<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
November 21, 1997
Date of report (Date of earliest event reported)
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0886515
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 686-1600
1
<PAGE>
ITEM 5. OTHER EVENTS
Patterson Dental Company(the "Company") is filing this Current Report on Form
8-K to present the supplemental financial statements, supplemental
management's discussion and analysis of financial condition and results of
operations, and other financial information that give effect to the August 26,
1997 acquisition of Canadian Dental Supply Ltd. ("CDS"), accounted for as a
pooling of interests, by restating 1997 and certain prior years financial
statements and information as if the Company and CDS always had been combined.
Effective August 26, 1997, the Company acquired CDS under a combination
agreement (the "Agreement"). Pursuant to this Agreement, the Company acquired
all the outstanding shares of CDS common stock in exchange for Company common
stock. Each share of CDS's outstanding common stock was converted into the right
to receive 4.216 shares of Company common stock.
The Company issued 112,432 shares of its common stock to acquire CDS. The
acquisition was accounted for as a pooling of interests. CDS is a Vancouver,
British Columbia based distributor of dental supplies and equipment. CDS will
be merged into the Company's Canadian operation.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following supplemental consolidated financial statements of the Company
that give effect to the acquisition of Canadian Dental Supply Ltd.
are included herein:
Supplemental Selected Consolidated Financial Data
Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations
Report of Independent Auditors
Supplemental Consolidated Statements of Income - Years Ended April 26,
1997, April 27, 1996, and April 29, 1995
Supplemental Consolidated Balance Sheets - April 26, 1997 and April 27,
1996
Supplemental Consolidated Statements of Changes in Stockholders'
Equity - Years ended - April 26, 1997, April 27, 1996, and April 29,
1995
Supplemental Consolidated Statements of Cash Flows - Years ended -
April 26, 1997, April 27, 1996, and April 29, 1995
Notes to Supplemental Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
Exhibit 27 - Restated Financial Data Schedules for fiscal years
ending April 27, 1996 and April 26, 1997 and each of the quarters
ending July 27, 1996, October 26, 1996, January 25, 1997, and July 26,
1997.
2
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ITEM 9 Sales of Equity Securities Pursuant to Regulation S
On November 21, 1997, Patterson Dental Company (the "Company") sold an
aggregate of 7,856 shares of its common stock (the "Shares"), valued at $34.25
per share, in a private transaction with Canadian investors, pursuant to
Regulation S under the securities Act of 1933, as amended. The sale of the
Shares was in addition to the sale, previously reported by the Company on Form
8-K on September 5, 1997, whereby the Company acquired approximately 91 percent
of the outstanding shares of Canadian Dental Supply Ltd. ("Canadian Dental").
The Company has now acquired 100 percent of Canadian Dental and, after post
closing adjustments, has sold a total of 112,432 shares of its common stock in
this transaction. The Company's reliance upon Regulation S was based on
representations by the investors regarding domicile and investment intent.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PATTERSON DENTAL COMPANY
Date November 25, 1997
By /s/ RONALD E. EZERSKI
-----------------------
Ronald E. Ezerski
Executive Vice President,
Treasurer, Secretary
and Chief Financial Officer
3
<PAGE>
1. SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
April 26, April 27, April 29, April 30, April 24,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Net sales $687,895 $606,983 $558,648 $492,561 $369,719
Cost of sales 440,262 392,091 358,868 316,628 239,926
-------- -------- -------- -------- --------
Gross profit 247,633 214,892 199,780 175,933 129,793
Operating expenses 196,448 170,958 160,501 143,915 109,312
-------- -------- -------- -------- --------
Operating income 51,185 43,934 39,279 32,018 20,481
Other income (expense) - net 1,119 1,711 946 591 85
-------- -------- -------- -------- --------
Income before income taxes and extraordinary item 52,304 45,645 40,225 32,609 20,566
Income taxes 19,687 16,997 15,396 12,824 7,251
-------- -------- -------- -------- --------
Income before extraordinary item 32,617 28,648 24,829 19,785 13,315
Extraordinary item (1)
(less income tax benefit of $281) -- -- -- -- (453)
-------- -------- -------- -------- --------
Net income $ 32,617 $ 28,648 $ 24,829 $ 19,785 $ 12,862
======== ======== ======== ======== ========
Earnings per common and common
equivalent share: (2)
Earnings before extraordinary item $1.50 $1.29 $1.12 $0.89 $ 0.62
Loss - extraordinary item (1) -- -- -- -- (0.02)
-------- -------- -------- -------- --------
Net earnings $1.50 $1.29 $1.12 $0.89 $ 0.60
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding (2) 21,793 21,651 21,600 21,597 19,954
Dividends per common share (2) -- -- -- -- --
Balance Sheet Data:
- -------------------
Working capital $ 96,893 $114,883 $ 90,392 $ 76,100 $ 61,089
Total assets 255,311 212,973 179,307 144,475 113,545
Total debt 10,792 10,681 9,664 13,557 5,209
Stockholders' equity 163,662 127,852 97,555 73,897 54,496
</TABLE>
(1) Relates to retirement of bank debt from proceeds of initial public
offering.
(2) Amounts are adjusted for a three-for-two split on June 17, 1994.
4
<PAGE>
2. SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INTRODUCTION:
Patterson Dental Company ("Patterson" or the "Company") distributes dental
supplies and equipment in the United States and Canada. The Company currently
supplies a full line of over 75,000 products to dentists, dental laboratories
and institutions. These products include supplies such as x-ray film and
solutions, impression materials and restorative materials, hand instruments and
sterilization and protective products and equipment such as x-ray machines,
handpieces, dental chairs, dental handpiece control units, diagnostic equipment,
sterilizers, dental lights and compressors. The Company's product line includes
approximately 1,500 private-label products sold under the Patterson name.
Patterson also offers customers a full range of related services including
dental equipment installation, maintenance and repair, dental office design and
equipment financing. Unless otherwise indicated, all references to Patterson or
the Company include its subsidiaries: Direct Dental Supply Co.; Patterson Dental
Canada, Inc.; Patterson Dental Supply, Inc.; and Canadian Dental Supply Ltd..
