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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 0-18347
SULLIVAN DENTAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 36-3070444
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10920 W. LINCOLN AVENUE, WEST ALLIS, WISCONSIN 53227
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 321 - 8881
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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Aggregate market value of voting stock held by non-affiliates, based on a
closing price of $15.38 per share as of March 5, 1997, was $118,424,939. Number
of shares of Common Stock outstanding as of March 5, 1997 was 9,947,201.
Documents Incorporated by Reference:
Specified portions of the Sullivan Dental Products, Inc. Proxy Statement dated
March 25, 1997 are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 The Company . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Recent Developments . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Products. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4 Sales and Service . . . . . . . . . . . . . . . . . . . . 2
Section 1.5 Sources of Supply . . . . . . . . . . . . . . . . . . . . 3
Section 1.6 Competition . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.7 Employees . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 5
Item 4.a Executive Officers of the Registrant . . . . . . . . . . . . . . 6
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . 7
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 13
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . 24
Item 10. Directors and Executive Officers(*) . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation(*) . . . . . . . . . . . . . . . . . . . . 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management(*). . . . . . . . . . . . . . . . . . . . . 24
Item 13. Certain Relationships and Related Transactions* . . . . . . . . . 24
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Independent Auditors' Report on Financial Statement Schedule . . . . . . . 26
Schedule VIII - Valuation and Qualifying Accounts. . . . . . . . . . . . . 27
(*) Incorporated by reference from Sullivan Dental Products, Inc. Proxy
Statement dated March 25, 1997.
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PART I
ITEM 1. BUSINESS
SECTION 1.1 THE COMPANY
Sullivan Dental Products, Inc. (the "Company" or "Sullivan") distributes
consumable dental supplies to dentists using a marketing strategy which combines
personal visits by sales representatives with a catalog of approximately 12,000
competitively priced items. The catalog is updated semi-annually, mailed
directly to customers, and used by the Company's sales representatives to obtain
additional business from existing customers and to develop new accounts. The
Company believes that its catalog includes substantially all of the product
categories used in general dentistry. The Company also sells, installs and
services dental equipment through 52 sales and service centers located
throughout the United States.
The Company believes that the combination of personal contact by its sales
representatives and the ability of customers to order directly by telephone
generates higher overall sales to individual customers than would be the case if
either marketing method were relied upon exclusively.
SECTION 1.2 RECENT DEVELOPMENTS
In September, 1996, the Company acquired Mountain West Dental Company, Inc., a
dental equipment, supply and service company operating in Idaho, Nevada and
Utah.
In November, 1996, Sullivan acquired Capitol Dental Supply, Inc., a dental
equipment and supply company based in Maryland, Virginia and Washington, D.C..
The Company declared four quarterly dividends of $.05 per share in 1996, payable
April 20, July 19, October 21 and January 20, 1997.
In February, 1997, Sullivan acquired Omega Professional Services, Inc., a Utah
based equipment leasing company for the purpose of establishing an internal
leasing division, SDP Financial Services.
In February, 1997, the Company acquired S.B. Service, a Connecticut based
sterilization equipment repair business.
In the future, the Company expects to continue to add sales representatives and
equipment sales and service centers although there can be no assurance that it
will be successful in doing so.
SECTION 1.3 PRODUCTS
Sullivan currently sells approximately 12,000 items, including aseptic products,
small equipment, hygiene supplies, impression materials, x-ray films, composite
restoratives, hand instruments, disposable paper and plastic bulk, latex exam
gloves and rotary cutting carbide burs. The Company's equipment lines include
x-ray units, patient chairs, imaging systems, instrument delivery systems,
cabinetry, operating lights, package items, sterilizers, film processors, vacuum
systems and intra-oral cameras.
Most products are sold under trademarks and trade names of suppliers. However,
in the third quarter of 1994, the Company began instituting a private label
program to introduce Sullivan brand products. In 1996, the Company had 325
Sullivan brand products resulting in private label sales of approximately
$12,270,000.
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The following table shows the approximate percentages of net sales contributed
by sales category for each of the years indicated:
Year Ended December 31,
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1996 1995 1994
Supplies . . . . . . . . 65.9% 67.3% 68.1%
Equipment. . . . . . . . 27.7 26.1 25.0
Repair service and parts 6.4 6.6 6.9
Total. . . . . 100.0% 100.0% 100.0%
Sales contributed by sales of equipment and sales of repair service and parts
have represented an increasing percentage of total sales over the past three
years, primarily as a result of the Company's net increase since December 31,
1993 of 20 equipment sales and service centers operated by the Company.
SECTION 1.4 SALES AND SERVICE
The Company currently sells its products to approximately 40,000 customers.
Almost all of the Company's customers are individual dentists or dental practice
groups. Other types of customers include dental laboratories, schools and
governmental agencies. During 1996, no single customer accounted for as much as
1% of total sales.
The Company's growth has resulted in large part from the expansion of its sales
force, which currently operates in 48 states. As of March 1, 1997, the sales
organization consisted of 378 sales representatives, including 18 independent
sales representatives. In 1995, the Company had a net increase of 18
salespeople. In 1996, the Company increased its salespeople by a net of 10
sales representatives. As of March 1, 1997, Sullivan's work force totalled
1,033 people, an increase in personnel of 60 since December 31, 1995. The
Company considers its relations with its sales representatives to be excellent,
but, as management believes is typical of the industry, the Company, in most
cases, has no employment or noncompetition agreements with its sales
representatives. The Company's sales representatives work primarily on a
commission basis. The Company believes that all independent sales
representatives have income from sources other than the Company. Sullivan's
independent sales representatives are not employees of the Company.
The Company's sales representatives visit customers regularly. The catalog is
updated semi-annually, mailed directly to customers, and used by the Company's
sales representatives to obtain additional business from existing customers and
to develop new accounts. The Company believes that its catalog includes
substantially all of the product categories used in general dentistry. The
Company also promotes customer satisfaction by permitting free returns and
paying shipping costs on orders of $75.00 or more.
Sales representatives telephone their customers' orders for supplies to
specially trained personnel at the Company's headquarters, which are the same
personnel that customers telephone directly. These telephone representatives
operate individual computer terminals which identify the customer, display
credit information and transmit orders immediately to the appropriate
distribution facility for shipping by common carrier. The Company has developed
a special alphanumeric code system for use by its telephone representatives
which permits customers to order by description rather than product number in
most instances. The Company believes this system enhances the communication
between customers and the telephone representatives and makes ordering from the
Company's catalog more convenient than from a catalog using standard product
codes. Orders received by 4:00 p.m. generally are shipped the same day, with an
average fill rate of approximately 97%.
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The Company offers several programs designed to enhance services as well as
implementing marketing strategies that produced significant results in 1996.
CustomFax, a fax ordering system customized for individual dental offices, was
introduced in the first quarter of 1996. In addition to offering customers
another convenient way of ordering, this program brought in new customers who
prefer to order by fax rather than telephone. CustomFax allows twenty-four hour
a-day ordering while providing a permanent ordering record for each office.
The success of Project Recapture, a marketing program instituted in 1995 to
pursue segments of the dental supply and equipment market not previously in the
dealer distribution network, prompted a successful 1996 version of the program.
Sullivan continued to network with prominent industry leaders and innovative
companies to provide a greater variety of services to its customers. Jennifer
de St. Georges, a renowned dental practice management consultant, made her
expertise available to customers of the Company through seminars, audio tapes
and training of Sullivan sales representatives. In addition, alliances with
national developers of software for dental practice management were established
to assist Sullivan's customers in selecting and integrating a computer-based
system for recordkeeping, billing and scheduling.
Sullivan's Track to the Future marketing program was launched with positive
results during the third quarter of 1996. The primary objective of this program
is to increase market penetration through targeting of new accounts by the
entire sales staff.
The Sullivan Source program became fully operational near the end of the fourth
quarter of 1996. This program, which offers the Sullivan complete catalog on CD
ROM, introduces customers to additional twenty-four hour ordering capabilities
as well as practice management programs.
The Company continues to expand its sales of Sullivan brand products, which at
year-end 1996 equaled 7.6% of total merchandise sales, a substantial increase
from 5.7% at the end of 1995.
As of March 1, 1997, the Company employed 77 specially trained employees who
assist dental practitioners with respect to office layout and selection of
equipment to fit their needs. The Company also provides installation and
maintenance services for equipment. These services are believed to be important
factors in making equipment sales. Equipment display areas are maintained in
the Company's headquarters and in 51 locations serving 48 states.
Because the Company maintains inventory levels sufficient to meet its high same
day order fill rate, backlogs of sales of supplies are not significant. The
Company generally places equipment orders with vendors upon receipt of orders
from customers. Backlog of unfilled orders for equipment at any time generally
represents customers' requests for later delivery of equipment and the time lag
between placing orders with vendors and delivery, in each case generally less
than 90 days. Although unfilled equipment orders may be considered to be firm
orders, the Company generally permits customers to cancel existing orders
without penalty, except for possible loss of deposit. The Company has not
experienced significant problems or delays in filling orders for equipment and
cancellations by customers have been minimal.
SECTION 1.5 SOURCES OF SUPPLY
The Company distributes selected items from substantially all major lines of
dental supplies and equipment. The Company does not, however, carry the full
selection of products offered by any single major dental supplies manufacturer.
The Company carefully limits the products which it sells to those likely to have
reasonably high turnover. The Company believes the products it carries account
for substantially all of the products categories used in general dentistry. Of
the approximately 385 vendors used by the Company,
3
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the largest accounted for less than 6% of products sold in 1996. The Company
has no long-term purchase contracts, but has experienced no difficulty in
obtaining adequate quantities. For most of the categories of products it
distributes, the Company has more than one source of supply. The Company
attempts to minimize its investment in inventory by product turnover analysis
and times its purchases to take advantage of special pricing programs available
from time to time.
SECTION 1.6 COMPETITION
Although reliable industry statistics are not available, the Company believes it
presently accounts for less than 10% of U.S. domestic retail sales of dental
supplies and equipment. The Company also believes that most dentists purchase
dental supplies from more than one distributor. Because most companies in the
industry are privately held or are affiliated with companies that also engage in
other businesses, it is not possible to obtain complete information concerning
the Company's competitive position in particular areas.
The Company operates in a highly competitive environment. The Company's
principal competitors are full-line, full-service retail dental dealers that are
essentially national in scope, such as Patterson Dental Co., which has
salespeople regularly calling on customers and is substantially larger than the
Company. The Company believes there are approximately 400 retail dealers and
mail order firms that distribute dental supplies and equipment in the United
States. Most retail dealers are privately owned and conduct their operations
locally and regionally, some with limited product lines. There are also several
mail order firms which conduct business on a national basis, including some
leading distributors of dental products, and several which operate on a regional
basis. The Company also competes with certain manufacturers that sell their
products both to distributors and directly to members of the dental profession.
The principal methods of competition in the dental supply and equipment
distribution business are price and service. The Company believes that its
catalog, combined with personal sales contact and support, competitive prices,
prompt delivery of products and the convenience to customers of calling in
orders toll-free to knowledgeable customer-representatives, are important
factors in enabling it to compete effectively.
SECTION 1.7 EMPLOYEES
As of March 1, 1997, the Company had 1,015 employees, consisting of 360 persons
engaged in sales, 223 service technicians and 432 persons comprising the
customer service, clerical, warehouse and corporate staff. None of the
Company's employees are covered by a collective bargaining agreement and
management considers employee relations to be excellent.
ITEM 2. PROPERTIES
The Company's executive offices and primary distribution center have been
located at 10920 West Lincoln Avenue, West Allis, Wisconsin, a suburb of
Milwaukee, since 1987. The leased facility provides 106,500 square feet housed
in a two story building with a basement. The facility contains approximately
52,500 square feet of office and showroom space and approximately 54,000 square
feet for warehousing and shipping located on approximately 3.3 acres, including
a 40,500 square foot addition completed in 1992 and a 24,000 square foot
addition completed in 1995. Effective November 1, 1996, a new 15 year lease was
executed with H&S Investments, L.L.C., for such premises. The new lease
provides for an annual rental of $544,548 for the first three years, increasing
by approximately 9% in each subsequent three year period. The new lease also
provides that all real estate taxes on the premises are to be paid by the
Company. In 1996, the Company paid $90,758 of base rent pursuant to the new
lease and an aggregate of $465,458 pursuant to the prior leases. The Company
also paid an aggregate of $100,530 for all tax obligations due pursuant to such
leases.
