resold 600 shares for $5.
The Company and the holders of the puttable common stock have agreed to
terminate the stockholder agreements contemporaneous with and subject to the
completion of the common stock offering. Therefore, all outstanding shares of
the puttable common stock will be reflected in stockholders' equity upon
completion of
F-14
<PAGE> 60
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Offering (see Note 20). A pro forma balance sheet as of September 30, 1997,
is presented assuming the termination of the stockholder agreements.
14. MAJOR CUSTOMERS:
The percentage of the Company's net sales to its major distributors are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Henry Schein, Inc...................................... 17.3% 17.8% 19.1%
Patterson Dental Company............................... 15.0 15.1 17.9
Sullivan Dental Products, Inc.......................... 10.5 8.4 7.7
</TABLE>
15. SUPPLEMENTARY EARNINGS PER SHARE:
As discussed in Note 20, the Company plans to retire substantially all of
its outstanding indebtedness using the net proceeds from the sale of common
stock. Assuming the Company's revolving line of credit and long-term borrowings
were retired as of January 1, 1996, supplementary earnings per share would be
$.68 and $.57 (unaudited) for the year ended December 31, 1996, and nine months
ended September 30, 1997, respectively, reflecting the elimination of interest
expense, net of income taxes, of $614 for 1996 and $555 for the nine months
ended September 30, 1997. Supplementary earnings per share assumes 4,444,003 and
4,409,914 weighted average shares outstanding for 1996 and the nine months ended
September 30, 1997, respectively, plus 1,280,000 and 1,460,000 shares,
representing those shares of common stock sold at an initial public offering
price of $11.00 per share, the application of the net proceeds therefrom
sufficient to retire $12.6 and $14.4 million of average outstanding borrowings
for 1996 and the nine months ended September 30, 1997, respectively.
16. EMPLOYEE BENEFITS:
The Company has a nonqualified bonus plan under which 5% of base
compensation is paid annually to full-time employees in Missouri and Texas who
are at least 25 years of age and have at least three years of service with the
Company. Compensation expense related to this plan totaled $65, $80 and $106 in
1994, 1995 and 1996, respectively. The Company also has a nonqualified profit
sharing plan for its employees in Missouri and Texas. Compensation expense
related to this plan was $174, $192 and $190 in 1994, 1995 and 1996,
respectively, and is based on the overall profitability of the Company
(excluding Denticator). Denticator has a nonqualified profit sharing plan for
certain employees in California. Compensation expense related to this plan was
$59 in 1996.
17. RELATED-PARTY TRANSACTIONS:
The Company leases a portion of its office space to, pays for services from
and loans funds to, a corporation in which two stockholders have an equity
interest. Rental and other income from such corporation totaled $18 in 1994, $17
in 1995 and $15 in 1996. As of December 31, 1995 and 1996, the Company had an
unsecured note receivable of $76 and $58, respectively, from such corporation.
The Company paid an aggregate of $9, $14 and $10 for services provided to such
corporation in 1994, 1995 and 1996, respectively.
The Company sells products to, and pays for services from, a corporation in
which a stockholder has an equity interest. Net sales to such corporation
totaled $47 in 1994, $15 in 1995 and $34 in 1996. Amounts paid for services
totaled $27 in 1994, $38 in 1995 and $41 in 1996.
F-15
<PAGE> 61
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company pays for services from and has outstanding trade receivables
due from a corporation in which a stockholder has personally guaranteed a loan.
Net purchases totaled $18 in 1996 and trade receivables due totaled $84 at
December 31, 1996.
The Company is a party to agreements with five trusts for the benefit of
children of the majority stockholder, pursuant to which the nonselling trusts
and the Company have rights of first refusal to purchase common stock held by
the trusts desiring to sell their common stock. These agreements will terminate
upon completion of the initial public offering of common stock (see Note 20).
In connection with the acquisition of Denticator, an employment agreement
(the Agreement) with Denticator's President and Chief Executive Officer was
executed. The Agreement provides for a base annual salary of $120 and delivery
of shares of common stock. If the individual is employed by the Company on July
22, 1998, the Company will deliver common stock in the number of shares equal to
$800 divided by the last reported sale price. The employment agreement also
provides the right to require the Company to repurchase with cash up to 40% of
the stock at the last reported sale price on July 22, 1998 by providing 10 days
advance written notice before receipt. The employee has agreed not to compete
with the Company for a period of two years after expiration or termination of
the employment agreement. The Company is accruing a liability of $800 evenly
over the two year period and recorded $176 of compensation expense for the year
ended December 31, 1996.
In April 1997, Denticator purchased the assets of Hot Plastics
Technologies, Inc. (HPT), a company that had provided injection molding services
for Denticator. The President and Chief Executive Officer of Denticator owned
75% of the stock of HPT. The sole consideration paid by Denticator for the
acquisition was the assumption of HPT's liabilities, which aggregated $606 and
included a note payable to the President and Chief Executive Officer of
Denticator of $104. The terms of the acquisition were negotiated for Denticator
by the Chief Executive Officer of the Company. The Company paid HPT an aggregate
of $213 (unaudited) for injection molding services between January 1, 1997, and
the date of HPT's acquisition by Denticator.
18. CONTINGENCIES:
The Internal Revenue Service (IRS) conducted a routine examination of the
Company's federal income tax returns, excluding Lorvic, for the tax years ended
December 31, 1993 and 1994. In February 1996, Young Dental received a notice of
proposed adjustments from the IRS proposing to increase federal income tax by
$250. The Company disagreed with the proposed adjustments and contested them.
Two issues have been resolved for $25. The remaining issue has a proposed
adjustment of $80 and is being contested. In the opinion of management, after
considering existing liabilities, the ultimate outcome of this examination will
not have a material adverse effect on the financial position or results of
operations of the Company.
The IRS examined Lorvic's federal income tax returns for the years ended
March 31, 1992 through 1995 and proposed deficiencies in federal income taxes
for those years in an aggregate amount of $766 due to the classification of
certain intangible assets. Lorvic has filed two petitions with the United States
Tax Court contesting these proposed deficiencies. The petitions have been
consolidated and are scheduled for trial in January 1998. In accordance with the
Agreement, the previous stockholders of Lorvic are responsible for the
settlement of this matter to the extent of $700 held in the tax contingencies
escrow fund plus earnings thereon together with $200 from the general
contingencies fund to cover any interest and penalties related to such matters.
These funds are expected to be sufficient to satisfy any resulting payments to
the IRS.
In May 1997, two former employees of Young Dental and a corporation formed
by them filed a Petition against Young Dental in the Circuit Court for the City
of St. Louis, Missouri (the Current Action). The Current Action results from an
action brought in 1993 by Young Dental against the same former employees and
corporation in the Federal District Court for the Eastern District of Missouri
(the Prior Action), alleging, among other things, patent infringement and
misappropriation of trade secrets. The Prior Action was resolved
F-16
<PAGE> 62
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in favor of the former employees and their corporation. In each of three counts
alleging malicious prosecution and three counts alleging abuse of process,
plaintiffs in the Current Action seek damages against Young Dental in
unspecified amounts in excess of $25. Plaintiffs also seek punitive damages.
While the Current Action is in its very early stages and discovery has yet to be
commenced, based upon the advice of legal counsel, the Company believes it has
defenses to each of plaintiffs' claims.
In the opinion of management, the ultimate outcome of these claims and
lawsuit will not have a material adverse effect on the financial position or
results of operations of the Company.
19. ACCOUNTING STANDARDS NOT IMPLEMENTED:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128),
which establishes standards for computing and presenting earnings per share.
SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual presentation of
basic and diluted earnings per share on the face of the income statements for
all entities with complex capital structures and requires a reconciliation of
the numerator and the denominator of the basic and diluted earnings per share
computations. The Company is required to adopt the provisions of SFAS 128 during
the quarter ending December 31, 1997, and all prior period earnings per share
data presented must be restated. The adoption of SFAS 128 is not expected to
have a significant impact on the Company's previously reported or prospective
earnings per share amounts.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which establishes standards for reporting and displaying comprehensive
income and its components. The Company is required to adopt the provisions of
SFAS 130 no later than the quarter ending March 31, 1998. The adoption of SFAS
130 is not expected to have a material effect on the Company's financial
position or results of operations.
20. SUBSEQUENT EVENTS:
In September 1997, the Company prepared and filed a registration statement
on Form S-1 with the U.S. Securities and Exchange Commission with respect to a
proposed initial public offering of up to 2,300,000 shares of common stock,
including an overallotment option of 300,000 shares (the Offering). A portion of
the net proceeds will be used to retire the revolving line of credit and
long-term borrowings (see Note 15). On October 15, 1997, in connection with the
Offering, the Company effected a 1.2 for one stock split of each outstanding
share of common stock in the form of a stock dividend. All share and per share
information have been retroactively restated to reflect this stock split.
In contemplation of and subject to the completion of the Offering, the
Company established a stock option plan whereby the compensation committee of
the Board of Directors will grant key employees and non-employee directors
incentive or nonqualified options at fair market value. The maximum number of
shares which can be issued under the stock option plan is 350,000 shares.
Pursuant to the stock option plan, the Company has granted options to purchase
226,000 shares of Common Stock at an exercise price equal to the initial public
offering price. An option to purchase 60,000 shares of Common Stock has been
granted to one employee, is immediately exercisable as to 25% of the shares
subject to the option and will become exercisable as to an additional 25% on
January 1 of each year from 1999 to 2001. Options to purchase an aggregate of
10,000 shares of Common Stock have been granted to two non-employee Directors
and are immediately exercisable. Each of the other options first becomes
exercisable as to 25% of the shares subject to option on January 1, 1999 and
will become exercisable as to an additional 25% on January 1 of each year from
2000 to 2002.
F-17
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lorvic Holdings, Inc.:
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity, and cash flows of Lorvic Holdings, Inc. and subsidiary
for the period from April 1, 1995, through May 4, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of their operations and their cash flows
for the period from April 1, 1995, through May 4, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
August 15, 1997
F-18
<PAGE> 64
LORVIC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM APRIL 1, 1995, THROUGH MAY 4, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Net sales................................................... $ 524
Cost of sales............................................... 152
-----
Gross profit........................................... 372
Selling, general and administrative expenses................ 286
-----
Income from operations................................. 86
-----
Other income (expense)
Interest expense.......................................... (6)
Other income, net......................................... 14
-----
8
-----
Income before provision for income taxes............... 94
Provision for income taxes.................................. 41
-----
Net income............................................. $ 53
=====
Earnings per share.......................................... $2.12
=====
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE> 65
LORVIC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1995, THROUGH MAY 4, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995...................... 20 $-- 5 $-- $756 $3,358
Net income................................. -- -- -- -- -- 53
-- -- -- -- ---- ------
Balance, May 4, 1995......................... 20 $-- 5 $-- $756 $3,411
== == == == ==== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE> 66
LORVIC HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1995, THROUGH MAY 4, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities
Net income................................................ $ 53
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation........................................... 11
Amortization........................................... 13
Deferred income taxes.................................. 268
Changes in operating assets and liabilities-
Accounts receivable.................................. (4)
Inventories.......................................... 5
Income taxes refundable.............................. (227)
Prepaid expenses..................................... (12)
Accounts payable..................................... 44
Accrued compensation and other expenses.............. (10)
Income taxes payable................................. 5
------
Net cash flows from operating activities.......... 146
Cash flows from financing activities
Payments on long-term borrowings.......................... (562)
------
Net decrease in cash and cash equivalents......... (416)
Cash and cash equivalents, beginning of period.............. 2,417
------
Cash and cash equivalents, end of period.................... $2,001
======
</TABLE>
The accompanying notes are an integral part of this statement.
F-21
<PAGE> 67
LORVIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1995, THROUGH MAY 4, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Lorvic Holdings, Inc. is the parent company of Lorvic Corporation which is
engaged in the development, design and manufacturing of professional dental
products, collectively, the "Company."
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, an asset and
liability approach to accounting and reporting for income taxes. Deferred income
taxes are provided for temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
EARNINGS PER SHARE
Earnings per share is computed on net income using the weighted average
number of common shares outstanding during the period (25,000 shares).
2. COMMON STOCK:
Class A and Class B common stockholders, voting separately as a class, are
entitled to elect three and four directors, respectively, to the Company's Board
of Directors. Each Class A director is entitled to one vote, and each Class B
director is entitled to four votes.
Each outstanding share of Class B common stock is convertible into equal
shares of Class A common stock in the event there is a public offering of the
common stock of the Company or at the option of certain stockholders contingent
upon certain ownership conditions being satisfied.
The Company has a stock forfeiture agreement with certain stockholders
whereby the stockholders agreed to forfeit a portion of their shares of Class A
and Class B common stock to the Company, without payment, provided certain
annual earnings targets, as defined, are fulfilled for each of the five years in
the period ended March 31, 1995. The date on which the shares are to be
forfeited is the earlier of the sale of the Company or the date upon which the
March 31, 1995, financial statements are received by the Company. The earnings
targets were met for each of the five years and cumulatively resulted in 1,250
shares (851 shares of Class B common stock and 399 shares of Class A common
stock) eligible for forfeiture to the Company.
Concurrent with the stock forfeiture agreement, the Company entered into a
stock option agreement with an officer and stockholder of the Company. Under the
terms of this agreement, the officer has the option to purchase the forfeited
shares at their par value of $.01 per share. The officer may exercise the option
on or up to five years subsequent to the forfeiture date.
On May 4, 1995, the date the Company was acquired (see Note 6), 1,250
shares of common stock were forfeited to the Company, and simultaneously, the
officer exercised the stock options and purchased the shares
F-22
<PAGE> 68
LORVIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for $.01 per share. The difference between the fair market value, based on the
May 4, 1995, acquisition price per share, and the per share option price,
totaling $731, has been included in selling, general and administrative expense
for the year ended March 31, 1995.
3. SIGNIFICANT CUSTOMERS:
During 1995, two customers each accounted for approximately 14% of the
Company's net sales.
4. RELATED-PARTY TRANSACTIONS:
The Company pays an annual management fee to a company affiliated through
common ownership. The management fee totaled $6 for the period from April 1,
1995, through May 4, 1995.
5. INCOME TAXES:
The components of the provision for income taxes are as follows for the
period from April 1, 1995, through May 4, 1995:
<TABLE>
<S> <C>
Income before provision for income taxes.................... $94
U.S. federal income tax rate................................ 34%
---
Computed income taxes.................................. 32
Other....................................................... 7
---
Provision for federal income taxes.......................... 39
State income taxes, net of federal tax benefit.............. 2
---
Provision for income taxes............................. $41
===
Effective tax rate..................................... 44%
===
</TABLE>
The Company made no income tax payments for the period from April 1, 1995,
through May 4, 1995.
6. SUBSEQUENT EVENT:
On May 4, 1995, the Company was acquired through a stock purchase
agreement. All issued and outstanding shares of common stock were purchased for
a total purchase price of approximately $13.4 million, net of cash acquired.
F-23
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To Denticator International, Inc.:
I have audited the accompanying statements of operations and accumulated
deficit and cash flows of Denticator International, Inc. for the period from
April 1, 1996, through July 22, 1996. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted the audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows for
the period from April 1, 1996, through July 22, 1996, in conformity with
generally accepted accounting principles.