Patterson's objective is to remain one of the leading distributors of
dental supplies, equipment and related services in North America while
continuing to improve its profitability and enhance its value to customers. To
achieve this objective, Patterson has adopted a strategy of emphasizing its
full-service capabilities, using technology to enhance customer service,
continuing to improve operating efficiencies, and growing through internal
expansion and acquisitions.
Effective August 26, 1997, the Company acquired Canadian Dental Supply Ltd.
("CDS") a Vancouver, British Columbia based distributor of dental supplies and
equipment. Each share of CDS's outstanding common stock was converted into the
right to receive 4.216 shares of Company common stock. The Company issued
112,432 shares of its common stock to acquire CDS. The transaction was accounted
for as a pooling of interests. The accompanying supplemental financial
statements give retroactive effect to the acquisition and include CDS for all
periods presented.
The commentary that follows should be read in conjunction with the
Supplemental Consolidated Financial Statements and the Notes to the Supplemental
Consolidated Financial Statements.
The Company's string of record performances results from an effective
growth strategy that has been successfully implemented over the last several
years. Patterson, one of the leaders in the dental supplies industry,
continues to exceed its goal of growing four percentage points faster than the
average industry growth rate. Since 1993, sales grew 17% and net income had a
growth rate of 26% compounded annually, exceeding the Company's goals.
Patterson's significant operating performance is attributable to a well-
developed, well-executed strategy for internal growth, which includes sales
force expansion, new product introduction and effective marketing programs; as
well as its aggressive external plan to grow its customer base and sales force
by acquiring smaller distributors, and more recently, increasing its value as
a single source supplier by acquiring complementary product lines.
Over the last five years, Patterson has completed ten acquisitions, which
contributed to the Company's growth. New product introductions and a
substantial selection of more than 75,000 products supported an increase in the
customer base and an increase in average sales per customer. On average,
consumables make up 62% of total sales; equipment represents 28%.
The Company has achieved an average three-year return on equity of 26%,
return on assets of 15% and return on sales of 5%.
RESULTS OF OPERATIONS
- ---------------------
The following table summarizes the results of operations over the past three
fiscal years as a percent of sales:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales............ 100.0% 100.0% 100.0%
Cost of sales........ 64.0% 64.6% 64.3%
----- ----- -----
Gross profit......... 36.0% 35.4% 35.7%
Operating expenses... 28.6% 28.2% 28.7%
----- ----- -----
Operating income..... 7.4% 7.2% 7.0%
Other income......... .2% .3% .2%
----- ----- -----
Income before taxes.. 7.6% 7.5% 7.2%
Income taxes......... 2.9% 2.8% 2.8%
----- ----- -----
Net income........... 4.7% 4.7% 4.4%
===== ===== =====
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
Net Sales. Net sales for fiscal 1997 grew 13.3% to $687.9 million from
$607.0 million in fiscal 1996. Colwell, acquired on October 1, 1996, contributed
5.5 percentage points of the sales increase. Excluding Colwell, dental supplies
represented 61% of the sales versus 60% in fiscal 1996, and equipment accounted
for 29% the same as last year, while other products and services were 10% versus
11% a year ago. The growth in sales of dental products reflects the success of
aggressive sales and marketing efforts to expand market share with existing and
new customers, and lead the introduction of new technologies. Sales of high-
technology products, such as the KCP 1000 cavity preparation device and CEREC 2,
which makes available chairside restorations in one visit, continue to drive
growth of equipment sales.
Gross Profit. Gross profit increased 15.2% to $247.6 million for fiscal
1997 compared with $214.9 million for fiscal 1996, primarily as a result of
increased sales volume. Gross margin increased to 36.0% versus 35.4% in fiscal
1996, reflecting the impact of higher margin Colwell sales for the last seven
months of the year. Excluding Colwell, margins were essentially flat with prior
year.
Operating Expenses. Operating expenses grew 15.0% to $196.4 million for
fiscal 1997 versus $171.0 million for fiscal 1996, primarily due to the increase
in sales and the related variable expenses. Excluding Colwell, the rate of
growth in operating expenses outpaced the increase in gross margin due to the
conversion of ESOP shares from preferred to common,
5
<PAGE>
which increased operating expense, and higher healthcare costs for employees.
Excluding the impact of the change in accounting for ESOP funding, operating
expenses as a percent of sales would have been 28.4% versus 28.2% for fiscal
1996.
Operating Income. Operating income expanded to $51.2 million, or 7.4% of
sales, in fiscal 1997. This represents a 16.5% increase from $43.9 million, or
7.2% of sales, in fiscal 1996. Operating margins improved slightly, reflecting
the higher margins associated with Colwell.
Other Income. Other income was $1.1 million in fiscal 1997 compared with
$1.7 million in fiscal 1996. The decrease was due to lower interest income
related to reduced short-term investment of excess cash.
Income Taxes. The effective tax rate was 37.6% for fiscal 1997 up
slightly from 37.2% reported in fiscal 1996 due to the loss in Canada, for which
no tax benefit has been recognized.
Net Income. Net income increased $4.0 million, or 13.9%, to $32.6 million
for fiscal 1997 on a 13.3% increase in sales. The net margin remained unchanged
from fiscal 1996 at 4.7%.
Refer to footnote 7 in Notes To Consolidated Financial Statements for the
impact of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation".
FISCAL 1996 COMPARED WITH FISCAL 1995
Net Sales. Net sales increased 8.7% to $607.0 million for fiscal 1996
compared with $558.6 million in fiscal 1995. Supplies constituted 60% of sales
in fiscal 1996 versus 62% in fiscal 1995, and equipment accounted for 29% versus
27%. Other products and services were 11% of sales for both periods. The
increase in sales was attributable primarily to higher unit sales in most of the
Company's product lines and, to a lesser extent, price increases. The unit
increases occurred primarily in equipment sales and more specifically in the
sale of Reveal intra-oral cameras.
Gross Profit. As a result of increased sales, gross profit increased 7.6%
to $214.9 million for fiscal 1996 compared with $199.8 million for fiscal 1995.
Gross margin decreased to 35.4% in fiscal 1996 from 35.7% in fiscal 1995. The
reduction in gross margin was primarily the result of the increase in equipment
sales as a percent of total sales and the lower margin on equipment sales
compared to supply sales, and a larger LIFO adjustment in fiscal 1996.
