UNITED STATES

SECURITIES 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, 2006

 

OR

 

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

 

For the transition period from _______to _______

 

 
|   |   |
|--------|--------|

Commission file number 000-23213

 

YOUNG INNOVATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Missouri        43-1718931
| (State or other jurisdiction of incorporation | (I.R.S. Employer |  
 
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 o 

 

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

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

 

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

 

Number of shares outstanding of the Registrant’s Common Stock at October 31, 2006:

8,969,314 shares of Common Stock, par value $.01 per share

 

 

1

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except per share data)**

 

** **

 

 

**September 30,**

**December 31,**

 

 

** **

**2006** 

(unaudited)

**2005** 

 

 

 

**Assets**

 

Current assets:

 

 

Cash and cash equivalents

$          1,029

$  10,227

Trade accounts receivable, net of allowance for doubtful accounts of  $476

and $435 in 2006 and 2005, respectively

 

13,543

 

9,538

Inventories

14,287

10,796

Other current assets

4,088      

3,796

Total current assets

32,947

34,357

Property, plant and equipment, net

27,860

21,567

Goodwill, net

77,913

52,690

Other intangible assets, net

11,318

7,074

Other assets

3,636

2,401

Total assets

$     153,674

$ 118,089
 

 

**Liabilities and Stockholders’ Equity**

 

 

Current liabilities:                                                                                          

 

 

Current maturities of long-term debt

Accounts payable and accrued liabilities

$      22,060

9,342  

$         --

6,171

Total current assets

Deferred income taxes

31,402

8,354

6,171

8,354

Stockholders’ equity:

 

Common stock, voting, $.01 par value per share, 25,000 shares authorized,

8,969 and 8,917 shares issued and outstanding in 2006 and 2005, respectively

 

90

 

90

Additional paid-in capital

28,980

28,922

Retained earnings

107,757

97,767

Common stock in treasury, at cost, 1,232 and 1,292 shares in 2006 and 

2005, respectively

 

(22,857)

 

(23,215)

Accumulated other comprehensive loss

(52)

--  

Total stockholders' equity

113,918

103,564

Total liabilities and stockholders' equity

$       153,674

$ 118,089
 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

2

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per share data)**

**(unaudited)**

 

 

 

 

 

 

 

 

**Three Months Ended September 30,**

 

**Nine Months Ended September 30,******

 

 

 

 

 

 

**2006**

** **

**2005**

 

**2006******

** **

**2005******

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

$   23,811

 

$   21,616 

 

$65,960

 

$  63,156

 

Cost of goods sold

 

 

 

11,045

 

9,811

 

30,130

 

28,929

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

12,766

 

11,805

 

35,830

 

34,227

 

Selling, general and administrative expenses

6,578

 

5,657

 

18,524

 

16,950

 

 

 

 

 

 

Income from operations

 

 

 

6,188

 

6,148

 

17,306

 

17,277

 

Interest expense (income), net

 

 

 

71

 

(58)

 

(232)

 

(177)

 

Other expense (income), net

 

 

 

--

 

(38)

 

(80)

 

(174)

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

6,117

 

6,244

 

17,618

 

17,628

 

Provision for income taxes

 

 

2,169

 

2,076

 

6,536

 

6,430

 

 

 

 

 

 

 

Net income

 

 

 

 

$   3,948

 

$   4,168

 

$   11,082

 

$     11,198

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

$0.44

 

$0.47

 

$1.24

 

$1.25

Diluted earnings per share

 

 

 

$0.43

 

$0.45

 

$1.21

 

$1.20

Basic weighted average shares outstanding

 

 

8,963

 

8,902 

 

8,941

 

8,974

Diluted weighted average shares outstanding

 

 

9,183

 

9,255

 

9,178

 

9,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

3

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(unaudited)**

** **

** **

 

 

**Nine Months Ended**

** **

** **

** **

**September 30,**

 

** **

** **

** **

**2006******

** **

**2005******

** **

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$11,082

 

$11,198

 

 

 

 

 

Adjustments to reconcile net income to net cash flows from 

 

 

 

 

 

operating activities --

 

 

 

 

 

Depreciation and amortization

 

2,642

 

2,298

 

Changes in assets and liabilities, net of acquisitions --

 

 

 

 

 

Trade accounts receivable

 

(2,399)

 

582

 

Inventories

 

(516)

 

61

 

Other current assets 

 

(244)

 

(179)

 

Other assets

 

(658)

 

(774)

 

Accounts payable and accrued liabilities

 

993

 

1,500

 

Other

 

--

 

238

 

 

 

 

 

Total adjustments

 

(182)

 

3,726

 

 

 

 

 

Net cash flows from operating activities

 

10,900

 

14,924

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(35,622)

 

--

 

Purchases of property, plant and equipment and intangibles

 

(5,138)

 

(2,646)

 

Purchases of private equity investments

 

(450)

 

--

 

Proceeds from sale of equity investment

 

--

 

200

 

 

 

 

 

Net cash flows from investing activities

 

