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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
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
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
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes __X__ No _____
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]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of July 11, 1997 was approximately $478,871,225.
As of July 11, 1997, there were 21,742,679 shares of Common Stock of the
registrant issued and outstanding.
Documents Incorporated By Reference
Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
--------------------- -----------------
Proxy Statement for 1997 Annual Meeting of Shareholders Part III
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FORM 10-K INDEX
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Page
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PART I................................................................................................ 1
Item 1. BUSINESS............................................................................. 1
Item 2. PROPERTIES........................................................................... 7
Item 3. LEGAL PROCEEDINGS.................................................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 8
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PART II................................................................................................ 8
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................. 8
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA................................................. 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 16
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 28
PART III............................................................................................... 28
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................... 28
Item 11. EXECUTIVE COMPENSATION............................................................... 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................... 29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 29
PART IV................................................................................................ 29
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................... 29
SIGNATURES............................................................................................. 31
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PART I
1. BUSINESS
General
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. Patterson's Colwell Systems division provides a variety of
printed products and office supplies to office-based healthcare providers
including medical and dental offices. 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.
The Company markets its products and services through more than 750 direct
sales representatives and equipment specialists who operate through 92 sales
offices in the United States and Canada. The Company processes an average of
more than 8,000 customer orders each business day using a computerized order
processing network that links the Company's sales offices and 9 distribution
centers. The Company estimates that 97% of its consumable goods orders are
shipped complete within 24 hours. Customers may order through a sales
representative or directly from the Company by mail, telephone and, for selected
customers, electronically through the Company's personal computer-based remote
order entry system (REMO), a hand-held bar code scanner (PDXpress), or a smart
phone with credit card processing (PassPort Plus). To support its marketing
efforts and facilitate order entry, Patterson publishes a catalog containing
approximately 10,000 dental products; a semiannual publication, Patterson Today,
featuring dental equipment; and periodic direct mail advertisements highlighting
popular and specially priced items.
In May 1985, a holding company formed by the Company's management and
certain investors purchased the Company's predecessor, then a Delaware
corporation, from a subsidiary of The Beatrice Companies, Inc. Following the
acquisition, management implemented strategies to enhance profitability through
improving operating efficiency and the quality and breadth of customer service.
The Company instituted a computerized order processing network, improved
inventory tracking and other management information systems, introduced
centralized purchasing, and reduced the number of distribution locations in the
U.S. from 56 to 8. Management also enhanced revenue growth through internal
expansion and strategic acquisitions, including the 1987 acquisition of the
third largest U.S. distributor of dental products, the 1993 acquisition of the
second largest distributor of dental products in Canada and the October 1996
acquisition of Colwell Systems, a direct marketer of stationery and office
products to healthcare providers. As a result of implementing these strategies,
net sales increased from $165.8 million for fiscal 1986 to $661.5 million for
fiscal 1997, operating margins increased every year since fiscal 1985 and
profitability increased from an operating loss for fiscal 1986 to operating
income of $50.7 million for fiscal 1997.
Industry Background
Total expenditures for dental services in the United States increased from
$13.3 billion in 1980 to $45.8 billion in 1995. Per capita expenditures
increased from $60 in 1980 to $150 in 1994 and are forecasted to reach $270 by
the year 2005. The Company believes that the demand for dental services and
dental equipment and supplies will continue to be influenced by the following
factors:
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. Demographics. The U.S. population grew from 235.1 million in 1980 to
271.0 million in 1994, and is expected to reach 295.7 million by 2005. The
median age of the population is also increasing and Patterson believes that
older dental patients spend more on a per capita basis for dental services.
. Dental products and techniques. Technological developments in dental
products have contributed to advances in dental techniques and procedures,
including cosmetic dentistry and dental implantation.
. Demand for certain dental procedures. Demand is growing for
preventive dentistry and periodontic (the treatment of gums), endodontic (root
canals), orthodontic (braces) and other dental procedures which enable patients
to keep their natural teeth longer and improve their appearance.
. Demand for infection control products. Greater public awareness and
new regulations and guidelines instituted by OSHA, the American Dental
Association and state regulatory authorities have resulted in increased use of
infection control (asepsis) products such as protective clothing, gloves,
facemasks and sterilization equipment to prevent the spread of communicable
diseases such as AIDS, hepatitis and herpes.
. Coverage by dental plans. An increasing percentage of dental services
are being funded by private dental insurance. The Health Care Financing
Administration statistics on expenditures for dental services in the United
States indicate that private dental insurance paid approximately 51% of the
$42.2 billion in total expenditures for 1994 as compared to approximately 30% of
the $14.4 billion in total expenditures for 1980.