Operating Expenses. Operating expenses increased 6.5% to $171.0 million
for fiscal 1996 compared with $160.5 million for fiscal 1995. Increased sales
volume was the main reason for the increase in operating expenses. The U.S.
operating expenses as a percent of sales decreased in fiscal 1996. The U.S.
operation's decrease in operating expense ratio was due mainly to its ability to
move more product through its distribution system without incurring a
proportionate increase in expenses. The U.S. operating expense ratio declined to
27.0% from 27.7%, and the Company's Canadian subsidiary operating expense ratio
increased to 35.6% from 34.7%. As a result, the consolidated operating expense
ratio declined to 28.2% from 28.7%.
Operating Income. Operating income increased 11.9% to $43.9 million for
fiscal 1996 compared with $39.3 million for fiscal 1995. Operating income as a
percent of sales increased to 7.2% from 7.0% due primarily to the decrease in
operating expenses as a percent of sales.
Other Income. Other income was $1.7 million in fiscal 1996 compared with
$0.9 million in fiscal 1995. The gain was due mainly to an increase in interest
income from financing customers' equipment purchases, and the short-term
investment of excess cash.
Income Taxes. The company's effective tax rate was 37.2% for fiscal 1996
and 38.3% for fiscal 1995. The decrease in the effective tax rate results
primarily from higher profits in Patterson Canada and utilization of the
Canadian subsidiary's net operating loss carryforwards, and an increase in tax-
exempt interest income. Patterson Canada's income before taxes increased 95% to
$1.4 million for fiscal 1996 from $0.7 million in fiscal 1995.
6
<PAGE>
Net Income. Net income increased $3.8 million, or 15.4%, to $28.6 million
for fiscal 1996 on a 8.7% increase in sales. Net income of $28.6 million
represented a 25.4% return on average equity compared with a return on average
equity of 29.0% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain balance sheet items as a percent
of total assets.
April 26, April 27,
1997 1996
----------- ----------
Total assets.......... 100.0% 100.0%
Current assets........ 68.1 86.3
Current liabilities... 30.1 32.3
Long-term debt........ 2.2 3.0
Stockholders' equity.. 64.1 60.0
Patterson's operating cash flow reflects higher profitability and
improved productivity in the use of working capital. Available liquid resources
at April 26, 1997, consisted of $9.1 million in cash and cash equivalents and
$28 million available under existing bank lines. The acquisition of Colwell on
October 1, 1996, utilized the company's cash balances and a portion of committed
credit lines during the October to January period. All borrowings associated
with the Colwell acquisition have been repaid.
Working capital decreased $18.0 million during fiscal 1997 to $96.9
million at April 26, 1997, primarily reflecting the decline in excess cash
balances associated with the purchase of Colwell. Liquidity, as measured by the
current ratio at the end of fiscal year 1997, declined to 2.3 to 1 from 2.7 to 1
reported last year.
Capital expenditures, net of dispositions, were $5.0 million in fiscal
1997 versus $7.7 million in fiscal 1996. In fiscal 1997, $61.2 million was
invested in acquisitions versus $2.4 million last year. Refer to footnote 2 in
Notes To Consolidated Financial Statements for discussion of the Colwell
acquisition.
The Company believes that funds from operations and the remainder of its
committed bank lines are sufficient to meet any other existing and presently
anticipated needs. In addition, the Company believes it has sufficient debt
capacity to obtain the necessary funds for use in accomplishing its corporate
objectives.
7
<PAGE>
ASSET MANAGEMENT
The following table summarizes the Company's days sales outstanding
(DSO), inventory turnover, and sales per employee over the past three fiscal
years:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Day sales outstanding 46 45 45
Inventory turnover(1) 7.4 6.6 6.3
Sales per employee (000's) $ 223 $ 228 $ 220
</TABLE>
(1) The inventory values used in this calculation are the LIFO inventory values
for U.S. dental inventories and the FIFO inventory value for Canadian and
Colwell inventories.
Days sales outstanding have remained relatively constant over the past
three years.
The inventory balance increased $11.6 million to $65.5 million at the end
of fiscal 1997 from $53.9 million at the end of fiscal 1996. The increase was
due primarily to the forward buying opportunities that were taken advantage of
at the end of fiscal 1997, which were not available at the end of fiscal 1996,
and inventory acquired through acquisitions.
EFFECT OF INFLATION
Inflation has not had a significant effect on the Company's operations and
the Company believes that supplier price increases can be passed on to its
customers.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company wishes to caution shareholders and prospective investors that
the following important factors, among others, could in the future affect the
Company's actual operating results which could differ materially from those
expressed in any forward-looking statements made by the Company. The statements
under this caption are intended to serve as cautionary statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for such
purpose. The order in which such factors appear below should not be construed to
indicate their relative importance or priority.
- - Reduced growth in expenditures for dental services by private dental
insurance plans.
- - Accuracy of the Company's assumptions concerning future per capita
expenditures for dental services, including assumptions as to population
growth and the demand for preventive dental services such as periodontic,
endodontic and orthodontic procedures.
- - The rate of growth in demand for infection control products currently
used for prevention of the spread of communicable diseases such as AIDS,
hepatitis and herpes.
- - The effects of health care reform, increasing emphasis on controlling
health care costs and legislation or regulation of health care pricing,
all of which may affect the ability of dentists to obtain reimbursement
for use of new and state-of-the-art procedures and technologies.
- - The amount and rate of growth of the Company's selling, general and
administrative expenses.
- - The effects of, and changes in, U.S. and world social and economic
conditions, monetary and fiscal conditions, laws and regulations, other
activities of governments, agencies and similar organizations, trade
policies and taxes, import and other charges, inflation and monetary
fluctuations; the ability or inability of the Company to obtain or hedge
against foreign currencies, foreign exchange rates and fluctuations in
those rates.
- - Ability of the Company to retain its base of customers and to increase
its market share.
8
<PAGE>
- - The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
- - Changes in economics of dentistry affecting dental practice growth and
the demand for dental products, including the ability and willingness of
dentists to invest in high-technology diagnostic and therapeutic
products.
- - The Company's ability to meet increased competition from national,
regional and full-service distributors and mail-order distributors of
dental products, while maintaining current or improved profit margins.
- - Continued ability to maintain satisfactory relationships with key vendors
and the ability of the Company to create relationships with additional
manufacturers of quality, innovative products.
