<PAGE> 1
UNITED STATES
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from.......... to .........
Commission file number 000-23213
YOUNG INNOVATIONS, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1718931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13705 Shoreline Court East, Earth City, Missouri 63045
(Address of principal executive offices)
(Zip Code)
(314) 344-0010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ...X... No ........
Number of shares outstanding of the Registrant's Common Stock at October 31,
1998:
6,772,796 shares of Common Stock, par value $.01 per share
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PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
YOUNG INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,533 $ 12,761
Trade accounts receivable, net of allowance for doubtful accounts
of $165 and $80, respectively 4,386 2,774
Inventories 3,318 2,239
Other current assets 2,732 1,316
-------- --------
Total current assets 12,969 19,090
-------- --------
PROPERTY, PLANT AND EQUIPMENT 11,646 7,441
-------- --------
MARKETABLE SECURITIES -- 100
-------- --------
OTHER ASSETS 665 656
-------- --------
INTANGIBLE ASSETS 28,370 18,142
-------- --------
Total assets $ 53,650 $ 45,429
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit
-- --
Current maturities of long-term debt
-- --
Accounts payable and accrued liabilities $ 5,687 $ 2,715
-------- --------
Total current liabilities 5,687 2,715
-------- --------
LONG-TERM DEBT
-- --
-------- --------
NONCURRENT LIABILITIES 450 456
-------- --------
DEFERRED INCOME TAXES 1,050 1,050
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value, 25,000,000 shares authorized,
6,772,796 and 6,710,296 shares issued and outstanding in 1998
and 1997, respectively 68 67
Additional paid-in capital 26,083 25,131
Unrealized gain on marketable securities, net of tax -- 9
Retained earnings 20,621 16,310
Common stock in treasury, at cost, 39,914 and 39,914 shares (309) (309)
-------- --------
Total stockholders' equity 46,463 41,208
-------- --------
Total liabilities and stockholders' equity $ 53,650 $ 45,429
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 9,282 $ 6,077 $ 25,625 $ 18,214
COST OF GOODS SOLD 4,306 2,324 11,400 7,343
------- ------- -------- --------
Gross profit 4,976 3,753 14,225 10,871
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,589 1,813 7,479 5,490
------- ------- -------- --------
Income from operations 2,387 1,940 6,746 5,381
------- ------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense -- (293) -- (895)
Other income (expense), net 57 15 262 17
------- ------- -------- --------
57 (278) 262 (878)
------- ------- -------- --------
Income before provision for income taxes 2,444 1,662 7,008 4,503
PROVISION FOR INCOME TAXES 941 638 2,695 1,716
------- ------- -------- --------
Net income $ 1,503 $ 1,024 $ 4,313 $ 2,787
======= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.22 0.23 $ 0.64 $ 0.63
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.22 0.23 $ 0.63 $ 0.63
======= ======= ======== ========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 6,773 4,410 6,759 4,410
======= ======= ======== ========
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 6,808 4,410 6,808 4,410
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,313 $ 2,787
-------- -------
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 1,444 939
Loss (gain) on sale of property, plant and equipment (23) 5
Deferred income taxes -- --
Changes in assets and liabilities:
Trade accounts receivable (650) 713
Inventories (464) (581)
Other current assets (405) (322)
Other assets 630 24
Accounts payable and accrued liabilities (345) (29)
Other -- (523)
-------- -------
Total adjustments 187 226
-------- -------
Net cash flows from operating activities 4,500 3,013
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (13,875) --
Purchases of property, plant and equipment (920) (508)
Proceeds from sale of property, plant and equipment 14 33
Purchases of marketable securities -- --
Proceeds from marketable securities 100 102
Payments on notes receivable -- 10
-------- -------
Net cash flows from investing activities (14,681) (363)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity issuance costs (47) --
Reissuance of common stock in treasury -- 15
Payments of long-term debt -- (2,663)
Change in revolving line of credit -- (2)
-------- -------
Net cash flows from financing activities (47) (2,650)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,228) --
CASH AND CASH EQUIVALENTS, beginning of period 12,761 98
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,533 $ 98
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
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YOUNG INNOVATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Dollars in thousands, except share data)
GENERAL
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial position as of
September 30, 1998 (unaudited), the unaudited results of operations for the
three and nine months ended September 30, 1998 and September 30, 1997 and the
unaudited statement of cash flows for the nine months ended September 30, 1998
and September 30, 1997. The financial statements have been prepared in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally made in an Annual Report on Form 10-K. Accordingly,
the consolidated financial statements included herein should be reviewed in
conjunction with the financial statements and the footnotes thereto included in
the Company's 1997 Annual Report on Form 10-K.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the full year.