See, "Factors That May Affect Future Operating Results."
According to the American Dental Association, there are over 140,000
dentists practicing in the United States in approximately 100,000 dental
practices, representing a fragmented, geographically diverse market. Dental
supplies and equipment are purchased by dentists from full-service dental
distributors such as Patterson, through mail order distributors, or, as to
certain products, directly from manufacturers. Full-service distributors
typically employ a sales force to make calls on dental offices and to provide
quick response time, personal attention and product knowledge. With the
introduction of new products and technologies, dentists are demanding more
sophisticated, personalized service from distributors of dental products. The
Company believes that it is well positioned to compete as a full-service
distributor of dental products, based primarily on its qualified and motivated
sales force, experienced service technicians, broad range of products and
services, accurate and timely delivery, strategic location of sales offices and
distribution centers, and competitive pricing.
Patterson's Strategy
Patterson's objective is to remain the leading national distributor of
dental supplies, equipment and related services 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.
Emphasizing Full-Service Capabilities. Patterson believes that its
customers value full service and responsive delivery of quality supplies and
equipment, in addition to competitive prices. Customers also increasingly expect
suppliers to be knowledgeable about products and services. Patterson currently
supplies a full line of over 75,000 different inventoried items. Patterson
generally ships within 24 hours from distribution centers located strategically
throughout the United States. The Company's knowledgeable sales representatives
and equipment specialists assist customers in the selection and purchasing of
supplies and equipment and provide consultation on office design, equipment
requirements and financing. Equipment installation, maintenance and repair is
performed by Patterson's trained service technicians.
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Using Technology to Enhance Customer Service. The Company's computerized,
remote order entry systems, REMO, PDXpress and PassPort Plus permit Patterson's
customers to order products rapidly and accurately from Patterson 24 hours a
day, seven days a week. In addition, by utilizing technologies such as computer-
aided design (CAD), Patterson is able to provide faster generation and revision
of dental office blueprints and a more effective dental office design
presentation.
Continuing to Improve Operating Efficiencies. Patterson continues to
implement programs designed to improve operating efficiencies. These programs
include enhancing its management information and product handling systems and
consolidating its distribution centers to improve product availability and to
reduce redundancies in personnel, equipment and certain inventories. In
addition, by offering its electronic order entry systems to dentists, Patterson
enables its sales representatives to spend more time with existing customers and
to call on additional customers.
Growing through Internal Expansion and Acquisitions. The Company intends to
continue to grow by opening additional sales offices, hiring established sales
representatives, hiring and training college graduates as territory sales
representatives, and acquiring other distributors in order to enter new markets
and expand its customer base. In August 1987, Patterson acquired the D.L. Saslow
Co., which at the time was the third largest distributor of dental products in
the United States. Between 1989 and 1997, Patterson acquired the customer base
and certain assets of smaller dental dealers in Boston; Portland, Maine;
Memphis; Salt Lake City; the Washington, D.C. area; Raleigh, North Carolina;
Akron, Ohio; St. Louis; Erie (Pa.), Kansas City, Omaha, Youngstown, San Antonio
and the Tampa-Orlando-Miami area. In addition, Patterson also expanded by
opening additional sales offices and hiring established sales representatives in
Baltimore; Tulsa; Charlotte, North Carolina; and Greenville, Columbia and
Charleston, South Carolina. In October 1993, the Company completed the
acquisition of Healthco International, Inc.'s Canadian subsidiary, Healthco
Canada, Inc. Now known as Patterson Dental Canada, Inc., this subsidiary, which
the Company believes is one of the two largest full service dental products
distributors in Canada, employs approximately 360 people, 100 of whom are sales
representatives. Patterson Dental Canada, Inc. has eleven sales offices
throughout Canada, including its headquarters facility in Montreal, which also
serves as its distribution center for Canada. The Company believes that it is
well positioned to take advantage of expected continued consolidation in the
dental products distribution industry. In October, 1996 the Company acquired the
Colwell Systems division of Deluxe Corporation. Colwell Systems produces and
sells a variety of products used in medical and dental offices including
appointment books, insurance and billing forms, stationery, envelopes, business
cards, reminder cards, file folders, labels and other office supply products.
Colwell Systems, which employs approximately 400 people, has two facilities in
Champaign, Illinois; a production facility which produces custom printed
products, and a distribution facility which houses the telemarketing operations
and ships orders for stock items.