- - Future operating results of the Company's Colwell Systems division depend
upon its ability to attract and retain customers by offering quick
response time and innovative products that meet industry reporting
standards. Because the cost of paper stock represents over half the cost
of its paper and printed products, future operating results may be
subject to fluctuations in paper prices. In addition, the introduction of
computer-based technologies into the management of health care practices
may affect future demand for printed products.
9
<PAGE>
3. SUPPLEMENTAL FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS ON SUPPLEMENTAL FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the supplemental consolidated balance sheets of Patterson Dental
Company (formed as a result of the consolidation of Patterson Dental Company and
Canadian Dental Supply Ltd.) as of April 26, 1997 and April 27, 1996, and the
related supplemental consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended April 26,
1997. The supplemental consolidated financial statements give retroactive
effect to the acquisition of Canadian Dental Supply Ltd. on August 26, 1997,
which has been accounted for using the pooling of interests method as described
in the notes to the supplemental consolidated financial statements. These
supplemental financial statements are the responsibility of the management of
Patterson Dental Company. Our responsibility is to express an opinion on these
supplemental 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, based on our audits, the supplemental financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Patterson Dental Company at April 26, 1997 and April 27,
1996 and the consolidated results of its operations and its cash flows for each
of the three years in the period ended April 26, 1997, after giving retroactive
effect to the acquisition of Canadian Dental Supply Ltd., as described in the
notes to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
May 22, 1997 (except for the pooling of interests with Canadian Dental Supply
Ltd. described in Note 2, for which the date is August 26, 1997)
10
<PAGE>
PATTERSON DENTAL COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
April 26, April 27,
1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 9,095 $ 46,056
Receivables, net of allowance for doubtful accounts of
$5,043 and $5,381 at April 26, 1997 and April 27, 1996, respectively.. 95,132 81,035
Inventory................................................................ 65,486 53,892
Prepaid expenses......................................................... 2,927 1,829
Deferred taxes........................................................... 1,178 898
-------- --------
Total current assets................................................. 173,818 183,710
Property and equipment, net............................................... 35,563 26,791
Intangibles, net.......................................................... 43,813 69
Other..................................................................... 2,117 2,403
-------- --------
Total assets......................................................... $255,311 $212,973
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 48,472 $ 44,046
Accrued payroll expense.................................................. 12,281 9,790
Other accrued expenses................................................... 9,268 8,647
Bank indebtedness........................................................ 3,927 3,426
Income taxes payable..................................................... 1,677 2,118
Current maturities of long-term debt..................................... 1,300 800
-------- --------
Total current liabilities............................................ 76,925 68,827
Long-term debt............................................................ 5,565 6,455
Deferred taxes............................................................ 1,362 1,157
-------- --------
Total liabilities.................................................... 83,852 76,439
Deferred credits.......................................................... 7,797 8,682
Commitments and contingent liabilities
Stockholders' equity:
Preferred Stock Series A, $.01 par value, $11.20 per share
liquidation value:
Authorized shares - 10,000,000
Issued and outstanding shares - none and 3,553,627 at
April 26, 1997 and April 27, 1996, respectively..................... -- 21,885
Preferred Stock, $.01 par value:
Authorized shares - 20,000,000...................................... -- --
Common Stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 21,829,905 and 17,813,867 at
April 26, 1997, and April 27, 1996, respectively.................... 219 178
Additional paid-in capital............................................... 56,168 32,382
Cumulative translation adjustment........................................ (899) (411)
Retained earnings........................................................ 123,243 89,718
Note receivable from ESOP................................................ (15,069) (15,900)
-------- --------
Total stockholders' equity.......................................... 163,662 127,852
-------- --------
Total liabilities and stockholders' equity.......................... $255,311 $212,973
======== ========
</TABLE>
See accompanying notes.
11
<PAGE>
PATTERSON DENTAL COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------
April 26, April 27, April 29,
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Net sales..................................... $687,895 $606,983 $558,648
Cost of sales................................. 440,262 392,091 358,868
-------- -------- --------
Gross profit.................................. 247,633 214,892 199,780
Operating expenses............................ 196,448 170,958 160,501
-------- -------- --------
Operating income.............................. 51,185 43,934 39,279
Other income and expense:
Amortization of deferred credits......... 885 885 885
Finance income, net...................... 1,289 1,821 950
Interest expense......................... (1,021) (1,000) (918)
Profit (loss) on currency exchange....... (34) 5 29
-------- -------- --------
Income before income taxes.................... 52,304 45,645 40,225
Income taxes.................................. 19,687 16,997 15,396
-------- -------- --------
Net income.................................... $ 32,617 $ 28,648 $ 24,829
======== ======== ========
Net income available for common shareholders.. $ 32,617 $ 28,026 $ 24,221
======== ======== ========
Earnings per common and common
equivalent share........................... $ 1.50 $ 1.29 $ 1.12
======== ======== ========
Weighted average common and common
equivalent shares outstanding.............. 21,793 21,651 21,600
======== ======== ========
</TABLE>
See accompanying notes.
12
<PAGE>
PATTERSON DENTAL COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
PREFERRED ADDITIONAL CUMULATIVE NOTE
Stock Common Paid-in Translation Retained Receivable
Series A STOCK CAPITAL ADJUSTMENT EARNINGS FROM ESOP TOTAL
---------- ------- ---------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994 $ 21,996 $178 $30,091 $(628) $39,940 $(17,680) $ 73,897
Tax benefit on unallocated
ESOP shares -- -- -- -- 283 -- 283
Change in translation adjustment -- -- -- 303 -- -- 303
Common stock issued, net (47) (1) 762 -- -- -- 714
Dividend paid -- -- -- -- (3,362) -- (3,362)
Cash payments received on note
receivable from ESOP -- -- -- -- -- 891 891
Net income -- -- -- -- 24,829 -- 24,829
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 29, 1995 21,949 177 30,853 (325) 61,690 (16,789) 97,555
Tax benefit on unallocated
ESOP shares -- -- -- -- 269 -- 269
Change in translation adjustment -- -- -- (86) -- -- (86)
Common stock issued, net (64) 1 1,529 -- -- -- 1,466
Dividend paid -- -- -- -- (889) -- (889)
Cash payments received on note
receivable from ESOP -- -- -- -- -- 889 889
Net income -- -- -- -- 28,648 -- 28,648
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 27, 1996 21,885 178 32,382 (411) 89,718 (15,900) 127,852
Change in translation
adjustment -- -- -- (488) -- -- (488)
Preferred shares exchanged
for common or cash -
ESOP redemptions (21,885) 39 21,846 -- -- -- --
Common stock issued, net -- 1 1,901 -- -- -- 1,902
Cash payments received on note
receivable from ESOP -- -- -- -- -- 831 831
Pooling of interests-Thau Nolde -- 1 39 -- 908 -- 948
Net income -- -- -- -- 32,617 -- 32,617
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 26, 1997 $ -- $219 $56,168 $(899) $123,243 $(15,069) $163,662
========= ====== ========== =========== ======= ========== ========
</TABLE>
See accompanying notes.