JOHN J. ECKLE
Vacaville, California,
August 28, 1996
F-24
<PAGE> 70
DENTICATOR INTERNATIONAL, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE PERIOD FROM APRIL 1, 1996, THROUGH JULY 22, 1996
<TABLE>
<S> <C>
Revenue..................................................... $1,658,229
----------
Costs and expenses
Cost of products sold..................................... 758,204
Royalty expenses (Note 2)................................. 380,171
General and administrative................................ 302,825
Selling and shipping...................................... 187,543
Interest.................................................. 19,070
Depreciation and amortization............................. 23,890
----------
Total costs and expenses............................. 1,671,703
----------
Loss before other income............................. (13,474)
Other income................................................ 2,800
----------
Loss before income taxes............................. (10,674)
Income tax expense (Note 3)................................. --
----------
Net loss............................................. (10,674)
Accumulated deficit
Balance, beginning of period.............................. (146,972)
----------
Balance, end of period.................................... $ (157,646)
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE> 71
DENTICATOR INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1996, THROUGH JULY 22, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net loss from operations.................................. $(10,674)
Adjustments to reconcile net loss to net cash provided by
operations:
Depreciation and amortization.......................... 23,890
Other.................................................. 5,331
Changes in operating assets and liabilities:
Accounts receivable.................................. 187,347
Inventories.......................................... (92,098)
Prepaid expenses and other current assets............ (11,315)
Other assets......................................... (835)
Accounts payable..................................... (44,775)
Royalties payable.................................... 107,241
Accrued expenses..................................... (5,512)
--------
Net cash provided by operating activities......... 158,600
Cash flows used in investing activities
Additions to property, plant and equipment................ (3,942)
Cash flows used in financing activities
Payments on long-term debt................................ (59,023)
--------
Net increase in cash.............................. 95,635
Cash, beginning of period................................... 64,584
--------
Cash, end of period......................................... $160,219
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE> 72
DENTICATOR INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1996, THROUGH JULY 22, 1996
1. ORGANIZATION AND NATURE OF BUSINESS:
Denticator International, Inc. (the Company) was incorporated on March 13,
1991, in the state of California as a wholly owned subsidiary of Bio Dental
Technologies Corp. (BTC).
On March 31, 1991, BTC sold all of the outstanding stock of the Company.
The sale of the stock incorporated a licensing agreement (Note 2) which gave the
Company exclusive manufacturing rights over the "Denticator" product line. The
"Denticator" product line was first introduced in 1931 and included a series of
dental devices for use in professional dentistry.
On March 31, 1991, in conjunction with the exclusive agreement referenced
above, the Company acquired the following assets from BTC in exchange for a
promissory note for $600,569:
<TABLE>
<S> <C>
Fixed assets.............................................. $ 47,592
Inventories............................................... 535,139
Organization costs and goodwill........................... 17,838
--------
$600,569
========
</TABLE>
On July 22, 1996, the Company consummated a plan to sell substantially all
of its assets and liabilities to Young Innovations, Inc. (Young) in exchange for
$50,000 cash and the assumption of all book liabilities of the Company. Young
simultaneously purchased the licensing agreement between the Company and BTC
(Note 2). Young formed a new corporation, Denticator International, Inc., a
Missouri corporation, to manufacture and distribute the "Denticator" product
line.
These statements and accompanying notes present the results of the
Company's operations and cash flows for the period from April 1, 1996, through
July 22, 1996. This short reporting period was elected by management to coincide
with the sale of substantially all of the assets and liabilities of the Company
as described above.
2. EXCLUSIVE LICENSING AGREEMENT:
On March 31, 1991, the Company entered into an exclusive licensing
agreement with BTC for the manufacture of the "Denticator" line of dental
products. Under this agreement, the Company owes a monthly royalty equal to the
greater of $30,000 or 17% of net sales from the "Denticator" product line.
Additional royalties are payable if the Company achieves certain levels of
profitability.
As of January 1, 1995, the Company increased the minimum monthly royalty
payable to BTC to $43,000 per month in exchange for BTC waving the provision in
the agreement whereby BTC could purchase products made by the Company at
specified prices.
The licensing agreement is for a period of four (4) years. At the
expiration of this period, the Company has the option to pay BTC a lump sum
equal to 1.5 times the average annual sales, reduced by 50% of the additional
royalties paid, to acquire the rights to the "Denticator" product line. If this
option is not exercised, the two companies may mutually agree to renew the
licensing agreement at terms negotiated at that time. As of the audit reporting
date, an offer to buy the Company had been accepted which will assign all rights
under this licensing agreement to Young. (Note 1).
During the period from April 1, 1996, through July 22, 1996, the Company
incurred BTC royalties under the licensing agreement totaling $361,675 and paid
$307,294.
F-27
<PAGE> 73
DENTICATOR INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
For federal income tax purposes, the Company has, as a result of a
contribution of inventory to charitable organizations, a federal charitable
contribution carryforward of approximately $172,500. The charitable contribution
carryforward, if unused, will expire in 1997.
No provision was made for current or deferred income tax expense for the
period from April 1, 1996, through July 22, 1996.
4. MAJOR CUSTOMERS:
The Company had sales to the following customers during the period from
April 1, 1996, through July 22, 1996:
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF TOTAL
-------- --------
<S> <C> <C>
Patterson Dental Company.......................... $197,481 11.9%
Darby Dental Supply Co............................ 187,585 11.3
The Supply House.................................. 94,890 5.7
H. Meer Dental Supply Company, Inc................ 85,385 5.2
-------- ----
Total........................................ $565,341 34.1%
======== ====
</TABLE>
F-28
<PAGE> 74
AUTOMATIC ASSEMBLY EQUIPMENT
[PHOTO OF AUTOMATIC
DISPOSABLE PROPHY ANGLE
ASSEMBLY EQUIPMENT]
[PHOTO OF CLOSE UP DETAIL OF AUTOMATIC
DISPOSABLE PROPHY ANGLE EQUIPMENT]
HIGHLY AUTOMATED ASSEMBLY
EQUIPMENT INCREASES
MANUFACTURING EFFICIENCY.
YOUNG OPERATES SOPHISTICATED EQUIPMENT TO MANUFACTURE ITS PREVENTIVE DENTAL
PRODUCTS.
[PHOTO OF AUTOMATED ROW OF INJECTION MOLDING EQUIPMENT]
INJECTION MOLDING EQUIPMENT
<PAGE> 75
======================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Selected Consolidated Financial Data... 16
Young Innovations, Inc. and Denticator
International, Inc. Unaudited Pro
Forma Financial Information.......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business............................... 25
Management............................. 33
Principal Stockholders................. 37
Certain Transactions................... 38
Description of Capital Stock........... 39
Shares Eligible for Future Sale........ 39
Underwriting........................... 40
Legal Matters.......................... 41
Experts................................ 41
Additional Information................. 41
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,000,000 SHARES
YOUNG INNOVATIONS, INC.
[LOGO OF SILVER STAR WITH COMPANY NAME IN BLUE]
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
ROBERT W. BAIRD & CO.
INCORPORATED
CLEARY GULL REILAND &
MCDEVITT INC.
, 1997
======================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In August 1995, the Registrant, as part of its organization as the holding
company for Young Dental, issued 4,450,214 shares of its Common Stock to the
existing stockholders of Young Dental in exchange for all of the outstanding
shares of common stock of Young Dental. In December 1996 and in February 1997,
respectively, the Registrant sold an aggregate of 2,520 shares of its Common
Stock to two purchasers for $4,645 and $14,864, in cash, respectively, subject
to appropriate resale restrictions. None of the foregoing shares were registered
under the Securities Act. The Registrant believes that none of these
transactions involved a public offering, and all were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
A list of exhibits is set forth in the Exhibit Index appearing elsewhere in
this Registration Statement and is incorporated herein by reference.
(B) FINANCIAL STATEMENT SCHEDULES.
Attached hereto is Schedule II -- Valuation and Qualifying Accounts.
II-1
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of St. Louis
and State of Missouri on the 15th day of October, 1997.
YOUNG INNOVATIONS, INC.
By: /s/ GEORGE E. RICHMOND
------------------------------------
George E. Richmond
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities indicated and on October 15, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GEORGE E. RICHMOND President, Chief Executive Officer, Director
- -------------------------------------------------------- (Principal Executive Officer)
George E. Richmond
* Secretary, Director
- --------------------------------------------------------
Richard G. Richmond
/s/ MICHAEL W. EGGLESTON Vice President, Treasurer, Chief Financial
- -------------------------------------------------------- Officer, Director (Principal Financial
Michael W. Eggleston Officer and Principal Accounting Officer)
* Director
- --------------------------------------------------------
Craig E. LaBarge
* Director
- --------------------------------------------------------
Richard P. Conerly
* Director
- --------------------------------------------------------
Alfred E. Brennan
*By: /s/ GEORGE E. RICHMOND
---------------------------------------------------
George E. Richmond
Attorney-In-Fact
</TABLE>
II-2
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Young Innovations, Inc. and
subsidiaries included in the Young Innovations, Inc. Form S-1 Registration
Statement and have issued our report thereon dated March 31, 1997 (except with
respect to matters discussed in Note 20, as to which the date is October 15,
1997). Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. Schedule II included in this Form S-1 Registration
Statement is the responsibility of the Company's management and is presented for
the purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 31, 1997
S-1
<PAGE> 79
YOUNG INNOVATIONS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION YEAR EXPENSES ACQUISITIONS DEDUCTIONS YEAR
----------- ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful receivables
1994................................... $-- $ 25 $ -- $ -- $25
1995................................... 25 -- 7 -- 32
1996................................... 32 22 -- -- 54
Reserve for obsolete and excess
inventories
1994................................... $-- $ 20 $ -- $ -- $20
1995................................... 20 20 -- -- 40
1996................................... 40 -- 3 -- 43
</TABLE>
S-2
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
</TABLE>
1* Form of Underwriting Agreement
3.1 Articles of Incorporation of Registrant and Statement of
Correction
3.2 By-Laws of Registrant
5* Opinion and Consent of Armstrong, Teasdale, Schlafly & Davis
as to the legality of issuance of the Shares
10.1 Employment and Noncompetition Agreement dated May 4, 1995,
by and between Young Dental Manufacturing Company and
Richard C. Nemanick, Sr.
10.2 Stock Purchase Agreement dated as of May 4, 1995, by and
among Young Dental Manufacturing Company, Chemical Venture
Capital Associates, P. Jeffrey Leck, John F. Kirtley,
Richard C. Nemanick, the Stockholders named therein and
Lorvic Holdings, Inc.
10.3 Escrow Agreement dated May 4, 1995 among Young Dental
Manufacturing Company, Chemical Venture Capital Associates,
P. Jeffrey Leck, John F. Kirtley, Richard C. Nemanick,
Lorvic Holdings, Inc. and Boatmen's Trust Company
10.4 Contingent Payment Agreement dated as of May 4, 1995, by and
between Young Dental Manufacturing Company, The Richard C.
Nemanick Trust and Boatmen's Trust Company
10.5 Consulting Agreement dated May 4, 1995, by and between Young
Dental Manufacturing Company and Richard C. Nemanick, Sr.
10.6 Buy-Sell Agreement dated as of December 31, 1991, by and
between the Richard G. Richmond Irrevocable Trust dated
December 31, 1991, the Ruth A. Garza Irrevocable Trust dated
December 31, 1991, the Scott J. Richmond Irrevocable Trust
dated December 31, 1991, the Bradley S. Richmond Irrevocable
Trust dated December 31, 1991, the Dawn N. Close Irrevocable
Trust dated December 31, 1991, and Young Dental
Manufacturing Company
10.7 Amendment and Modification of Buy-Sell Agreement dated as of
August 7, 1995, by and between the Richard G. Richmond
Irrevocable Trust dated December 31, 1991, the Ruth A. Garza
Irrevocable Trust dated December 31, 1991, the Scott J.
Richmond Irrevocable Trust dated December 31, 1991, the
Bradley S. Richmond Irrevocable Trust dated December 31,
1991, the Dawn N. Close Irrevocable Trust dated December 31,
1991, Young Dental Manufacturing Company and the Registrant
10.8 Form of Stock Plan Agreement, by and between certain
employees, George E. Richmond and Young Dental Manufacturing
Company
10.9 Form of Amendment and Modification of Stock Plan, by and
between certain employees, George E. Richmond, Young Dental
Manufacturing Company and the Registrant
10.10 Young Dental Manufacturing Company Pension Bonus Plan dated
as of April 12, 1983
10.11 Young Dental Manufacturing Company Profit Sharing Plan dated
as of January 1, 1987
10.12 Term Loan and Revolving Loan Agreement dated as of July 22,
1996 between Young Innovations, Inc., Young Dental
Manufacturing Company, Lorvic Holdings, Inc., The Lorvic
Corporation, Denticator International, Inc. and The
Boatmen's National Bank of St. Louis (now NationsBank,
N.A.), and Amendment No. 1 thereto dated April 1, 1997
10.13 Asset Purchase Agreement dated July 22, 1996, among
Denticator International, Inc., BioDental Technologies
Corp., Jose L. Mendoza and Young Innovations, Inc.
10.14 Assignment and Release Agreement dated July 22, 1996, by and
between Bio Dental Technologies Corp., Denticator
International, Inc. and Young Innovations, Inc.
10.15 Employment and Non-Competition Agreement dated July 22,
1996, by and between Denticator International, Inc. and Jose
L. Mendoza
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 Escrow Agreement dated July 22, 1996, by and among Young
Innovations, Inc., Bio Dental Technologies Corp., and the
Union Bank of California
10.17* 1997 Stock Option Plan of the Registrant
10.18* Employment Agreement dated October 8, 1997, by and between
Young Innovations, Inc. and Alfred E. Brennan
21 Subsidiaries of the Registrant
23.1* Consent of Arthur Andersen LLP
23.2* Consent of John J. Eckle
23.3* Consent of Armstrong, Teasdale, Schlafly & Davis (included
in Exhibit 5.1)
24 Power of Attorney (included on Signature page II-3).
27* Financial Data Schedule
</TABLE>
- -------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1
YOUNG INNOVATIONS, INC.
2,300,000 Shares of Common Stock
UNDERWRITING AGREEMENT
_______________, 1997
ROBERT W. BAIRD & CO. INCORPORATED
CLEARY GULL REILAND & MCDEVITT INC.
As Representatives of the Several Underwriters
Identified in Schedule I Annexed Hereto
c/o Robert W. Baird & Co. Incorporated
227 West Monroe Street
Chicago, Illinois 60606
Ladies and Gentlemen:
SECTION 1. INTRODUCTORY. Young Innovations, Inc., a Missouri
corporation (the "COMPANY"), proposes to sell 2,000,000 shares (the "FIRM
SHARES") of common stock, $.01 par value per share (the "COMMON STOCK"), to the
several underwriters identified in Schedule I annexed hereto (the
"UNDERWRITERS"), who are acting severally and not jointly. In addition, the
Company has agreed to grant to the Underwriters an option to purchase up to
300,000 additional shares of Common Stock (the "OPTIONAL SHARES") as provided
in section 5 hereof. The Firm Shares and, to the extent such option is
exercised, the Optional Shares are hereinafter collectively referred to as the
"SHARES."
You, as representatives of the Underwriters (the "REPRESENTATIVES"),
have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon hereafter as in
your judgment is advisable and that the public offering price of the Shares
initially will be $_____ per share.
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
PRINCIPAL SHAREHOLDER. The Company represents and warrants to, and agrees
with, the several Underwriters, and shall be deemed to represent and warrant to
the several Underwriters on each Closing Date (as hereinafter defined), that:
(a) Each of the Company and the subsidiaries of the Company that are listed
on Exhibit 21.1 of the Registration Statement (as hereinafter defined)
(individually, a
<PAGE> 2
"SUBSIDIARY" and collectively, the "SUBSIDIARIES") has been duly
incorporated and is validly existing as a corporation and in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as presently conducted and described in the
Prospectus (as hereinafter defined) and the Registration Statement; each
of the Company and the Subsidiaries is duly registered and qualified to
do business as a foreign corporation under the laws of, and is in good
standing as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register or
qualify would not have a material adverse effect on the condition
(financial or other), business, property, net worth, results of
operations or prospects of the Company and the Subsidiaries, taken as a
whole ("MATERIAL ADVERSE EFFECT"); and no proceeding has been instituted
in any such jurisdiction revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
Complete and correct copies of the articles of incorporation and
by-laws, as amended or restated ("ARTICLES OF INCORPORATION" and
"BY-LAWS," respectively), of the Company and each of the Subsidiaries as
in effect on the date hereof have been delivered to the Representatives,
and no changes thereto will be made on or subsequent to the date hereof
and prior to each Closing Date.