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The Company has a lease expiring March 31, 2000 for its 55,000 square foot West
Coast distribution center in the San Francisco area. The California lease
provides for a monthly base rental of approximately $22,200, increasing to
approximately $30,500 by the end of the term and also requires payment for the
Company's share of operating expenses relating to the leased premises. The
Company has the option at the end of the lease term to extend the term of the
lease for a five year period at the then fair market rental.
The Company has a lease expiring February 28, 2002 for its 41,000 square foot
East Coast distribution center in the Baltimore area. The lease provides for an
average monthly base rental of approximately $15,300 with the Company paying its
share of operating expenses. The Company has the option at the end of the lease
term to extend the term of the lease for an additional five year period at the
then fair market rental.
The Company has a lease expiring on November 1, 2001 for its 44,000 square foot
Southern distribution center in the Charlotte, North Carolina area. This lease
provides for a monthly base rental of approximately $12,200, increasing by
approximately 3% each year through the end of the term. The lease also requires
the Company to pay its share of operating expenses relating to the leased
premises. The Company has the option at the end of the term to extend the term
of the lease for a seven year period with similar 3% increases during the
extension term.
The Company has a lease expiring on March 31, 2000 for its 40,000 square foot
Southwestern distribution center in the Dallas/Fort Worth, Texas area. The
lease provides for an average monthly base rental of $9,200. The lease also
requires the Company to pay all operating expenses of the leased premises, a
stand-alone building. At the end of the term, the Company has an option to
extend the term of the lease for an additional five year period at the lesser of
the then fair market rental or $11,667 per month.
The Company leases equipment sales and service centers at 52 locations serving
48 states. These sales and service centers vary in size between approximately
820 and 18,000 square feet.
In the opinion of management, the Company's facilities are in good order and
repair and are suitable and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
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ITEM 4.A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position and Year First Elected
---- --- -------------------------------
Robert E. Doering 66 Chief Executive Officer since July, 1992;
President from 1990 until January, 1997;
Executive Vice President from 1988 to 1990.
Robert J. Sullivan 66 Chairman of the Board since 1990; Chief
Executive Officer of the Company from 1985 to
July, 1992.
Timothy J. Sullivan 30 President since January, 1997; Treasurer since
October, 1996; Vice President - Operations
from 1992 until January, 1997; Chief
Financial Officer since May, 1995; Secretary
since 1992; Controller from May, 1991 to July,
1992; Assistant Controller from January, 1989
to May, 1991.
Kevin J. Ackeret 46 Executive Vice President since January, 1995;
Vice President - Sales from 1985 to January,
1995.
Geoffrey A. Reichardt 40 Senior Vice President - Sales since January,
1997; Vice President - Sales from January,
1996 to January, 1997; National Sales Manager
from February, 1994 to January, 1996;
National Equipment Manager from September,
1993 to February, 1994.
Kenneth A. Schwing 49 Vice President - Equipment Division since
1993; National Equipment Sales Manager from
August, 1992 to July, 1993.
David A. Steck 41 Vice President - Marketing since August, 1995;
Regional Sales Manager since July, 1992.
The officers are elected annually by the Board of Directors.
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth high and low sales prices of the Common Stock of
the Company as reported on the NASDAQ National Market System since January 1,
1995:
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
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High 16.75 16.13 11.13 10.63
Low 13.25 8.25 8.50 9.00
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
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High 12.25 12.25 11.50 13.88
Low 9.50 9.75 9.88 11.13
The information contained in the above table was furnished by NASDAQ. The
Company's Common Stock is traded in the over-the-counter market and is quoted on
the NASDAQ National Market System under the symbol "SULL."
As of March 5, 1997, the Company had 415 record holders of its Common Stock
including brokers and other nominees. The Company believes there are in excess
of 500 beneficial owners of its Common Stock.
The Company declared four quarterly cash dividends of $.05 per share during 1996
and declared one dividend of $.20 per share during 1995. While the Company
intends to continue to pay quarterly dividends, their payment in the future will
be at the discretion of the Company's Board of Directors and will depend, among
other things, upon the Company's future earnings, operations, capital
requirements and financial condition, as well as business conditions generally.
7
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the years in the five-year
period ended December 31, 1996 has been derived from the audited balance sheets
and related statements of income of the Company.
The selected financial data should be read in conjunction with the financial
statements and notes thereto which are included elsewhere in this annual report
and also with Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (In thousands, except per share data)
Net sales $ 241,583 $ 215,568 $ 203,602 $ 169,000 $ 118,022
Cost of sales 158,937 141,753 133,985 111,530 77,680
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Gross profit 82,646 73,815 69,617 57,470 40,342
Operating expenses 68,901 62,465 57,247 47,362 31,486
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Operating income 13,745 11,350 12,370 10,108 8,856
Interest expense (279) (94) (6) (28) (72)
Other income, principally interest 975 811 399 95 216
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Income before provision for income taxes 14,441 12,067 12,763 10,175 9,000
Provision for income taxes 5,776 4,827 5,086 3,999 3,555
--------- --------- --------- --------- ---------
Net income $ 8,665 $ 7,240 $ 7,677 $ 6,176 $ 5,445
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per common and common
equivalent share $ .91 $ .77 $ .82 $ .66 $ .60
Cash dividends per common share $ .20 $ .20 - - -
Weighted average common shares 9,523 9,405 9,409 9,415 9,049
<CAPTION>
December 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (In thousands)
Working capital $ 54,201 $ 47,028 $ 45,536 $ 37,577 $ 32,217
Total assets 101,050 96,915 81,105 68,604 54,448
Short-term bank debt - 9,900 - 2,600 1,000
Stockholders' equity 76,459 62,453 57,617 49,274 42,319
</TABLE>
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECTION 7.1 RESULTS OF OPERATIONS
SECTION 7.1.1 FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the year ended December 31, 1996 were $241,583,000, an increase of
$26,015,000, or 12.1%, over 1995. The $26,015,000 increase in net sales in 1996
was substantially due to increased unit sales and, to a lesser extent, price
increases. The growth in unit sales was generated largely by increased
penetration into existing markets, the acquisitions of Mountain West Dental
Company, Inc. and Capitol Dental Supply, Inc., which acquisitions are more fully
described in the footnotes to the financial statements and, to a lesser extent,
by increased sales to existing customers. No individual customer accounted for
more than 1%, or single product accounted for more than 2% of net sales for 1996
or 1995.
Sales of dental supplies comprised 65.9% of net sales in 1996 compared to 67.3%
in 1995. Sales of dental equipment constituted 27.7% of net sales in 1996
compared to 26.1% in 1995. Sales of repair service and parts constituted 6.4% of
net sales in 1996 versus 6.6% in 1995. The increase in the amount of equipment
sales as a percentage of net sales was substantially due to the Company's
opening of a net of six new Equipment Sales and Service Centers during 1996
(eight new centers were opened and two were closed), an increase of fourteen new
equipment specialists from 1995 to 1996 as well as increased sales of intra-oral
cameras.
Gross profit rose $8,831,000, or 12.0%, in 1996 compared to 1995, primarily as a
result of increased sales. Gross profit as a percentage of net sales remained at
34.2% in 1996.
Operating expenses rose $6,436,000, or 10.3%, to $68,901,000 in 1996 compared to
$62,465,000 in 1995 but, more significantly, decreased as a percentage of net
sales to 28.5% in 1996 from 29.0% in 1995. Of this increase in operating
expenses, $3,607,000 resulted from increased salaries and commissions primarily
due to higher sales generating higher commissions.
For the year ended December 31, 1996, operating income increased $2,395,000, or
21.1%, due to increased sales and more focused management of operating expenses.
Interest expense increased by $185,000 to $279,000 for the year ended December
31, 1996, primarily due to the increased use of the Company's lines of credit in
December of 1995 to increase inventories and the continued use of those lines
for a portion of 1996. The weighted average interest rate paid in 1996
decreased to 6.4% from 7.0% in 1995, primarily due to fluctuations in the
federal funds rate.
The provisions for income taxes for 1996 increased $949,000, or 19.7%, primarily
due to higher profits. The provision for income taxes reflected an effective
rate of 40% for 1996 and 1995. Net income increased by $1,425,000, or 19.7%, in
1996 compared to 1995 and net income per share increased to $.91 per share in
1996 from $.77 per share in 1995, primarily due to the factors identified above.
9
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SECTION 7.1.2 FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for the year ended December 31, 1995 were $215,568,000, an increase of
$11,965,000, or 5.9% over 1994. The $11,965,000 increase in net sales in 1995
was substantially due to increased unit sales and, to a lesser extent, price
increases. The growth in unit sales was generated largely by increased
penetration in existing markets and the acquisition of Inglis Dental Supply,
Inc., as more fully described in the footnotes to the financial statements, and,
to a lesser extent, by increased sales to existing customers. No individual
customer accounted for more than 1%, or single product sold accounted for more
than 2%, of net sales for 1995 or 1994.
Sales of dental supplies comprised 67.3% of net sales in 1995 versus 68.1% in
1994, with dental equipment sales and sales of repair service and parts
accounting for the balance in each year. Sales of dental equipment constituted
26.1% of net sales in 1995 versus 25.0% in 1994. Sales of repair service and
parts constituted 6.6% of net sales in 1995 versus 6.9% in 1994. The increase
in the amount of equipment sales as a percentage of net sales was substantially
due to the Company's opening or acquisition of four equipment sales and service
centers during 1995 as well as increased sales of intra-oral cameras.
Gross profit rose $4,198,000, or 6.0%, in 1995 compared to 1994, primarily as
the result of increased sales. Gross profit as a percentage of net sales
remained at 34.2% in 1995.
Operating expenses rose $5,217,000, or 9.1%, to $62,465,000 in 1995 compared to
$57,248,000 in 1994 and increased as a percentage of net sales to 29.0% from
28.1% over the same period. Of this increase in operating expenses, $2,473,000
resulted from increased salaries and commissions due to an increase in sales
creating higher commissions and salaries paid to new sales trainees and support
staff.
For the year ended December 31, 1995, operating income decreased from the
previous year by $1,020,000, or 8.2%, to $11,350,000 due to increases in
operating expenses. Interest expense increased by $88,000 to $94,000 for the
year ended December 31, 1995, primarily due to use of the Company's credit line
to build inventories at the new regional distribution center as well as year-end
purchases to avoid price increases and to satisfy the Company's buying
commitments to qualify for rebates from the Company's vendors. The weighted
average interest rate paid in 1995 rose to 7.0% from 6.5% in 1994, primarily due
to an increase in borrowing rates generally. Other income, consisting primarily
of service charges and investment income, increased by $412,000 in 1995 compared
to 1994.
The provision for income taxes for 1995 decreased $259,000, or 5.1%, primarily
due to lower profits. The provision for income taxes reflected an effective
rate of 40.0% for 1995 compared to 39.9% in 1994. Net income decreased by
$437,000, or 5.7%, in 1995 compared to 1994, and net income per share decreased
from $.82 in 1994 to $.77 in 1995, primarily due to the factors identified
above.
10
<PAGE>
SECTION 7.2 LIQUIDITY AND CAPITAL RESOURCES
The Company, pursuant to a stock repurchase plan which authorized the purchase
of up to 500,000 shares, had as of December 31, 1996 repurchased 280,000 shares
of its common stock from the public at various prices with an average price of
approximately $9.00 per share, which repurchases total $2,538,753.
Working capital at December 31, 1996 was $54,201,000, an increase of $7,173,000
from December 31, 1995 reflecting higher net income less dividends paid.
Working capital at December 31, 1995 was $47,028,000, an increase of $1,492,000
over December 31, 1994.
Cash and cash equivalents as of December 31, 1996 increased by $378,000 from the
year earlier. Cash was used for capital expenditures consisting principally of
equipment purchases ($1,658,000), repayment of bank debt ($9,900,000) and
payment of dividends ($1,374,000) and was primarily provided by operations
($13,100,000).