13
<PAGE>
PATTERSON DENTAL COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
----------------------------------
April 26, April 27, April 29,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................. $ 32,617 $ 28,648 $ 24,829
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 4,942 3,934 3,436
Amortization of deferrals.......................... (885) (1,024) (876)
Amortization of goodwill........................... 1,339 -- --
Bad debt expense................................... 356 605 783
Deferred taxes..................................... (75) 475 234
Change in assets and liabilities net of acquired:
Increase in receivables........................ (7,176) (7,727) (6,725)
(Increase) decrease in inventory............... (7,879) 11,934 (15,694)
Increase (decrease) in accounts payable........ 2,785 (324) 12,995
Increase in accrued liabilities................ 1,735 2,256 3,018
Other changes from operating activities, net... (1,383) 1,313 (347)
-------- -------- --------
Net cash provided by operating activities...... 26,376 40,090 21,653
INVESTING ACTIVITIES:
Additions to property and equipment, net..................... (5,010) (7,653) (6,275)
Acquisitions................................................. (61,171) (2,401) --
-------- -------- --------
Net cash used in investing activities........................ (66,181) (10,054) (6,275)
FINANCING ACTIVITIES:
Payments and retirement of long-term debt and
obligations under capital leases......................... (334) (128) (1,115)
Increase (Decrease) in bank credit agreement................. 501 1,156 (5,312)
Payment of dividend.......................................... -- (889) (891)
Cash payments received on note receivable from ESOP.......... 831 889 891
Common stock issued, net..................................... 1,902 1,466 723
-------- -------- --------
Net cash provided by (used in) financing activities.......... 2,900 2,494 (5,704)
Effect of exchange rate changes on cash...................... (56) (44) 18
-------- -------- --------
Net increase (decrease) in cash and cash equivalents......... (36,961) 32,486 9,692
Cash and cash equivalents at beginning of period............. 46,056 13,570 3,878
-------- -------- --------
Cash and cash equivalents at end of period................... $ 9,095 $ 46,056 $ 13,570
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid............................................ $ 20,229 $ 16,147 $ 15,506
Interest paid................................................ 1,024 1,003 924
Exchange of preferred shares into common stock............... 21,885 -- --
</TABLE>
See accompanying notes.
14
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
APRIL 26, 1997
(Dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries Patterson Dental Supply, Inc., Direct Dental Supply
Co., Colwell Systems, Inc., Canadian Dental Supply Ltd. and Patterson Dental
Canada Inc. All significant intercompany transactions have been eliminated in
consolidation.
Description of Business
The Company is one of the largest providers of dental equipment, supplies
and services to dentists, institutional customers and dental laboratories in
North America, operating from 108 locations with approximately 3,000 employees.
The Company distributes approximately 75,000 dental and office products from
over 1,100 manufacturers, offering specialty items and services including the
Patterson private label line of dental items. In addition, its Colwell
subsidiary produces and sells stationery and office products to healthcare
providers.
Fiscal Year End
The fiscal year end for the Company is the last Saturday in April.
Cash and Cash Equivalents
Cash equivalents consist of investments in money market funds and floating
rate municipal bonds. Cost approximates fair value.
Inventory
Inventory consists of merchandise held for sale and is stated at the lower
of cost or market. Cost is determined using the last-in, first-out (LIFO) method
for domestic inventories and the first-in, first-out (FIFO) method for foreign
and Colwell inventories. Inventories valued at LIFO represent 77% of total
inventories at April 26, 1997 and 75% at April 27, 1996.
The accumulated LIFO provision was $10,943 at April 26, 1997 and $9,733 at
April 27, 1996. The Company believes that inventory replacement cost exceeds the
inventory balance by an amount approximating the LIFO reserve.
Property and Equipment
Property and equipment are stated at cost. The Company provides depreciation
on the straight-line method over estimated useful lives of 40 years for
buildings, 3 to 20 years for leasehold improvements or the term of the lease, if
less, 5 years for data processing equipment, and 5 to 10 years for office
furniture and equipment.
Intangibles
Intangibles represent primarily the excess of the purchase price over the
fair value of the net tangible assets of acquired businesses and are amortized
over a period of twenty years.
Accumulated amortization at April 26, 1997 was $1,401. The Company employs
the undiscounted cash flow method of assessment for these assets when factors
indicating an impairment are present.
15
<PAGE>
Earnings Per Common Share
For 1996 and 1995, earnings per share information assumes the conversion of
Patterson Preferred to Common at the ratio of 1 to 1.08 for shares held by the
ESOP. Patterson Preferred along with dilutive stock options are common stock
equivalents. For purposes of this computation, net income was reduced by an
amount equal to the preferred stock dividends, net of applicable taxes. Such
reduction reflects the additional compensation expense necessary to fund the
ESOP, absent such dividends.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted by the Company on
April 25, 1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact, compared to
primary earnings per share now reported, is not expected to be material.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Employee Stock Ownership Plan
Compensation expense related to the Company's defined contribution ESOP is
computed based on the shares allocated method. In 1996 and 1995 such amounts
were reduced by related Preferred Stock dividends.
Deferred Credits
Negative goodwill (deferred credit) arose through the purchase of the
Patterson business in fiscal 1986 and D.L. Saslow Co., Inc. in fiscal 1988. The
Company is amortizing the deferred credits on a straight-line basis over 20
years.
Use of Estimates in the Preparation of Financial Statements
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.
Long-Lived Assets
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1997. The effect of
adoption was not material.