(b) The shares of Common Stock issued and outstanding immediately prior to
the issuance and sale of the Shares to be sold by the Company hereunder
as set forth in the Prospectus have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the description
thereof contained in the Prospectus and the Registration Statement.
There are no preemptive, preferential or, except as described in the
Prospectus, other rights to subscribe for or purchase any shares of
Common Stock (including the Shares), and no shares of Common Stock have
been issued in violation of such rights. The Shares to be issued and
sold by the Company to the Underwriters have been duly authorized and,
when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus and the Registration
Statement. The delivery of certificates for the Shares to be issued and
sold by the Company hereunder and payment therefor pursuant to the terms
of this Agreement will pass valid title to such Shares to the
Underwriters, free and clear of any lien, claim, encumbrance or defect
in title. Except as described in the Prospectus, there are no
outstanding options, warrants or other rights of any description,
contractual or otherwise, entitling any person to be issued any class of
security by the Company or any Subsidiary, and there are no holders of
Common Stock or other securities of the Company or any Subsidiary, or of
securities that are convertible or exchangeable into Common Stock or
other securities of the Company or any Subsidiary, that have rights to
the registration of such Common Stock or securities under the Securities
Act of 1933, as amended, and the regulations
-2-
<PAGE> 3
thereunder (together, the "ACT") or the securities laws or regulations
of any of the states (the "BLUE SKY LAWS").
(c) Except for the Subsidiaries, and as otherwise set forth in the
Prospectus, the Company has no subsidiaries and does not own any equity
interest in or control, directly or indirectly, any other corporation,
limited liability company, partnership, joint venture, association,
trust or other business organization. The Company owns directly or
indirectly all of the issued and outstanding capital stock of each
Subsidiary, free and clear of any and all liens, claims, encumbrances or
security interests, and all such capital stock has been duly authorized
and validly issued and is fully paid and nonassessable. There are no
outstanding options, warrants or other rights of any description,
contractual or otherwise, entitling any person to subscribe for or
purchase any shares of capital stock of any Subsidiary.
(d) The Company has full corporate power and authority to enter into and
perform this Agreement, and the execution and delivery by the Company of
this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein,
have been duly authorized with respect to the Company by all necessary
corporate action and will not: (i) violate any provisions of the
Articles of Incorporation or By-laws of the Company or any Subsidiary;
(ii) violate any provisions of, or result in the breach, modification or
termination of, or constitute a default under, any provision of any
agreement, lease, franchise, license, indenture, permit, mortgage, deed
of trust, evidence of indebtedness or other instrument to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary, or any property owned or leased by the Company or any
Subsidiary, may be bound or affected; (iii) violate any statute,
ordinance, rule or regulation applicable to the Company or any
Subsidiary, or order or decree of any court, regulatory or governmental
body, arbitrator, administrative agency or instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or any Subsidiary; or (iv) result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary. No consent, approval, authorization or other
order of any court, regulatory or governmental body, arbitrator,
administrative agency or instrumentality of the United States or other
country or jurisdiction is required for the execution and delivery of
this Agreement by the Company, the performance of its obligations
hereunder or the consummation of the transactions contemplated hereby,
except for compliance with the Act, the Securities Exchange Act of 1934,
as amended, and the regulations thereunder (together, the "EXCHANGE
ACT"), the Blue Sky Laws applicable to the public offering of the Shares
by the several Underwriters and the clearance of such offering and the
underwriting arrangements evidenced hereby with the National Association
of Securities Dealers, Inc. (the "NASD"). This
-3-
<PAGE> 4
Agreement has been duly executed and delivered by and on behalf of the
Company and is a valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except as
enforceability of such agreements may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally.
(e) A registration statement on Form S-1 (Reg. No. 333-34971) with respect
to the Shares, including a preliminary form of prospectus, has been
carefully prepared by the Company in conformity with the requirements of
the Act, has been filed with the Securities and Exchange Commission (the
"COMMISSION") and has been declared effective under the Act. Such
registration statement, as finally amended and revised at the time such
registration statement was or is declared effective by the Commission
(including the information contained in the form of final prospectus, if
any, filed with the Commission pursuant to Rule 424(b) and Rule 430A
under the Act and deemed to be part of the registration statement if the
registration statement has been declared effective pursuant to Rule
430A(b)) and as thereafter amended by post-effective amendment, if any,
is herein referred to as the "REGISTRATION STATEMENT." The related
final prospectus in the form first filed with the Commission pursuant to
Rule 424(b) or, if no such filing is required, as included in the
Registration Statement, or any supplement thereto, is herein referred to
as the "PROSPECTUS." The prospectus subject to completion in the form
included in the Registration Statement at the time of the initial filing
of the Registration Statement with the Commission, and each such
prospectus as amended from time to time until the date of the
Prospectus, is referred to herein as the "PRELIMINARY PROSPECTUS." The
Company has prepared and filed such amendments to the Registration
Statement since its initial filing with the Commission, if any, as may
have been required to the date hereof, and will file such additional
amendments thereto as may hereafter be required. There have been
delivered to the Representatives three signed copies of the Registration
Statement and each amendment thereto, if any, together with three copies
of each exhibit filed therewith, and such number of conformed copies for
each of the Underwriters of the Registration Statement and each
amendment thereto, if any (but without exhibits), and of each
Preliminary Prospectus and of the Prospectus as the Representatives have
requested.
(f) Neither the Commission nor any state securities commission has issued
any order preventing or suspending the use of any Preliminary
Prospectus, nor, to the knowledge of the Company, have any proceedings
for that purpose been initiated or threatened, and each Preliminary
Prospectus filed with the Commission as part of the Registration
Statement as originally filed or as part of any amendment or supplement
thereto complied when so filed with the requirements of the Act and, as
of its date, did not include any untrue statement of a material fact or
omit to state a material fact
-4-
<PAGE> 5
required to be stated therein or necessary to make the statements
therein not misleading. As of the effective date of the Registration
Statement, and at all times subsequent thereto up to each Closing Date,
the Registration Statement and the Prospectus contained or will contain
all statements that are required to be stated therein in accordance with
the Act and conformed or will conform in all respects to the
requirements of the Act, and neither the Registration Statement nor the
Prospectus included or will include any untrue statement of a material
fact or omitted or will omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading. Neither the Company, nor any person that controls, is
controlled by (including the Subsidiaries) or is under common control
with the Company, has distributed or will distribute prior to each
Closing Date any offering material in connection with the offering and
sale of the Shares other than a Preliminary Prospectus, the Prospectus,
the Registration Statement or other materials permitted by the Act and
provided to the Representatives.
(g) Arthur Andersen LLP and John S. Eckle, which have expressed their
respective opinions with respect to the consolidated financial
statements and schedules filed with the Commission and included as a
part of each Preliminary Prospectus, the Prospectus or the Registration
Statement are each independent accountants as required by the Act.
(h) The consolidated financial statements and the related notes thereto
included in each Preliminary Prospectus, the Prospectus and the
Registration Statement present fairly the financial position, results of
operations and cash flows of the Company as of their respective dates or
for the respective periods covered thereby, all in conformity with
generally accepted accounting principles consistently applied throughout
the periods involved. The financial statement schedules, if any,
included in the Registration Statement present fairly the information
required to be stated therein on a basis consistent with the
consolidated financial statements of the Company contained therein. The
Company had an outstanding capitalization as set forth in the
Registration Statement and under "CAPITALIZATION" in the Prospectus as
of the date indicated therein, and there has been no material change
thereto since such date except as disclosed in the Prospectus. The
financial and statistical information and data relating to the Company
in each Preliminary Prospectus, the Prospectus and the Registration
Statement are accurately presented and prepared on a basis consistent
with the audited consolidated financial statements and books and records
of the Company. The consolidated financial statements and schedules and
the related notes thereto included in each Preliminary Prospectus, the
Prospectus or the Registration Statement are the only such financial
statements and schedules required under the Act to be set forth therein.
-5-
<PAGE> 6
(i) The financial information set forth in the Prospectus under "Summary
Financial Data", "Selected Consolidated Financial Data" and the "Young
Innovations, Inc. and Denticator International, Inc. Unaudited Pro Forma
Financial Information" presents fairly, on the basis stated in each
Registration Statement and the Prospectus, the information set forth
therein; the pro forma financial information included in each
Registration Statement and the Prospectus presents fairly the
information shown therein and has been prepared in accordance with
generally accepted accounting principles in the United States and the
Commission's rules and guidelines with respect to pro forma information;
and the assumptions used in preparing the pro forma financial statements
included in each Registration Statement and the Prospectus provide a
reasonable basis for presenting the significant effects directly
attributable to the transactions or events described therein, the
related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(j) Neither the Company nor any Subsidiary is, nor with the giving of notice
or passage of time or both, would be, in violation or in breach of: (i)
its respective Articles of Incorporation or By-laws; (ii) any statute,
ordinance, order, rule or regulation applicable to the Company or such
Subsidiary; (iii) any order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or such Subsidiary; or (iv) any provision of any agreement,
lease, franchise, license, indenture, permit, mortgage, deed of trust,
evidence of indebtedness or other instrument to which the Company or
such Subsidiary is a party or by which any property owned or leased by
the Company or such Subsidiary is bound or affected. Neither the
Company nor any Subsidiary has received notice of any violation of any
applicable statute, ordinance, order, rule or regulation applicable to
the Company or any Subsidiary. The Company and each Subsidiary have
obtained and hold, and are in compliance with, all permits,
certificates, licenses, approvals, registrations, franchises, consents
and authorizations of governmental or regulatory authorities required
under all laws, rules and regulations in connection with their
businesses (hereinafter "PERMIT" or "PERMITS"), and all of such permits
are in full force and effect; and the Company and each Subsidiary have
fulfilled and performed all of their respective obligations with respect
to each such permit and no event has occurred which would result in, or
after notice or lapse of time would result in, revocation or termination
of any such permit or result in any other impairment of the rights of
the holder of such permit. Neither the Company nor any Subsidiary is or
has been (by virtue of any action, omission to act, contract to which it
is a party or other occurrence) in violation of any applicable foreign,
federal, state, municipal or local statutes, laws, ordinances, rules,
regulations or orders (including those relating to
-6-
<PAGE> 7
environmental protection, occupational safety and health and equal
employment practices) heretofore or currently in effect.
(k) There are no legal or governmental proceedings or investigations pending
or, to the knowledge of the Company, threatened to which the Company or
any Subsidiary is or may be a party or to which any property owned or
leased by the Company or any Subsidiary is or may be subject, including,
without limitation, any such proceedings that are related to
environmental or employment discrimination matters, which are required
to be described in the Registration Statement or the Prospectus which
are not so described, or which question the validity of this Agreement
or any action taken or to be taken pursuant hereto. Except as described
in the Registration Statement or the Prospectus, neither the Company nor
any Subsidiary: (i) is in violation of any statute, ordinance, rule or
regulation, or any decision, order or decree of any court, regulatory
body, arbitrator, administrative agency or other instrumentality of the
United States or other country or jurisdiction having jurisdiction over
the Company or such Subsidiary relating to the use, disposal or release
of hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"); (ii) owns or operates
any real property contaminated with any substance that is subject to any
environmental laws; (iii) is liable for any off-site disposal or
contamination pursuant to any environmental laws; or (iv) is subject to
any claim relating to any environmental laws, which violation,
contamination, liability or claim could have a Material Adverse Effect.
(l) There is no transaction, relationship, obligation, agreement or other
document required to be described in the Registration Statement or the
Prospectus or to be filed or deemed to be filed as an exhibit to the
Registration Statement by the Act, which has not been described or filed
as required. All such contracts or agreements to which the Company or
any Subsidiary is a party have been duly authorized, executed and
delivered by the Company or such Subsidiary, constitute valid and
binding agreements of the Company or such Subsidiary, and are
enforceable by and against the Company or such Subsidiary, in accordance
with the respective terms thereof, except as enforceability of such
contracts and agreements may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally.
(m) The Company or a Subsidiary has good and valid title to all property and
assets reflected as owned by the Company or such Subsidiary in the
Company's consolidated financial statements included in the Registration
Statement (or elsewhere in the Registration Statement or the
Prospectus), free and clear of all liens, claims, mortgages, security
interests or other encumbrances of any kind or nature
-7-
<PAGE> 8
whatsoever except those, if any, reflected in such financial statements
(or elsewhere in the Registration Statement or the Prospectus). All
property (real and personal) held or used by the Company or a Subsidiary
under leases, licenses, franchises or other agreements is held by the
Company or such Subsidiary under valid, subsisting, binding and
enforceable leases, franchises, licenses or other agreements, except as
enforceability of leases, franchises, licenses or other agreements may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally.
(n) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has taken or will take, directly or indirectly, any action designed to
cause or result in, or which constituted, or which could cause or result
in, stabilization or manipulation, under the Exchange Act or otherwise,
of the price of any security of the Company to facilitate the sale or
resale of the Common Stock.
(o) Except as described in the Registration Statement or the Prospectus,
since the respective dates as of which information is given in the
Registration Statement or the Prospectus and prior to each Closing Date:
(i) neither the Company nor any Subsidiary has or will have incurred any
liability or obligation, direct or contingent, or entered into any
transaction, that is material to the Company, except as in the ordinary
course of business; (ii) the Company has not and will not have paid or
declared any dividend or other distribution with respect to its capital
stock and neither the Company nor any Subsidiary is or will be
delinquent in the payment of principal or interest on any outstanding
debt obligation; and (iii) there has not been and will not have been any
change in the capital stock, any material change in the indebtedness of
the Company or any Subsidiary, or any change or development involving or
which could be expected to involve, a Material Adverse Effect, whether
or not arising from transactions in the ordinary course of business.
(p) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has, directly or indirectly: (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any
contribution in violation of law; or (ii) made any payment to any
federal, state or foreign governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof or applicable foreign jurisdictions.
(q) The Company or a Subsidiary owns or possesses adequate rights to use all
patents, patent applications, trademarks, service marks, trade names,
trademark registrations,
-8-
<PAGE> 9
service mark registrations, copyrights and licenses presently used in or
necessary for the conduct of its business or ownership of its
properties, and neither the Company nor any Subsidiary has violated or
infringed upon the rights of others, or received any notice of conflict
with the asserted rights of others, in respect thereof.
(r) The Company or a Subsidiary has in place and effective such policies of
insurance, with limits of liability in such amounts, as are normal and
prudent in the ordinary course of the business of the Company and its
Subsidiaries.
(s) No labor dispute with the employees of the Company or any Subsidiary
exists or, to the knowledge of the Company, is imminent, and neither the
Company nor any Subsidiary is a party to any collective bargaining
agreement and, to the knowledge of the Company, no union organizational
attempts have occurred or are pending. There has been no change in the
relationship of the Company or any Subsidiary with any of its principal
suppliers, manufacturers, contractors or customers resulting in or that
could result in a Material Adverse Effect.
(t) Neither the Company nor any Subsidiary is an "INVESTMENT COMPANY", an
"AFFILIATED PERSON" of, or "PROMOTER" or "PRINCIPAL UNDERWRITER" for, an
"INVESTMENT COMPANY", as such terms are defined in the Investment
Company Act of 1940, as amended.