Cash and cash equivalents as of December 31, 1995 decreased by $7,028,000 from
the prior year. Cash was used in operations ($10,600,000), for equipment
purchases ($2,600,000), to purchase treasury stock ($2,200,000) and to pay
dividends ($1,800,000). Cash was provided by increasing the notes payable to
the bank ($9,900,000).
Net cash provided by operating activities for the year ended December 31, 1996
was $13,100,000 and was primarily the result of higher net income adjusted for
depreciation, bad debts, and fluctuations in inventory, accounts payable and
accounts receivable.
Net cash used in operating activities for the year ended December 31, 1995 was
$10,594,000, primarily as a result of increases in inventory and accounts
receivable offset by net income and adjustments for depreciation and bad debts.
Net cash provided by operating activities for the year ended December 31, 1994
of approximately $10,825,000 was primarily the result of higher net income
adjusted for depreciation, bad debts and fluctuations in inventory, accounts
payable and accrued expenses.
Accounts receivable of $35,093,000 as of December 31, 1996 increased $3,300,000,
or 10.5%, compared to December 31, 1995 due to the increase of sales in the
fourth quarter of 1996. Accounts receivable of $31,753,000 as of December 31,
1995 increased $5,833,000, or 22.5%, compared to December 31, 1994, due to the
increase in sales in the fourth quarter of 1995. The Company's write-off
experience was less than 0.2% of net sales in 1996 and 1995.
Inventory of $40,400,000 at year-end 1996 represented a decrease of $5,578,000,
or 12.1%, over December 31, 1995, primarily due to reduced purchasing in 1996.
Inventory of $45,978,000 at December 31, 1995 represented an increase of
$13,029,000, or 39.5%, over December 31, 1994. Such increase was primarily due
to the opening of the Texas distribution center and year-end purchases to avoid
price increases and to satisfy the Company's buying commitments to qualify for
rebates from the Company's vendors. The increase in inventory was primarily
funded by a $9,900,000 increase in the notes payable to the bank.
11
<PAGE>
Capital expenditures were $1,658,000 in 1996. Such expenditures were primarily
for the purchase of office equipment, furniture and fixtures and computer
software and hardware (in part to create Sullivan Source, a new customer
ordering system); the purchase of vehicles for service technicians and capital
expenditures related to the acquisition and opening of new equipment sales and
service centers.
Capital expenditures were $2,573,000 in 1995. Such expenditures were primarily
for the opening of the Texas distribution center (new office equipment,
furniture and computer hardware), for vehicles for service technicians and for
leasehold improvements for the expansion of the corporate headquarters.
Capital expenditures have generally been financed by internally generated funds
but were also financed by the bank lines in 1995.
Other assets, net of amortization, as of December 31, 1996, rose $6,862,000 to
$16,384,000 compared to December 31, 1995. Other assets, net of amortization,
as of December 31, 1995, rose $2,266,000 to $9,522,000 compared to December 31,
1994. Each of these increases was primarily due to an increase in goodwill from
acquisitions.
The Company had maximum unsecured bank lines of credit totaling $23,000,000 at
December 31, 1996 and totaling $18,000,000 at December 31, 1995 and December 31,
1994. The amounts available under the bank lines of credit at those dates were
$23,000,000, $8,100,000 and $18,000,000, respectively. The credit lines were
increased in February, 1996 to $23,000,000. The annual interest rates on the
current lines of credit are 1.00% and .90% over the federal funds rate,
respectively, and are payable monthly.
The Company believes that cash from operations and its bank lines of credit will
provide it with liquidity sufficient to meet currently foreseeable capital
needs.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sullivan Dental Products, Inc.
West Allis, Wisconsin
We have audited the accompanying balance sheets of Sullivan Dental
Products, Inc. as of December 31, 1996 and 1995, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sullivan Dental Products, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 18, 1997
13
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 50,217 $ 172,482
Commercial paper -- cash equivalent 500,000 -
Accounts receivable:
Trade (Note 1) 35,093,051 31,753,427
Other 180,617 1,039,093
Inventory (Note 1) 40,399,951 45,977,729
Prepaid expenses and income taxes (Note 4) 1,752,373 1,851,508
------------- -------------
Total current assets 77,976,209 80,794,239
EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Note 1):
Warehouse and office equipment 7,794,591 7,528,286
Transportation equipment 3,106,327 2,672,728
Leasehold improvements 1,367,264 1,296,970
------------- -------------
12,268,182 11,497,984
Less accumulated depreciation and amortization 5,577,684 4,899,204
------------- -------------
Net equipment and leasehold improvements 6,690,498 6,598,780
OTHER ASSETS:
Goodwill (Notes 1 and 9) 16,043,511 9,276,039
Other 340,068 245,568
------------- -------------
$ 101,050,286 $ 96,914,626
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks (Note 2) $ - $ 9,900,000
Accounts payable 15,241,950 18,474,537
Accrued expenses:
Salaries, commissions and benefits 3,105,005 2,098,566
Other 4,944,268 3,293,498
Dividends payable 484,113 -
------------- -------------
Total current liabilities 23,775,336 33,766,601
DEFERRED INCOME TAXES (Note 4) 816,000 695,000
STOCKHOLDERS' EQUITY (Notes 6, 7 and 9):
Preferred stock--$.01 par value; 500,000 shares
authorized, none issued - -
Common stock--$.01 par value; 30,000,000 shares
authorized, 9,982,747 and 9,306,747 shares issued
in 1996 and 1995, respectively 99,827 93,067
Paid-in capital 38,702,016 31,030,201
Retained earnings 40,469,320 33,662,217
------------- -------------
Total 79,271,163 64,785,485
Less treasury stock at cost (300,496 and
257,496 shares in 1996 and 1995, respectively) (2,812,213) (2,332,460)
------------- -------------
Total stockholders' equity 76,458,950 62,453,025
------------- -------------
$ 101,050,286 $ 96,914,626
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
14
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 241,582,814 $ 215,567,723 $ 203,602,279
Cost of sales 158,936,929 141,752,826 133,985,069
------------- ------------- -------------
Gross profit 82,645,885 73,814,897 69,617,210
Operating expenses 68,900,766 62,464,880 57,247,528
------------- ------------- -------------
Operating income 13,745,119 11,350,017 12,369,682
Interest expense (279,438) (94,252) (6,424)
Other income, principally interest 975,422 811,123 399,255
------------- ------------- -------------
Income before provision for income taxes 14,441,103 12,066,888 12,762,513
Provision for income taxes (Note 4) 5,776,000 4,827,000 5,086,000
------------- ------------- -------------
Net income $ 8,665,103 $ 7,239,888 $ 7,676,513
------------- ------------- -------------
------------- ------------- -------------
Net income per common and common equivalent share $.91 $.77 $.82
---- ---- ----
---- ---- ----
Weighted average common shares 9,523,000 9,405,000 9,409,000
</TABLE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 9,096,197 $ 90,962 $ 28,625,897 $ 20,557,165 -
Issuance of shares in connection with:
Acquisition (Note 9) 36,300 363 489,687 - -
Stock options exercised (Note 7) 29,500 295 152,275 - -
Tax benefit of stock options exercised - - 24,000 - -
Net income - - - 7,676,513 -
------------- ------------- ------------- ------------- -------------
Balances, December 31, 1994 9,161,997 91,620 29,291,859 28,233,678 -
Issuance of shares in connection with:
Acquisition (Note 9) 110,000 1,100 1,456,400 - -
Stock options exercised (Note 7) 34,750 347 153,942 - -
Tax benefit of stock options exercised - - 128,000 - -
Dividends (Note 6) - - - (1,811,349) -
Shares repurchased (Note 6) - - - - $ (2,231,250)
Shares reacquired from prior year
acquisition (Note 9) - - - - (101,210)
Net income - - - 7,239,888 -
------------- ------------- ------------- ------------- -------------
Balances, December 31, 1995 9,306,747 93,067 31,030,201 33,662,217 (2,332,460)
Issuance of shares in connection with:
Acquisitions (Note 9) 669,000 6,690 7,594,185 - -
Stock options exercised (Note 7) 7,000 70 68,180 - -
Tax benefit of stock options exercised - - 9,450 - -
Dividends (Note 6) - - - (1,858,000) -
Shares repurchased (Note 6) - - - - (307,503)
Shares reacquired from prior year
acquisition (Note 9) - - - - (172,250)
Net income - - - 8,665,103 -
------------- ------------- ------------- ------------- -------------
Balances, December 31, 1996 9,982,747 $ 99,827 $ 38,702,016 $ 40,469,320 $ (2,812,213)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
15
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,665,103 $ 7,239,888 $ 7,676,513
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,240,457 1,880,088 1,512,263
(Gain) loss on sale of assets (7,117) 34,171 6,406
Provision for losses on accounts receivable 337,532 405,261 360,293
Deferred income taxes 642,000 192,000 57,000
Changes in assets and liabilities, net of acquired businesses:
(Increase) in accounts receivable--trade (2,646,834) (4,920,320) (106,112)
Decrease (increase) in accounts receivable--other 859,144 37,616 (237,531)
Decrease (increase) in inventory 7,326,588 (12,408,367) (4,315,682)
Decrease (increase) in prepaid expenses and income taxes 317,735 (592,293) (81,625)
(Increase) in other assets (145,161) (60,120) (78,939)
(Decrease) increase in accounts payable (4,477,757) (899,283) 5,203,490
Increase in accrued expenses-- salaries,
commissions and benefits 1,006,439 633,831 216,219
(Decrease) increase in accrued expenses--other (1,000,000) (1,722,252) 198,381
(Decrease) increase in income taxes payable - (414,073) 414,073
------------ ------------ ------------
Net cash provided by (used in) operating activities 13,118,129 (10,593,853) 10,824,749
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of assets, net of cash received (paid) (Note 9) 317,883 (232,543) 15,122
Purchase of equipment and leasehold improvements (1,658,077) (2,573,489) (1,342,184)
Proceeds from sale of assets 103,490 232,661 46,406
------------ ------------ ------------
Net cash (used in) investing activities (1,236,704) (2,573,371) (1,280,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in notes payable to banks (9,900,000) 9,900,000 (2,600,000)
Purchase of treasury stock (307,503) (2,231,250) -
Dividends paid (1,373,887) (1,811,349) -
Proceeds from stock options exercised 68,250 154,289 152,570
Tax benefit of stock options exercised 9,450 128,000 24,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (11,503,690) 6,139,690 (2,423,430)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 377,735 (7,027,534) 7,120,663
CASH AND CASH EQUIVALENTS, beginning of year 172,482 7,200,016 79,353
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 550,217 $ 172,482 $ 7,200,016
------------ ------------ ------------
Supplemental information on cash flows and noncash
transactions is as follows:
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 315,570 $ 58,120 $ 6,424
Income taxes 4,653,481 5,369,505 4,432,725
Supplemental schedule of noncash investing and financing
activities:
Acquisition of companies:
Fair value of assets acquired $ 11,178,932 $ 5,040,757 $ 987,011
Liabilities assumed (3,895,940) (3,350,714) (512,083)
Stock issued (7,600,875) (1,457,500) (490,050)
------------ ------------ ------------
Total cash (received) paid for net assets acquired $ (317,883) $ 232,543 $ (15,122)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
16
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Revenue Recognition:
The Company sells dental supplies, equipment and repair parts, and
provides related services primarily to dentists throughout the United States.
Revenues are recognized when dental supplies are shipped, when equipment is
delivered and installed or when services are rendered to customers.
Accounts Receivable:
Trade receivables are reflected net of an allowance for uncollectible
accounts of $975,000 and $805,000 in 1996 and 1995, respectively. The Company
monitors credit lines extended to individual customers to minimize the credit
risk.
Inventory:
Inventory of merchandise and equipment for resale is stated at the
lower of cost (first-in, first-out method) or market. The Company uses
estimated gross profit rates to determine cost of sales and inventory on an
interim basis.
Equipment and Leasehold Improvements:
Equipment, which is stated at cost, is being depreciated over the
estimated useful lives of the assets on the straight-line and accelerated
methods. The range of useful lives of the various classes of assets is 5 to 10
years. Leasehold improvements are amortized over the lease term or the
estimated useful life, whichever is less.