1. DESCRIPTION OF BUSINESS:
Young Innovations, Inc. and its subsidiaries (the Company) designs,
manufactures and markets single-use supplies, autoclavable instruments, X-ray
machines and other products used by dental professionals, primarily in
preventive dentistry, diagnostics 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, Indiana and Texas. The Company markets its products to
dental professionals worldwide through a network of medical and dental product
distributors.
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, Lorvic Holdings, Inc., The
Lorvic Corporation, Young Dental International, Inc., Denticator International,
Inc. (Denticator) and Panoramic Corporation (Panoramic). Panoramic is included
since its acquisition on February 27, 1998.. All significant intercompany
accounts and transactions are eliminated in consolidation.
3. ACQUISITIONS:
On February 27, 1998, the Company, through a wholly-owned subsidiary,
acquired substantially all of the assets and assumed certain liabilities of
Panoramic, an Indiana corporation.The purchase price was financed principally
through cash from the remaining net proceeds of the Company's initial public
offering and additionally through the issuance of $1,000 (62,500 shares) of the
Company's common stock.The acquisition of Panoramic 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 estimated fair value of net assets
acquired was $10,744 , is comprised of goodwill and a non-compete covenant and
is being amortized over 40 and 2 years, respectively.The purchase price
allocation is as follows:
Trade accounts receivable................................. $865
Inventories............................................... 637
Other current assets...................................... 163
Property, plant and equipment............................. 4,040
Other assets.............................................. 20
Intangible assets (goodwill and non-compete covenant) 10,744
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Current liabilities....................................... (1,550)
Noncurrent liability...................................... (44)
------
Payments, cash ($13,875) and stock ($1,000)............... $14,875
=======
The results of operations for Panoramic are included in the consolidated
financial statements since February 27, 1998.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Panoramic as if the
acquisition had occurred at the beginning of 1998 and 1997, with pro forma
adjustments to give effect to amortization of goodwill and certain other
adjustments, together with related income tax effects. The unaudited pro forma
information does not purport to be indicative of the results of operations had
these transactions been completed as of the assumed dates or which may be
obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales....................................... $ 27,049 $ 24,777
Net income...................................... 4,331 3,274
Basic and diluted earnings per share............ .64 .73
</TABLE>
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
Finished products...................................... $ 1,003 $ 824
Work in process........................................ 1,392 975
Raw materials and supplies............................. 948 543
------- -------
3,343 2,342
Reserve for obsolete and excess inventories............ (25) (103)
------- -------
Total inventories................................. $ 3,318 $ 2,239
======= =======
</TABLE>
5. COMMON STOCK:
The Company issued $1,000 (62,500 shares) of its common stock on February
27, 1998 as part of the consideration for the acquisition of the assets and
liabilities of Panoramic (see Note 3).
6. STOCK OPTIONS:
The Company granted to four former Panoramic employees, who are currently
employees of the Company, stock options to purchase 40,000 shares of the
Company's common stock at an exercise price equal to the closing price of the
Company's common stock on February 27, 1998, the date of closing and the date of
the grant. Each of the options first become exercisable as to 25% of the shares
subject to the options on February 27, 1999, and becomes exercisable as to an
additional 25% on February 27 of each year from 2000 to 2002.These options
expire in ten years from the grant date or, in the event of termination of
employment, at the election of the Company, upon: (i) a cash payment of the
amount by which the fair value of the options exceeds the exercise price for
such options; or (ii) the execution of a consulting agreement in which case the
options terminate upon the termination of the consulting agreement.
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A summary of the options outstanding and exercisable at September 30, 1998
is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICE
------ ------ -----
<S> <C> <C> <C>
Outstanding, beginning of year...................... 234,600 $12.00--$13.50 $12.03
Granted............................................. 53,000 $15.00--$17.50 $16.86
Exercised........................................... -- -- --
Forfeited........................................... 23,600 $12.00 $12.00
Outstanding, nine months ended September 30, 1998... 264,000 $12.00--$17.50 $13.00
Exercisable, nine months ended September 30, 1998... 35,000 $12.00--$17.50 $13.00
</TABLE>
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company elected APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the Plan. Accordingly,
no compensation cost has been recognized for the Plan.
7. EARNINGS PER SHARE:
During 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings per Share. Basic earnings per share (Basic EPS) is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share (Diluted EPS) include
the dilutive effect of stock options, if any, using the treasury stock method.