(u) All federal, state and local tax returns required to be filed by or on
behalf of the Company or any Subsidiary have been filed (or are the
subject of valid extension) with the appropriate federal, state and
local authorities, and all such tax returns, as filed, are accurate in
all material respects; all federal, state and local taxes (including
estimated tax payments) required to be shown on all such tax returns or
claimed to be due from or with respect to the business of the Company or
such Subsidiary have been paid or reflected as a liability on the
financial statements of the Company or such Subsidiary for appropriate
periods; except as described in the Registration Statement or the
Prospectus, all deficiencies asserted as a result of any federal, state
or local tax audits have been paid or finally settled, and, except as
described in the Registration Statement or the Prospectus, no issue has
been raised in any such audit which, by application of the same or
similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so audited; no state of facts exist
or has existed which would constitute grounds for the assessment of any
tax liability with respect to the periods which have not been audited by
appropriate federal, state or local authorities; there are no
outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local tax return of any
period; and neither the Company nor any Subsidiary has ever been a
member of an affiliated group of corporations filing consolidated
federal income
-9-
<PAGE> 10
tax returns, other than a group of which the Company or Young Dental
Manufacturing Company is and has been the common parent.
(v) Except for the Company's 1997 Stock Option Plan, its nonqualified bonus
plan and its profit sharing plan, neither the Company nor any Subsidiary
is a participating employer or plan sponsor with respect to any employee
pension benefit plan as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or any
employee welfare benefit plan as defined in Section 3(1) of ERISA,
including, without limitation, any multiemployer welfare or pension
plan. With respect to the Plans, the Company is in substantial
compliance with all applicable regulations, including ERISA and the
Code. With respect to each defined benefit retirement plan, such plan
does not have benefit liabilities (as defined in Section 4001(a)(16) of
ERISA) exceeding the assets of the plan. The Company or the
administrator of each of the Plans, as the case may be, has timely filed
the reports required to be filed by ERISA and the Code in connection
with the maintenance of the Plans, and no facts, including, without
limitation, any "REPORTABLE EVENT" as defined by ERISA and the
regulations thereunder, exist in connection with the Plans which, under
applicable law, would constitute grounds for the termination of any of
the Plans by the Pension Benefit Guaranty Corporation or for the
appointment by the appropriate United States District Court of a trustee
to administer any of the Plans.
(w) The Company and each Subsidiary maintain a system of internal accounting
controls sufficient to provide reasonable assurances that: (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of consolidated financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) None of the Company, any Subsidiary, any officer or director of the
Company or any Subsidiary, or any person who owns, of record or
beneficially, any class of securities issued by the Company is: (i) an
officer, director or partner of any brokerage firm, broker or dealer
that is a member of the NASD ("NASD MEMBER"); or (ii) directly or
indirectly, a "PERSON ASSOCIATED WITH" an NASD member or an "AFFILIATE"
of an NASD member, as such terms are used in the NASD Rules of Fair
Practice. In addition, neither the Company nor any Subsidiary has
issued or transferred any Common Stock, warrants, options or other
securities, or any other items of value, to any of the Underwriters or
any "RELATED PERSON" of any Underwriter, as such term is used in the
NASD Rules of Fair Practice, except as provided in this Agreement.
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<PAGE> 11
(y) The Company has prepared and filed with the Commission a registration
statement for the Common Stock pursuant to Section 12(g) of the Exchange
Act. Such registration statement either has been declared effective by
the Commission under the Exchange Act or will be declared effective by
the Commission prior to or concurrently with the commencement of the
public offering of the Shares. The Common Stock has been approved for
designation upon notice of issuance as a Nasdaq National Market security
on The Nasdaq Stock Market ("NASDAQ") concurrently with the
effectiveness of the Registration Statement.
(z) All offers and sales of the securities of the Company and each
Subsidiary prior to the date hereof were made in compliance with the Act
and all other applicable state and federal laws or regulations.
(aa) The Company has obtained for the benefit of the Underwriters the
agreement, enforceable by Robert W. Baird & Co. Incorporated ("BAIRD"),
of each of the officers and directors of the Company, and each of the
shareholders of the Company, that for a period of 180 days after the
date of the Prospectus, such persons will not, without the prior written
consent of Baird, directly or indirectly, offer, sell, transfer, or
pledge, contract to sell, transfer or pledge, or cause or in any way
permit to be sold, transferred, pledged, or otherwise disposed of, any:
(i) shares of Common Stock; (ii) rights to purchase shares of Common
Stock (including, without limitation, shares of Common Stock that may be
deemed to be beneficially owned by any such shareholder in accordance
with the applicable regulations of the Commission and shares of Common
Stock that may be issued upon the exercise of a stock option, warrant or
other convertible security); or (iii) securities that are convertible or
exchangeable into shares of Common Stock.
(bb) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment.
A certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to the Underwriters as to the
matters covered thereby. A certificate delivered by the Company to its counsel
for purposes of enabling such counsel to render the opinion referred to in
section 8(d) will also be furnished to the Representatives and counsel for the
Underwriters and shall be deemed to be additional representations and
warranties to the Underwriters by the Company as to the matters covered
thereby.
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SECTION 3. REPRESENTATION OF UNDERWRITERS. The Representatives will act as
the representatives for the several Underwriters in connection with the public
offering of the Shares, and any action under or in respect of this Agreement
taken by the Representatives will be binding upon all of the Underwriters.
SECTION 4. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set
forth in the last paragraph on the outside front cover page of the Prospectus
concerning the terms of the offering by the Underwriters, the paragraph on the
inside front cover page of the Prospectus relating to stabilization practices,
and the concession and reallowance amounts and the description of stabilizing
practices appearing under the caption "UNDERWRITING" in the Prospectus
constitute all of the information furnished to the Company by and on behalf of
the Underwriters for use in connection with the preparation of the Registration
Statement and the Prospectus, as such information is referred to in this
Agreement.
SECTION 5. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties and agreements herein
contained, and subject to the terms and conditions herein set forth, the
Company agrees to sell to the Underwriters identified in Schedule I
annexed hereto 2,000,000 Firm Shares, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company the
number of Firm Shares as hereinafter set forth at the price per share of
$__________. The obligation of each Underwriter to the Company shall be
to purchase from the Company that number of full Firm Shares which (as
nearly as practicable in full shares as determined by the
Representatives) bears the same proportion to the number of Firm Shares
to be sold by the Company as the number of shares set forth opposite the
name of such Underwriter in Schedule I annexed hereto bears to the total
number of Firm Shares to be purchased by all of the Underwriters under
this Agreement.
(b) On the First Closing Date (as hereinafter defined), the Company will
deliver to the Representatives, at the offices of Robert W. Baird & Co.
Incorporated, 227 West Monroe Street, Chicago, Illinois 60606, or
through the facilities of The Depository Trust Company, for the accounts
of the several Underwriters, certificates representing the Firm Shares
to be sold by them against payment of the purchase price therefor in
funds available on the same day by wire transfer to the account of the
Company at a bank acceptable to Robert W. Baird & Co. Incorporated or
by official Federal Reserve Bank check drawn to the order of the Company
with respect to the Firm Shares being sold by the Company. As referred
to in this Agreement, the "FIRST CLOSING DATE" shall be on the third
full business day after the date of the Prospectus, at 9:00 a.m.,
Chicago, Illinois time, or at such other date or time not later than ten
full business days after the date of the Prospectus as the
Representatives and
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<PAGE> 13
the Company may agree. The certificates for the Firm Shares to be so
delivered will be in denominations and registered in such names as the
Representatives request by notice to the Company prior to the First
Closing Date, and such certificates will be made available for checking
and packaging at 9:00 a.m., Chicago, Illinois time on the first full
business day preceding the First Closing Date at a location to be
designated by the Representatives.
(c) In addition, on the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions
herein set forth, the Company hereby agrees to sell to the Underwriters,
and the Underwriters, severally and not jointly, shall have the right at
any time within thirty days after the date of the Prospectus to purchase
up to 300,000 Optional Shares from the Company at the purchase price per
share to be paid for the Firm Shares, for use solely in covering any
over-allotments made by the Underwriters in the sale and distribution of
the Firm Shares. Such Optional Shares shall be purchased for the
account of each Underwriter in the same proportion as the number of Firm
Shares set forth opposite such Underwriter's name bears to the total
number of Firm Shares (subject to adjustment by Robert W. Baird & Co.
Incorporated to eliminate fractions). The option granted hereunder may
be exercised upon notice by the Representatives to the Company within
thirty days after the date of the Prospectus setting forth the aggregate
number of Optional Shares to be purchased by the Underwriters and sold
by the Company, the names and denominations in which the certificates
for such shares are to be registered and the date and place at which
such certificates will be delivered. Such date of delivery (the "SECOND
CLOSING DATE") shall be determined by the Representatives, provided that
the Second Closing Date, which may be the same as the First Closing
Date, shall not be earlier than the First Closing Date and, if after the
First Closing Date, shall not be earlier than three nor later than ten
full business days after delivery of such notice to exercise.
Certificates for the Optional Shares will be made available for checking
and packaging at 9:00 a.m., Chicago, Illinois time, on the first full
business day preceding the Second Closing Date at a location to be
designated by the Representatives. The manner of payment for and
delivery of (including the denominations of and the names in which
certificates are to be registered) the Optional Shares shall be the same
as for the Firm Shares.
(d) The Representatives have advised the Company that each Underwriter has
authorized the Representatives to accept delivery of the Shares and to
make payment therefor. It is understood that the Representatives,
individually and not as representatives of the Underwriters, may (but
shall not be obligated to) make payment for any Shares to be purchased
by any Underwriter whose funds shall not have been received by the
Representatives by the First Closing Date or the Second Closing Date, as
the case may be, for the account of such Underwriter, but any such
payment shall not relieve
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<PAGE> 14
such Underwriter from any obligation under this Agreement. As referred
to in this Agreement, "CLOSING DATE" shall mean either the First Closing
Date or the Second Closing Date.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters that:
(a) If the effective time of the Registration Statement is not prior to the
execution and delivery of this Agreement, the Company will use its best
efforts to cause the Registration Statement to become effective at the
earliest possible time and, upon notification from the Commission that
the Registration Statement has become effective, will so advise the
Representatives and counsel to the Underwriters promptly. If the
effective time of the Registration Statement is prior to the execution
and delivery of this Agreement and any information shall have been
omitted therefrom in reliance upon Rule 430A, the Company, at the
earliest possible time, will furnish the Representatives with a copy of
the Prospectus to be filed by the Company with the Commission to comply
with Rule 424(b) and Rule 430A under the Act and, if the Representatives
do not object to the contents thereof, will comply with such Rules. Upon
compliance with such Rules, the Company will so advise the
Representatives promptly. The Company will advise the Representatives
and counsel to the Underwriters promptly of the issuance by the
Commission or any state securities commission of any stop order
suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose, or of any notification
of the suspension of qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceedings for
that purpose, and will also advise the Representatives and counsel to
the Underwriters promptly of any request of the Commission for amendment
or supplement of the Registration Statement, of any Preliminary
Prospectus or of the Prospectus, or for additional information, and the
Company will not file any amendment or supplement to the Registration
Statement (either before or after it becomes effective), to any
Preliminary Prospectus or to the Prospectus (including a prospectus
filed pursuant to Rule 424(b)) if the Representatives have not been
furnished with a copy prior to such filing (with a reasonable
opportunity to review such amendment or supplement) or if the
Representatives object to such filing.
(b) If, at any time when a prospectus relating to the Shares is required by
law to be delivered in connection with sales by an Underwriter or
dealer, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact, or would omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to
supplement the Prospectus
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<PAGE> 15
to comply with the Act, the Company promptly will advise the
Representatives and counsel to the Underwriters thereof and will
promptly prepare and file with the Commission, at its expense, an
amendment to the Registration Statement which will correct such
statement or omission or an amendment which will effect such compliance;
and, if any Underwriter is required to deliver a prospectus after the
effective date of the Registration Statement, the Company, upon request
of the Representatives, will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act. The Company consents to
the use, in accordance with the provisions of the Act and with the Blue
Sky Laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, of each Preliminary Prospectus.
(c) Neither the Company nor any Subsidiary will, prior to the Second Closing
Date, if any, incur any liability or obligation, direct or contingent,
or enter into any material transaction, other than in the ordinary
course of business, or enter into any transaction with an "AFFILIATE,"
as defined in Rule 405 under the Act, which is required to be described
in the Prospectus pursuant to Item 404 of Regulation S-K under the Act,
except as described in the Prospectus.
(d) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, acquire any of the Common Stock nor will the
Company declare or pay any dividend or make any other distribution upon
its Common Stock payable to shareholders of record on a date prior to
such earlier date, except as described in the Prospectus.
(e) The Company will make generally available to its security holders and
the Representatives an earnings statement as soon as practicable, but in
no event later than sixty days after the end of its fiscal quarter in
which the first anniversary of the effective date of the Registration
Statement occurs, covering a period of twelve consecutive calendar
months beginning after the effective date of the Registration Statement,
which will satisfy the provisions of the last paragraph of Section 11(a)
of the Act and Rule 158 promulgated thereunder.
(f) During such period as a prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, the Company will
furnish to the Representatives, at the expense of the Company, copies of
the Registration Statement, the Prospectus, any Preliminary Prospectus
and all amendments and supplements to any such documents in each case as
soon as available and in such quantities as the Representatives may
reasonably request.
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<PAGE> 16
(g) The Company will apply the net proceeds from the sale of the Shares to
be sold by it hereunder for the purposes set forth in the Prospectus.
(h) The Company will cooperate with the Representatives and counsel to the
Underwriters in qualifying or registering the Shares for sale under the
Blue Sky Laws of such jurisdictions as the Representatives designate,
and will continue such qualifications or registrations in effect so long
as reasonably requested by the Representatives to effect the
distribution of the Shares. The Company shall not be required to
qualify as a foreign corporation or to file a general consent to service
of process in any such jurisdiction where it is not presently qualified.
In each jurisdiction where any of the Shares shall have been qualified
as provided above, the Company will file such reports and statements as
may be required to continue such qualification for a period of not less
than one year from the date of the Prospectus. The Company shall
promptly prepare and file with the Commission, from time to time, such
reports as may be required to be filed by the Act and the Exchange Act,
and the Company shall comply in all respects with the undertakings given
by the Company in connection with the qualification or registration of
the Shares for offering and sale under the Blue Sky Laws.
(i) During the period of three years from the date of the Prospectus, the
Company will furnish to each of the Representatives and to each of the
other Underwriters who may so request, as soon as available, each
report, statement or other document of the Company or its Board of
Directors mailed to its shareholders or filed with the Commission, and
such other information concerning the Company as the Representatives may
reasonably request.
(j) The Company shall deliver the requisite notice of issuance to Nasdaq and
shall take all necessary or appropriate action within its power to
maintain the authorization for trading of the Common Stock as a Nasdaq
National Market security, or take such action to authorize the Common
Stock for listing on the New York Stock Exchange or the American Stock
Exchange, for a period of at least thirty-six months after the date of
the Prospectus.
(k) Except for the issuance and sale by the Company of Common Stock upon
exercise of presently existing outstanding stock options, the sale of
the Shares to be sold by the Company pursuant to this Agreement, and the
grant of employee stock options pursuant to the Company's 1997 Stock
Option Plan, a copy of which is filed as an exhibit to the Registration
Statement, and provided that, except as disclosed in the Prospectus,
none of such options shall be exercisable during the 180-day period
herein described, the Company shall not, for a period of 180 days after
the date of the Prospectus, without the prior written consent of Baird,
directly or indirectly, offer,
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<PAGE> 17
sell or otherwise dispose of, contract to sell or otherwise dispose of,
or cause or in any way permit to be sold or otherwise disposed of, any:
(i) shares of Common Stock; (ii) rights to purchase shares of Common
Stock; or (iii) securities that are convertible or exchangeable into
shares of Common Stock.