Goodwill:
Goodwill represents the excess of the cost over the estimated fair
value of the net assets acquired and is being amortized on a straight-line basis
over 20 to 40 years. Accumulated amortization for goodwill was $1,162,073 and
$756,148 at December 31, 1996 and 1995, respectively. Goodwill is reviewed for
impairment whenever events or circumstances provide evidence that suggest that
the carrying amount of the asset may not be recoverable. The operations of
acquired businesses are generally integrated into those of the Company promptly
after acquisition. Goodwill impairment, if any, is measured using undiscounted
cash flows. The Company does not individually distinguish the undiscounted cash
flows of acquired operations.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred income taxes are determined utilizing an asset
and liability approach. This method gives consideration to the future tax
consequences associated with differences between financial accounting and tax
bases of assets and liabilities. This method gives immediate effect to changes
in income tax laws upon enactment.
Cash Flows:
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The change in assets and liabilities in the
operating section of the statements of cash flows is reflected net of the
effects of the acquisitions consummated.
Net Income Per Share:
Net income per share is based on the weighted average number of common
shares outstanding including the effect of stock options, computed by the
treasury stock method. Primary and fully diluted weighted average shares have
not been disclosed as the difference between the two is not significant. Common
stock equivalents result from the assumed issuance of shares under stock option
plans.
17
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments:
The Company believes the carrying amount of its financial instruments
(cash, accounts receivable, accounts payable and notes payable) is a reasonable
estimate of the fair value of these instruments.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - Notes Payable to Banks
The Company has two unsecured bank lines of credit at December 31,
1996. One has a maximum line of credit of $15,000,000 with interest payable
monthly at 1% over the federal funds rate (7.5% at December 31, 1996). The
other has a maximum line of credit of $8,000,000 with interest payable monthly
at .9% over the federal funds rate (7.4% at December 31, 1996).
The following is a summary of borrowings under the lines of credit:
December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Balance at end of year $ - $ 9,900,000 $ -
Interest rate at end of year 7.45% 6.85% 7.85%
Maximum outstanding $ 14,000,000 $ 9,900,000 $ 2,600,000
Average outstanding $ 4,459,686 $ 1,218,700 $ 73,013
Weighted average interest
rate during the year 6.42% 7.00% 6.51%
Note 3 - Lease Commitments
The Company leases its office and distribution facilities under
noncancelable operating leases expiring at various dates through 2011. The
leases require the Company to pay for insurance, maintenance, a portion of the
property taxes and other expenses as defined in the leases. The future minimum
rental payments required under these leases which have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1996, are as
follows:
Year Ending
December 31,
------------
1997 $ 2,669,815
1998 2,409,946
1999 2,205,523
2000 1,659,469
2001 1,212,631
Thereafter 7,091,320
-----------
$17,248,704
-----------
-----------
Rent expense amounted to $2,718,516, $2,462,111 and $1,854,864 for 1996, 1995
and 1994, respectively.
18
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Effective November 1, 1996 the Company signed a lease on the Company's
Wisconsin executive office and distribution facility which is owned by certain
officers and stockholders of the Company and certain members of their families.
The annual rent is $544,548 through October 31, 1999, increases by 9% on
November 1, 1999 and will increase by 9% every three years thereafter until
October 31, 2011. The lease requires the Company to pay all expenses related to
the building, including property taxes. This lease replaced three other leases
on this facility, also owned by certain officers and stockholders of the
Company. The total rent expense, including property taxes, on this facility
amounted to $656,746, $615,282 and $417,587 for 1996, 1995 and 1994,
respectively.
Note 4 - Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Current tax provision:
Federal $4,094,000 $3,690,000 $3,994,000
State 1,040,000 945,000 1,035,000
------------ ------------ ------------
5,134,000 4,635,000 5,029,000
Deferred taxes 642,000 192,000 57,000
------------ ------------ ------------
$5,776,000 $4,827,000 $5,086,000
------------ ------------ ------------
------------ ------------ ------------
The approximate tax effects of temporary differences are as follows:
December 31,
------------------------
1996 1995
--------- ---------
Inventory $ 308,000 $ 323,000
Bad debt reserve 260,000 222,000
Accruals 543,000 332,000
Depreciation (500,000) (478,000)
Goodwill (316,000) (217,000)
Other (138,000) (83,000)
--------- ---------
$ 157,000 $ 99,000
--------- ---------
--------- ---------
19
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
A reconciliation of the federal statutory rate to the Company's effective income
tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 5.2 5.3 5.3
Other, net .8 .7 .6
-------- -------- --------
Effective rate 40.0% 40.0% 39.9%
-------- -------- --------
-------- -------- --------
</TABLE>
Note 5 - Related Party Transactions
The Company has been affiliated since 1988 with Dash Medical Gloves,
Inc. ("Dash"), which is owned by an officer of the Company and his family. The
Company purchased inventory from Dash in 1996, 1995 and 1994, totaling
$4,585,518, $4,574,639 and $3,668,989, respectively.
As discussed in Note 3, the Company's Wisconsin executive office and
distribution facility is leased from certain officers and stockholders of the
Company and certain members of their families.
Note 6 - Stockholders' Equity
The Company's Board of Directors has the authority to determine the
relative rights and preferences of any series it may establish with respect to
the 500,000, $.01 par value authorized preferred stock. No preferred stock is
issued or outstanding.
During June 1996 and 1995, the Company repurchased 30,000 and 250,000
shares of its own common stock in the open market for $307,503 and $2,231,250,
respectively and recorded it as treasury stock.
During 1996, the Company declared quarterly dividends of $.05 per
share payable in April, July, October and January 1997. Total dividends are
$1,858,000 for 1996.
During 1995, the Company declared an annual dividend of $.20 per
share, amounting to $1,811,349, payable in August 1995.
Note 7 - Stock Options
The Company adopted an Incentive Stock Option Plan in 1990 for the
benefit of certain officers, directors and employees. The total number of
shares reserved for issuance pursuant to this plan is 750,000. On December 1,
1995, the Company adopted the 1995 Long-Term Stock Incentive Plan for the
benefit of certain officers, directors, managers and key employees. The total
number of shares reserved for issuance pursuant to this plan is 750,000. At
December 31, 1996, the Company had also granted non-qualified stock options to
certain directors and officers to purchase up to 394,000 shares of common stock.
All the options are exercisable for up to ten years from the date of grant, at a
price not less than the fair market value of the common stock at the date of
grant. At December 31, 1996, all the options granted have vested.
20
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation", but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its plans. If the Company had
elected to recognize compensation cost for the options granted during 1996 and
1995, consistent with the method prescribed by SFAS No. 123, net income and net
income per share would have been changed to the pro forma amounts indicated
below:
Year Ended December 31,
--------------------------
1996 1995
------------- -----------
Net income - as reported $ 8,665,103 $ 7,239,888
Net income - Pro forma 8,327,631 7,106,908
Net income per share - as reported $ .91 $ .77
Net income per share - Pro forma .87 .76
The fair value of stock options used to compute pro forma net income
and net income per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1996 and 1995: average dividend yield of 2.0%; expected
volatility of 21.7%; an average risk free interest rate of 6.2%; and an expected
holding period of ten years.
Presented below is a summary of the status of the stock options, and
the related transactions for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
Weighted Average Weighted Average
Stock Options Shares Exercise Price Shares Exercise Price
------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,113,625 $ 8.02 751,875 $ 10.62
Granted 297,000 10.81 406,500 9.56
Reissued - - 346,000 9.75
Exercised (7,000) 9.75 (34,750) 4.44
Expired (19,000) 9.63 (10,000) 17.75
Cancelled - - (346,000) 17.51
--------- --------- --------- ---------
Outstanding at end of year 1,384,625 $ 8.59 1,113,625 $ 8.02
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The following table summarizes the status of stock options outstanding
at December 31, 1996:
Weighted Average
Range of Remaining Weighted Average
Exercise Prices Shares Contractual Life Exercise Price
- --------------- ------ ---------------- ----------------
$ 4.44 335,000 3.2 years $ 4.44
$ 6.89 to $10.31 888,125 8.6 years 9.62
$10.50 to $12.68 161,500 9.7 years 11.54
---------
1,384,625
---------
---------
21
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Note 8 - Employee Benefits
Employees with six or more months of service are eligible to
participate in a 401(k) savings and investment plan established by the Company
in 1989. Under this plan, employee contributions are immediately 100% vested.
Employer contributions are vested 20% after two years of service and an
additional 20% for each additional year of service, fully vesting after six
years of service. Contributions to the plan are made at the discretion of the
Company and aggregated $584,289, $541,560 and $613,620 in 1996, 1995 and 1994,
respectively.
The Company currently does not provide any post-retirement benefits.
Note 9 - Acquisitions
During 1996, the Company acquired certain assets and assumed certain
liabilities of two regional dental supply and equipment companies, in exchange
for 669,000 shares of common stock of the Company valued at $7,600,875.
During 1995, the Company acquired certain assets and assumed certain
liabilities of two regional dental supply and equipment companies. The total
purchase price of these acquired businesses was $308,000 in cash and 110,000
shares of common stock of the Company valued at $1,457,500. During 1996, one of
these acquisitions was revalued and 13,000 shares valued at $172,250 were
returned to the Company and recorded as treasury stock and as a reduction of the
original goodwill.
During 1994, the Company acquired certain assets and assumed certain
liabilities of one regional dental supply and equipment company, in exchange for
36,300 shares of common stock of the Company valued at $490,050. During 1995,
this acquisition was revalued and 7,497 shares valued at $101,210 were returned
to the Company and recorded as treasury stock and as a reduction of the original
goodwill.
The above acquisitions have been accounted for under the purchase
method of accounting. The results of operations of these companies since the
date of acquisition have been included in the financial statements. The excess
of total acquisition cost over the fair value of net assets acquired (goodwill)
was $7,301,126 in 1996, $2,669,774 in 1995 and $584,308 in 1994. Amortization
expense was $405,925, $256,358 and $175,165 in 1996, 1995 and 1994,
respectively.
The effect of the 1996 and 1995 acquisitions on the Company's results
of operations on a pro forma basis was not material.
Note 10 - Commitments and Contingencies
In the normal course of business, the Company has various legal
proceedings pending. Management believes that the Company's liability, if any,
with respect to these matters will not have a material impact on the Company's
results of operations or financial position.
The Company entered into an agreement with certain officers to provide
benefits equal to each individual's annual base compensation in the event of
death or voluntary or other termination. Termination benefits are conditioned
upon the individual's agreement not to compete with the Company for a specified
period.
22
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Note 11 - Subsequent Events
On February 14, 1997, the Company purchased substantially all of the
assets and assumed certain liabilities of Omega Professional Services, Inc., a
Utah based equipment leasing company, in exchange for 200,000 shares of common
stock of the Company valued at approximately $2,800,000.
On January 7, 1997 the Company announced that it had reached an
agreement in principle to purchase substantially all of the assets and assume
certain liabilities of S. B. Service, a Connecticut based sterilization
equipment repair company. The transaction, which is expected to close in
February 1997, contemplates exchange of 65,000 shares of common stock of the
Company valued at approximately $910,000.
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Part III Items 10, 11, 12 and 13 is hereby
incorporated by reference from the Company's Proxy Statement dated March 25,
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Financial Statement Schedule
The Financial Statement Schedule filed as part of this Report is on
page 27. All other schedules are omitted as inapplicable or because
the required information is included in the financial statements or
notes thereto included herein.
2. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit Index which follows the Financial Statement
Schedule and immediately precedes the exhibits filed.
3. Reports on Form 8-K
The Company was not required to, and did not file a Form 8-K during
the fourth quarter of 1996.
4. Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995.
This annual report on Form 10-K contains forward looking statements
that are subject to risks and uncertainties, including but not limited
to the following: The dental products business is extremely
competitive; the general level of economic activity can have a
substantial impact on the Company's business production; the Company's
growth has been substantially enhanced through acquisitions, which may
or may not be available on acceptable terms in the future, and which,
if consummated, may or may not be advantageous to the Company.
Accordingly, actual results may differ materially from those set forth
in the forward looking statements. Attention is also directed to
other risk factors set forth in documents filed by the Company with
the Securities and Exchange Commission.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SULLIVAN DENTAL PRODUCTS, INC.