Products
Patterson distributes approximately 75,000 dental products categorized as
supplies, equipment and other. The following table shows the approximate
percentages of net sales contributed by sales category for the last four fiscal
years:
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1994 1995 1996 1997
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Dental & Office Supplies.................................... 62% 62% 60% 63%
Equipment................................................... 27 27 29 27
Other....................................................... 11 11 11 10
--- --- --- ---
Total.................................................. 100% 100% 100% 100%
=== === === ===
</TABLE>
Supplies. Patterson offers a wide range of consumable dental products such
as x-ray film and solutions; impression materials; restorative materials
(composites and alloys); hand instruments; sterilization products; infection
control products such as protective clothing, gloves and facemasks; paper,
cotton and other disposable products; toothbrushes and a full line of dental
accessories including instruments, burs and diamonds. Patterson markets its own
private label line of dental supplies consisting of approximately 1,500 items,
including anesthetics, instruments, preventative and restorative products, and
cotton and paper products. Compared to most name brand supplies, the private
label line provides lower prices for the Company's customers and higher margins
for the Company.
3
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Equipment. Patterson offers a wide range of dental equipment including x-
ray machines, high and low speed handpieces, dental chairs, dental handpiece
control units, diagnostic equipment, sterilizers, dental lights and compressors.
The Company has obtained distribution rights for the KCP 1000 PAC, an innovative
product for cavity preparation. In addition, the Company is the exclusive
distributor of the Welch Allyn Reveal(R) intra-oral camera, and its lighted
mouth mirror, Denlight(R). In fiscal 1996, the Company began distributing a
thermal disinfector for cleaning dental instruments prior to sterilization and
the CEREC 2, which allows the dentist to prepare surface treatments, inlays,
onlays and crowns chairside (rather than by a lab), thus completing the
procedure in one visit, rather than two, and allowing the dentist to treat more
patients. Patterson estimates that approximately 90% of its equipment sales are
made to established dentists, dental laboratories and institutions and that the
remainder are made to dentists and dental clinics establishing new practices.
Most of the equipment sold by Patterson is custom-ordered.
Other. Other includes repair parts and labor, and teeth for use in
dentures.
Services
Patterson offers a broad range of services to its customers to support
supply and equipment sales.
Equipment Installation, Repair and Maintenance. To keep their practices
running efficiently, dentists require reliable performance from their equipment.
All major equipment sold by Patterson includes installation and Patterson's 90-
day labor warranty at no additional charge. Patterson also provides complete
repair and maintenance service for all dental equipment, whether or not
purchased from Patterson, including 24-hour handpiece repair service.
Patterson's service technicians call on dental offices throughout the United
States for equipment repair and maintenance. A computerized scheduling, tracking
and billing system documents and instantly retrieves customer repair histories,
and helps Patterson to keep frequently needed repair items in inventory.
Electronic Order Entry Systems. Patterson's computerized remote order entry
systems permit customers to place orders from their offices directly to
Patterson 24 hours a day, seven days a week. Remote Order Entry (REMO),
introduced in 1987, gives customers direct and immediate access through a
personal computer to a database containing Patterson's complete inventory. In
September 1991, the Company began offering customers PDXpress(R), a computerized
order entry system utilizing a hand-held bar code scanner. PDXpress(R)
eliminates handwritten order forms by permitting a user to scan a product bar
code from an inventory tag system or from Patterson's bar-coded catalog.
Patterson's most recent system, introduced in 1996, is PassPort Plus, a new
smart phone which incorporates automated ordering with credit card processing.
More than 6,700 Patterson customers currently utilize either REMO, PDXpress(R)
or PassPort Plus to order dental supplies. REMO, PDXpress(R) and PassPort Plus
are provided at no additional charge to customers who maintain certain minimum
purchase requirements.
Dental Office Design. Patterson provides dental office layout and design
services through its staff of 95 equipment specialists. Through the use of
Patterson's own computer-aided design (CAD) program, equipment specialists can
create original or revised dental office blueprints in a fraction of the time
required to produce conventional drawings. Customers purchasing major equipment
items receive dental office design services at no additional charge.
Equipment Financing. The Company arranges financing for qualified
purchasers of equipment. The Company sells its retail installment contracts to a
third party or, alternatively, arranges financing/leasing through a third party.
In fiscal 1997, the Company originated over $52 million of equipment finance
contracts.
Equipment financing is provided by BA Credit Corp., a unit of BankAmerica,
pursuant to an agreement entered into in July 1993. Applications for financing
originated by the Company are reviewed by BA Credit Corp. which upon approval
may purchase the equipment and lease it to the customer or purchase an
installment sale contract from the Company without recourse.