2. ACQUISITIONS
During 1997 and in the first quarter of 1998, the Company acquired all of
the common stock of Thau-Nolde, Inc., located in St. Louis, Missouri, in
exchange for 83,400 shares of common stock, and all of the common stock of
EagleSoft Incorporated, located in Effingham, Illinois in exchange for 186,667
shares of common stock. Thau-Nolde and EagleSoft were merged into the Company
and the acquisitions were accounted for as a pooling-of-interests. The financial
statements do not reflect the financial position and results of operations of
Thau-Nolde or EagleSoft prior to the dates of the acquisitions based on
materiality. The Company also acquired certain assets of Dental Services Co.,
Inc., located in Erie, Pennsylvania.
16
<PAGE>
This acquisition was accounted for as a purchase and, accordingly, the net
assets and operating results are included in the Company's financial statements
from the date of acquisition. The pro forma impact of these acquisitions on the
Company's results of operations for all years presented was not material.
Effective August 26, 1997, the Company acquired Canadian Dental Supply Ltd.
("CDS") a Vancouver, British Columbia based dental distributor. Each share of
CDS common stock was converted into 4.216 shares of Company common stock. The
Company issued 112,432 shares to CDS shareholders. The transaction was
accounted for as a pooling of interests. The accompanying financial statements,
for all periods presented, have been restated to include the results of CDS.
Separate results of operations for the periods prior to the merger with CDS
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
---------
Patterson Dental Company $661,518 $581,893 $532,598
CDS 26,377 25,090 26,050
-------- -------- --------
Total Combined $687,895 $606,983 $558,648
======== ======== ========
Net Income
----------
Patterson Dental Company $ 32,415 $ 28,747 $ 24,180
CDS 202 (99) 649
-------- -------- --------
Total Combined $ 32,617 $ 28,648 $ 24,829
======== ======== ========
Other Changes in Stockholders' Equity
-------------------------------------
Patterson Dental Company $ 3,211 $ 1,183 $ 832
CDS (18) 466 (2,003)
-------- -------- --------
Total Combined $ 3,193 $ 1,649 $ (1,171)
======== ======== ========
</TABLE>
During 1996, the Company acquired all of the common stock of Barber Dental
Supply Inc., located in Omaha, Nebraska. Barber was merged into the Company. The
Company also acquired certain assets of Eagle Dental Supply, Inc., located in
Kansas City, Missouri. Both acquisitions have been accounted for as purchases
and, accordingly, their net assets and operating results are included in the
Company's financial statements from the respective dates of acquisition. The pro
forma impact of the acquisitions on the Company's results of operations for all
years presented was not material.
On October 1, 1996 the Company purchased the Colwell division of Deluxe
Corporation (Colwell) for an aggregate purchase price of $61.0 million. The
acquisition was accounted for as a purchase and, accordingly, the net assets and
results of operations are included in the accompanying financial statements
since the date of acquisition. The following unaudited pro forma summary
presents the consolidated results of operations as if the acquisition had
occurred at the beginning of the 1996 fiscal period.
Year Ended
(In thousands, except per share data)
April 26, 1997 April 27, 1996
-------------- --------------
Net sales $711,660 $663,062
Income before taxes 54,386 43,548
Net income 33,887 27,368
Earnings per share $ 1.55 $ 1.24
17
<PAGE>
3. PROPERTY AND EQUIPMENT
April 26, April 27,
1997 1996
-------- --------
Land.................................. $ 3,466 $ 3,242
Buildings............................. 16,628 12,637
Leasehold improvements................ 1,561 1,447
Furniture and equipment............... 14,756 9,313
Data processing equipment............. 15,945 13,036
-------- --------
52,356 39,675
Accumulated depreciation.............. (16,793) (12,884)
-------- --------
$ 35,563 $ 26,791
======== ========
4. LONG-TERM DEBT
April 26, April 27,
1997 1996
-------- --------
Mortgage.............................. $ 3,257 $ 3,497
Notes payable bearing interest at
prime plus 1 1/2% 2,724 2,712
Bank loan bearing interest at
prime plus 1/2%.................... 548 819
Obligations under capital leases...... 336 227
-------- --------
6,865 7,255
Less current maturities............... 1,300 800
-------- --------
$ 5,565 $ 6,455
======== ========
The Company has revolving credit agreements which provide for unsecured
borrowings and sales of installment contract receivables of up to a combined $60
million until September 1997. The agreements require that the Company maintain a
minimum current ratio, maximum leverage ratio and minimum net worth. The Company
was in compliance with the covenants at April 26, 1997.
The mortgage obligations consist of an 11.5%, 20 year mortgage due 2007, a
9.25% 3-year mortgage due January 1998, and a bank loan secured by a collateral
mortgage bearing interest at 8.5%. The mortgages cover Patterson Dental Canada's
Montreal and Canadian Dental's Alberta buildings. Monthly payments are 60
Canadian dollars. Long-term debt becomes due: $1,300 in 1998, $1,011 in 1999,
$735 in 2000, $521 in 2001, $490 in 2002 and the balance thereafter.
The notes payable consist of advances from shareholders repayable at $27 per
month and other advances repayable either on demand or one year after demand.
5. LEASES
The Company leases facilities for its branch locations. These leases are
accounted for as operating leases. Future minimum rental payments under
noncancelable operating leases are as follows for the years ending in April:
1998............................. $ 3,869
1999............................. 3,155
2000............................. 2,336
2001............................. 1,393
2002............................. 965
Thereafter....................... 235
-------
Total minimum payments required.. $11,953
=======
Rent expense was $5,255, $4,872 and $4,833 for the years ended April 26,
1997, April 27, 1996 and April 29, 1995, respectively.
18
<PAGE>
6. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
1997 1996 1995
-------- ------- -------
Income (loss) before income taxes:
United States.................................. $52,633 $44,290 $38,404
Canada......................................... (329) 1,355 1,821
------- ------- -------
Total......................................... $52,304 $45,645 $40,225
======= ======= =======
Significant components of the provision for income taxes are as follows:
1997 1996 1995
-------- ------- -------
Current:
Federal........................................ $17,417 $13,642 $12,022
Foreign........................................ 147 36 443
State.......................................... 2,198 2,844 2,697
------- ------- -------
Total current................................. 19,762 16,522 15,162
Deferred:
Federal........................................ (55) 418 191
Foreign........................................ -- -- --
State.......................................... (20) 57 43
------- ------- -------
Total deferred................................ (75) 475 234
------- ------- -------
Provision for income taxes........................ $19,687 $16,997 $15,396
======= ======= =======
Deferred income tax expense (benefit) results from temporary differences in
the recognition of income and expense items for tax and financial statement
reporting purposes.