By /S/ Timothy J. Sullivan
-------------------------------------
Timothy J. Sullivan, President
Dated: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chief Executive
Officer and Director
(Principal Executive Officer and
/S/ Robert E. Doering Chief Accounting Officer) March 25, 1997
- -------------------------
Robert E. Doering
President, Treasurer,
Secretary, and Director
/S/ Timothy J. Sullivan (Principal Financial Officer) March 25, 1997
- -------------------------
Timothy J. Sullivan
Chairman of the Board
/S/ Robert J. Sullivan and Director March 25, 1997
- -------------------------
Robert J. Sullivan
Executive Vice President
/S/ Kevin J. Ackeret and Director March 25, 1997
- -------------------------
Kevin J. Ackeret
/S/ Wayne G. Holt Director March 25, 1997
- -------------------------
Wayne G. Holt
/S/ Howard O. Wolfe Director March 25, 1997
- -------------------------
Howard O. Wolfe
/S/ Kerry B. Wolfe Director March 25, 1997
- -------------------------
Kerry B. Wolfe
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sullivan Dental Products, Inc.
West Allis, Wisconsin
We have audited the financial statements of Sullivan Dental Products, Inc. as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, and have issued our report thereon dated February 18, 1997;
such financial statements and report are included herein. Our audits also
included the financial statement schedule of Sullivan Dental Products, Inc.
listed in Item 14(1). The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 18, 1997
26
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
SCHEDULE VIII
Valuation and Qualifying Accounts for Each
Of the Three Years Ended December 31, 1996
<TABLE>
<CAPTION>
Additions/
Additions (Deductions)
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Of Year Expense Accounts Deductions of Year
---------- ---------- ------------ ---------- -------
Description
- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible
accounts 1996 $ 805,000 $ 412,532 $ -0- $ 242,532 (1) $ 975,000
Allowance for uncollectible
accounts 1995 602,000 510,261 -0- 307,261 (1) 805,000
Allowance for uncollectible
accounts 1994 340,000 505,293 (8,258) (2) 235,035 (1) 602,000
</TABLE>
(1) Deductions are write-offs net of recoveries.
(2) Additions (deductions) due to acquired accounts receivables.
27
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
EXHIBIT INDEX
Exhibit Total
Number Description and Page or Incorporation by Reference Pages
- ------- -------------------------------------------------- -----
3.1 Articles of Incorporation of Registrant.(*****)
3.2 By-laws of Registrant.(*****)
4.1 Article Fourth of Articles of Incorporation of
Registrant.(*****)
10.5 Lease dated October 26, 1989 between Registrant and Orchard
Livermore Associates (relating to real property located at
7085 Vaughn Avenue, Livermore, California).*(as amended on
the 1st day of February, 1994).(*******)
10.8 Form of Indemnity Agreement for Directors and Officers of
Registrant.(*)(1)
10.10 Registrant's 1990 Incentive Stock Option Plan as amended on 6
January 19, 1995 (included herein at pages 30-35).(1)
10.11 Form of Non-Qualified Stock Option Agreement.(*)(1)
10.19 Office/Warehouse Lease Agreement dated December 10, 1991,
and extended for five (5) years effective March 1, 1997
pursuant to Registrant's exercise of the renewal option
contained therein, by and between Riverside Associates
Limited Partnership and Registrant (relating to property
located at 4610 Mercedes Drive, Belcamp, Maryland)(***) as
amended on the 27th day of August, 1996 (which amendment is
included herein at pages 36-38). 3
10.23 Non-Qualified Stock Option Agreements dated December 30,
1991 by and between Registrant and Kerry B. Wolfe and
Stephen E. Ryd, respectively.(***)(1)(as amended on
October 31, 1995). (*******)
10.25 Promissory Note dated May 29, 1992 executed by Registrant in
favor of Marshall & Isley Bank (relating to $8,000,000
unsecured line of credit).(****)
10.26 Lease Agreement dated December 14, 1993 by and between Alvin
E. Levine d/b/a Greylyn Business Park as Landlord and
Registrant (relating to property located at 9309 Monroe
Road, Charlotte, North Carolina).(*****)
10.27 Lease Agreement dated February 2, 1995, by and between Kern
Associates as Landlord and Registrant (relating to property
located at 1322 Avenue R, Grand Prairie, Texas)(******)
10.28 Registrant's 1995 Long-Term Stock Incentive Plan.(*******)(1)
28
<PAGE>
Exhibit Total
Number Description and Page or Incorporation by Reference Pages
- ------- -------------------------------------------------- -----
10.29 Demand Line of Credit Agreement and Demand Line of Credit
Note each dated February 2, 1996, by and between Registrant
and Firstar Trust Company (relating to $15,000,000 unsecured
line of credit).(*******)
10.30 Industrial Building Lease effective November 1, 1996 by and
between Registrant and H&S Investments, L.L.C. relating to
property located at 10920 West Lincoln Avenue, West Allis,
Wisconsin (included herein at pages 39-44) 6
10.31 Non-Qualified Stock Option Agreement dated October 31, 1995
by and between Registrant and Kerry B. Wolfe (included
herein at pages 45-49)(1) 5
23 Consent of Deloitte & Touche LLP, as independent auditors
(included herein at page 50). 1
27 Financial Data Schedule (included herein at page 51) 1
- ----------------------------------------------------------------------
(*) Incorporated by reference to Registrant's Registration Statement on Form
S-1, Registration No. 33-33740, filed with the Securities and Exchange
Commission on March 5, 1990, wherein the document has the same exhibit number as
shown above.
(***) Incorporated by reference to Registrant's Registration Statement on Form
S-1, Registration No. 33-46266, filed with the Securities and Exchange
Commission on March 9, 1992, wherein the document has the same exhibit number as
shown above.
(****) Incorporated by reference to Registrant's 1992 Form 10-K for the year
ended December 31, 1992, file No. 0-18347, filed with the Securities and
Exchange Commission on March 27, 1993, wherein the document has the same exhibit
number as shown above.
(*****) Incorporated by reference to Registrant's 1993 Form 10-K for the year
ended December 31, 1993, file No. 0-18347, filed with the Securities and
Exchange Commission on March 31, 1994, wherein the document has the same exhibit
number as shown above.
(******) Incorporated by reference to Registrant's 1994 Form 10-K for the year
ended December 31, 1994, File No. 0-18347, filed with the Securities and
Exchange Commission on March 30, 1995, wherein the document has the same exhibit
number as shown above.
(*******) Incorporated by reference to Registrant's 1995 Form 10-K for the year
ended December 31, 1995, File No. 0-18347, filed with the Securities and
Exchange Commission on March 29, 1996, wherein the document has the same exhibit
number as shown above.
(1) Denotes management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Report pursuant to Item 601 of Regulation S-K.
29
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
1990 INCENTIVE STOCK OPTION PLAN
AS AMENDED
1. PURPOSE.
The purpose of the Sullivan Dental Products, Inc. 1990 Incentive Stock Option
Plan (the "Plan") is to attract and retain outstanding individuals as officers,
directors and key employees of Sullivan Dental Products, Inc. (the "Company")
and its subsidiaries, and to furnish incentives to such individuals through
rewards based upon the ownership and performance of the Company's Common Stock,
$.01 par value (the "Common Stock"). To this end, the Committee hereinafter
designated may grant Incentive Stock Options to officers, directors and key
employees of the Company and its subsidiaries, on the terms and subject to the
conditions set forth in this plan.
2. PARTICIPANTS.
Participants in the Plan shall consist of such officers, directors and other key
employees of the Company and its subsidiaries as either the Board of Directors
of the Company (the "Board") or the Committee (as defined below) in their
respective sole discretion may select from time to time to receive stock
options.
3. SHARES RESERVED UNDER THE PLAN.
The maximum number of shares of Common Stock of the Company which may be issued
pursuant to all grants made under the Plan shall not exceed 750,000. Any shares
subject to any option which terminates by expiration, cancellation or otherwise
prior to the issuance of such shares shall again be available for future options
under the Plan. Shares of Common Stock to be issued pursuant to options under
the Plan may be authorized and unissued shares of Common Stock, treasury Common
Stock, or any combination thereof.
4. ADMINISTRATION OF THE PLAN.
(a) The Board may from time to time appoint a Committee (the "Committee")
consisting of not fewer than three directors, each of whom shall be a
"disinterested person" while a member of the Committee. The Board may remove
any member of the Committee and fill any vacancy thereon, and delegate to such
Committee full power and authority to take any action required or permitted to
be taken by the Board under this Plan. As hereafter used in the Plan, the term
"Board of Directors" or "Board" shall mean and include the Committee to the
extent the Committee is acting within the authority granted by the Board. The
term "disinterested person" shall mean a person who is not eligible at the time
he or she exercises discretion in administering the Plan, and has not at any
time within one year prior thereto been eligible for selection as a person to
whom options may be granted under the Plan
30
<PAGE>
or any other plan of the Company or any of its affiliates entitling the
participants therein to acquire stock, stock options or stock appreciation
rights of the Company. The definition of "disinterested person" herein is
intended to coincide with that of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended ("Rule 16b-3"), and shall be automatically amended herein
without further action on the part of the Board as and when the definition of
"disinterested person" in Rule 16b-3, or any rule that is successor thereto, is
amended.
(b) Except as hereinafter provided, the Plan shall be administered by the
Board, which may from time to time issue rules, regulations or orders relating
to the Plan, adopt resolutions not inconsistent with the provisions of the Plan,
interpret the provisions of the Plan and supervise the administration of the
Plan. Subject to the express provisions of the Plan, the Board shall have
authority in its discretion (i) to determine which officers, directors and
employees of the Company and its subsidiaries shall be eligible for
participation in the Plan, (ii) to select individuals to receive grants of stock
options under the Plan, (iii) to determine the number of shares subject to the
grant of any stock option, the time and conditions of exercise, the fair market
value of the Common Stock of the Company for purposes of the Plan, and all other
terms and conditions of any grant. Where such discretion is exercised with
respect to participants who are directors of the Company, such discretion may be
exercised only by (i) the Committee or (ii) the actual Board of Directors of the
Company, a majority of which Board and a majority of the directors then acting
are disinterested persons. All determinations shall be by the affirmative vote
of a majority of the members of the Board at meeting called for such purpose, or
reduced to writing and signed by all of the members of the Board. Subject to
the Company's by-laws, all decisions made by the Board shall be final,
conclusive and binding on all persons, including the Company stockholders,
employees and optionees.
(c) Each option shall be evidenced by an Incentive Stock Option Agreement,
the form of which is attached hereto as Exhibit A and is hereby made a part
hereof, which Agreement shall contain such other terms and conditions as may be
approved by the Board and shall be signed by an officer of the Company and the
employee.
(d) If the laws or regulations (including Rule 16b-3) relating to
incentive stock options are changed during the term of the Plan, the Board shall
have the power to alter the Plan to conform to such changes in the law. The
Board shall have such authority without the necessity of obtaining further
stockholder approval unless the changes (i) require such approval under law,
(ii) provide for an increase in the aggregate number of shares of Common Stock
for which options may be granted under the Plan (other than as contemplated in
Paragraph 7), or (iii) change the class of persons eligible to receive options
under the Plan.
5. EFFECTIVE DATE AND TERM OF THE PLAN.
This Plan shall become effective on the date hereof; provided, however, that the
validity of this Plan and each option granted hereunder shall expressly depend
upon approval of the Plan within twelve (12) months after the adoption of the
Plan by a vote of a majority of the holders of the outstanding Common Stock of
the Company. If such approval is not obtained, the Plan and each option which
may have
31
<PAGE>
been granted hereunder shall be null and void. The Plan shall terminate on the
1st day of March, 2000 unless terminated sooner by action of the Board. No
further grants may be made under the Plan after termination, but termination
shall not affect the rights of any participant under, or the authority of the
Board with respect to, any grants of options made prior to termination.
6. STOCK OPTIONS.
(a) Grants. Options to purchase shares of Common Stock of the Company
that qualify as "incentive stock options" within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended (the "Code"), may be granted from
time to time to such officers, directors and other key employees of the Company
and its subsidiaries as may be selected by the Board; provided, however,
incentive stock options may not be granted to any individual who is not then an
employee of the Company.
(b) Terms of Options. An option shall be exercisable in whole or in such
installments and at such times as may be determined by the Board in its sole
discretion, provided that no option shall be exercisable more than ten (10)
years after the date of grant. The per share option price of all options shall
not be less than 100% of the fair market value of a share of Common Stock of the
Company on the date the option is granted.