For the third quarter ended September 30,1998, the weighted average shares
outstanding during the period of 6,772,796, used for Basic EPS, was increased by
the dilutive impact of stock options of 35,412, for a total of 6,808,208 shares
used for Diluted EPS. For the nine months ended September 30,1998, the weighted
average shares outstanding during the period of 6,759,060, used for Basic EPS,
was increased by the dilutive impact of stock options of 48,558, for a total of
6,807,618 shares used for Diluted EPS.
8. SUPPLEMENTARY EARNINGS PER SHARE:
Assuming the Company's revolving line of credit and long-term borrowings
were retired as of January 1, 1997, supplementary earnings per share (unaudited)
would be $.21 and $.58 for the three months ended September 30, 1997 and the
nine months ended September 30, 1997, respectively, reflecting the elimination
of interest expense, net of income taxes. Supplementary earnings per share
assumes weighted average shares outstanding (pre-public) plus shares
representing those shares of common stock sold at the initial public offering
price, the application of the net proceeds therefrom sufficient to retire the
average outstanding borrowings for the three months ended September 30, 1997 and
the nine months ended September 30, 1997.
9. RELATED-PARTY TRANSACTIONS:
In connection with the acquisition of Denticator on July 22, 1996,an employment
agreement (the Agreement) with Denticator's President and Chief Executive
Officer (the Individual) was executed. The Agreement provided for the delivery
of common stock worth $800.On April 6,1998, the Company agreed to an amendment
(the Amendment) to the Agreement. The Amendment required the Company to pay cash
in lieu of common stock in the amount of $800 on July 22, 1998 to the Individual
if the Individual was employed by the Company on that date. On July 22, 1998,
the Company made the required cash payment to the Individual. The Company
accrued the $800 liability evenly over the two year period and recorded $24 and
$100 of compensation expense for the quarters ended September 30, 1998 and
September 30,1997, respectively. The Company recorded $224 and $300 of
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compensation expense for the nine months ended September 30, 1998 and September
30, 1997, respectively. The Agreement provides for a base annual salary of $120,
and the Individual has agreed not to compete with the Company for a period of
two years after expiration or termination of the Agreement.
10. CONTINGENCIES:
On August 29, 1998, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") entered into a Settlement Agreement
("Agreement") with Young Dental resolving all issues raised in the litigation
filed by the Adverse Parties in the Circuit Court for the City of St. Louis,
Missouri described in prior reports filed by the Company with the Securities and
Exchange Commission. The litigation has been dismissed with no material effect
on the Company's financial position or results of operations.
In September, 1998 the Internal Revenue Service ("IRS") recalculated the
federal income tax deficiencies related to the federal income tax returns of
Lorvic Holdings, Inc. ("Lorvic") for the years ended March 31, 1992 through 1995
based upon the United States Tax Court's ("Court") findings and opinion filed in
August, 1998. In accordance with the stock purchase agreement pursuant to which
the Company acquired Lorvic in May 1995, the previous stockholders of Lorvic
were responsible for the settlement of this matter to the extent of amounts held
in an escrow fund. The escrowed amounts were sufficient to satisfy these
deficiencies in full for all affected years; the deficiencies will have no
adverse effect on the Company's financial position or results of operations.
11. ACCOUNTING STANDARD NOT IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position at fair value. The adoption of SFAS 133 is not expected to have a
material effect on the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
NET SALES
Net sales increased $3.2 million, or 52.7%, to $9.3 million in 1998
from $6.1 million in 1997. The increase was the result primarily of the
inclusion of Panoramic sales and additionally of the sales growth from the base
business of prophy products.
GROSS PROFIT
Gross profit increased $1.2 million, or 32.6%, to $5.0 million in 1998
from $3.8 million in 1997. Gross profit benefited from the inclusion of
Panoramic and the increased prophy product sales. Gross margin decreased to
53.6% of net sales in 1998 from 61.8% in 1997. The Company's gross margin
decreased as a result of sales of Panoramic products, which carry lower gross
margins, and the increased costs incurred in the transfer and consolidation of
the majority of the manufacturing of the Denticator product line from California
to Missouri.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
SG&A expenses increased $776,000, or 42.8%, to $2.6 million in 1998
from $1.8 million in 1997. As a percent of net sales, SG&A expenses decreased to
27.9% in 1998 from 29.8% in 1997. SG&A expenses increased primarily due to the
inclusion of expenses of Panoramic.
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INCOME FROM OPERATIONS
Income from operations increased $447,000 or 23.0%, to $2.4 million in
1998 from $1.9 million in 1997.