(41,210)

 

(2,446)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings of short-term debt

 

22,060

 

--

 

Proceeds from stock options exercised

 

1,083

 

188

 

Payment of cash dividend

 

(1,706)

 

(1,102)

 

Purchase of treasury stock, net

 

(1,093)

 

(6,011)

 

Tax benefit from stock options exercised

 

 

768

 

--

 

 

 

 

 

Net cash flows from financing activities

 

21,112

 

(6,925)

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents 

 

(9,198)

 

5,553

 

Cash and cash equivalents, beginning of period

 

10,227

 

2,552

 

 

 

 

 

Cash and cash equivalents, end of period

 

$1,029

 

$8,105

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

**YOUNG INNOVATIONS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2006**

**(In thousands, except per share data)**

 

**GENERAL:**

 

This report includes information in a condensed format and should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.  The results of operations for the three months ended September 30, 2006 are not necessarily indicative of the results expected for the full year or any other interim period.  

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to the rules of the Securities and Exchange Commission.  In our opinion, the statements include all adjustments necessary (which are of a normal recurring nature) for the fair presentation of the results of the interim periods presented.

 

The balance sheet information at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

**1.**

**ORGANIZATION:**

 

Young Innovations, Inc. and its subsidiaries (“the Company”) develop, manufacture, and market supplies and equipment used to facilitate the practice of dentistry and to promote oral health.  The Company’s product offerings include disposable and metal prophylaxis (“prophy”) angles, prophy cups and brushes, prophy pastes, microapplicators, panoramic X-ray machines, dental handpieces (drills) and related components, home care kits, orthodontic and children’s toothbrushes, flavored examination gloves, infection control products, ultrasonic cleaning systems, ultrasonic scaling and endodontic systems, and obturation systems used in endodontic surgery (root canal procedures).   The Company’s manufacturing and distribution facilities are located in Missouri, California, Indiana, Tennessee, Texas, Canada, Wisconsin and Ireland.  Export sales were less than 10% of total net sales for2005 and 2004.  

 

**2.**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

**Principles of Consolidation**

 

The condensed consolidated financial statements include the accounts of Young Innovations, Inc. and its direct and indirect wholly owned subsidiaries.  All significant inter-company accounts and transactions are eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

**Revenue Recognition**

 

 

5

 

 

 

Revenue from the sale of products is recorded at the time title passes, generally when the products are shipped as the Company’s shipping terms are customarily FOB shipping point.  The Company employs a variety of promotional activities, including, but not limited to, rebate programs, free goods offers, off-invoice pricing discounts, and free shipping promotions.  The Company’s income statement classification and expense recognition and measurement for these promotional activities is in accordance with the provisions of Emerging Issues Task Force (EITF) 01-9:  *Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).*  The Company generally warrants its products against defects and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The policy with respect tosales returns generally provides that a customer may not return inventory except at the Company’s option with the exception of X-ray machines, which have a 90-day return policy.  The Company owns X-ray equipment rented on a month-to-month basis to customers.  Revenue from the rental of equipment to others is recognized on a month-to-month basis as the revenue is earned.  A liability for the removal costs of the rented X-ray machines is capitalized and amortized over four years.  A liability for the removal costs of the purchased X-ray machines expected to be returned to the Company is included in accounts payable and accrued liabilities at September 30, 2006 and December 31, 2005.  

 

The Company offers a financing option to its customers purchasing X-ray machines through notes payable to the Company.  Prior to 2006, the Company also offered financing through third parties.  The equipment purchased is used to secure the notes.  These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes is accrued as earned and recorded as interest income.  

 

**Interest Expense (Income), net**

 

Interest expense (income) includes interest paid related to borrowings on the Company’s credit facility, as well as offsetting interest income earned on various investments.  Interest income totaled $183 and $79 for the three months ended September 30, 2006 and 2005, respectively.  

 

**Other Expense (Income), net**

 

Other expense (income) includes the Company’s portion of losses from its limited partnership interest in a private equity investment, rental income from leased space, sale of scrap, and other miscellaneous income and expense items, all of which are not directly related to the Company’s primary business.  

 

**Supplemental Cash Flow Information**

 

Cash flows from operating activities include $4,897 and $4,479 for the payment of federal and state income taxes and $57 and $55 for the payment of interest or loan charges for the nine months ended September 30, 2006 and 2005, respectively.    

 

**Foreign Currency Translation**

 

The translation of financial statements into U.S dollars has been performed in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, *Foreign Currency Translation*.  The local currency for all entities included in the condensed consolidated financial statements has been designated as the functional currency.  Non-U.S. dollar denominated assets and liabilities have been translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date.  Revenues and expenses have been translated at the weighted average of exchange rates in effect during the year.  Translation adjustments are recorded as a separate component of shareholders’ equity.  Net currency transaction losses (gains) included in other expense, net were $6 and ($5) for the three months ended September 30, 2006 and 2005, respectively.  