(c) Exercise of Options. An optionholder's right to exercise shall not
be lost because he is subsequently transferred to the employ of a subsidiary of
the Company acquired by it after the grant of the option. Options shall be
exercised by delivering to the Secretary of the Company a written notice of
exercise which notice shall set forth the number of shares with respect to which
the option is then being exercised. Upon exercise, the option price may be paid
in cash, in shares of Common Stock of the Company having a fair market value
equal to the option price, in a combination thereof or upon such terms and
conditions as shall be determined by the Board. After full payment for the
shares being purchased, the Company shall within a reasonable time cause to be
issued a certificate or certificates representing such shares.
(d) Restrictions Relating to Incentive Stock Options. No incentive
stock option shall be granted to an employee who, at the time such option is
granted, owns stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any parent or subsidiary of the
Company within the meaning of Section 422A(b)(6) of the Code unless:
(i) at the time the option is granted, the option price is at least 110%
of the fair market value of the Common Stock subject to the option,
and
(ii) such option by its terms is not exercisable after the expiration of
five (5) years from the date such option is granted.
32
<PAGE>
(e) Termination of Employment. Except as may otherwise be provided in
the agreement or instrument evidencing the grant of a stock option, if any
optionee ceases to be employed by the Company and any of its subsidiaries for
any reason, any option held by such optionee may be exercised for a period
ending on the earlier of:
(i) the 90th day following the date of such cessation of employment,
if cessation was not due to permanent disability;
(ii) the 365th day following the date of such cessation of employment,
if cessation was due to permanent disability; or
(iii) on the date of expiration of such option but only with respect
to that number of shares of Common Stock for which such option was
exercisable immediately prior to the date of cessation of employment.
(f) Additional Terms and Conditions. The agreement or instrument
evidencing the grant of a stock option may contain such other terms, provisions
and conditions not inconsistent with the Plan as may be determined by the Board
in its sole discretion.
7. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION, ETC.
If the number of shares of issued Common Stock shall be increased or reduced by
changes in par value, reclassification, stock dividend, stock split or other
similar event, the number of shares of Common Stock subject to options and the
option price per share shall be equitably adjusted.
8. EFFECT OF LIQUIDATION, MERGER, CONSOLIDATION OR OTHER EVENTS.
Unless otherwise determined by the Board, and notwithstanding any other
provisions of the Plan, each outstanding stock option shall automatically
terminate upon the effective date of:
(a) the liquidation or dissolution of the Company,
(b) any merger or consolidation in which the Company is not the surviving
corporation or pursuant to which the Common Stock of the Company does not remain
outstanding, or
(c) the acquisition by another person of all or substantially all of the
assets of the Company;
provided, however, that the Board in anticipation of any such event or any
similar event, or in the event of (i) the acquisition by any person of the
beneficial ownership of 25% or more of the outstanding voting securities of the
Company or (ii) any offer by any person to acquire any voting securities of the
Company which, if accepted, would result in the beneficial ownership by such
person of 25% or more
33
<PAGE>
of the outstanding voting securities of the Company, may accelerate the time
within which such stock options may be exercised.
9. AMENDMENT AND TERMINATION OF PLAN.
The Plan may be amended or terminated by the Board in any respect except that
(other than pursuant to paragraph 7 of the Plan) no amendment may be made
without stockholder approval if such amendment would increase the maximum number
of shares available for issuance pursuant to the Plan or change the class of
employees eligible to participate in the Plan.
10. GOVERNMENTAL APPROVAL; INVESTMENT PURPOSE
No option shall be granted under the Plan and no shares shall be issued,
transferred or delivered upon exercise of any option granted under the Plan
unless the Board is satisfied that there has been full compliance with all
applicable requirements of the Securities Act of 1933 and state law, all
applicable requirements of any national securities exchange on which the
Company's shares are then listed, and all other requirements of law or of any
regulatory bodies having jurisdiction over the granting of such options or of
the issuance, transfer or delivery of shares thereunder. The Board may, if it
shall deem it necessary or desirable, require any person acquiring shares
pursuant to the exercise of an option under the Plan to represent to and agree
with the Company in writing that such person is acquiring the shares for
investment purposes. The Board may also cause to be stamped or printed on the
back of the certificate or certificates representing the shares so acquired a
legend in such form as it shall determine referring to the fact that the shares
have not been registered under the Securities Act of 1933 or applicable state
law and may not be sold or offered for sale unless registered pursuant to the
provisions of that Act or applicable state law or unless an exemption from such
registration is available.
11. EXCULPATION
Each member of the Board and each officer and agent of the Company shall be
fully justified in relying or acting in good faith upon any information
furnished to him in connection with the administration of the Plan. In no event
shall any person who is or shall have been a member of the Board or an officer
or agent of the Company be held liable for any determination made or other
action taken or any omission to act in reliance upon such information, or for
any action (including the furnishing of information) taken or any failure to
act, if in good faith.
12. MISCELLANEOUS.
(a) No Right to a Grant. Neither the adoption of the Plan nor any
action of the Board shall be deemed to give any employee any right to be
selected as a participant in the Plan or to be granted a stock option.
34
<PAGE>
(b) Rights as a Stockholder. No person shall have any rights as a
stockholder of the Company with respect to any shares covered by a stock option
until the date of the issuance of a stock certificate to such person pursuant to
the exercise of such stock option.
(c) Employment. Nothing contained in this Plan shall be deemed to
confer upon any employee any right of continued employment with the Company or
any of its subsidiaries or to limit or diminish in any way the right of the
Company or any such subsidiary to terminate his or her employment at any time
with or without cause.
(d) Taxes. The Company may require a participant to pay to the Company
(by deduction or otherwise), prior to and as a condition of making any delivery
of shares or any cash payment pursuant to any exercise of a stock option, the
amount of any tax required by law to be withheld with respect to such exercise.
(e) Nontransferability. No stock option shall be transferable except
by will or the laws of descent and distribution and shall be exercisable only by
the holder during his or her lifetime.
(f) Joint Tenancy. Upon notice to the Company by a participant in the
Plan, any shares of Common Stock of the Company to be issued hereunder may be
issued to said participant and a person designated by said participant in joint
tenancy with rights of survivorship.
(g) Notices. Any notice provided for hereunder shall be deemed to have
been duly given if delivered in person or mailed by certified or registered
mail, return receipt requested, to the Company at 10920 Lincoln Avenue, West
Allis, Wisconsin 53227, or to a participant at his or her address appearing in
the payroll records of the Company or a subsidiary of the Company. The Company
or said participant may from time to time designate some other address by notice
in writing given in accordance with the provisions of this paragraph 12(g).
(h) Applicable Law. This Agreement shall be construed under and
governed by the laws of the State of Wisconsin.
35
<PAGE>
BY OVERNIGHT MAIL AND CERTIFIED MAIL - RETURN RECEIPT REQUESTED
NOTICE OF EXERCISE OF RENEWAL OPTION
August 27, 1996
To: Riverside Associates Limited Partnership
Lincoln Property Company
1530 Wilson Boulevard
Suite 200
Arlington, Virginia 22209
Re: Office/Warehouse Lease Agreement dated December 10, 1991, by and between
Riverside Associates Limited Partnership as Landlord and Sullivan Dental
Products, Inc. as Tenant (the "Lease") for the premises commonly known as
4610 Mercedes Drive, Belcamp, Maryland 21017
PLEASE TAKE NOTICE that the undersigned Tenant, pursuant to Paragraph 45 of the
above-referenced Lease, does hereby exercise its option to renew said Lease for
an additional term of five (5) years to commence on March 1, 1997, and to expire
on February 28, 2002, upon the terms and conditions set forth in the Lease.
Please acknowledge your receipt of this Notice by signing the enclosed duplicate
original of this Notice where indicated and returning same to the undersigned in
the self-addressed, stamped envelope provided.
If you have any questions, please advise.
SULLIVAN DENTAL PRODUCTS, INC.
By /S/ KENNETH A. SCHWING
----------------------------------------
(Vice) President
The undersigned hereby acknowledges receipt of the foregoing Notice of Exercise
of Renewal Option and agrees that the Lease is hereby extended by five (5) years
through February 28, 2002, at such rental rates and upon such terms as are set
forth in such Lease.
RIVERSIDE ASSOCIATES LIMITED PARTNERSHIP
By J. PAUL BILL
------------------------------
Authorized Agent
cc: Wolfe, Wolfe & Ryd
36
<PAGE>
August 27, 1996
BY OVERNIGHT MAIL AND CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Riverside Associates Limited Partnership
Lincoln Property Company
1530 Wilson Boulevard, Suite 200
Arlington, Virginia 22209
Attention: Mr. Neil Alt
Re: Office/Warehouse Lease Agreement dated
December 10, 1991, by and between
Riverside Associates Limited
Partnership, as Landlord, and Sullivan
Dental Products, Inc., as Tenant, (the
"Lease") for the premises commonly known
as 4610 Mercedes Drive, Belcamp,
Maryland (the "Premises")
Dear Mr. Alt:
This shall confirm the parties' agreement that the above referenced Lease, as
extended by Notice of Exercise of Renewal Option dated August 27, 1996, shall be
amended as follows:
1. On or before March 1, 1997, Landlord shall, at its sole cost and
expense: (a) paint the office area of the Premises with satin or
semi-gloss paint, the color of which shall be selected by Tenant; and
(b) clean the carpet within the Premises.
2. Notwithstanding anything to the contrary contained in the Lease,
Tenant's sole obligation for the maintenance and/or repair of the HVAC
system in the Premises shall be to keep in effect during the entire
Renewal Term, including any extensions thereof, at Tenant's sole cost
and expense, a maintenance agreement with an established contractor
providing for periodic (at least quarterly) inspection, servicing and
repair (the "Work") of the HVAC system serving the Premises, which
Work shall include, without limitation, the lubrication of all parts,
the inspection of all cooling towers, the inspection and correction of
all fluid levels, the replacement of all belts, bearings and filters
and all other services customarily required for preventative
maintenance.
3. Notwithstanding anything to the contrary contained in the Lease,
Tenant's sole obligation for the maintenance and/or repair of the
sprinkler system in the Premises shall be to keep in effect during the
entire Renewal Term, including any extensions thereof, at Tenant's
sole cost and expense, a maintenance agreement with an established
contractor providing for periodic (at least annual) inspection,
servicing and repair of the sprinkler system serving the Premises.
4. Paragraph 27 of the Lease be and hereby is amended to exclude from
such Landlord's Lien any and all of Tenant's inventory, whether such
inventory is located within the Premises or elsewhere.
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Mr. Neil Alt
August 27, 1996
Page 2
5. If, at the end of the Renewal Term (the "First Renewal Term"), Tenant
is not in material default of any of the terms, conditions, or
covenants of the Lease, as modified herein, Tenant, but not any
assignee or subtenant of Tenant, is hereby granted one (1) option to
renew this Lease for an additional term of five (5) years (the "Second
Renewal Term") upon the same terms and conditions contained in the
Lease, as modified herein, with the following exceptions:
a. The Second Renewal Term will contain no further renewal options
unless granted by Landlord in writing; and
b. Rental during the Second Renewal Term shall be the market rate
for similar office/warehouse projects within the Belcamp,
Maryland area as agreed upon by Landlord and Tenant within sixty
(60) days after Tenant exercises this Second Renewal Option;
provided, however, that said rental during the Second Renewal
Term shall not be less than the rental in effect during the First
Renewal Term.
If Tenant desires to renew this Lease for a Second Renewal Term,
Tenant will notify Landlord of its intention to renew no later than
six (6) months prior to the expiration date of the First Renewal Term.
Please confirm your agreement with the foregoing by signing the enclosed copy of
this letter where indicated and returning same to me via facsimile and mail.
Thank you for your cooperation.
Very truly yours,
SULLIVAN DENTAL PRODUCTS, INC.