Significant components of the Company's deferred tax liabilities and assets
as of April 26, 1997 and April 27, 1996 are as follows:
1997 1996
-------- --------
Canadian net operating loss carryforward.. $ 4,017 $ 4,162
Bad debt allowance........................ 963 918
Unicap COS................................ 521 521
ESOP unearned compensation................ 428 351
Inventory obsolescence reserve............ 311 286
Hospital insurance........................ 318 225
Vacation pay accrual...................... 158 195
LIFO reserve.............................. (1,111) (1,288)
Depreciation.............................. (444) (522)
Financing income.......................... (1,045) (835)
Other..................................... (283) (110)
Valuation allowance....................... (4,017) (4,162)
------- -------
Total................................. $ (184) $ (259)
======= =======
Income tax expense varies from the amount computed using the U.S. statutory
rate. The causes of these differences and the related tax effects are shown
below:
19
<PAGE>
1997 1996 1995
-------- -------- --------
Tax at U.S. statutory rate................... $18,306 $15,978 $14,079
State tax provision, net of federal benefit.. 1,416 1,886 1,781
Effect of foreign (income) losses............ 262 (440) (195)
ESOP dividend on allocated preferred stock... -- (74) (63)
Amortization of deferred credit.............. (310) (310) (310)
Other........................................ 13 (43) 104
------- ------- -------
$19,687 $16,997 $15,396
======= ======= =======
At April 26, 1997, the Company had net operating loss carryforwards of
$9,565 for Canadian income tax purposes that expire in years 1998 through 2001.
Those carryforwards resulted primarily from the Company's fiscal 1994
acquisition of Healthco Canada Inc. For financial reporting purposes, a
valuation allowance of $4,017 has been established to reduce the deferred tax
assets to their net realizable value.
7. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP)
During 1990, the Company's Board of Directors adopted a leveraged ESOP.
During fiscal 1991, under the provisions of the plan and related financing
arrangements, the Company loaned the ESOP $22,000 for the purpose of acquiring
its then outstanding preferred stock. The cost of the ESOP is borne by the
Company through annual contributions to the plan in amounts determined by the
Board of Directors. Shares of stock acquired by the plan are allocated to each
employee who has completed 1,000 hours of service during the plan year. During
1997, 1996 and 1995, shares with a cost of $824, $800 and $900, respectively,
were earned and allocated to ESOP participants.
During 1997 the ESOP was funded through a Company contribution of $831.
During 1996 and 1995, the ESOP funding was effected through a preferred
stock dividend aggregating $889 and $891, respectively, which served to reduce
recorded compensation expense.
On June 24, 1996, the Company called for redemption all of the outstanding
shares of the Preferred Stock Series A which had a redemption value of $39,792
plus accrued dividends of $231. The trustee for the ESOP converted the Preferred
Shares into 3,837,083 shares of Common Stock on July 3, 1996. Had the stock
conversion occurred on May 1, 1994, earnings per share would have been unchanged
for each of the three years in the period ended April 26, 1997.
At April 26, 1997, 1,184,961 shares of the common stock were allocated to
participants and had a fair market value of $36,586.
At April 26, 1997 and April 27, 1996 indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheet.
Stock Option Plan
In June 1992, the Company adopted the Patterson Dental Company 1992 Stock
Option Plan (the "Plan"). The Plan provides for the granting of options to
designated employees and non-employees, including consultants to the Company, to
purchase up to a maximum of 1,350,000 shares of Common Stock. The Plan is
administered by the Stock Option Committee, which determines the employees,
officers and others who are to receive options, the type of option to be
granted, and the number of shares subject to each option and the exercise price
of each option.
Stock options must be granted at an exercise price not less than the fair
market value of the Common Stock on the dates the options are granted (or, for
persons who own more than 10 percent of the Company's outstanding voting stock,
not less than 110% of such fair market value). No options have been granted to
date under the Plan.
20
<PAGE>
Director Stock Option Plan
In June 1992, the Company adopted the 1992 Director Stock Option Plan
(the "Director Option Plan"), pursuant to which 225,000 shares of Common Stock
have been reserved for the grant of non-statutory stock options to the Company's
outside directors. Options are granted at the fair market value on the date of
grant and are exercisable for a period of four years commencing one year after
the date of grant. At April 26, 1997, the Company's current outside directors
held the following options:
Weighted Average
Date of Grant Granted Exercised Held Price Per Share
- --------------- ------- --------- ------ ----------------
09/1/92 45,000 30,000 15,000 $10.67
10/1/93 18,000 -- 18,000 $21.83
10/1/94 18,000 -- 18,000 $18.00
10/1/95 18,000 -- 18,000 $26.50
10/1/96 18,000 -- 18,000 $28.00
------- ------ ------
117,000 30,000 87,000
======= ====== ======
As of April 26, 1997, outstanding options had a weighted-average remaining
contractual life of 2.5 years.
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations to
account for its stock option plan. Under APB No. 25, no compensation expense is
recognized if the exercise price of the Company's stock options equals the
market price on the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation" requires that the fair value of options granted during 1997 and
1996 and the pro forma impact on earnings be disclosed when material. The pro
forma impact was not material for 1997 and 1996.
Employee Stock Purchase Plan
In June 1992, the Company adopted an employee stock purchase plan (the
"Stock Purchase Plan"). A total of 225,000 shares of Common Stock are reserved
for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code is
administered by the Board of Directors of the Company or by a committee
appointed by the Board of Directors. Employees are eligible to participate after
a year of employment with the Company if they are employed for at least 20 hours
per week and more than five months per year. The Stock Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation, at 85% of the lower of the
fair market value of the Common Stock on the offering date or at the end of each
three-month period following the offering date during the applicable offering
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. Employees purchased 42,522 and 50,747 shares in
1997 and 1996, respectively. At April 26, 1997, 118,452 shares were available
for purchase under the plan.