 

**3.**

**ACQUISITIONS**

 

On July 31, 2006, the Company entered into an agreement, through its wholly-owned subsidiaries Young Microbrush, LLC and Young Microbrush Ireland Ltd., with Microbrush Inc., a Wisconsin corporation, and Microbrush International Ltd., a Republic of Ireland private limited company, (collectively, “Microbrush”).  Under the agreement, the Company acquired substantially all of Microbrush’s assets related to the manufacture, 

 

6

 

 

development and distribution of dental products. The acquisition of U.S. purchased assets was completed on July 31, 2006.  The acquisition of Irish purchased assets was completed on August 18, 2006.  The Company paid approximately $32,777 in cash, including direct transaction costs, in connection with the acquisition.  An additional $3,000 in purchase price may be paid by the Company (“Earnout Payments”) if certain performance targets are achieved over the next two years.  Of the purchase price, $3,000 was paid into an escrow account pending settlement of any indemnification claims the Company may have pursuant to the transaction documents.  Amounts paid or received by the Company in future periods, if any, in connection with escrow account settlements and Earnout Payments discussed above will be accounted for as an adjustment to purchase price when the related contingencies are resolved.  Theacquisition further establishes the Company as a leader in the category of consumable dental products, enabling the Company to expand its product offerings in this area.

 

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

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.  The Company is in the process of finalizing the valuations related to certain assets acquired and liabilities assumed and upon doing so will adjust the preliminary purchase price allocation if necessary.  

 

Purchase Price

$

32,777

Less:

Current assets

3,345

Property, plant and equipment

2,853

Identifiable intangible assets, net

4,325

Plus:

Current liabilities

(227)

 
Accrued liabilities

(1,256)

Goodwill

$

23,737

 
 

 

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

 

 Amortizable intangible assets:

Patents (10-12 years)

$  

854

 
Non-compete agreement (5 years)

111

 
Customer relationships (8 years)

494

 
 
1,459

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

 

Trademark/Trade Name

2,866

 

$  

4,325

 

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

 

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

 

7

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

Net sales

$24,833

 

$24,477

 

$73,341

 

$72,150

 

 

 

 

 

 

 

 

Operating income

$6,306

 

$6,797

 

$19,321

 

$19,151

 

 

 

 

 

 

 

 

Net income

$3,980

 

$4,380

 

$11,879

 

$11,759

 

 

 

 

 

 

 

 

Basic earnings per share

$0.44

 

$0.49

 

$1.33

 

$1.31

Diluted earnings per share

$0.43

 

$0.47

 

$1.29

 

$1.26

Basic weighted average shares outstanding

8,963

 

8,902

 

8,941

 

8,974

Diluted weighted average shares outstanding

9,183

 

9,255

 

9,178

 

9,332

 

 

 

 

 

 

 

 

 

**4.**

**SHARE-BASED COMPENSATION:**

 

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

 

Any employee of the Company or its affiliates, any consultant whom the Compensation Committee determines is significantly responsible for the Company’s success and future growth and profitability, and any member of the Board of Directors, may be eligible to receive awards under the 2006 Plan.  The purpose of the 2006 Plan is to: (a) attract and retain highly competent persons as employees, directors, and consultants of the Company; (b) provide additional incentives to such employees, directors, and consultants by aligning their interests with those of the Company’s shareholders; and (c) promote the success of the business of the Company.  The Compensation Committee of the Board of Directors establishes vesting schedules for each option issued under the Plan. Outstanding options generally vested over a period up to four years.  All outstanding options expire 10 years from the grant date.

 

In October 2001, the Company granted 120,000 shares of non-vested equity shares to certain executive officers of the Company.  No monetary consideration was paid by the officers who received the non-vested equity shares.  These shares vest 20% each year for five years starting in October 2002.  In May 2006, the Company granted 7,500 shares of non-vested equity shares.  No monetary consideration was paid by the employees who received the non-vested equity shares.  These shares vest 20% each year for five years starting in May 2007.  Under the 1997 and 2006 Plan, non-vested equity share units and restricted stock may be awarded or sold to participants under terms and conditions established by the Compensation Committee.  For non-vested equity shares, compensation expense is based upon the grant date market price and is recorded over the vesting period.  

 

Accounting for Share-Based Compensation

 

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

 

8

 

 

 

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

 

Had the Company determined employee stock based compensation cost based on a fair value model at the grant date for its stock options under SFAS 123, the Company's net earnings per share for the three months and nine months ended September 30, 2005 would have been adjusted to the pro forma amounts as follows ($ in thousands, except per share amounts): 

** **

**Three Months Ended**

**September 30, 2005******

**Nine Months Ended**

**September 30, 2005******

 

 

Net income, as reported 

$  4,168

$ 11,198

Deduct:  Total stock-based compensation expense 

determined under fair-value-based method, net of tax

(59)

(3,786)

Pro forma net income

$  4,109

$  7,412

 

Earnings per share:

 

 

Basic – as reported  

$    0.47

$   1.25

Basic  – pro forma

$    0.46

$   0.83

Diluted – as reported

$    0.45

$   1.20

Diluted - pro forma

$    0.44

$   0.79

Amount of stock-based compensation included in determination of net income:

 

 

Restricted stock compensation

$      56

$    160

 

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

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

2005

2003

2001

Dividend yield (1)

0.49%

0.37%

0.0%

Expected volatility (2)

38.8%

32.3%

43.7%

Risk-free interest rate (3)

4.5%

4.5%

4.8%

Expected life (4)

8.0

8.0

8.0

 

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

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

(3)  Represents the Treasury bill rate.