By /S/ KENNETH A. SCHWING
----------------------------------------
Kenneth A. Schwing, Vice President
cc: Wolfe, Wolfe & Ryd
THE UNDERSIGNED HEREBY ACKNOWLEDGES AGREEMENT
WITH THE FOREGOING AMENDMENTS TO THE ABOVE
REFERENCED LEASE:
RIVERSIDE ASSOCIATES LIMITED PARTNERSHIP
By J. PAUL BILL
----------------------------------------
Authorized Agent
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<PAGE>
INDUSTRIAL BUILDING LEASE
DATE OF LEASE TERM OF LEASE MONTHLY RENT
- ------------- ------------- ------------
BEGINNING ENDING
--------- ------
September 30, 1996 November 1, 1996 October 31, 2011 See Rider Paragraph R2
Location of Premises:
See Legal Description attached hereto as Exhibit "A" and hereby made a part
hereof;
Commonly known as 10920 West Lincoln Avenue, West Allis, Wisconsin
Purpose:
To operate a Dental Supply Company
LESSEE LESSOR
- ------ ------
NAME: Sullivan Dental Products, Inc. NAME AND H & S Investment, L.L.C.
10920 West Lincoln Avenue BUSINESS 10920 West Lincoln Avenue
ADDRESS West Allis, Wisconsin 53227 ADDRESS West Allis, Wisconsin
53227
In consideration of the mutual covenants and agreements herein stated,
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor solely for
the above purpose the premises designated above (the "Premises"), together with
the appurtenances thereto, for the above Term.
1. RENT. Lessee shall pay Lessor or Lessor's agent as rent for the
Premises the sum stated above, monthly in advance, until termination of this
lease, at Lessor's address stated above or such other address as Lessor may
designate in writing.
2. CONDITION AND UPKEEP OF PREMISES. Lessee has examined and knows the
condition of the Premises and has received the same in good order and repair,
and acknowledges that no representations as to the condition and repair thereof
have been made by Lessor, or his agent, prior to or at the execution of this
lease that are not herein expressed; Lessee will keep the Premises including all
appurtenances, in good repair, replacing all broken glass with glass of the same
size and quality as that broken, and will replace all damaged plumbing fixtures
with others of equal quality, and will keep the Premises, including adjoining
alleys, in a clean and healthful condition according to the applicable municipal
ordinances ' and the direction of the proper public officers during the term of
this lease at Lessee's expense, and will without injury to the roof, remove all
snow and ice from the same when necessary, and will remove the snow and ice from
the sidewalk abutting the Premises; and upon the termination of this lease, in
any way, will yield up the Premises to Lessor, in good condition and repair,
loss by fire and ordinary wear excepted, and will deliver the keys therefor at
the place of payment of said rent.
3. LESSEE NOT TO MISUSE; SUBLET; ASSIGNMENT. Lessee will not allow the
Premises to be used for any purpose that will increase the rate of insurance
thereon, nor for any purpose other than that hereinbefore specified, and will
not load floors with machinery or goods beyond the floor load rating prescribed
by applicable municipal ordinances, and will not allow the Premises to be
occupied in whole, or in part, by any other person, and will not sublet the same
or any part thereof, nor assign this lease without in each case the written
consent of the Lessor first had, and Lessee will not permit any transfer by
operation of law of the interest in the Premises acquired through this lease,
and will not permit the Premises to be used for any unlawful purpose, or for any
purpose that will injure the reputation of the building or increase the fire
hazard of the building, or disturb the tenants or the neighborhood, and will not
permit the same to remain vacant or unoccupied for more than ten consecutive
days; and will not allow any signs, cards or placards to be posted, or placed
thereon, nor permit any alteration of or addition to any part of the Premises,
except by written consent of Lessor; all ilterations ind additions to the
Premises shall remain for the benefit of Lessor unless otherwise provided in the
consent aforesaid.
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<PAGE>
4. MECHANIC'S LIEN. Lessee will not permit any mechanic's lien or liens
to be placed upon the Premises or any building or improvement thereon during the
term hereof, and in case of the filing of such lien Lessee will promptly pay
same. If default in payment thereof shall continue for thirty (30) days after
written notice thereof from Lessor to the Lessee, the Lessor shall have the
right and privilege at Lessor's option of paying the same or any portion thereof
without inquiry as to the validity thereof, and any amounts so paid, including
expenses and interest, shall be so much additional indebtedness hereunder due
from Lessee to Lessor and shall be repaid to Lessor immediately on rendition of
bill therefor.
5. INDEMNITY FOR ACCIDENTS. Lessee covenants and agrees that he will
protect and save and keep the Lessor forever harmless and indemnified against
and from any penalty or damages or charges imposed for any violation of any laws
or ordinances, whether occasioned by the neglect of Lessee or those holding
under Lessee, and that Lessee will at all times protect, indemnify and save and
keep harmless the Lessor against and from any and all loss, cost, damage or
expense, arising out of or from any accident or other occurrence on or about the
Premises, causing injury to any person or property whomsoever or whatsoever and
will protect, indemnify and save and keep harmless the Lessor against and from
any and all claims and against and from any and all loss, cost, damage or
expense arising out of any failure of Lessee in any respect to comply with and
perform all the requirements and provisions hereof.
6. NON-LIABILITY OF LESSOR. Except as provided by Wisconsin statute,
Lessor shall not be liable for any damage occasioned by failure to keep the
Premises in repair, nor for any damage done or occasioned by or from plumbing,
gas, water, sprinkler, steam or other pipes or sewerage or the bursting, leaking
or running of any pipes, tank or plumbing fixtures, in, above, upon or about
Premises or any building or improvement thereon nor for any damage occasioned by
water, snow or ice being upon or coming through the roof, skylights, trap door
or otherwise, nor for any damages arising from acts or neglect of any owners or
occupants of adjacent or contiguous property.
7. WATER, GAS AND ELECTRIC CHARGES. Lessee will pay, in addition to
the rent above specified, all water rents, gas and electric light and power
bills taxed, levied or charged on the Premises, for and during the time for
which this lease is granted, and in case said water rents and bills for gas,
electric light and power shall not be paid when due, Lessor shall have the right
to pay the same, which amounts so paid, together with any sums paid by Lessor to
keep the Premises in a clean and healthy condition, as above specified, are
declared to be so much additional rent and payable with the installment of rent
next due thereafter.
8. KEEP PREMISES IN REPAIR. Lessor shall not be obliged to incur any
expense for repairing any improvements upon said demised premises or connected
therewith, and the Lessee at his own expense will keep all improvements in good
repair (injury by fire, or other causes beyond Lessee's control excepted) as
well as in a good tenantable and wholesome condition, and will comply with all
local or general regulations, laws and ordinances applicable thereto, as well as
lawful requirements of all competent authorities in that behalf. Lessee will,
as far as possible, keep said improvements from deterioration due to ordinary
wear and from falling temporarily out of repair. If Lessee does not make
repairs as required hereunder promptly and adequately, Lessor may but need not
make such repairs and pay the costs thereof, and such costs shall be so much
additional rent immediately due from and payable by Lessee to Lessor.
9. ACCESS TO PREMISES. Lessee will allow Lessor free access to the
Premises for the purpose of examining or exhibiting the same, or to make any
needful repairs, or alterations thereof which Lessor may see fit to make and
will allow to have placed upon the Premises at all times notice of "For Sale"
and "To Rent", and will not interfere with the same.
10. ABANDONMENT AND RELETTING. If Lessee shall abandon or vacate the
Premises, or if Lessee's right to occupy the Premises be terminated by Lessor by
reason of Lessee's breach of any of the covenants herein, the same may be relet
by Lessor for such rent and upon such terms as Lessor may deem fit, subject to
Wisconsin statute; and if a sufficient sum shall not thus be realized monthly,
after paying the expenses of such re-letting and collecting to satisfy the rent
hereby reserved, Lessee agrees to satisfy and pay all deficiency monthly during
the remaining period of this lease.
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<PAGE>
11. HOLDING OVER. Lessee will, at the termination of this lease by
lapse of time or otherwise, yield up immediate possession to Lessor, and failing
so to do, will pay as liquidated damages, for the whole time such possession is
withheld, the sum of Five Hundred Dollars ($ 500.00) per day; but the provisions
of this clause shall not be held as a waiver by Lessor of any right of re-entry
as hereinafter set forth; nor shall the receipt of said rent or any part
thereof, or any other act in apparent affirmance of tenancy, operate as a waiver
of the right to forfeit this lease and the term hereby granted for the period
still unexpired, for a breach of any of the covenants herein.
12. EXTRA FIRE HAZARD. There shall not be allowed, kept, or used on the
Premises any inflammable or explosive liquids or materials save such as may be
necessary for use in the business of the Lessee, and in such case, any such
substances shall be delivered and stored in amount, and used, in accordance with
the rules of the applicable Board of Underwriters and statutes and ordinances
now or hereafter in force.
13. DEFAULT BY LESSEE. If default be made in the payment of the above
rent, or any part thereof, or in any of the covenants herein contained to be
kept by the Lessee, Lessor may at any time thereafter at his election declare
said term ended and reenter the Premises or any part thereof, with or (to the
extent permitted by law) without notice or process of law, and remove Lessee or
any persons occupying the same, without prejudice to any remedies which might
otherwise be used for arrears of rent, and Lessor shall have at all times the
right to distrain for rent due, and shall have a valid and first lien upon all
personal property which Lessee now owns, or may hereafter acquire or have an
interest in, which is by law subject to such distraint, as security for payment
of the rent herein reserved.
14. NO RENT DEDUCTION OR SET OFF. Lessee's covenant to pay rent is and
shall be independent of each and every other covenant of this lease. Lessee
agrees that any claim by Lessee against Lessor shall not be deducted from rent
nor set off against any claim for rent in any action.
15. RENT AFTER NOTICE OR SUIT. It is further agreed, by the parties
hereto, that after the service of notice, or the commencement of a suit or after
final judgment for possession of the Premises, Lessor may receive and collect
any rent due, and the payment of said rent shall not waive or affect said
notice, said suit, or said judgment.
16. PAYMENT OF COSTS. Lessee will pay and discharge all reasonable
costs, attorney's fees and expenses that shall be made and incurred by Lessor in
enforcing the covenants and agreements of this lease.
17. RIGHTS CUMULATIVE. The rights and remedies of Lessor under this
lease are cumulative. The exercise or use of any one or more thereof shall not
bar Lessor from exercise or use of any other right or remedy provided herein or
otherwise provided by law, nor shall exercise nor use of any right or remedy by
Lessor waive any other right or remedy.
18. FIRE AND CASUALTY. In case the Premises shall be rendered
untenantable during the term of this lease by fire or other casualty, Lessor at
his option may terminate the lease or repair the Premises within 60 days
thereafter. If Lessor elects to repair, this lease shall remain in effect
provided such repairs are completed within said time. If Lessor shall not have
repaired the Premises within said time, then at the end of such time the term
hereby created shall terminate. If this lease is terminated by reason of fire
or casualty as herein specified, rent shall be apportioned and paid to the day
of such fire or other casualty.
19. SUBORDINATION. This lease is subordinate to all mortgages which may
now or hereafter affect the Premises.
20. PLURALS; SUCCESSORS. The words "Lessor" and "Lessee" wherever
herein occurring and used shall be construed to mean "Lessors" and "Lessees" in
case more than one person constitutes either party to this lease; and all the
covenants and agreements contained shall be binding upon, and inure to, their
respective successors, heirs, executors, administrators and assigns and may be
exercised by his or their attorney or agent.
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<PAGE>
21. SEVERABILITY. Wherever possible each provision of this lease shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this lease shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this lease.
If this instrument is executed by a corporation, such execution has been
authorized by a duly adopted resolution of the Board of Directors of such
corporation.
This lease consists of 5 pages numbered 1 to 5, including a rider
consisting of 2 pages, identified by Lessor and Lessee.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of
the Date of Lease stated above.
LESSEE: Sullivan Dental Products, Inc. LESSOR: H&S Investments, L.L.C.
/S/ TIMOTHY J. SULLIVAN (Seal) /S/ ROBERT J. SULLIVAN (Seal)
- -------------------------------- --------------------------------
(Vice) President Robert J. Sullivan, Manager
/S/ TIMOTHY J. SULLIVAN (Seal) /S/ WAYNE G. HOLT (Seal)
- -------------------------------- --------------------------------
(Assistant) Secretary Wayne G. Holt, Manager
42
<PAGE>
RIDER TO INDUSTRIAL BUILDING LEASE DATED SEPTEMBER 30, 1996
BY AND BETWEEN SULLIVAN DENTAL PRODUCTS, INC.,
A WISCONSIN CORPORATION, AS LESSEE,
AND H & S INVESTMENTS, L.L.C., AS LESSOR,
FOR THE PREMISES COMMONLY KNOWN AS
10920 W. LINCOLN AVENUE, WEST ALLIS, WISCONSIN (THE "PROPERTY")
R-1. In the event that the terms of this Rider shall conflict with the terms of
the Industrial Building Lease to which this Rider is attached, then the
terms of this Rider shall prevail.
