<PAGE> 1
PROSPECTUS
2,000,000 SHARES
YOUNG INNOVATIONS, INC.
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. See "Underwriting" for
information relating to the determination of the initial public offering price.
The Common Stock has been 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........................ $12.00 $0.84 $11.16
- -------------------------------------------------------------------------------------------------------------
Total(3)......................... $24,000,000 $1,680,000 $22,320,000
=============================================================================================================
</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
$27,600,000, $1,932,000 and $25,668,000, 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 November 10, 1997 through The Depository Trust Company or at the
offices of Robert W. Baird & Co. Incorporated, Milwaukee, Wisconsin.
<TABLE>
<S> <C>
ROBERTW. BAIRD & CO. CLEARY GULL REILAND & MCDEVITT
INCORPORATED INC.
</TABLE>
THE DATE OF THIS PROSPECTUS IS NOVEMBER 4, 1997.
<PAGE> 2
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> 3
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> 4
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> 5
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 the Lorvic and Denticator acquisitions.
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; (ii) actively developing new dental products and
product lines; and (iii) pursuing targeted international expansion.
3
<PAGE> 6
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."
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 230,800 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> 7
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 $ 0.67 $ 0.53 $ 0.63 $ 0.55
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 4,450 4,450 4,450 4,450 4,444 6,124 4,450 4,410 6,090
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) $11,330
Total assets.............................................. 32,566 40,716
Total debt (including current maturities)................. 13,741 21
Stockholders' equity...................................... 13,098 36,604
</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 1,680,000 shares, representing those
shares of Common Stock offered hereby (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> 8
(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
$0.58 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 1,070,000
and 1,330,000 shares, representing those shares of Common Stock sold at the
initial public offering price (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> 9
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> 10
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> 11
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.
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,
9
<PAGE> 12
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.
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
10
<PAGE> 13
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 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 $9.14 per share in the net tangible book value per share from the
initial public offering price. See "Dilution."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the 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 was 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
11
<PAGE> 14
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."
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> 15
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 $21.9 million
($25.2 million if the Underwriters' over-allotment option is exercised in full).
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> 16
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; (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 $ 8,248
======= =======
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................................ -- 21,850
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 36,604
------- -------
Total capitalization................................. $23,207 $36,625
======= =======
</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 230,800 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> 17
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; (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 $18.3 million or $2.86
per share of Common Stock. This represents an immediate increase in net tangible
book value of $4.09 per share to existing stockholders and an immediate dilution
of $9.14 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>
Initial public offering price per share..................... $12.00
Net tangible book value per share before the Offering..... $ (1.23)
Increase per share attributable to new investors.......... 4.09
-------
Pro forma net tangible book value per share after the
Offering.................................................. 2.86(2)
------
Dilution of net tangible book value per share to new
investors(1).............................................. $ 9.14(2)
======
</TABLE>
- ---------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the 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 $3.23 and $8.77, respectively.
15
<PAGE> 18
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> 19
(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
$0.58 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 1,070,000
and 1,330,000 shares, representing those shares of Common Stock sold at the
initial public offering price (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> 20
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 $ 0.67
======= =======
Weighted average common
shares
outstanding(5)....... 4,444 6,124
======= =======
</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 1,680,000 shares, representing those shares of Common Stock
offered hereby (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> 21
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 growth in net sales has been driven by three principal
factors: (i) the successful introduction of a line of highly reliable disposable
prophy angles; (ii) the increase in its market share of metal prophy angles,
cups and brushes; and (iii) the acquisitions of Lorvic and Denticator. The
Company'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 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
19
<PAGE> 22
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.
20
<PAGE> 23
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.
21
<PAGE> 24
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
22
<PAGE> 25
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
23
<PAGE> 26
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 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."
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.
24
<PAGE> 27
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 the Lorvic and Denticator acquisitions.
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 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.
25
<PAGE> 28
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.
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
26
<PAGE> 29
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. 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.
27
<PAGE> 30
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.
28
<PAGE> 31
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> 32
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.
30
<PAGE> 33
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.
31
<PAGE> 34
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 FDA regulations presently in effect which
exempt certain types of products generically.
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.
32
<PAGE> 35
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................... 64 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................. 43 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").
33
<PAGE> 36
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> 37
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
35
<PAGE> 38
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
230,800 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.
36
<PAGE> 39
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> 40
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> 41
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> 42
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.......................... 628,500
Cleary Gull Reiland & McDevitt Inc.......................... 628,500
Cowen & Company............................................. 45,000
A.G. Edwards & Sons, Inc. .................................. 45,000
EVEREN Securities, Inc. .................................... 45,000
Advest, Inc. ............................................... 32,000
George K. Baum & Company.................................... 32,000
J.C. Bradford & Co. ........................................ 32,000
Crowell, Weedon & Co. ...................................... 32,000
J.J.B. Hilliard, W.L. Lyons, Inc. .......................... 32,000
Interstate/Johnson Lane Corporation......................... 32,000
Legg Mason Wood Walker Incorporated......................... 32,000
McDonald & Company Securities, Inc. ........................ 32,000
Mesirow Financial, Inc. .................................... 32,000
Parker/Hunter Incorporated.................................. 32,000
Pauli & Company Incorporated................................ 32,000
Rauscher Pierce Refsnes, Inc. .............................. 32,000
Raymond James & Associates, Inc. ........................... 32,000
The Robinson-Humphrey Company, Inc. ........................ 32,000
Roney & Co. ................................................ 32,000
Stifel, Nicolaus & Company, Incorporated.................... 32,000
Van Kasper & Company........................................ 32,000
Wedbush Morgan Securities................................... 32,000
Wheat, First Securities, Inc. .............................. 32,000
---------
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
$0.50 per share and that the Underwriters and such dealers may reallow a
concession of not in excess of $0.10 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.
40
<PAGE> 43
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 was 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 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.
41
<PAGE> 44
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 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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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 1,025 733 939
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 -- 212 336 (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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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
$.69 and $.58 (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 1,170,000 and 1,330,000 shares,
representing those shares of common stock sold at the initial public offering
price, the application of the net proceeds therefrom sufficient to retire $12.6
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> 60
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> 61
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
230,800 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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
================================================================================
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................. 42
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
UNTIL NOVEMBER 29, 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.
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
ROBERTW. BAIRD & CO.
INCORPORATED
CLEARY GULL REILAND &
MCDEVITT INC.
NOVEMBER 4, 1997
================================================================================