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

Stock Option Activity  

The following table summarizes stock option activity for the nine months ended September 30, 2006: 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

Options

Shares

(000)

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term

AggregateIntrinsic Value

($000)

 

 

Outstanding at December 31, 2005

928

$22.24

 

 

 

 

Granted

--

--

 

 

 

 

Exercised

103

$10.47

 

 

 

 

Forfeited or expired

--

--

 

 

 

 

Outstanding at September 30, 2006

825

$23.72

6.27 yrs

$10,100

 

 

Exercisable at September 30, 2006

825

$23.72

6.27 yrs

$10,100

 

 

 

 

 

 

 

 

        

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

 

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

 

The total aggregate intrinsic value of options exercised during the three months ended September 30, 2006 and 2005 was $396 and $202, respectively, and $2,463 and $467 for the nine months ended September 30, 2006 and 2005, respectively.  Payments received upon the exercise of stock options for the three months ended September, 2006 and 2005 totaled $237 and $68, respectively, and $1,083 and $188 for the nine months ended September 30, 2006 and 2005, respectively.  The related tax benefit realized related to these exercises was $52 and $67 for the three months ended September 30, 2006 and 2005, respectively, and $768 and $110 for the nine months ended September 30, 2006 and 2005, respectively.  The Company issues shares from treasury upon share option exercises.

Non-Vested Equity Shares Activity

Until the restricted shares vest they are restricted from sale, transfer or assignment in accordance with the terms of the agreements under which they were issued. The Company calculates compensation cost for restricted stock grants by using the fair market value of its common stock at the date of grant and the number of shares issued. This compensation cost is amortized over the applicable vesting period. The following table details the status and changes in non-vested equity shares for the nine months ended September 30, 2006: 

 

 

 

Shares

(000)

Weighted-Average

Grant Date

Fair Value

Non-vested equity shares, December 31, 2005

24

$14.02

Granted

8

$33.77

Vested

--

--

Forfeited

--

--

Non-vested equity shares, September 30, 2006

32

$18.72

 

 

 

During the nine months ended September 30, 2006, the Company recorded pretax compensation expense of $272 related to the Company’s restricted stock.  As of September 30, 2006, there was approximately $243 of unrecognized compensation cost related to non-vested equity shares, which will be amortized over the weighted-average remaining requisite service period of 4.4 years.  The Company issues share grants from treasury.

 

**5.**

**INVESTMENTS:**

 

On February 21 2006, the Company invested $450 for a limited partnership interest in a private equity investment fund and has an unfunded capital commitment of up to $2,550.  The investment is accounted for under the equity method of accounting and included in other assets on the Condensed Consolidated Balance Sheet.  Equity income 

 

10

 

 

(loss) is recorded using a three-month lag.  The Company’s loss attributed to this private equity investment was included in other income, net and totaled $22 for the three months ended September 30, 2006. 

 

**6.**

**NOTES RECEIVABLE:**

 

The Company offers a financing option to its customers purchasing X-ray machines through notes payable to the Company.  Prior to 2006, the Company also offered financing through third parties.  The equipment purchased is used to secure the notes.  Total revenue from sales of equipment financed by the Company was $1,162 and $1,116 during the three months ended September 30, 2006 and September 30, 2005, respectively.  These transactions are recorded as a sale upon the transfer of title to the purchaser, which generally occurs at the time of shipment, at an amount equal to the sales price of non-financed sales.  Interest on these notes is accrued as earned and recorded as interest income.  

 

Notes receivable consist of the following:

 

**September 30,**

**December 31,**

 

**2006******

**2005******

 

 

Notes receivable, short-term

$       2,014

$       2,160

Notes receivable, long-term

3,021

2,328

 

 

 

Total notes receivable

$      5,035

$      4,488
 

 

Notes receivable are included in other current assets and other assets in the accompanying condensed consolidated balance sheets.  