INTEREST EXPENSE
Interest expense decreased $293,000 to $0 in 1998 from $293,000 in
1997. The decrease was due to the retirement of all of the Company's bank debt
with the net proceeds of the Company's initial public offering in November,
1997.
OTHER INCOME (EXPENSE)
Other income (expense) increased $42,000 to $57,000 in 1998 from
$15,000 in 1997 primarily due to interest income in the 1998 quarter.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $303,000 for 1998 to $941,000 from
$638,000 for 1997 as a result of a 47% increase in the income before income
taxes versus the year earlier period.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
NET SALES
Net sales increased $7.4 million, or 40.7%, to $25.6 million in 1998
from $18.2 million in 1997. The increase was primarily attributable to the
inclusion of sales of Panoramic (acquired on February 27, 1998), and the
remaining increase was the result of higher sales of prophy products.
GROSS PROFIT
Gross profit increased $3.3 million, or 30.9%, to $14.2 million in 1998
from $10.9 million in 1997. Gross profit benefited from the acquisition of
Panoramic and from the increased prophy product sales. Gross margin decreased to
55.5% of net sales in 1998 from 59.7% in 1997. The Company's gross margin
decreased as a result of the inclusion of sales of Panoramic products, which
carry lower gross margins.The increased costs incurred in the transfer and
consolidation of the majority of the manufacturing of the Denticator product
line from California to Missouri as well as the attainment of ISO certification
for Young Dental's manufacturing facilities in Missouri and Texas and CE Mark
approval for its prophy products contributed to the gross margin decrease.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
SG&A expenses increased $2.0 million, or 36.2%, to $7.5 million in 1998
from $5.5 million in 1997. As a percent of net sales, SG&A expenses decreased to
29.2% in 1998 from 30.1% in 1997. SG&A expenses increased primarily due to the
inclusion of expenses of Panoramic.
INCOME FROM OPERATIONS
Income from operations increased $1.3 million or 25.4%, to $6.7 million
in 1998 from $5.4 million in 1997.
INTEREST EXPENSE
Interest expense decreased $895,000 to $0 in 1998 from $895,000 in
1997. The decrease was due to the retirement of all of the Company's bank debt
with the net proceeds of the Company's initial public offering in November,
1997.
OTHER INCOME (EXPENSE)
Other income (expense) increased $245,000 to $262,000 in 1998 from
$17,000 in 1997 primarily due to interest income and gains on the disposal of
assets versus losses on disposal of assets in the year earlier period.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $1.0 million for 1998 to $2.7
million from $1.7 million for 1997 as a result of a 56% increase in the income
before income taxes versus the year earlier period and an effective tax rate of
38.4% versus 38.1% in the year earlier period.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
On February 27, 1998, the Company acquired the net assets of Panoramic in
Fort Wayne, Indiana. The Company paid approximately $13.9 million in cash plus
$1.0 million (62,500 shares) of its common stock. The purchase price was
financed principally through cash from the remaining net proceeds of the
Company's initial public offering.
Historically, the Company has financed its operations primarily through cash
flow from operating activities and, to a lesser extent, through borrowings under
its credit facilities. Net cash flow from operating activities was $4.5 million
for the nine months ended September 30, 1998 compared to $3.0 million for the
nine months ended September 30, 1997. Capital expenditures for property, plant
and equipment were $920,000 for the nine months ended September 30, 1998 in line
with the Company's estimates for the year. 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 to the Company's information systems.
On August 29, 1998, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") entered into a Settlement Agreement
("Agreement") with Young Dental resolving all issues raised in the litigation
filed by the Adverse Parties in the Circuit Court for the City of St. Louis,
Missouri described in prior reports filed by the Company with the Securities and
Exchange Commission. The litigation has been dismissed with no material effect
on the Company's financial position or results of operations.
In September, 1998 the Internal Revenue Service ("IRS") recalculated the
federal income tax deficiencies related to the federal income tax returns of
Lorvic Holdings, Inc. ("Lorvic") for the years ended March 31, 1992 through 1995
based upon the United States Tax Court's ("Court") findings and opinion filed in
August, 1998. In accordance with the stock purchase agreement pursuant to which
the Company acquired Lorvic in May 1995, the previous stockholders of Lorvic
were responsible for the settlement of this matter to the extent of amounts held
in an escrow fund. The escrowed amounts were sufficient to satisfy these
deficiencies in full for all affected years; the deficiencies will have no
adverse effect on the Company's financial position or results of operations.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position at fair value. The adoption of SFAS 133 is not expected to have a
material effect on the Company's financial position or results of operations.