R-2. Rent shall be due as follows:
a. For the period November 1, 1996, through October 31, 1999, the amount
of base rent shall be $544,548 per year, payable in monthly
installments of $45,379.
b. For the period November 1, 1999, through October 31, 2002, the amount
of base rent shall be $593,556 per year, payable in monthly
installments of $49,463.
c. For the period November 1, 2002, through October 31, 2005, the amount
of base rent shall be $646,980 per year, payable in monthly
installments of $53,915.
d. For the period November 1, 2005, through October 31, 2008. the amount
of base rent shall be $705,204 per year, payable in monthly
installments of $58,767.
e. For the period November 1, 2008, through October 31, 2011, the amount
of base rent shall be $768,672 per year, payable in monthly
installments of $64,056.
R-3. Lessee shall, during the entire term hereof, keep in full force and effect
a policy or policies of public liability and property damage insurance with
respect to the Property and the business operated by Lessee and any
sublessees of Lessee in the Property in which the limits of public
liability shall be not less than $200,000.00 per person and $500,000.00 per
accident and in which the property damage liability shall not be less than
$50,000.00. The policy or policies shall name Lessor, any person, firms or
corporations designated by Lessor, and Lessee as the insured, and shall
contain a clause that Lessee will not cancel or change the insurance
without first giving Lessor thirty (30) days prior written notice.
R-4. Each of the parties hereto hereby waives any and all rights of action for
negligence against the other party hereto which may hereafter arise for
damage to the Property, to the personal property therein, or for the right
to use and occupancy, resulting from any fire or other casualty of the kind
covered by a standard fire insurance policy with extended coverage,
regardless of whether or not or in what amounts such insurance is now or
hereafter carried by the parties hereto, or either of them. Where Lessee
obtains such insurance, it shall provide Lessor, prior to the commencement
of the term of the Lease, with a certificate of insurance.
R-5. Lessee further agrees to obey all ordinances of the City of West Allis,
Wisconsin, in regard to cleaning of the streets and alleys and sidewalks in
front of the Property and any and all lawful orders, rules and regulations
of the proper health officers of said City.
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<PAGE>
R-6. During the term of the Lease, Lessee shall pay as additional rent all real
estate taxes, assessments, and general or special assessments imposed on
the Property. Within ten (10) days after receipt of a copy of the real
estate tax bill for the Property, Lessee shall pay to Lessor the sums due
pursuant to such real estate tax bill. If said real estate tax bill covers
any period of time during which Lessee does not occupy the Property, Lessee
shall pay its pro rata share of such real estate tax bill, based upon a 365
day year and the number of days that Lessee does occupy the Property.
LESSEE: LESSOR:
SULLIVAN DENTAL PRODUCTS, INC., a H & S INVESTMENTS, L.L.C.
Wisconsin corporation
By /S/ TIMOTHY J. SULLIVAN By /S/ ROBERT J. SULLIVAN
---------------------------------- --------------------------------------
(Vice) President Robert J. Sullivan, Manager
By /S/ WAYNE G. HOLT
--------------------------------------
Wayne G. Holt, Manager
ATTEST:
/S/ TIMOTHY J. SULLIVAN
- ------------------------------------
(Assistant) Secretary
44
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement made and entered into this 31st day of October, 1995
by and between Sullivan Dental Products, Inc., a Delaware corporation (Company),
and Kerry B. Wolfe (Optionee).
WITNESSETH:
WHEREAS, on the 31st day of October, 1995, the Board of Directors of the
Company authorized the appropriate officers of the Company to grant a
non-qualified stock option to the Optionee; and
WHEREAS, the Optionee performs valuable services for and makes substantial
contributions to the Company; and
WHEREAS, the Company considers it desirable and in its best interest that
the Optionee has the opportunity to purchase shares of the Company's common
stock, $.01 par value (Common Shares) upon the terms and conditions herein set
forth.
NOW, THEREFORE, in consideration of the premises, it is hereby understood
and agreed as follows that:
1. The Company hereby grants to the Optionee the option to purchase 5,000
Common Shares at a purchase price equal to $9.75 per share, in the manner and
subject to the conditions hereinafter provided (Option).
2. The Option may be exercised at any time and from time to time, in
whole or in part, until 5:00 p.m. on the 30th day of October, 2005.
3. The Optionee shall exercise the Option by delivering to the Company
the following:
A) A written notice executed by Optionee stating that he is
exercising the Option and the number of Common Shares to be purchased
pursuant to the Option; and
B) The purchase price for the Stock, which shall be evidenced
by a twelve (12) month promissory note executed by the Optionee which said
promissory note shall provide for full recourse against the Optionee and
shall further provide for the Optionee to pay interest quarterly at the
then applicable federal rate pursuant to the appropriate section of the
Internal Revenue Code of 1986, as amended, or any successor statute and the
regulations promulgated thereunder and which said
45
<PAGE>
promissory note shall further provide for the right of prepayment from time
to time without penalty; and
C) Collateral other than the Common Stock being purchased hereunder,
which said collateral shall have a fair market value equal to at least the
purchase price of the Common Shares being purchased hereunder.
4. The Company shall, upon receipt of said written notice, executed
promissory note and collateral, cause delivery to the Optionee of the Common
Stock being purchased pursuant to said written notice.
5. If the number of issued Common Shares shall be increased or reduced by
changes in par value, reclassification, stock dividend, stock split, or other
similar event, the number of Common Shares subject to the Option and the Option
price per share shall be equitably adjusted. Unless otherwise determined by the
Board, each outstanding stock option shall automatically terminate upon the
effective date of:
(a) the liquidation or dissolution of the Company,
(b) any merger or consolidation in which the Company is not the surviving
corporation or pursuant to which the Common Stock of the Company does not remain
outstanding, or
(c) the acquisition by another person of all or substantially all of the
assets of the Company.
6. The Option is non-transferable by the Optionee, except in the event of
his death as provided in Paragraph 7 below, and during the Optionee's lifetime
is exercisable only by him. The Optionee shall have no rights as a stockholder
with respect to the Common Shares covered by the Option until payment of the
option price and delivery to him of certificates for such Common Shares as
herein provided.
7. The Optionee hereby represents and warrants to the Company that the
Common Shares acquired by him pursuant to exercise of the Option will be
acquired solely for his own account for investment only, and any sale, transfer
or other disposition of such Common Shares by him will be made in compliance
with all applicable federal and state security laws. In the event of the death
of the Optionee,
46
<PAGE>
the rights under this Option may be devised by will, and in the absence of a
will, shall pass pursuant to the laws of descent and distribution of the state
of his domicile.
8a. The Company hereby advises the Optionee, and the Optionee hereby
acknowledges that he understands that the Common Shares acquired by him upon
exercise of the Option may not then be registered under the Securities Act of
1933 (Act) and such shares must be held by him until they are registered under
the Act or any exemption from such registration is available. Certificates for
all Common Shares purchased pursuant to exercise of the Option will bear the
following legend:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933. The securities may not be sold or
transferred in the absence of such registration or an exemption therefrom
under said Act."
8b. The Optionee hereby acknowledges that the Company may place a stop
transfer order with the transfer agent of the Common Shares regarding the
transfer of the Optionee's Common Shares purchased pursuant to exercise of the
Option. Such shares are commonly known as "Restricted Securities". The Company
shall have no obligation to take any action that may be necessary to make
available any exemption from registration under the Act.
8c. Upon exercise of the Option, the Company shall deliver to the
Optionee, and the Optionee shall acknowledge that he has received, reviewed, and
is familiar with certain releases, rules, notices and the like issued by the
Securities and Exchange Commission, including but not limited to Rule 144 under
the Act, which are in effect on the date the Option is exercised which
establishes definitive guidelines governing, among other things, the resale of
"Restricted Securities." The Optionee understands that reliance on Rule 144 to
sell securities is subject to certain restrictions and limitations which are
currently as follows:
i. The Optionee must have been the beneficial owner of the Common
Shares for at least two (2) years and the full purchase price have been
paid at least two (2) years prior to the sale. In computing the two (2)
year holding period, there must be excluded any period during
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<PAGE>
which the Optionee had a short position in or any put or other options to
dispose of any Common Shares.
ii. There is a limitation on the amount of Common Shares which can be
sold during any three (3) month period. This limitation is the greater of
(a) one percent of the outstanding Common Shares as shown by the most
recent financial statements published by the Company, or (b) the average
weekly reported volume of trading in such securities on all national
securities exchanges and/or reported through the Automated Quotation System
for a Registered Securities Association during the four (4) calendar weeks
preceding the filing of the notice of sale with the Securities and Exchange
Commission as required by Rule 144, or (c) the average weekly volume of
trading of Common Shares reported through the consolidated transaction
reporting system contemplated by Rule 11Aa3-1 under the Securities Exchange
Act of 1934 during the four (4) week period described in the aforesaid
Rule. If the Optionee is not an affiliate of the Company (the term
affiliate being defined to mean a person that directly or indirectly
through one or more intermediaries controls or is controlled by or is under
common control with the Company) these restrictions shall not apply if the
Optionee owned the Common shares for three (3) years or more.
iii. The Common Shares can only be sold in "broker's transactions" as
that term is defined in Rule 144.
iv. The Optionee may be required to file a notice of proposed sale
(on Form 144) with the Securities and Exchange Commission concurrently with
the placing of an order to execute the sale.
8d. In connection with any disposition of the Common Shares by the
Optionee under Rule 144 or pursuant to some other exemption available to the
Optionee under federal or state securities laws, the Optionee may be required to
deliver to the Company an opinion from his counsel and/or to receive an opinion
of counsel from the Company to the effect that all applicable requirements have
been met.
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<PAGE>
8e. In addition to the above requirements, the Optionee acknowledges that
unless he consults his tax advisor prior to a sale of the Common Shares acquired
as a result of exercise of the Option, he may be taxed at ordinary income rates
as a result of the sale thereof.
9. Taxes. The Company may require the Optionee to pay to the Company
(by deduction or otherwise), prior to and as a condition of making any delivery
of shares or any cash payment pursuant to any exercise of a stock option, the
amount of any tax required by law to be withheld with respect to such exercise.
10. Joint Tenancy. Upon notice to the Company by the Optionee, any
Common Shares to be issued hereunder may be issued to the Optionee and a person
designated by the Optionee in joint tenancy with rights of survivorship.
11. Notices. Any notice provided for in this Agreement shall be
deemed to have been duly given if delivered in person or mailed by certified or
registered mail, return receipt requested, to the Company at 10920 W. Lincoln
Avenue, West Allis, Wisconsin 53227, or to the Optionee at 126 Park Lane,
Deerfield, Illinois 60015. The Company or the Optionee may from time to time
designate some other address by notice in writing given in accordance with the
provisions of this Paragraph 11.
12. Applicable Law. This Agreement shall be construed under and
governed by the laws of the State of Wisconsin.
13. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
SULLIVAN DENTAL PRODUCTS, INC.
ATTEST:
/s/ Timothy J. Sullivan By /s/ Robert E. Doering
- ----------------------------------- -------------------------------------
(Assistant) Secretary (Vice) President
/s/Kerry B. Wolfe
----------------------------------------
Optionee
49
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-61292, No. 33-61294, No. 33-67298, No. 333-3430 and No. 333-11899 of Sullivan
Dental Products, Inc. on Forms S-8, Registration Statements No. 33-61284, No.
33-67294, No. 33-91962 and No. 333-3428 of Sullivan Dental Products, Inc. on
Forms S-3 and Registration Statement No. 333-11901 of Sullivan Dental Products,
Inc. on Form S-4 of our reports dated February 18, 1997, appearing in the Annual
Report on Form 10-K of Sullivan Dental Products, Inc. for the year ended
December 31, 1996.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 24, 1997
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