 

**7.**

**INVENTORIES:**

 

Inventories consist of the following: 

 

**September 30,**

**December 31,**

 

**2006******

**2005******

 

 

Finished products

$     7,143

$      6,742

Work in process

2,271

1,808

Raw materials and supplies

4,873

2,246

Total inventories

$    14,287

$     10,796

 

 

**8.**

**PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant and equipment consist of the following:

 

**September 30,**

**December 31,**

 

**2006******

**2005******

 

 

Land

$    3,152

$    1,611

Buildings and improvements

13,162

11,479

Machinery and equipment

22,165

19,256

Equipment rented to others

7,531

6,158

Construction in progress

1,593

991

 

$  47,603

$  39,495

 

 

 

Less:  Accumulated depreciation

(19,743)

(17,928)

Total property, plant and equipment, net

$   27,860

$  21,567

 

 

 

11

 

 

 

 

**9.**

**GOODWILL AND INTANGIBLE ASSETS:**

 

Goodwill activity is as follows:

 

Goodwill at December 31, 2005

$ 52,690 

Acquisition of D&N

1,692

Adjustments to allocation of purchase price

    (206)

Acquisition of Microbrush

23,737

Goodwill at September 30, 2006

$ 77,913

 

 

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

 

During the first quarter of 2006, YI Ventures LLC acquired substantially all of the assets and assumed a portion of the liabilities of D&N Microproducts, Inc., a contract manufacturer of the Company’s diagnostic product line.  The Company paid approximately $2,800 in cash, including transaction costs.  Upon initial allocation of the purchase price at the time of the acquisition, goodwill was determined to be $1,582 and $269 of supplier relationships was recognized.  During the second and third quarters of 2006, goodwill increased $110 due to adjustments to the purchase price allocation.  

 

On July 31, 2006, the Company acquired Microbrush (see footnote 3).  The acquisition resulted in preliminary goodwill of approximately $23,737 and $4,325 of intangible assets.

 

Other intangible assets consist of the following:

 
** **

**As of September 30, 2006******

 
** **

**Gross Carrying Amount******

**Accumulated Amortization******

**Net Carrying Amount******

Amortized intangible assets

 

 

 

License agreements

$1,200

$170

$1,030

Core technology

591

85

506

Patents

2,197

419

1,778

Product formulas

430

57

373

Customer & supplier relationships                             

1,233

240

993

Noncompete agreements

498

281

217

Total

$6,149

$1,252

$4,897

 

 

 

 

Unamortized intangible assets

 

 

 

Trademarks

$6,421

 

$6,421

Total intangible assets

$12,570

$1,252

$11,318

 

 

 

 

12

 

 

 

 

 
** **

**As of December 31, 2005******

 
** **

**Gross Carrying Amount******

**Accumulated Amortization******

**Net Carrying Amount******

Amortized intangible assets

 

 

 

License agreements

$     1,200

$          125

$        1,075

Core technology

591

62

529

Patents

1,343

339

1,004

Product formulas

430

48

382

Customer & supplier relationships                                

469

170

299

Non-compete agreements

391

161

230

Total

$    4,424

$         905

$       3,519

 

 

 

 

Unamortized intangible assets

 

 

 

Trademarks

$    3,555

 

$      3,555

Total intangible assets

$    7,979

$         905

$      7,074

 

The costs of other intangible assets with finite lives are amortized over their expected useful lives using the straight-line method.  The amortization lives are as follows: 10 to 20 years for patents, license agreements and core technology; 40 years for product formulations; and 5 to 8 years for supplier and customer relationships.  Non-compete agreements are amortized over the length of the signed agreement.  The weighted average life for amortizable intangible assets is 16 years.  Aggregate amortization expense for the three months ended September 30, 2006 and 2005 was $104 and $83, respectively.  Estimated amortization expense for each of the next five years is as follows:

 

For the year ending 12/31/06

$  528

 
For the year ending 12/31/07

533

 
For the year ending 12/31/08

533

 
For the year ending 12/31/09

533

For the year ending 12/31/10

474

 

**10.**

**CREDIT ARRANGEMENTS AND NOTES PAYABLE:**

 

The Company has a credit arrangement that provides for an unsecured revolving credit facility with an aggregate commitment of $50,000.  Borrowings under the arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25% or Prime to Prime +.5% depending on the Company’s level of indebtedness.  Commitment fees for this arrangement range from .15% to .20% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of September 30, 2006 and December 31, 2005, the Company was in compliance with all of these covenants.  

 

Long-term debt was as follows:

 

 

**September 30,**

 

**December 31,**

 

**2006******

**2005******

Revolving credit facility due 2007 with a weighted-average interest 

 

 

rate of 6.57% 

$    22,060

$            --

 

 

 

Less - current portion

22,060

--

$            --

$            --
 

 

 

In certain circumstances, the Company provides recourse for loans for equipment purchases by customers.  Certain banks require the Company to provide recourse to finance equipment for new dentists and other customers with 

 

13

 

 

credit histories that are not consistent with the banks' lending criteria.   In the event that a bank requires recourse on a given loan, the Company would assume the bank’s security interest in the equipment securing the loan.  As of September 30, 2006 and December 31, 2005, approximately $46 and $98, respectively, of the equipment financed with various lenders was subject to such recourse.  Recourse on a given loan is generally eliminated by the bank after one year, provided the bank has received timely payments on that loan.  Based on the Company's past experience with respect to these arrangements, it is the opinion of management that the fair value of the recourse provided is minimal and not material to the results of operations or financial position of the Company.