YEAR 2000 ISSUE
Many computer systems are currently based on storing two digits to identify the
year of a transaction (for example, "98" for 1998), rather than a full four
digits, and are not programmed to consider the start of a new century.
Significant processing inaccuracies and even inoperability could result in the
year 2000 and thereafter. In addition, systems not typically regarded as
computer systems but used in manufacturing or administrative functions may
contain embedded technology so that these systems would be unable to interpret
the calendar year 2000 appropriately.
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<PAGE> 11
With the objective of minimizing the risk of Year 2000 issues, the Company set
up a program to identify the operating systems software, applications software
and hardware on its information technology ("IT") computer network; identify
the software and equipment of its non-IT systems; and address compliance of its
key business partners. The identification of the IT and non-IT systems is
complete and the assessment for compliance and any remediation of
non-compliance were and are being conducted simultaneously.
With respect to the IT systems, the mainframe operating system and the
accompanying business critical applications have been patched and letter
certified as Year 2000 compliant by the Company's hardware and software
vendors. The personal computers ("PC's"), workstations, servers and PC business
applications have been patched and tested per the vendors' instructions and are
Year 2000 compliant. Software assessed as not Year 2000 compliant was
developed for the Company as part of a customer data base system. The Company
is currently working with a vendor to remediate this non-compliance and
anticipates that reprogramming or replacement will result in Year 2000
compliance by the second quarter of 1999. With respect to the non-IT systems,
the Company has obtained written certification of Year 2000 compliance from its
various administrative and manufacturing equipment vendors.
In most cases, existing IT and non-IT software was already Year 2000 compliant
or was patched with upgraded versions supplied by the vendors. In a few
instances, software was replaced with more current, compliant systems. Due to
the nature of the Year 2000 problem, work in the IT and non-IT areas may
continue until the Year 2000 if the Company's vendors continue to upgrade their
systems with software patches to be installed and tested by the Company.
With respect to key business partners, the Company is in the process of
compiling a compliance list based on the receipt of surveys the Company sent to
its business partners. The Company is continuing to survey its partners and
anticipates completion of this process by the end of the second quarter of
1999.
There has not been a material adverse impact on the Company's operations or
financial condition as a result of IT and non-IT projects caused by the Year
2000 issue. The Company has annual maintenance contracts with most of its IT
and non-IT vendors, and external costs in the form of vendor software upgrades,
patches and testing programs were covered under these contracts. Current year
costs have been expensed as those costs have been incurred. The remaining
internal and external costs are not expected to materially exceed normal
operating expenses, and the Company has not deferred any significant capital
expenditures due to its Year 2000 efforts.
The Company has not had an independent review of its Year 2000 risk. The
majority of its IT and non-IT systems have already been certified in writing as
Year 2000 compliant. The remediation efforts relative to the customer data base
software remain on schedule. A reasonably possible worst case scenario would be
non-compliance of this software and ultimate replacement that would not have a
material adverse impact on the Company's operations or financial condition.
With respect to its key business partners, there can be no assurance of their
compliance by the end of 1999. A reasonably possible worst case scenario might
include these partners being non-compliant which could result in a material
disruption of the Company's operations.
The Company has not developed a formal contingency plan for non-compliance of
its customer data base software and of its business partners. The Company will
continue to closely monitor and assess the progress towards compliance in these
areas and will develop a contingency plan by the end of the second quarter of
1999 in the event any areas remain non-compliant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
11
<PAGE> 12
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27 Financial Data Schedule
(b) Reports on Form 8-K.
None
Signature
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YOUNG INNOVATIONS, INC.
November 13, 1998 /s/Michael W. Eggleston
- ----------------- ----------------------------
Date Michael W. Eggleston
Vice President, Treasurer and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
UNAUDITED FINANCIAL STATEMENTS AS OF SEPT. 30, 1998 AND FOR THE QUARTER AND NINE
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,533
<SECURITIES> 0
<RECEIVABLES> 4,551
<ALLOWANCES> 165
<INVENTORY> 3,318
<CURRENT-ASSETS> 12,969
<PP&E> 18,175
<DEPRECIATION> 6,529
<TOTAL-ASSETS> 53,650
<CURRENT-LIABILITIES> 5,687
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 46,395
<TOTAL-LIABILITY-AND-EQUITY> 53,650
<SALES> 25,625
<TOTAL-REVENUES> 25,625
<CGS> 11,400
<TOTAL-COSTS> 11,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 85
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,008
<INCOME-TAX> 2,695
<INCOME-CONTINUING> 4,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,313
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
</TABLE>