(l) The Company will maintain a transfer agent and, if required by law or
the rules of The Nasdaq Stock Market or any national securities exchange
on which the Common Stock is listed, a registrar (which, if permitted by
applicable laws and rules, may be the same entity as the transfer agent)
for its Common Stock. The Company shall, as soon as practicable after
the date hereof, use its best efforts to obtain listing in Standard and
Poor's Stock Guide, or such other recognized securities manuals for
which it may qualify for listing, and the Company shall use its best
efforts to maintain such listings for at least five years after the
First Closing Date.
(m) If at any time when a prospectus relating to the Shares is required to
be delivered under the Act, any rumor, publication or event relating to
or affecting the Company shall occur as a result of which, in the
opinion of Baird, the market price of the Common Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to the Prospectus), the
Company will, after written notice from Baird advising the Company of
any of the matters set forth above, promptly consult with Baird
concerning the advisability and substance of, and, if the Company and
Baird determine that it is appropriate, disseminate, a press release or
other public statement responding to or commenting on, such rumor,
publication or event.
(n) If the sale to the Underwriters of the Shares is not consummated for any
reason other than termination of this Agreement pursuant to section 11
hereof, without limiting any other rights the Underwriters may have, the
Company agrees to reimburse the Underwriters upon demand for all
out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Underwriters), that shall have been incurred by the
Underwriters in connection with the proposed purchase and sale of the
Shares, and the provisions of sections 7 and 10 hereof shall at all
times be effective and apply.
(o) The Company will comply or cause to be complied with the conditions to
the obligations of the Underwriters in section 8 hereof.
SECTION 7. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement is terminated for any reason, the Company will pay the costs,
fees and expenses incurred in connection with the public offering of the
Shares. Such costs, fees and expenses to be paid by the Company include,
without limitation:
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(a) All costs, fees and expenses (excluding the expenses incurred by the
Underwriters and the legal fees and disbursements of counsel for the
Underwriters, but including such fees and disbursements described in
subsection (b) of this section 7) incurred in connection with the
performance of the Company's obligations hereunder, including without
limiting the generality of the foregoing: the registration fees related
to the filing of the Registration Statement with the Commission; the
fees and expenses related to the quotation of the Shares on Nasdaq or
other national securities exchange; the fees and expenses of the
Company's counsel, accountants, transfer agent and registrar; the costs
and expenses incurred in connection with the preparation, printing,
shipping and delivery of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial
statements) and all agreements and supplements provided for herein, this
Agreement and the Preliminary and Supplemental Blue Sky Memoranda,
including, without limitation, shipping expenses via overnight delivery
and/or courier service to comply with applicable prospectus delivery
requirements; and the costs and expenses associated with the production
of materials related to, and travel expenses incurred by the management
of the Company in connection with, the various meetings to be held
between the Company's management and prospective investors.
(b) All registration fees and expenses, including legal fees and
disbursements of counsel for the Underwriters incurred in connection
with qualifying or registering all or any part of the Shares for offer
and sale under the Blue Sky Laws and the clearing of the public offering
and the underwriting arrangements evidenced hereby with the NASD.
(c) All fees and expenses related to printing of the certificates for the
Shares, and all transfer taxes, if any, with respect to the sale and
delivery of the Shares.
SECTION 8. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters under this Agreement shall be subject
to the accuracy of the representations and warranties on the part of the
Company herein set forth as of the date hereof and as of each Closing Date, to
the accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions, unless waived in writing
by the Representatives:
(a) The Registration Statement shall have been declared effective by the
Commission not later than 2:00 p.m., Washington, D. C. time, on the date
of this Agreement, or such later time as shall have been consented to by
the Representatives, which consent shall be deemed to have been given if
the Registration Statement shall have been declared effective on or
before the date and time requested in the acceleration request submitted
on behalf of the Representatives pursuant to Rule 461 under the Act; all
filings required by Rules 424(b) and 430A under the Act shall have been
timely
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made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission or any state
securities commission nor, to the knowledge of the Company, shall any
proceedings for that purpose been initiated or threatened; and any
request of the Commission or any state securities commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to the satisfaction of the
Representatives.
(b) Since the dates as of which information is given in the Registration
Statement:
(i) there shall not have occurred any change or development involving,
or which could be expected to involve, a Material Adverse
Effect, whether or not arising from transactions in the ordinary
course of business; and
(ii) the Company shall not have sustained any loss or interference
from any labor dispute, strike, fire, flood, windstorm,
accident or other calamity (whether or not insured) or from any
court or governmental action, order or decree,
the effect of which on the Company, in any such case described in clause (i) or
(ii) above, is in the opinion of the Representatives so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares on the terms and in the manner contemplated in the
Registration Statement and the Prospectus.
(c) The Representatives shall not have advised the Company that the
Registration Statement or the Prospectus contains an untrue statement of
fact that, in the opinion of the Representatives or counsel for the
Underwriters, is material, or omits to state a fact that, in the opinion
of the Representatives or such counsel, is material and is required to
be stated therein or necessary to make the statements therein not
misleading.
(d) The Representatives shall have received an opinion of Armstrong,
Teasdale, Schlafly & Davis, counsel for the Company addressed to the
Representatives, as the representatives of the Underwriters, and dated
the First Closing Date or the Second Closing Date, as the case may be,
to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and
authority to own, lease and operate its properties and conduct its
business as presently conducted and as described in the Prospectus
and the Registration Statement; the Company is duly registered and
qualified to do business as a foreign corporation under the laws
of, and is in good standing as such in, each jurisdiction in which
such
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<PAGE> 20
registration or qualification is required, except where the
failure to so register or qualify would not have a Material
Adverse Effect;
(ii) The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, par value $.01 per share, and all such
stock conforms as to legal matters to the descriptions thereof in
the Prospectus and the Registration Statement;
(iii) The issued and outstanding shares of capital stock of the Company
immediately prior to the issuance and sale of the Shares to be
sold by the Company hereunder have been duly authorized and
validly issued, are fully paid and nonassessable, and there are no
preemptive, preferential or, except as described in the
Prospectus, other rights to subscribe for or purchase any shares
of capital stock of the Company, and to such counsel's knowledge,
no shares of capital stock of the Company have been issued in
violation of such rights;
(iv) Except for the Subsidiaries, the Company has no subsidiaries, and
the Company does not own any equity interest in or control,
directly or indirectly, any other corporation, limited liability
company, partnership, joint venture, association, trust or other
business organization except as described in the Prospectus and
the Registration Statement; each Subsidiary has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as presently conducted and
as described in the Prospectus and the Registration Statement;
each Subsidiary is duly registered or qualified to do business as
a foreign corporation under the laws of, and is in good standing
as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register
or qualify would not have a Material Adverse Effect; the issued
and outstanding shares of the capital stock of each Subsidiary
have been duly authorized and validly issued, are fully paid and
nonassessable and there are no preemptive, preferential or, to
such counsel's knowledge, other rights to subscribe for or
purchase any shares of capital stock of any Subsidiary, and to
such counsel's knowledge, no shares of capital stock of any
Subsidiary have been issued in violation of such rights; except as
otherwise disclosed in the Prospectus, the Company owns directly
and, to such counsel's knowledge, beneficially all of the issued
and outstanding capital stock of each Subsidiary, free and clear
of any and all liens, claims, encumbrances and security interests;
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(v) The certificates for the Shares to be delivered hereunder are in
due and proper form and conform to the requirements of
applicable law; and when duly countersigned by the Company's
transfer agent, and delivered to the Representatives or upon the
order of the Representatives against payment of the agreed
consideration therefor in accordance with the provisions of this
Agreement, the Shares to be sold by the Company represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable, and free of any preemptive, preferential or other
rights to subscribe for or purchase shares of Common Stock;
(vi) The Registration Statement has become effective under the Act,
and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or are threatened
under the Act or any Blue Sky Laws; the Registration Statement and
the Prospectus and any amendment or supplement thereto (except for
the financial statements and other statistical or financial data
included therein as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements
of the Act; no facts have come to the attention of such counsel
which lead it to believe that either the Registration Statement or
the Prospectus or any amendment or supplement thereto contains any
untrue statement of a material fact or omitted or will omit to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the
Prospectus, as of the First Closing Date or the Second Closing
Date, as the case may be, contained any untrue statement of a
material fact or omitted or will omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which
they were made (except for the financial statements and other
financial and statistical data included therein as to which such
counsel need express no opinion); to such counsel's knowledge,
there are no legal or governmental proceedings pending or
threatened, including, without limitation, any such proceedings
that are related to environmental or employment discrimination
matters, required to be described in the Registration Statement or
the Prospectus which are not so described or which question the
validity of this Agreement or any action taken or to be taken
pursuant thereto, nor, to such counsel's knowledge, is there any
transaction, relationship, agreement, contract or other document
of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement by the Act, which is not described or filed
as required;
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<PAGE> 22
(vii) The Company has full corporate power and authority to enter into
and perform this Agreement; the performance of the Company's
obligations hereunder and the consummation of the transactions
described herein have been duly authorized by the Company by
all necessary corporate action and this Agreement has been duly
executed and delivered by and on behalf of the Company, and is a
legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except that
rights to indemnity or contribution may be limited by applicable
law and except as enforceability of this Agreement may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally, and by equitable
principles limiting the right to specific performance or other
equitable relief; no consent, approval, authorization or other
order or decree of any court, regulatory or governmental body,
arbitrator, administrative agency or other instrumentality of the
United States or other country or jurisdiction having jurisdiction
over the Company is required for the execution and delivery of
this Agreement or the consummation of the transactions
contemplated by this Agreement (except for compliance with the
Act, the Exchange Act, applicable Blue Sky Laws and the clearance
of the underwriting arrangements by the NASD);
(viii) The execution, delivery and performance of this Agreement by the
Company will not: (A) violate any provisions of the Articles
of Incorporation or By-laws of the Company or any Subsidiary; (B)
to such counsel's knowledge, violate any provisions of, or result
in the breach, modification or termination of, or constitute a
default under, any agreement, lease, franchise, license,
indenture, permit, mortgage, deed of trust, other evidence of
indebtedness or other instrument to which the Company or any
Subsidiary is a party or by which the Company or such Subsidiary,
or any of their respective owned or leased property is bound, and
which is filed as an exhibit to the Registration Statement; or (C)
violate any statute, ordinance, order, rule, decree or regulation
of any court, regulatory or governmental body, arbitrator,
administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over
the Company or any Subsidiary;
(ix) To such counsel's knowledge, except as described in the Prospectus,
there are no holders of Common Stock or other securities of the
Company, or securities that are convertible or exchangeable into
Common Stock or other securities of the Company, that have rights
to the registration of such securities under the Act or any Blue
Sky Laws;
-22-
<PAGE> 23
(x) The Common Stock has been designated for inclusion as a National
Market security on The Nasdaq Stock Market and is registered under
the Exchange Act;
(xi) Neither the Company nor any Subsidiary is, nor with the giving of
notice or passage of time or both would be, in violation of its
respective Articles of Incorporation or By-laws or, to such
counsel's knowledge, in default in any material respect in the
performance of any agreement, lease, franchise, license, permit,
mortgage, deed of trust, evidence of indebtedness or other
instrument, or any other document that is filed as an exhibit to
the Registration Statement, to which the Company or any Subsidiary
is subject or bound;
(xii) Neither the Company nor any Subsidiary is an "INVESTMENT COMPANY",
an "AFFILIATED PERSON" of, or "PROMOTER" or "PRINCIPAL UNDERWRITER"
for, an "INVESTMENT COMPANY", as such terms are defined in the
Investment Company Act of 1940, as amended, and, upon its receipt
of any proceeds from the sale of the Shares, the Company will not
become or be deemed to be an "INVESTMENT COMPANY" thereunder;
(xiii) The description in the Registration Statement and the Prospectus of
statutes, law, regulations, legal and governmental proceedings, and
contracts and other legal documents described therein fairly and
correctly present, in all material respects, the information
required to be included therein by the Act; and
(xiv) All offers and sales by the Company and the Subsidiaries of their
capital stock before the date hereof were at all relevant times
duly registered under or exempt from the registration requirements
of the Act, and were duly registered under or the subject of an
available exemption from the registration requirements of any
applicable Blue Sky Laws.
In rendering such opinion, counsel for the Company may rely, to the extent
counsel deems such reliance proper, as to matters of fact upon certificates of
officers of the Company and of governmental officials, and copies of all such
certificates shall be furnished to the Representatives and the Underwriters on
or before each Closing Date.
(e) The Representatives shall have received an opinion of McDermott, Will &
Emery, counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the issuance
and sale of the Shares by the Company, the Registration Statement and
other related matters as the Representatives may require, and the
Company shall have furnished to such counsel such documents
-23-
<PAGE> 24
and shall have exhibited to them such papers and records as they request
for the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received on each Closing Date, a
certificate of George E. Richmond, President and Chief Executive
Officer, and Michael W. Eggleston, Vice President, Treasurer and Chief
Financial Officer, of the Company, to the effect that:
(i) The representations and warranties of the Company set forth in
section 2 hereof are true and correct as of the date of this
Agreement and as of the date of such certificate, and the Company
has complied with all the agreements and satisfied all the
conditions to be performed or satisfied by it at or prior to the
date of such certificate;
(ii) The Commission has not issued an order preventing or suspending the
use of the Prospectus or any Preliminary Prospectus or any
amendment or supplement thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and
to the knowledge of the respective signatories, no proceedings for
that purpose have been initiated or are pending or contemplated
under the Act or under the Blue Sky Laws of any jurisdiction;
(iii) Each of the respective signatories has carefully examined the
Registration Statement and the Prospectus, and any amendment or
supplement thereto, and such documents contain all statements
required to be stated therein, and do not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and since the date on which the
Registration Statement was initially filed, no event has occurred
that was required to be set forth in an amended or supplemented
prospectus or in an amendment to the Registration Statement that
has not been so set forth; and
(iv) Since the date on which the Registration Statement was initially
filed with the Commission, there shall not have occurred any
change or development involving, or which could be expected to
involve, a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as
disclosed in the Prospectus and the Registration Statement as
heretofore amended or (but only if the Representatives expressly
consent thereto in writing) as disclosed in an amendment or
supplement thereto filed with the Commission and delivered to the
Representatives after the execution of this Agreement; since such
date and except as so disclosed or in the
-24-
<PAGE> 25
ordinary course of business, the Company has not incurred any
liability or obligation, direct or indirect, or entered into any
transaction which is material to the Company; since such date and
except as so disclosed, there has not been any change in the
outstanding capital stock of the Company, or any change that is
material to the Company in the short-term debt or long-term debt
of the Company; since such date and except as so disclosed, the
Company has not acquired any of the Common Stock or other capital
stock of the Company nor has the Company declared or paid any
dividend, or made any other distribution, upon its outstanding
Common Stock payable to shareholders of record on a date prior to
such Closing Date; since such date and except as so disclosed, the
Company has not incurred any material contingent obligations, and
no material litigation is pending or threatened against the
Company; and, since such date and except as so disclosed, the
Company has not sustained any material loss or interference from
any strike, fire, flood, windstorm, accident or other calamity
(whether or not insured) or from any court or governmental action,
order or decree.
The delivery of the certificate provided for in this subsection (f) shall be
and constitute a representation and warranty of the Company as to the facts
required in the immediately foregoing clauses (i), (ii), (iii) and (iv) to be
set forth in said certificate.
(g) At the time this Agreement is executed and also on each Closing Date,
there shall be delivered to the Representatives letters addressed to the
Representatives, as the representatives of the Underwriters, from Arthur
Andersen LLP, the Company's independent accountants, the first letter to
be dated the date of this Agreement, the second letter to be dated the
First Closing Date and the third letter (if applicable) to be dated the
Second Closing Date, which shall be in form and substance satisfactory
to the Representatives and shall contain information as of a date within
five days of the date of such letter. There shall not have been any
change or decrease set forth in any of the letters referred to in this
subsection (g) which makes it impracticable or inadvisable in the
judgment of the Representatives to proceed with the public offering or
purchase of the Shares as contemplated hereby.