Capital Accumulation Plan
In May 1996, the Board of Directors adopted an employee Capital Accumulation
Plan (the "CAP Plan"). The CAP Plan was approved by the shareholders at the
annual meeting held September 9, 1996. A total of 1,000,000 shares of Common
Stock are reserved for issuance under the CAP Plan. Officers and other key
employees of the Company or its subsidiaries are eligible to participate by
purchasing Common Stock through payroll deductions, which must be between 5% and
25% of an employee's compensation, at 75% of the average closing price of the
Common Stock for the calendar year. The shares issued are restricted stock and
are held in the custody of the Company until the restrictions lapse. The
restriction period is three years from the beginning of the plan year. Employees
purchased 37,174 shares in 1997. At April 26, 1997, 962,826 shares were
available for purchase under the Plan.
21
<PAGE>
8. LITIGATION
In the ordinary course of business, the Company is subject to a variety of
product-related and employment related liability claims. The Company's
management and legal counsel believe that the loss, if any, resulting from these
claims will be substantially covered by insurance or third party
indemnification, and any uninsured losses from such claims will not have a
materially adverse effect on its operations or financial position.
9. OPERATIONS BY GEOGRAPHIC AREA
The Company operates predominantly in one industry segment, the distribution
of dental supplies, equipment and related services. The following is a summary
of the Company's operations in different geographic areas:
Year Ended
--------------------------------
April 26, April 27, April 29,
1997 1996 1995
--------- ---------- ---------
Net sales to unaffiliated customers:
United States $604,698 $526,055 $478,361
Canada 83,197 80,928 80,287
Operating income:
United States $ 50,783 $ 41,744 $ 36,112
Canada 402 2,190 3,167
Identifiable assets:
United States $217,941 $176,135 $144,665
Canada 37,370 36,838 34,642
10. QUARTERLY RESULTS (UNAUDITED)
Quarterly results are determined in accordance with the accounting policies
used for annual data and include certain items based upon estimates for the
entire year. All fiscal quarters include results for 13 weeks. The following
table summarizes results for fiscal 1997 and 1996.
Three Months Ended
--------------------------------------
Apr 26, Jan 25, Oct 26, Jul 27,
1997 1997 1996 1996
-------- -------- -------- --------
Net sales....................... $187,587 $181,996 $169,013 $149,299
Gross profit.................... 68,836 66,137 59,886 52,774
Operating income................ 14,955 14,487 12,399 9,344
Net income...................... 9,190 9,017 8,092 6,318
Earnings per common and common
equivalent share............... $ 0.42 $ 0.41 $ 0.37 $ 0.29
Three Months Ended
--------------------------------------
Apr 27, Jan 27, Oct 28, Jul 29,
1996 1996 1995 1995
-------- -------- -------- --------
Net sales....................... $161,583 $154,820 $150,025 $140,555
Gross profit.................... 57,789 54,478 52,628 49,997
Operating income................ 12,306 10,867 10,755 10,006
Net income...................... 8,312 7,031 6,994 6,311
Earnings per common
and common
equivalent share............... $ 0.38 $ 0.32 $ 0.31 $ 0.28
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the supplemental consolidated financial statements of Patterson
Dental Company as of April 26, 1997 and April 27, 1996, and for each of the
three years in the period ended April 26, 1997, and have issued our report
thereon dated May 22, 1997 (included elsewhere in this Form 8-K). Our audits
also included the supplemental financial statement schedule listed in Item 7 of
this Form 8-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic supplemental financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 22, 1997 (except for the pooling of interests with Canadian Dental Supply
Ltd. described in Note 2, for which the date is August 26, 1997)
23
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PATTERSON DENTAL COMPANY
(Dollars in thousands)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - END OF
OF PERIOD ($) EXPENSES ($) DESCRIBE ($) DESCRIBE ($) PERIOD ($)
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended April 26, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,381 $ 357 $ 140(3) $ 835(1) $ 5,043
======= ====== ======= ======== =======
LIFO inventory adjustment $ 9,733 $1,210 $ -- $ -- $10,943
Inventory obsolescence reserve 1,133 1,322 202(3) 1,311(2) 1,346
------- ------ ------- -------- -------
Total inventory reserve $10,866 $2,532 $ 202 $ 1,311 $12,289
======= ====== ======= ======== =======
Year ended April 27, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,785 $ 608 $ -- $ 1,012(1) $ 5,381
======= ====== ======= ======== =======
LIFO inventory adjustment $ 8,179 $1,554 $ -- $ -- $ 9,733
Inventory obsolescence reserve 1,221 1,141 -- 1,229(2) 1,133
------- ------ ------- -------- -------
Total inventory reserve $ 9,400 $2,695 $ -- $ 1,229 $10,866
======= ====== ======= ======== =======
Year ended April 29, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 6,145 $ 780 $ -- $ 1,140(1) $ 5,785
======= ====== ======= ======== =======
LIFO inventory adjustment $ 7,394 $ 785 $ -- $ -- $ 8,179
Inventory obsolescence reserve 3,671 1,388 -- 3,838(2) 1,221
------- ------ ------- -------- -------
Total inventory reserve $11,065 $2,173 $ -- $ 3,838 $ 9,400
======= ====== ======= ======== =======
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory disposed of and written off.
(3) Acquisition of Colwell Systems and Thau-Nolde, Inc.
24
<PAGE>
EXHIBIT 21
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
Patterson Dental Supply, Inc. Minnesota
Direct Dental Supply Co. Nevada
Patterson Dental Canada, Inc. Canada
Canadian Dental Supply Ltd. British Columbia, Canada
Canadian Dental Supply (Alta) Ltd Alberta, Canada
Canadian Dental Supply (Ontario) Ltd. Ontario, Canada
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-56764) pertaining to the 1992 Stock Option Plan, 1992 Director Stock
Option Plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan, the
Registration Statement (Form S-8 No. 333-03583) pertaining to the Patterson
Dental Company Capital Accumulation Plan of Patterson Dental Company, and the
Registration Statement on Form S-3 (No. 333-19951) of our reports dated May 22,
1997 (except for the pooling of interests with Canadian Dental Supply Ltd.
described in Note 2, for which the date is August 26,1997), with respect to the
supplemental consolidated financial statements and the supplemental financial
statement schedule included in this Current Report on Form 8-K of Patterson
Dental Company.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
November 20, 1997
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