 

**11.**

**EARNINGS PER SHARE:**

 

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

** **

**Three Months Ended**

**September 30,**

**Nine  Months Ended**

**September 30**

** **

**2006******

**2005******

**2006******

**2005******

 

(unaudited)

(unaudited)

 

 

 

 

 

Net income 

$3,948

$4,168

$11,082

$11,198

Weighted average shares outstanding for basic earnings per share

 

 

 

 

8,963

8,902

8,941

8,974

Dilutive effect of stock options and restricted stock

220

353

237

358

Weighted average shares outstanding for diluted earnings per share

9,183

9,255

9,178

9,332

 

 

 

 

Basic earnings per share

$0.44

$0.47

$1.24

$1.25

Diluted earnings per share

$0.43

$0.45

$1.21

$1.20

 

**12.**

**COMMITMENTS AND CONTINGENCIES:**

 

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

 

The Company generally warrants its products against defects and its most generous policy provides a two-year parts and labor warranty on X-ray machines.  The accrual for warranty costs was $277 and $285 at September 30, 2006 and December 31, 2005, respectively.  

 

**13.**

**RELATED-PARTY TRANSACTIONS:**

 

During the three month period ended September 30, 2006, the Company paid consulting fees of $13 to a corporation which is wholly owned by George E. Richmond, the Company’s Chairman.  

 

**14.**

**SUBSEQUENT EVENTS:**

 

On October 24, 2006, the Board of Directors declared a quarterly dividend of $0.04 per share, payable December 15, 2006 to shareholders of record on November 15, 2006.

 

 

 

**15.**

**NEWLY ISSUED ACCOUNTING STANDARDS:**

 

 

14

 

 

 

In June 2006, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is currently evaluating the potential impact of this interpretation.

 

15

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

In December 2001, the SEC requested that all registrants include in their MD&A their most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions using different assumptions.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company believes that the following accounting policies fit this definition:

 

Allowance for doubtful accounts – Accounts receivable balances are subject to credit risk.  Management has reserved for expected credit losses, sales returns and allowances, and discounts based upon past experience as well as knowledge of current customer information.  The Company believes that the reserves are adequate.  It is possible, however, that the accuracy of the Company’s estimation process could be impacted by unforeseen circumstances.  Management continuously reviews the reserve balance and refines the estimates to reflect any changes in circumstances.

 

Inventory – The Company values inventory at the lower of cost or market on a first-in, first-out basis.  Inventory values are based upon standard costs which approximate historical costs.  Management regularly reviews inventory quantities on hand and records a provision for excess or obsolete inventory based primarily on estimated product demand and other knowledge related to the inventory.  If demand for the Company’s products is significantly different than management’s expectations, the reserve could be materially impacted.  Changes to the reserves are included in cost of goods sold.  

 

Goodwill and other intangible assets – The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142 effective January 1, 2002.  Goodwill and other long-lived assets with indefinite useful lives are reviewed by management for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.  If indicators of impairment are present, the determination of the amount of impairment would be based on management’s judgment as to the future operating cash flows to be generated from the assets.  SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

Contingencies - The Company and its subsidiaries from time to time are subject to various contingencies, including legal proceedings arising in the normal course of business. Management, with the assistance of external legal counsel, performs an analysis of current litigation and will record liabilities if a loss is probable and can be reasonably estimated. 

 

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

 

Stock Options - As of January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which requires recognition of expense related to the fair value of stock-based compensation awards. The Company has 

 

16

 

 

elected the modified prospective transition method as permitted by SFAS No. 123R; accordingly, results from prior periods have not been restated.  Under this transition method, compensation cost must be recognized in the financial statements for all awards granted after the date of adoption as well as for existing stock awards for which the requisite service has not been rendered as of the date of adoption.   Due to the fact that all of the Company’s options were issued prior to the date SFAS No. 123R was adopted and were vested as of January 1, 2006, the adoption of SFAS No. 123R did not have a material impact on the Company’s financial statements.

 

RESULTS OF OPERATIONS (In thousands, except per share data)

 

**Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005**

 

***Net Sales***

Net sales increased $2,195 to $23,811 in the third quarter of 2006 from $21,616 in the third quarter of 2005.  The acquisition of Microbrush contributed $1,996 in net sales in the third quarter.  The strong sales of Microbrush products helped offset ongoing weakness in sales of diagnostic equipment and a modest contribution of sales from the reintroduction of certain fluoride products.

 

***Gross Profit***

Gross profit increased $961 to $12,766 in the third quarter of 2006 compared to $11,805 in the third quarter of 2005 primarily due to increased sales volume as a result of the Microbrush acquisition.  Gross margin decreased to 53.6% of net sales in the third quarter of 2006 from 54.6% in the third quarter of 2005.  The one-time impact of Microbrush purchase accounting contributed to the decrease in gross margin.  Gross margin continues to have volatility related to product mix variances offset by the positive impact of operating efficiencies and higher sales volumes.