(h) The Shares shall have been qualified or registered for sale under the
Blue Sky Laws of such jurisdictions as shall have been specified by the
Representatives, the underwriting terms and arrangements for the
offering shall have been cleared by the NASD, and the Common Stock shall
have been designated for inclusion as a Nasdaq National Market security
on the Nasdaq Stock Market and shall have been registered under the
Exchange Act.
-25-
<PAGE> 26
(i) Receipt of such further certificates and documents as the
Representatives may reasonably request (including certificates of
officers of the Company).
All such opinions, certificates, letters and documents shall be in compliance
with the provisions hereof only if they are reasonably satisfactory to the
Representatives and to McDermott, Will & Emery, counsel for the Underwriters.
The Company shall furnish the Representatives with such manually signed or
conformed copies of such opinions, certificates, letters and documents as the
Representatives may reasonably request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at either Closing Date is not so satisfied, this Agreement at the
election of the Representatives will terminate upon notification to the Company
without liability on the part of any Underwriter, including the
Representatives, the Company except for the provisions of section 6(n) hereof,
the expenses to be paid by the Company pursuant to section 7 hereof and except
to the extent provided in section 10 hereof.
SECTION 9. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
will use its best efforts to prevent the issuance of any stop order suspending
the effectiveness of the Registration Statement, and, if such stop order is
issued, to obtain as soon as possible the lifting thereof.
SECTION 10. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
the Act or the Exchange Act, from and against any losses, claims,
damages, expenses, liabilities or actions in respect thereof ("CLAIMS"),
joint or several, to which such Underwriter or each such controlling
person may become subject under the Act, the Exchange Act, Blue Sky Laws
or other federal or state statutory laws or regulations, at common law
or otherwise (including payments made in settlement of any litigation),
insofar as such Claims arise out of or are based upon any breach of any
representation, warranty or covenant made by the Company in this
Agreement, or any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or in
any application filed under any Blue Sky Law or other document executed
by the Company for that purpose or based upon written information
furnished by the Company and filed in any state or other jurisdiction to
qualify any or all of the Shares under the securities laws thereof (any
such document, application or information being hereinafter called a
"BLUE SKY APPLICATION") or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading. The Company
-26-
<PAGE> 27
agrees to reimburse each Underwriter and each such controlling person
for any legal fees or other expenses incurred by such Underwriter or any
such controlling person in connection with investigating or defending
any such Claim; provided, however, that the Company will not be liable
in any such case to the extent that: (i) any such Claim arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or supplement thereto or in any
Blue Sky Application in reliance upon and in conformity with the written
information furnished to the Company pursuant to section 4 of this
Agreement; or (ii) such statement or omission was contained or made in
any Preliminary Prospectus and corrected in the Prospectus and (1) any
such Claim suffered or incurred by any Underwriter (or any person who
controls any Underwriter) resulted from an action, claim or suit by any
person who purchased Shares which are the subject thereof from such
Underwriter in the offering, and (2) such Underwriter failed to deliver
or provide a copy of the Prospectus to such person at or prior to the
confirmation of the sale of such Shares in any case where such delivery
is required by the Act, unless such failure was due to failure by the
Company to provide copies of the Prospectus to the Underwriters as
required by this Agreement. The indemnification obligations of the
Company as provided above are in addition to and in no way limit any
liabilities the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors and each of its officers who
signs the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act or the Exchange Act against
any Claim to which the Company, or any such director, officer or
controlling person may become subject under the Act, the Exchange Act,
Blue Sky Laws or other federal or state statutory laws or regulations,
at common law or otherwise (including payments made in settlement of any
litigation, if such settlement is effected with the written consent of
such Underwriter and Baird), insofar as such Claim arises out of or is
based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or in any Blue Sky Application, in
reliance solely upon and in conformity with the written information
furnished by the Representatives to the Company pursuant to section 4 of
this Agreement. Each Underwriter will severally reimburse any legal
fees or other
-27-
<PAGE> 28
expenses incurred by the Company, or any such director, officer or
controlling person in connection with investigating or defending any
such Claim, and from any and all Claims solely resulting from failure of
an Underwriter to deliver a Prospectus, if the person asserting such
Claim purchased Shares from such Underwriter and a copy of the
Prospectus (as then amended if the Company shall have furnished any
amendments thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended) would have
cured the defect giving rise to such Claim. The indemnification
obligations of each Underwriter as provided above are in addition to any
liabilities any such Underwriter may otherwise have. Notwithstanding
the provisions of this section, no Underwriter shall be required to
indemnify or reimburse the Company, or any officer, director or
controlling person in an aggregate amount in excess of the total price
at which the Shares purchased by any such Underwriter hereunder were
offered to the public, less the amount of any damages such Underwriter
has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.
(c) Promptly after receipt by an indemnified party under this section of
notice of the commencement of any action in respect of a Claim, such
indemnified party will, if a Claim in respect thereof is to be made
against an indemnifying party under this section, notify the
indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve an
indemnifying party from any liability it may have to any indemnified
party under this section or otherwise. In case any such action is
brought against any indemnified party, and such indemnified party
notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent
that he, she or it may wish, jointly with all other indemnifying
parties, similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if
the defendants in any such action include both the indemnified party and
any indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to the indemnified
party and/or other indemnified parties which are different from or
additional to those available to any indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense
of such action on behalf of such indemnified party or parties.
(d) Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election to assume the defense of such
action and upon approval by the indemnified party of counsel selected by
the
-28-
<PAGE> 29
indemnifying party, the indemnifying party will not be liable to such
indemnified party under this section for any legal fees or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof, unless:
(i) the indemnified party shall have employed separate counsel in
connection with the assumption of legal defenses in accordance
with the proviso to the last sentence of subsection (c) of this
section (it being understood, however, that the indemnifying party
shall not be liable for the legal fees and expenses of more than
one separate counsel, approved by Baird, if one or more of the
Underwriters or their controlling persons are the indemnified
parties);
(ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the indemnified
party's notice to the indemnifying party of commencement of the
action; or
(iii) the indemnifying party has authorized the employment of counsel
at the expense of the indemnifying party.
(e) If the indemnification provided for in this section is unavailable to an
indemnified party under subsection (a), (b) or (c) hereof in respect of
any Claim referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall, subject to the limitations
hereinafter set forth, contribute to the amount paid or payable by such
indemnified party as a result of such Claim:
(i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Underwriters from the
offering of the Shares; or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above,
but also the relative fault of the Company and the Underwriters in
connection with the statements or omissions which resulted in such
Claim, as well as any other relevant equitable considerations.
The relative benefits received by each of the Company and the Underwriters
shall be deemed to be in such proportion so that the Underwriters are
responsible for that portion represented by the percentage that the amount of
the underwriting discounts and commissions per share appearing on the cover
page of the Prospectus bears to the public offering price per share appearing
thereon, and the Company (including its officers and directors and controlling
persons) is responsible for the remaining portion. The relative fault of the
Company and the Underwriters shall be determined by
-29-
<PAGE> 30
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the Claims referred to above shall be
deemed to include, subject to the limitations set forth in subsections (c) and
(d) of this section, any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
(f) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this section were determined by
pro rata or per capita allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method or allocation
which does not take into account the equitable considerations referred
to in subsection (e) of this section. Notwithstanding the other
provisions of this section, no Underwriter shall be required to
contribute any amount that is greater than the amount by which the total
price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this section are
several in proportion to their respective underwriting commitments and
not joint.
SECTION 11. DEFAULT OF UNDERWRITERS. It shall be a condition to the
obligations of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter provided in this section, each of
the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representatives of
all such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on
either the First Closing Date or the Second Closing Date and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed ten percent (10%) of the total number of
Shares which the Underwriters are obligated to purchase on such Closing Date,
the Representatives may make arrangements for the purchase of such Shares by
other persons, including any of the Underwriters, but if no such arrangements
are made by such Closing Date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares which such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is greater than ten percent (10%) of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, and arrangements
satisfactory to the Representatives for the purchase of such Shares by other
persons are not made within thirty-six hours
-30-
<PAGE> 31
after such default, this Agreement will terminate without liability on the part
of any nondefaulting Underwriter, the Company except for the expenses to be
paid by the Company pursuant to section 7 hereof and except to the extent
provided in section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than seven business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected.
As used in this Agreement, the term "UNDERWRITER" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve
a defaulting Underwriter from liability for its default.
SECTION 12. EFFECTIVE DATE. This Agreement shall become effective upon the
execution and delivery of this Agreement by the parties hereto. Such execution
and delivery shall include an executed copy of this Agreement sent by
telecopier, facsimile transmission or other means of transmitting written
documents.
SECTION 13. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof, this Agreement may be
terminated by the Representatives prior to or on the First Closing Date and the
over-allotment option from the Company referred to in section 5 hereof, if
exercised, may be cancelled by the Representatives at any time prior to or on
the Second Closing Date, if in the judgment of the Representatives, payment for
and delivery of the Shares is rendered impracticable or inadvisable because:
(a) additional governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or the American Stock
Exchange, or trading in securities generally shall have been suspended
or materially limited on either such exchange or on The Nasdaq Stock
Market or a general banking moratorium shall have been established by
either federal or state authorities in New York, Missouri or Wisconsin;
(b) any event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information contained
in the Registration Statement or which is not reflected in the
Registration Statement but should be reflected therein to make the
statements or information contained therein not misleading in any
material respect; or
(c) an outbreak or escalation of hostilities or other national or
international calamity or any substantial change in political, financial
or economic conditions shall have occurred or shall have accelerated to
such extent, in the judgment of the
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<PAGE> 32
Representatives, as to have a material adverse effect on the financial
markets of the United States, or to make it impracticable or inadvisable
to proceed with completion of the sale of and payment for the Shares as
provided in this Agreement.
Any termination pursuant to this Section shall be without liability on the
part of any Underwriter to the Company, or on the part of the Company to any
Underwriter, except for expenses to be paid by the Company pursuant to section
7 hereof or reimbursed by the Company pursuant to section 6(n) hereof and
except as to indemnification to the extent provided in section 10 hereof.
SECTION 14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company, of its officers or directors and of the
several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers, directors or any controlling person, as the case may be, and will
survive delivery of and payment for the Shares sold hereunder.
SECTION 15. NOTICES. All communications hereunder will be in writing and,
if sent to the Representatives, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to Robert W. Baird & Co.
Incorporated at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202,
Attention: Paul T. Rogalski, Managing Director, with a copy to Thomas J.
Murphy, Esq., McDermott, Will & Emery, 227 West Monroe Avenue, Chicago,
Illinois 60606; and if sent to the Company, will be mailed, delivered,
telecopied (with receipt confirmed) or telegraphed and confirmed to the Company
at 13705 Shoreline Court, Earth City, Missouri 63045, Attention: George E.
Richmond, with a copy to Armstrong, Teasdale, Schlafly & Davis, One
Metropolitan Square, Suite 2600, St. Louis, Missouri 63102, Attention: John L.
Gillis, Jr.
SECTION 16. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in section 10 hereof and no other person
will have any right or obligation hereunder. The term "SUCCESSORS" shall not
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 17. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph clause or provision hereof.
SECTION 18. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Wisconsin
without reference to conflict of law principles thereunder. This Agreement may
be signed in various counterparts which together
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<PAGE> 33
shall constitute one and the same instrument, and shall be effective when at
least one counterpart hereof shall have been executed by or on behalf of each
party hereto.
* * *
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<PAGE> 34
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including the Representatives, all in accordance with its terms.
Very truly yours,
YOUNG INNOVATIONS, INC.
By:
------------------------------------
Its:
-----------------------------------
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the date
first above written
ROBERT W. BAIRD & CO. INCORPORATED
CLEARY GULL REILAND & MCDEVITT INC.
By: ROBERT W. BAIRD & CO. INCORPORATED
Acting as Representative of the several
Underwriters (including themselves) identified
in Schedule I annexed hereto.
By:
----------------------------
Authorized Representative
-34-
<PAGE> 35
YOUNG INNOVATIONS, INC.
SCHEDULE I
<TABLE>
<CAPTION>
NO. OF
UNDERWRITER SHARES
----------- ------
<S> <C>
Robert W. Baird & Co. Incorporated
Cleary Gull Reiland & McDevitt Inc.
---------
Total 2,000,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 5
[ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS LETTERHEAD]
October 15, 1997
Young Innovations, Inc.
13705 Shoreline Court
Earth City, Missouri 63045
Re: Registration Statement on Form S-1 for up to 2,300,000 Shares of Common
Stock
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (the "Registration
Statement") filed by Young Innovations, Inc., a Missouri corporation (the
"Company"), with the Securities and Exchange Commission on September 3, 1997
(Registration No. 333-34971), as amended to the date hereof, in connection with
the registration under the Securities Act of 1933, as amended, of up to an
aggregate of 2,300,000 shares of the Company's Common Stock, $0.01 par value
per share (the "Common Stock"), of which (i) 2,000,000 are being offered by the
Company, and (ii) up to 300,000 additional shares may be offered by the Company
pursuant to an over-allotment option granted to the underwriters as set forth
in the Registration Statement.
As your counsel, we have examined the Company's Articles of Incorporation and
Bylaws, each as amended to the date hereof, and the records of corporate
proceedings and other actions taken by the Company in connection with the
authorization, issuance and sale of the Common Stock. Based upon the foregoing
and in reliance thereon, we are of the opinion that:
Subject to (i) compliance with applicable state securities laws and (ii)
receipt from the Securities and Exchange Commission of an order declaring the
Registration Statement effective, the 2,000,000 shares of Common Stock to be
sold by the Company and the additional 300,000 shares subject to the
underwriters' over-allotment option (assuming exercise of the underwriters'
over-allotment option), when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and nonassessable.
<PAGE> 2
ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS
Young Innovations, Inc.
October 15, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of said Registration
Statement.
Very truly yours,
ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS
<PAGE> 1
EXHIBIT 10.17
YOUNG INNOVATIONS, INC.
__________________________
1997 STOCK OPTION PLAN
__________________________
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TABLE OF CONTENTS
Page
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1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . 1
2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . 1
3. PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . . 1
4. STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . 2
6. PAYMENT FOR SHARES . . . . . . . . . . . . . . . . . . . 3
7. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . 3
8. NON-ASSIGNABILITY . . . . . . . . . . . . . . . . . . . 4
9. TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . 4
10. ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . 5
11. RIGHTS PRIOR TO ISSUANCE OF SHARES . . . . . . . . . . . 6
12. TERMINATION AND AMENDMENT . . . . . . . . . . . . . . . 6
13. EFFECT ON EMPLOYMENT . . . . . . . . . . . . . . . . . . 6
14. COMPLIANCE WITH SECURITIES, TAX AND OTHER LAWS . . . . . 6
15. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . 7
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YOUNG INNOVATIONS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE.
The purpose of the Plan is to promote the best interests of the
Company and its shareholders by encouraging participants to acquire a
proprietary interest in the Company through the grant of options, thus
identifying their interests with those of shareholders and giving participants
a greater personal interest in the success of the Company.
2. ADMINISTRATION.
(a) Except as set forth in paragraph 2(c), the Plan shall be
administered by the Compensation Committee, and the selection of participants
in the Plan and decisions concerning the timing, pricing, vesting, other
restrictions, and amount of any grant of options under the Plan shall be made
by the Compensation Committee. Except as provided in Section 10, and except as
set forth in paragraph 2(c), the Compensation Committee shall interpret the
Plan, prescribe, amend, and rescind rules and regulations relating to the Plan,
and make all other determinations necessary or advisable for its
administration, and the decision of the Compensation Committee on any question
concerning the interpretation of the Plan or any option granted under the Plan
shall be final and binding upon all participants.