In May 1994, the Company entered into a Receivables Purchase Agreement with
PNC Bank, National Association, under which PNC Bank committed to purchase, on a
limited recourse basis, the Company's installment sale contracts secured by
dental equipment. The Company services the accounts, for which it receives
servicing fees. PNC
4
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Bank's initial commitment of $15 million was increased to $25 million effective
August 1995. PNC Bank's commitment to purchase additional contracts expired
effective May 1996.
In April 1996, the Company entered into a Contract Purchase Agreement with
First Bank National Association, under which First Bank committed to purchase
from the Company, on a limited recourse basis, the Company's installment sale
contracts secured by dental equipment. The Company services the accounts. First
Bank committed up to a combined $40 million for both installment contract
receivables outstanding and unsecured borrowings under a revolving credit
agreement with the Company. As of April 26, 1997, First Bank had purchase
contracts with an outstanding principal balance of $32 million under the
Contract Purchase Agreement. In July, 1997 the First Bank commitment was
increased to $70 million with the addition of two other bank participants.
Sales and Marketing
During fiscal 1997, Patterson sold its products to over 74,000 customers
who made one or more purchases of supplies during the year. Patterson's
customers include dentists, dental laboratories and institutions. No single
customer accounted for more than 1% of sales during fiscal 1997, and Patterson
is not dependent on any customer or group of customers.
Due to the fragmented nature of the dental products market, Patterson
believes that a large sales force is necessary to reach potential customers and
to provide full service. As of April 26, 1997, Patterson employed approximately
750 trained sales representatives, 95 of whom were equipment specialists. Each
representative works within an assigned sales territory from one of 92 sales
offices under the supervision of a branch sales manager. Sales representatives
are all Patterson employees and are generally compensated on a commission basis,
with some representatives receiving a base salary and commission.
To assist its sales representatives, Patterson publishes a variety of
catalogs and fliers containing product and service information. Patterson's
customers receive a full-line product catalog containing over 10,000 inventoried
items. A separate catalog limited to high-volume products contains bar coding
and product numbers, permitting PDXpress(R) and PassPort Plus users to enter
orders electronically 24 hours a day, seven days a week. Selected consumable
supplies, new products, specially priced items and high-demand items such as
asepsis products are promoted through merchandise fliers printed bimonthly and
distributed to over 100,000 dentists nationwide. In addition, equipment sold by
the Company is featured in the Company's semiannual publication, Patterson
Today, which also includes articles on dental office design, trends in dental
practice, products and services offered by Patterson, and information on
equipment maintenance.
The Company believes that its computerized remote order entry systems,
REMO, PDXpress (R) and PassPort Plus help to establish relationships with new
customers and increase loyalty among existing customers. Patterson provides
these systems at no additional cost to customers who maintain certain minimum
purchase requirements.
Distribution
Patterson ships its dental supplies from 9 distribution centers. The
Company's 92 sales offices in the United States and Canada are configured with
display areas where the latest dental equipment can be demonstrated. Equipment
inventory is also staged at sales offices before delivery to dental offices for
installation.
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Patterson processes an average of more than 8,000 orders per day. A
customer can place an order through a sales representative, by telephone
utilizing a Patterson catalog or other publication and, for selected customers,
electronically utilizing REMO, PDXpress(R) or PassPort Plus. All orders are
routed through one of the Company's branch offices and are entered into a
computerized ordering, shipping and inventory system, which links each of the
Company's distribution centers. If an item is not available in the distribution
center nearest to the customer, the computer system automatically directs
shipment of the item from another center. As items are ordered, the system
automatically records reductions in the inventory of the items. Each order is
printed out in the shipping department of the appropriate distribution center,
where employees pick and pack the order. All orders are checked for accuracy
before shipment by common carrier. The Company estimates that 97% of its
consumable goods orders are shipped complete within 24 hours.
In order to assure the availability of products for delivery to customers,
the Company must maintain significant working capital to enable it to carry
substantial inventories at its distribution centers. The Company's inventory
consists mostly of dental supply items; equipment is generally custom-ordered by
customers. By utilizing its computerized inventory management and ordering
systems, the Company is able to accurately predict inventory turns in order to
minimize inventory levels for each item.
Sources of Supply
The Company obtains dental products from approximately 1,100 vendors. In
calendar 1996, the Company's top 10 vendors and single largest vendor accounted
for approximately 39% and 7%, respectively, of the cost of products sold. There
is more than one source of supply for almost all of the categories of products
sold by the Company.