 

***Selling, General, and Administrative Expenses***

SG&A expenses increased $921 or 16.3% to $6,578 in the third quarter of 2006 from $5,657 in the third quarter of 2005.  SG&A costs increased approximately $640 as a result of the acquisitions of Microbrush and D&N Microproducts, Inc.  The remaining SG&A increase was primarily due to personnel to support the growth of the business.  As a percent of net sales, SG&A expenses were relatively unchanged at 27.6% in 2006 compared to 26.2% in 2005. 

 

***Income from Operations***

Income from operations was relatively unchanged at $6,188 in the third quarter of 2006 compared to $6,148 in the third quarter of 2005.  The change was a result of the items explained above.  

 

***Interest Expense (Income), net*** 

Interest expense (income), net increased $129 to $71 in the third quarter of 2006 from ($58) in the third quarter of 2005.  The increase was primarily attributable to additional interest expense resulting from borrowings on the Company's credit facility.

 

***Other Expense (Income), net*** 

Other expense (income), net increased $38 to $0 in the third quarter of 2006 from ($38) in the third quarter of 2005.  This increase was due to lower levels of miscellaneous income.     

 

***Provision for Income Taxes***

Provision for income taxes increased $93 for the third quarter of 2006 to $2,169 from $2,076 in the third quarter of 2005 as a result of a higher tax rate.  The effective tax rate in the third quarter of 2006 was 35.5% compared to 33.2% in the third quarter of 2005. The effective tax rate in the third quarter of 2005 included  the recognition of tax benefits resulting from a non-recurring capital loss. 

 

**Nine Months Ended September 30, 2006 Compared to Six Months Ended September 30, 2005**

 

***Net Sales***

 

17

 

 

 

Net sales increased $2,804 or 4.4% to $65,960 in the first nine months of 2006 from $63,156 for the first nine months of 2005.  Sales were negatively affected by the suspension of the manufacture and sale of certain chemical products, which represented approximately $1,800 of sales in 2005.  The Company had sales of approximately $100 upon reintroduction of these certain fluoride products in 2006.  The acquisition of Microbrush contributed $1,996 in net sales which helped offset ongoing weakness in sales of diagnostic equipment.

 

***Gross Profit***

Gross profit increased $1,603 or 4.7%, to $35,830 for the first nine months of 2006 from $34,227 for the first nine months of 2005. The additional gross profit was primarily a result of the increased net sales resulting from the Microbrush acquisition and production efficiencies.  Gross margin was unchanged at 54.3% in the first nine months of 2006 and 54.2% of net sales for the first nine months of 2005.  The acquisition of Microbrush decreased gross margins but was offset by increased operating efficiencies associated with the consolidation of our Colorado facility to Earth City, Missouri as well as increased sales volume. 

 

***Selling, General, and Administrative Expenses***

SG&A expenses increased $1,574 or 9.3% to $18,524 for the first nine months of 2006 from $16,950 for the first nine months of 2005.  SG&A costs increased approximately $1,050 as a result of the acquisitions of Microbrush and D&N Microproducts, Inc.  The remaining SG&A increase was primarily due to personnel to support the growth of the business.  As a percent of net sales, SG&A expenses increased to 28.1% in 2006 from 26.8% in 2005 as a result of the factors explained above.  

 

***Income from Operations***

Income from operations was relatively unchanged at $17,306 for the first nine months of 2006 compared to $17,277 for the first nine months of 2005.

 

***Interest Expense (income), net*** 

Interest expense (income), net increased $55 to ($232) for the first nine months of 2006 from ($177) in the first nine months of 2005 due to a higher cash balance throughout the first nine months of 2006.

 

***Other Expense (income), net*** 

Other expense (income), net decreased $94 to ($80) for the first nine months of 2006 from ($174) in the first nine months of 2005.  This increase was due to lower levels of miscellaneous income.      

 

***Provision for Income Taxes***

Provision for income taxes increased $106 for the first nine months of 2006 to $6,536 from $6,430 for the first nine months of 2005 as a result of higher pre-tax income and a slight increase in the effective tax rate.  The effective tax rate in 2006 was 37.1% compared to 36.5% in 2005.  The lower effective tax rate in 2005 was primarily attributable to the recognition of tax benefits resulting from a non-recurring capital loss.

 

**Liquidity and Capital Resources**

 

Historically, the Company has financed its operations primarily through cash flow from operating activities and, to a lesser extent, through borrowings under its credit facility.  Net cash flow from operating activities was $10,900 and $14,936 for the first nine months of 2006 and 2005, respectively.  Capital expenditures for property, plant and equipment were $5,138 and $2,646 for the nine months of 2006 and 2005, respectively.  Significant capital expenditures included land, facility improvements, panoramic X-ray machines and new equipment purchases.  Consistent with the Company’s historical capital expenditures, future capital expenditures are expected to include facility development and improvements, panoramic X-ray machines for the Company’s rental program, production machinery and information systems.