(b) The Compensation Committee may delegate to one or more
directors, officers or managers of the Company, or a committee of such
directors, officers or managers, the authority, subject to such terms and
limitations as the Compensation Committee shall determine, to grant options to,
or to cancel, modify, waive rights with respect to, alter, discontinue or
terminate options held by participants who are not officers or directors of the
Company for purposes of Section 16 of the Exchange Act.
(c) With respect to any options granted to members of the
Compensation Committee, all authority of the Compensation Committee, including
without limitation the grant of options and the administration and
interpretation of the Plan, shall be exercised by the Board.
3. PARTICIPANTS.
Participants in the Plan shall be such Employees as the Compensation
Committee may select from time to time and such Non-Employee Directors as the
Board may select from time to time. The Compensation Committee may grant
options to an individual upon the condition that the individual become an
Employee, provided that the option shall be deemed to be granted only on the
date the individual becomes an Employee.
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4. STOCK.
The stock available for grants of options under the Plan shall be the
Common Stock, and may be either authorized and unissued shares or treasury
shares held by the Company. The total amount of Common Stock on which options
may be granted under the Plan shall not exceed 350,000 shares, subject to
adjustment in accordance with Section 10. Shares subject to any unexercised
portion of a terminated, cancelled, expired or forfeited option granted under
the Plan may again be subjected to grants or awards under the Plan.
5. GRANT OF OPTIONS.
(a) General. Subject to the limitations set forth in the Plan,
the Compensation Committee from time to time may grant options to such
participants and for such number of shares of Common Stock and upon such other
terms (including, without limitation, the exercise price, the times at which
the option may be exercised, and any applicable vesting requirements) as it
shall designate. Each option shall be evidenced by a stock option agreement or
other contract in such form and containing such provisions as the Compensation
Committee shall deem appropriate, provided that such terms shall not be
inconsistent with the Plan. Subject to compliance with paragraph 5(b), any
option may be designated in whole or in part as either an Incentive Stock
Option or a Nonqualified Stock Option. Any participant may hold more than one
option under the Plan and any other stock option plan of the Company. The date
on which an option is granted shall be the date of the Compensation Committee's
authorization of the option or such later date as shall be determined by the
Compensation Committee at the time the option is authorized.
(b) Incentive Stock Options. Any option intended to constitute an
Incentive Stock Option shall comply with the following requirements in addition
to the other requirements of the Plan:
(i) The exercise price per share for each Incentive Stock
Option granted under the Plan shall be not less than the Fair Market
Value per share of Common Stock on the date the option is granted;
provided that no Incentive Stock Option shall be granted to any
participant who owns (within the meaning of Section 424(d) of the
Code) stock of the Company, or any Parent or Subsidiary, possessing
more than 10% of the total combined voting power of all classes of
stock of such Company, Parent or Subsidiary unless, at the date of
grant of an option to such participant, the exercise price for the
option is at least 110% of the Fair Market Value of the shares subject
to option and the option, by its terms, is not exercisable more than
five years after the date of grant;
(ii) The aggregate Fair Market Value of the underlying
Common Stock at the time of grant as to which Incentive Stock Options
under the Plan (or a plan
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of a Subsidiary) may first be exercised by a participant in any
calendar year shall not exceed $100,000; to the extent that an option
intended to constitute an Incentive Stock Option shall exceed the
$100,000 limitation, the portion of the option that exceeds such
limitation shall be treated as a Nonqualified Stock Option); and
(iii) An Incentive Stock Option shall not be exercisable
after the 10th anniversary of the date of grant or such lesser period
as the Compensation Committee may specify from time to time.
(c) Nonqualified Stock Options. A Nonqualified Stock Option shall
be exercisable for a term not to exceed 10 years, or such lesser period as the
Compensation Committee shall determine, and shall be on such other terms and
conditions as the Compensation Committee shall determine.
6. PAYMENT FOR SHARES.
The purchase price for shares of Common Stock to be acquired upon
exercise of an option granted hereunder shall be paid in full, at the time of
exercise, in any of the following ways:
(i) In cash; or
(ii) By certified check, bank draft or money order; or
(iii) If the Compensation Committee so approves at the time
of exercise, by tendering to the Company shares of Common Stock then
owned by the participant, duly endorsed for transfer or with duly
executed stock power attached, which shares shall be valued at their
Fair Market Value as of the date of such exercise and payment; or
(iv) If the Compensation Committee so approves at the time
of exercise, by delivery to the Company of a properly executed
exercise notice, acceptable to the Company, together with irrevocable
instructions to the participant's broker to deliver to the Company a
sufficient amount of cash to pay the exercise price and any applicable
income and employment withholding taxes, in accordance with a written
agreement between the Company and the brokerage firm ("Cashless
Exercise") if, at the time of exercise, the Company has entered into
such an agreement.
7. WITHHOLDING TAXES.
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(a) The Company shall have the right to withhold from a
participant's compensation or require a participant to remit sufficient funds
to satisfy applicable withholding for income and employment taxes upon the
exercise of an option. If the Compensation Committee so approves at the time
of such exercise, (i) a participant may make an election, notice of which shall
be in writing and promptly delivered to the Compensation Committee, to tender
previously-acquired shares of Common Stock or have shares of Common Stock
withheld from the exercise of an option, provided that the shares have an
aggregate Fair Market Value on the date of such exercise sufficient to satisfy
in whole or in part the applicable withholding taxes, or (ii) the Cashless
Exercise procedure described in Section 6 may be utilized to satisfy the
withholding requirement.
(b) Except as permitted under Rule 16b-3, a participant subject to
the insider trading restrictions of Section 16(b) of the Exchange Act may use
Common Stock to satisfy the applicable withholding requirements only if notice
of election to so use Common Stock is given or becomes effective within the
"window periods" set forth in Rule 16b-3, or if such election is irrevocable
and made at least six months prior to the date of the exercise.
8. NON-ASSIGNABILITY.
No option (or any rights or obligations related thereto) shall be
transferable by a participant except by will or the laws of descent and
distribution. During the lifetime of a participant, an option shall be
exercised only by the participant. No transfer of an option (or any rights or
obligations related thereto) shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and such evidence
as the Company may deem necessary to establish the validity of the transfer and
the acceptance by the transferee of the terms and conditions of such option.
9. TERMINATION OF EMPLOYMENT.
Unless otherwise determined by the Compensation Committee or provided
in the stock option agreement relating to a particular grant of an option:
(i) If, prior to the date that such option shall first
become exercisable, the participant's Employment shall be terminated
for any reason, with or without Cause, including by the voluntary act,
death, Disability, or retirement of the participant, the participant's
right to exercise the option shall terminate and all rights thereunder
shall cease;
(ii) If, on or after the date that such option shall first
become exercisable, a participant's Employment shall be terminated by
the Company for Cause, the participant's right to exercise the option
shall terminate and all rights thereunder shall cease;
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(iii) If, on or after the date that such option shall first
become exercisable, a participant's Employment shall be terminated due
to death or Disability, the participant or the executor or
administrator of the estate of the participant or the person or
persons to whom the option shall have been transferred by will or by
the laws of descent and distribution (as the case may be), shall have
the right, prior to the earlier of (i) the expiration of the option or
(ii) one year from the date of the participant's death or termination
due to such Disability, to exercise the option to the extent that it
was exercisable and unexercised on the date of death or Disability,
subject to any other limitation on exercise in effect at the date of
exercise; and
(iv) If, on or after the date that such option shall first
become exercisable, a participant's Employment shall be terminated for
any reason other than for Cause or due to the participant's death or
Disability, the participant shall have the right, prior to the earlier
of (i) the expiration of the option or (ii) three months after such
termination of Employment, to exercise the option to the extent that
it was exercisable and is unexercised on the date of such termination
of Employment, subject to any other limitation on the exercise of the
option in effect at the date of exercise; and
The provisions of the preceding clauses (iii) and (iv) shall not apply to the
extent that the shares subject to the option are subject to forfeiture or
repurchase by the Company as a result of the termination of the participant's
employment.
10. ADJUSTMENTS.
(a) In the event that the Compensation Committee shall determine
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Common Stock or other securities of the
Company, issuance of warrants or other rights to purchase Common Stock or other
securities of the Company, or other similar corporate transaction or event
affects the Common Stock such that an adjustment is determined by the
Compensation Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Compensation Committee shall, in such manner as it may
deem equitable, adjust any or all of (i) the number and type of shares of
Common Stock which thereafter may be made the subject of options, (ii) the
number and type of shares of Common Stock subject to outstanding options, and
(iii) the exercise price with respect to any option, or, if deemed appropriate,
make provision for a cash payment to the holder of an outstanding option;
provided, however, in each case, that with respect to Incentive Stock Options
no such adjustment shall be authorized to the extent that such authority would
cause the Plan to violate Section 422 of the Code or any successor provision
thereto;
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and provided further, however, that the number of shares of Common Stock
subject to any option shall always be a whole number.
(b) In the event of a Change of Control, unless otherwise
determined by the Compensation Committee, all outstanding options under the
Plan immediately shall become exercisable in full, regardless of any
installment provision applicable to such option; provided, however, that to the
extent that the acceleration of a grant or an award is deemed to constitute a
"golden parachute payment" under Section 280G of the Code and such payment,
when aggregated with other golden parachute payments to the participant results
in an "excess golden parachute payment" under Section 280G of the Code, any
accelerated payment under this Section 10 shall be reduced to the highest
permissible amount that shall not subject the participant to an excess golden
parachute excise tax under Section 4999 of the Code and shall entitle the
Company to retain its full compensation tax deduction for the payment.
11. RIGHTS PRIOR TO ISSUANCE OF SHARES.
No participant shall have any rights as a shareholder with respect to
any shares covered by an option grant until the issuance of a stock certificate
to the participant for such shares. No adjustment shall be made for dividends
or other rights with respect to such shares for which the record date is prior
to the date such certificate is issued.
12. TERMINATION AND AMENDMENT.
(a) The Board may terminate the Plan, or the granting of options,
at any time. No options shall be granted under the Plan after the tenth (10th)
anniversary of the date of the adoption of this Plan by the Board. Termination
of the Plan shall not affect the rights of the holders of any options
previously granted.
(b) The Board may amend or modify the Plan at any time and from
time to time. No amendment, modification, or termination of the Plan shall in
any manner affect any option granted under the Plan without the consent of the
participant holding same.
13. EFFECT ON EMPLOYMENT.
Neither the adoption of the Plan nor the granting of any option
pursuant to it shall be deemed to create any right in any individual to be
retained as an Employee.
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14. COMPLIANCE WITH SECURITIES, TAX AND OTHER LAWS.
Notwithstanding anything contained herein to the contrary, the
Company's obligation to sell and deliver Common Stock pursuant to the exercise
of an option is subject to such compliance with federal and state laws, rules
and regulations applying to the authorization, issuance or sale of securities
or such other laws or regulations as the Company deems necessary or advisable.
As a condition to the delivery of any Common Stock pursuant to the exercise of
an option, the Company may require a participant, or any person acquiring the
rights with respect to such option, to make any representation or warranty that
the Company deems to be necessary under any applicable securities, tax, or
other law or regulation.
15. CERTAIN DEFINITIONS.
"Board" means the Board of Directors of the Company.
"Cause" with respect to any participant has the meaning set forth in
the participant's written employment agreement with the Company, or if no such
agreement exists or if "Cause" is not defined in such agreement, then "Cause"
means (i) the participant's conviction (including a plea of nolo contendere) of
a felony or any other crime involving moral turpitude, unethical business
conduct, or dishonesty involving the Company or persons having business
dealings with the Company, or (ii) any dishonest or unethical conduct by the
participant which in the judgment of a majority of the Board (with the
participant not voting) may reasonably be expected to materially adversely
affect the Company's business, or (iii) the participant's inability, for any
reason, to fully perform the participant's normal employment duties for a
period of ninety (90) consecutive calendar days or for a total of thirty (30)
business days in any six (6) month period, or (iv) such other reason as
constitutes "cause" under the common law of Missouri as then in effect.
"Change in Control" means (i) a merger or consolidation of the Company
with or into any other entity unless after such event at least a majority of
the voting power of the surviving or resulting entity is beneficially owned by
persons who beneficially own a majority of the voting power of the Company
immediately prior to such event, or (ii) the sale of all or substantially all
the assets of the Company, or (iii) the dissolution of the Company, or (iv) a
change in the identity of a majority of the members of the Company's Board of
Directors within any twelve-month period, which change or changes are not
recommended by the incumbent directors determined immediately prior to any such
change or changes.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock of the Company.
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"Company" means Young Innovations, Inc., a Missouri corporation.
"Compensation Committee" means the Compensation Committee of the
Board, or with respect to any time when there is no such committee, the Board.
"Disabled" or "Disability" means permanently disabled as defined in
Section 22(e)(3) of the Code.
"Employee" means an individual with an "employment relationship" with
the Company, or any Parent or Subsidiary, as defined in Regulation 1.421-7(h)
promulgated under the Code, and shall include, without limitation, employees
who are directors of the Company, or any Parent or Subsidiary.
"Employment" means the state of being an Employee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means the average of the high and low sale prices,
or the average of the closing bid and asked prices, as the case may be, per
share of the Common Stock reported in the Wall Street Journal for the last
preceding day on which the Common Stock was traded prior to the date with
respect to which Fair Market Value is to be determined, as determined by the
Compensation Committee in its sole discretion.
"Incentive Stock Option" means an option, or portion thereof, which
meets the requirements of Section 422 of the Code and is designated as such.
"Non-Employee Director" has the meaning set forth in Rule 16b-3.
"Nonqualified Stock Option" means an option granted under the Plan
other than an Incentive Stock Option.
"Parent" means any "parent corporation" of the Company as defined in
Section 424(e) of the Code.
"Plan" means this 1997 Stock Option Plan.
"Rule 16b-3" means Securities and Exchange Commission Rule 16b-3
promulgated under the Exchange Act of 1934.
"Subsidiary" means any "subsidiary corporation" of the Company as
defined in Section 424(f) of the Code.
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EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
8th day of October, 1997, by and between Young Innovations, Inc., a
Missouri corporation ("Employer") and Alfred E. Brennan ("Employee").
WHEREAS, Employer wishes to employ Employee, and Employee wishes to be
employed by Employer, and the parties wish to set forth the terms of such
employment in writing in this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein set forth, Employer hereby employs Employee, and Employee
hereby accepts such employment, upon the following terms:
1. Term of Employment.
Unless terminated earlier as set forth in Section 4, the initial term of
Employee's employment shall be 15 months beginning as of October 1, 1997 (the
"Effective Date"). Thereafter, the term of Employee's employment will
automatically be extended for successive one year terms expiring December 31
unless either party notifies the other party at least 60 days before the
expiration of the initial term, or any subsequent term, that it does not wish
to extend this Agreement; but if such notice is given, Employee's employment
will terminate without further notice at the close of business on the last day
of the then current term.
2. Duties of Employee.
(a) Employee shall diligently and faithfully serve Employer as its Senior
Vice President and Chief Operating Officer, reporting to Employer's Chief
Executive Officer. Employee shall perform such further duties and services
upon special projects related or associated with the business and affairs of
Employer as may from time to time be assigned to him by Employer's Chief
Executive Officer or Board of Directors ("Board"), and shall devote his full
productive time, energies, attention and best efforts to the performance of the
services required by such duties (except as provided in paragraph 2(c)), and
shall diligently support and promote Employer's business, with the objective
that Employer will be operated in an efficient, sound and profitable manner.
(b) Employee agrees to serve, if elected or appointed, as a director of
Employer and/or as a director or officer of one or more affiliates of Employer.