 

During the first quarter of 2006, YI Ventures LLC acquired substantially all of the assets and assumed a portion of the liabilities of D&N Microproducts, Inc., a contract manufacturer of the Company’s diagnostic product line.  The Company paid approximately $2,800 in cash.  A majority of the sales from this acquisition are intercompany and therefore will not have a material impact on revenue growth.

 

 

18

 

 

 

On July 31, 2006, the Company acquired substantially all of the assets of Microbrush, Inc. and Microbrush International, Ltd. for approximately $32 million in cash. The purchase price was principally financed with borrowings on the Company's credit facility and cash generated from operations.

 

The Company maintains a credit agreement with a borrowing capacity of $50,000 which currently expires in September 2007. Borrowings under the agreement bear interest at rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5% depending on the Company’s level of indebtedness.  Commitment fees for this agreement range from .15% to .20% of the unused balance.  The agreement is unsecured and contains various financial and other covenants.  As of September 30, 2006 and December 31, 2005, the Company was in compliance with all of these covenants.  As of September 30, 2006, the Company had $22.1 million in outstanding borrowings under this agreement and $27.9 million available for borrowing. Management believes through its operating cash flows as well as borrowing capabilities, the Company has adequate liquidity and capital resources to meet its needs on a short and long-term basis.

 

**Forward-Looking Statements**

 

Investors are cautioned that this report as well as other reports and oral statements by Company officials may contain certain forward-looking statements as defined in the Private Securities Litigation and Reform Act of 1995. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions and which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” or similar expressions. These statements are not guaranties of future performance and the Company makes no commitment to update or disclose any revisions to forward-looking statements, or any facts, events or circumstances after the date hereof that may bear upon forward-looking statements. Because such statements involve risks and uncertainties, actual actions and strategies and the timing andexpected results thereof may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in the Company's Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission. 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign exchange rates.  From time to time, the Company finances acquisitions, capital expenditures and its working capital needs with borrowings under a revolving credit facility.  Due to the variable interest rate feature on the debt, the Company is exposed to interest rate risk.  A theoretical 100 basis point increase in interest rates would have resulted in approximately $39 and $12 of additional interest expense in the nine month periods ended September 30, 2006 and 2005, respectively.  Alternatively, a 100 basis point decrease in interest rates would have reduced interest expense by approximately $39 and $12 in the nine month periods ended September 30, 2006 and 2005, respectively.  

 

Sales of the Company’s products in a given foreign country can be affected by fluctuations in the exchange rate.  However, the Company sells less than 10% of its products outside of the United States.  Of these foreign sales in 2006, approximately 60% were denominated in US dollars with the remaining amount denominated in Canadian and Euro dollars.  The Company does not feel that foreign currency movements have a material impact on its financial statements.

 

The Company does not use derivatives to manage its interest rate or foreign exchange rate risks. 

 

Item 4.

Controls and Procedures.

 

Our Chief Executive Officer, President, and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer, President, and Chief Financial Officer, to allow timely decisions regarding required disclosure and that the information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Except as discussed below, there have been no changes in our internal controls over financial reporting that occurred during the quarterly period ended September 30, 2006 that have materially affected, 

 

19

 

 

or that are reasonably likely to materially affect our internal control over financial reporting.  On July 31, 2006, the Company entered into an agreement with Microbrush Inc., a Wisconsin corporation, and Microbrush International Ltd., a Republic of Ireland private limited company, (collectively, “Microbrush”).  Under the agreement, the Company acquired substantially all of Microbrush’s assets related to the manufacture, development and distribution of dental products. The acquisition of U.S. purchased assets was completed on July 31, 2006.  The acquisition of Irish purchased assets was completed on August 18, 2006.   The Company paid $32,777 in cash to acquire Microbrush.  The net sales, pretax income and net income of Microbrush for the year-ended December 31, 2005 was $11,679, $2,598, and $2,466, respectively.  The scope of management’s assessment of the effectiveness of internalcontrol over financial reporting during 2006 does not include the Microbrush business.  This exclusion is in accordance with the general guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting in the year of acquisition.  As with any acquisition, there are inherent risks in the timing, development and implementation of internal controls that could negatively impact us; however, we do not believe they will have a material impact on our financial statements. 

 

 

20

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits.

 

Exhibits.

 

31.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.3  Certification pursuant to 18 U.S.C Section 1350 as adopted pursuant to 

  Section 302 of Sarbanes-Oxley Act of 2002

 

32.1  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

21

 

 

 

SIGNATURES

 

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 8, 2006

*/s/*

*Alfred E. Brennan, Jr.*

 
----------------------  

------------------------------------------------------------  

Date  

Alfred E. Brennan, Jr.

 
 
Chief Executive Officer

 
 

*/s/*

*Arthur L. Herbst, Jr.*

 
------------------------------------------------------------  

Arthur L. Herbst, Jr.

 
President

 
 

 

*/s/*

*Christine R. Boehning*

 
------------------------------------------------------------  

Christine R. Boehning

 
Vice President and Chief Financial Officer

 
 

 

 

 

 

 

 

22

 

 

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