Such duties shall be deemed to be part of Employee's duties for Employer, and
Employee shall not be entitled to additional compensation for serving in any
such capacity beyond that provided in this Agreement.
(c) It is understood that Employee shall be allowed to pursue certain prior
commitments, not significantly detracting from his obligations under paragraph
2(a), as approved by Employer.
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3. Compensation and Benefits.
(a) Salary. Employee shall receive an initial base salary ("Base Salary")
of $180,000 per year, which shall be payable in accordance with, and shall be
subject to change from time to time in accordance with, Employer's executive
payroll and compensation policies and procedures. However, the Base Salary
shall not be less than $180,000 per year.
(b) Stock Option. Effective on the Effective Date, Employer shall issue to
Employee an option to acquire up to 60,000 shares of Employer's common stock
(the "Option"). The Option shall be issued pursuant to Employer's proposed
1997 Stock Option Plan (the "Option Plan"), a draft copy of which Employee
hereby acknowledges having received. If for any reason the Option Plan is not
adopted or is not approved by Employer's shareholders, the Option will be
granted on terms comparable to those of the Option Plan. The Option shall
contain the following specific provisions:
Date and Duration of Option. The Option shall be issued as of and
subject to the occurrence of the pricing date (the "Pricing Date") of
Employer's currently proposed initial public offering (the "IPO"), and shall
expire, to the extent not exercised, ten years after the Pricing Date,
subject to possible earlier termination as set forth in the Option Plan.
Exercisability of Option. The Option shall be immediately exercisable
as to 15,000 shares, and shall become exercisable as to an additional
15,000 shares on January 1 of each of the years 1999, 2000 and 2001, so that
it shall be exercisable as to all Option Shares on January 1, 2001. However,
if there is a Change in Control prior to the expiration date of the Option
the Option shall become immediately exercisable, to the extent it was not
previously exercisable, as to all Option Shares.
Exercise Price. The exercise price of the Option shall be equal to the
offering price to the public of the shares offered in the IPO.
Type of Option. The Option shall be an incentive stock option ("ISO") if
and to the extent permitted under the Option Plan and related Federal tax
laws and regulations. To the extent the aggregate fair market value of the
underlying Option Shares, measured at the time of grant, as to which the
Option first becomes exercisable in any calendar year exceeds $100,000, the
portion of the option that exceeds such limitation will be a nonqualified
stock option.
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(c) Fringe Benefits. Employee shall be entitled to participate in such
retirement and other employee benefit plans as Employer may adopt for its
employees or its senior executives generally, and shall receive such other
fringe benefits and executive perquisites which are afforded by Employer from
time to time to its senior executives or which are otherwise agreed upon
between Employee and the Board.
(d) Business Expenses. Employee shall be entitled to reimbursement of his
expenses reasonably incurred in the promotion and conduct of Employer's
business, subject to the oversight of Employer's Chief Executive Officer and to
any limitations or policies applicable to Employer's executives generally, and
subject to compliance with such substantiation and record-keeping requirements
as may be required from time to time to support the deductibility of such
expenses for Federal income tax purposes.
4. Termination of Employment.
(a) Termination in Certain Events by Either Party. Employee's employment
may be terminated by either party if:
(i) the closing of the sale of the shares offered in the IPO has not
occurred by November 30, 1997, or
(ii) the Company has not executed a definitive agreement for, or
consummated, the acquisition of an entity with at least $8 million of
revenues by March 31, 1998,
and the terminating party gives written notice of termination to the other
party within 30 days after the occurrence of such event.
(b) Termination by Employer for Cause. Except as provided in paragraph
4(a), during the term of this Agreement Employee's employment may be terminated
by Employer without breach of this Agreement only for "Cause," which with
respect to a termination by Employer means only:
(i) conviction (including a plea of nolo contendere) of a felony or any
other crime involving moral turpitude, unethical business conduct, or
dishonesty involving the Company or persons having business dealings with the
Company, or
(ii) any dishonest or unethical conduct which in the judgment of a
majority of the Board (with Employee not voting) may reasonably be
expected to materially adversely affect Employer's business, or
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(iii) any material breach of Employee's covenants set forth in this
Agreement which is not cured within ten (10) days after Employee is notified
of such breach by Employer, or
(iv) Employee's inability or refusal, for any reason, to fully perform
his duties under this Agreement for a period of ninety (90) consecutive
calendar days or for a total of thirty (30) business days in any six (6)
month period.
(c) Termination by Employee for Cause. Except as provided in paragraph
4(a), during the term of this Agreement Employee may voluntarily terminate his
employment without breach of this Agreement only for "Cause," which with
respect to a termination by Employee means only:
(i) the cessation of Employer's normal business operations other than
in connection with the orderly liquidation of Employer's business, or
(ii) Employer's failure to pay Employee his compensation under this
Agreement generally in a timely manner, or
(iii) any other material violation of Employer's covenants set forth in
this Agreement which is not cured within ten (10) days after Employer is
notified of such violation by Employee.
(d) Effect of Termination by Employer for Cause or by Employee Without
Cause. If Employee's employment is terminated by Employer for Cause as set
forth in paragraph 4(b), or if Employee terminates his employment for any
reason other than for Cause as set forth in paragraph 4(c), then all further
obligations of Employer under this Agreement shall automatically terminate,
except for Base Salary and fringe benefits accrued through the effective date
of termination and such other benefits as may be provided by law.
(e) Effect of Termination by Death of Employee. In the event of Employee's
death, all further obligations of Employer under this Agreement shall
automatically terminate, except that Employer shall pay to such person as may
have been designated by Employee in a writing filed with Employer as the
beneficiary under this Agreement or, if no such designation has been made, to
any person designated by Employee in a writing filed with Employer as
Employee's beneficiary under Employer's retirement plans or, if no such
designation has been made, then to the personal representative of Employee's
estate, the Base Salary and fringe benefits accrued through the effective date
of termination and such other benefits as may be provided by law.
(f) Limitation on Liability of Employer for Other Terminations. If
Employee's employment is terminated by Employer for any reason other than Cause
as set forth in paragraph 4(b), or if Employee terminates his employment for
Cause as set forth in paragraph 4(c), then Employer's liability to Employee, in
damages or otherwise, on account of such termination shall be limited to (i)
Employee's Base Salary for the remainder of the then current employment term
plus, if the termination is within 30 days of the end of the current term and
Employer has not given notice of non-renewal pursuant to Section 1, Employee's
Base Salary for the following one-year term, plus (ii) the value of any fringe
benefits which would have accrued through the end of the current term, or if
the termination is within 30 days of the end of
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the current term and Employer has not given notice of non-renewal pursuant to
Section 1, the following term, plus (iii) such other benefits as may be
provided by law.
(g) Other Rights Not Affected. The enumeration of certain rights or
liabilities of the parties effective upon termination of Employee's employment
shall not affect any rights or remedies of a party at law or in equity for any
breach of this Agreement by the other party. In addition, upon any termination
of Employee's employment, including by reason of Employee's death, Employer may
accelerate, offset and withhold from any amounts due to Employee or his
beneficiary or personal representative any indebtedness of Employee to Employer
existing at the effective date of termination.
5. Covenants Relating to Confidential Information.
(a) Duty Not to Disclose Confidential Information. Employee covenants to use
his best efforts and exercise utmost diligence to protect and guard Employer's
trade secrets, know-how, methods, resources, financial models, business
procedures and processes, customer lists, records, computer information and all
other confidential information relating to Employer's business (hereinafter
individually and collectively referred to as "Confidential Information"). Both
during Employee's employment by Employer and thereafter, Employee shall not,
directly or indirectly, use for Employee's benefit or for the benefit of any
other person or entity, or disclose to any other person or entity, any
Confidential Information, whether or not acquired, learned, obtained or
developed by Employee alone or in conjunction with others, except as such
disclosure or use may be required in connection with Employee's employment by
Employer or may be expressly consented to in writing by Employer. Employee's
obligations under this paragraph shall terminate upon termination of Employee's
employment as to any Confidential Information which:
(i) was known to Employee prior to the commencement of his employment
(and not merely prior to the Effective Date), or
(ii) is now generally known to the public, or hereafter becomes
generally known to the public otherwise than through a breach of this
Agreement, but in such latter event only as of the date such Confidential
Information becomes generally known to the public and without terminating any
liability of Employee to Employer for unauthorized disclosure prior to such
date, or
(iii) is made available to Employee by a third party not under any
duty of confidentiality with respect to such Confidential Information.
(b) Delivery of Tangible Information. Employee shall deliver promptly to
Employer at the termination of his employment or at any other time Employer may
reasonably request, without retaining any copies, notes or excerpts thereof,
all work sheets, memoranda, diaries, notes, records, computer printouts,
computer storage media, address books, files and any other documents made or
compiled or otherwise obtained by, or delivered or made available to, Employee
as a result of Employee's employment and containing, or relating directly or
indirectly to, any Confidential Information.
-5-
<PAGE> 6
(c) Each of the foregoing obligations of Employee in this paragraph shall
also apply with respect to Confidential Information of customers and others
with whom the Company has a business relationship, learned or acquired by
Employee during the course of his or her employment by the Company.
(d) Upon termination of Employee's employment, Employee agrees not to notify
any customer of the Company of Employee's termination until the Company has
discussed with said customer plans for transferring the handling of such
customer's orders or other business to other personnel of the Company, and
Employee further agrees to cooperate with the Company to the end that all
customers of the Company with whom Employee has had a business relationship may
be retained by the Company.
6. Non-Inducement Covenant.
Employee hereby expressly covenants and agrees that during the period of
Employee's employment with the Company and for a period of two (2) years after
the termination of such employment (irrespective of whether such termination
shall be voluntary or involuntary on the part of Employee), Employee shall not
without the express written consent of the Company directly or indirectly, in
Employee's own behalf or on behalf of any other person or entity, hire or
solicit for hire any employee of the Company, or induce any person employed by
the Company to leave the employ of the Company for any reason.
7. Intellectual Property.
Employee hereby agrees that all right, title, and interest in and to any
inventions (whether or not they are patentable) and copyrightable works of
authorship that Employee has made, whether solely or jointly, during his
employment by Employer or that Employee makes, whether solely or jointly, while
an employee of Employer, and which are either within the scope of Employee's
employment or are made at Employer's specific request, including but not
limited to the financial models and similar intellectual property currently
being used by Employer and any modifications or enhancements thereof, shall
belong exclusively to Employer; and Employee agrees to assign and hereby does
assign all right, title and interest in and to such inventions and works of
authorship to Employer and agrees to execute such further assignments and other
documents as Employer may reasonably require in order to secure and enforce
Employer's rights therein.
8. Disclosure.
Each party hereby authorizes the other to disclose the existence of this
Agreement and the restrictive covenants set forth herein to third parties,
including but not necessarily limited to prospective employers of Employee,
without incurring any liability for so acting.
9. Review and Consultation.
Employee acknowledges that he has had a opportunity to review this Agreement
and consult with his legal and financial advisers prior to signing this
Agreement.
-6-
<PAGE> 7
10. Miscellaneous.
(a) Notices. All notices and communications hereunder shall be in writing,
and shall be deemed to be duly given if either actually received by the party
entitled thereto (in the case of Employer, by its Chief Executive Officer) or
two business days after its deposit in the United States mail, registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to Employee: Alfred E. Brennan
-------------------
-------------------
If to Employer: Young Innovations, Inc.
13705 Shoreline Court
Earth City, MO 63045
Attention: Chief Executive Officer
Either party may change its designated address for receipt of notices by giving
written notice thereof to the other party.
(b) Entire Agreement; Modification and Waiver. This Agreement constitutes
the full and complete understanding and agreement of the parties with respect
to Employee's employment by Employer, supersedes all prior written or oral
understandings and agreements with respect thereto, and cannot be amended or
terminated orally. Any amendment shall be binding against Employer only if
approved by a majority of the Board, with Employee not voting. Unless
otherwise expressly stated in writing, any waiver of any provision of this
Agreement shall not constitute a waiver of any other provision; nor shall a
waiver of any breach of any covenant of this Agreement constitute a waiver of
any succeeding or continuing breach of the same, or any other, covenant.
(c) Remedies of Employer Upon Breach of Agreement. Employee acknowledges
that irreparable harm would be sustained by Employer if Employee breaches the
covenants set forth in this Agreement, and Employee therefore agrees that
without prejudice to any other rights or remedies which Employer may have under
this Agreement or at law or in equity, Employer shall be entitled to apply to
any court of competent jurisdiction for, and to obtain, injunctive relief
against Employee in order to prevent any breach or threatened breach of such
covenant. Employee hereby acknowledges that Employer's business is national in
scope and therefore expressly agrees that the limitation of the covenants in
this Agreement to a specific geographical area within the United States would
not adequately protect the Company.
(d) Severability of Certain Provisions. It is the intention of the parties
that the confidentiality and non-competition covenants in this Agreement are
intended to restrict Employee's activities only to the extent necessary for the
protection of the legitimate business interests of Employer, and the parties
specifically covenant that if any of the foregoing provisions are held to be
too broad for such purpose the Court having power to make such adjudication is
authorized to modify or interpret such provisions to the end that such
restrictions, as modified,
-7-
<PAGE> 8
shall be reasonable and valid; and that if any of the foregoing provisions
shall be held to be invalid or unenforceable, the same shall be deemed to be
severable and shall not defeat the remaining provisions.
(e) Binding Effect of Agreement. This Agreement shall be binding upon
Employee and, except as regards personal services, upon Employee's heirs,
personal representatives, executors and administrators, and shall inure to the
benefit of Employer and its successors and assigns. Employee expressly
consents to the assignment of this Agreement to any successor to all or
substantially all of Employer's business, and agrees to perform the duties and
services required of him herein for any such successor assignee.
(f) Governing Law; Situs of Suit. This Agreement shall be governed by, and
interpreted in accordance with, the internal laws of the State of Missouri.
Employee agrees that he may be sued, and hereby waives any right to contest
jurisdiction or venue, in the Circuit Court of St. Louis County, Missouri or
the United States District Court for the Eastern District of Missouri, which
courts, except in the case of proceedings under paragraph 12(c), shall be the
exclusive forums in any proceedings by either party concerning this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
Employee: /s/ Alfred E. Brennan
-------------------------------------------
Alfred E. Brennan
Employer: YOUNG INNOVATIONS, INC.
By: /s/ George E. Richmond
---------------------------------------
Title: President and CEO
-----------------------
-8-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
October 15, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountant, I hereby consent to the use of my report
(and to all references to my Firm) included in or made part of this
registration statement.
/s/ John J. Eckle
JOHN J. ECKLE
Vacaville, California,
October 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
company's audited and unaudited consolidated financial statements included
elsewhere in this registration statement and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 98 98
<SECURITIES> 204 102
<RECEIVABLES> 3,261 2,569
<ALLOWANCES> 54 75
<INVENTORY> 1,733 2,338
<CURRENT-ASSETS> 5,898 6,112
<PP&E> 11,979 12,936
<DEPRECIATION> 4,897 5,500
<TOTAL-ASSETS> 32,481 32,566
<CURRENT-LIABILITIES> 11,670 12,017
<BONDS> 7,519 4,656
0 0
0 0
<COMMON> 42 42
<OTHER-SE> 10,269 13,055
<TOTAL-LIABILITY-AND-EQUITY> 32,481 32,566
<SALES> 21,580 15,087
<TOTAL-REVENUES> 21,580 15,087
<CGS> 9,470 6,430
<TOTAL-COSTS> 9,470 6,430
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 22 21
<INTEREST-EXPENSE> 974 700
<INCOME-PRETAX> 5,223 3,710
<INCOME-TAX> 1,955 1,367
<INCOME-CONTINUING> 3,268 2,343
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,268 2,343
<EPS-PRIMARY> .74 .53
<EPS-DILUTED> .74 .53
</TABLE>