Competition
The highly competitive U.S. dental products distribution industry consists
principally of national, regional and local full-service distributors and mail-
order distributors. In addition to Patterson and two other national, full-
service firms, Sullivan Dental Products, Inc. and the Henry Schein Company
("Schein"), there are at least 20 full-service distributors which operate on a
regional level, and hundreds of small local distributors. Approximately 23 of
these independent distributors are members of a purchasing group known as the
ADC buying group ("ADC"). ADC purchases dental products and obtains volume
discounts for the benefit of its members. ADC members, who market and sell
products independently, are believed to have combined sales exceeding those of
the Company. Although the Company does not have reliable information regarding
the market share of mail-order companies, it believes that Schein is the largest
mail-order company. Patterson believes that it competes with full-service
distributors and mail-order distributors based primarily on its qualified and
motivated sales force, experienced service technicians, broad range of products
and services, accurate and timely delivery, strategic location of sales offices
and distribution centers, and competitive pricing.
Trademarks
Patterson has registered with the United States Patent and the Trademark
Office the marks "Patterson" and "PDXpress." The Company believes that the
Patterson mark is well recognized in the dental products industry and by dental
professionals, and is therefore a valuable asset of the Company.
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Colwell Systems
The Company's Colwell Systems division, acquired in October, 1996, provides
a variety of printed products and office supplies to office-based healthcare
providers including medical and dental offices. Colwell's products include
custom printed products, insurance and billing forms, stationery, envelopes and
business cards, labels, file folders, appointment books and other stock office
supply products. Colwell sells its products through catalogs distributed to over
160,000 customers several times a year and through its own telemarketing staff
located in Champaign, Illinois. Colwell receives orders by telephone and through
the mail. Colwell operates from two facilities located in Champaign, Illinois.
One facility is a 86,200 square foot printing plant which specializes in short-
run printing and produces Colwell's custom printed products. The other facility
in Champaign serves as its distribution center for its stock items, the call
center for its telemarketing group and administrative offices. Colwell employees
136 people at its printing plant and 254 people at its distribution and call
center facility.
Colwell's principal competition includes two other national direct
marketers of forms and office supplies to the healthcare market, local printing
companies and local and national chain office supply stores.
Employees
As of April 26, 1997, the Company employed 2,913 people in the United
States and Canada on a full-time basis, consisting of 786 sales representatives,
111 telemarketing employees, 613 service technicians, 351 distribution
employees, 188 manufacturing employees, and 864 general and administrative
employees. Patterson has not experienced a shortage of qualified personnel in
the past, and believes that it will be able to attract such employees in the
future. None of Patterson's employees is subject to collective bargaining
agreements or represented by a union. The Company considers its relations with
its employees to be good.
Governmental Regulation
The manufacture of certain dental equipment and devices distributed by the
Company is subject to regulation by the United States Food and Drug
Administration (the "FDA") pursuant to the Federal Food, Drug and Cosmetic Act
and the Medical Device Amendments of 1976, and regulations promulgated
thereunder. Such regulation is imposed primarily on manufacturers of medical
devices. The Safe Medical Devices Act of 1990 (the "SMDA") requires
manufacturers, distributors and end-users to report information that "reasonably
suggests" that there is a probability that a device marketed by a distributor
has caused or contributed to a death, serious illness or serious injury. The
Company believes that it is in compliance with the SMDA.
2. PROPERTIES
As of April 26, 1997, Patterson's 102 facilities consisted of 90 sales
offices, 7 distribution centers, two combined sales office/distribution centers,
its Colwell production facility and telemarketing/distribution facility and its
headquarters building. All but eight facilities are leased and, with few
exceptions, such leases are for three to five-year terms. As of April 26, 1997,
the Company leased approximately 628,000 square feet at an annual cost of $6.20
per square foot. The Company considers its facilities to be well-maintained and
suitable for its purposes.
The Company has made a significant investment in computer, data processing
and automated office equipment systems and it plans to continuously upgrade
these systems. The Company believes that technology-based systems are crucial in
supporting its operating efficiency and providing it with a competitive
advantage.
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3. LEGAL PROCEEDINGS
The Company has been involved in various legal proceedings arising in the
ordinary course of business. Some of these proceedings involve claims against
the Company for alleged personal injuries arising out of the use of dental
products manufactured by third parties and distributed by the Company. The
Company believes that if any of such cases are determined in favor of the
claimants, the manufacturers of such products would have primary responsibility
for any damages because Patterson is a distributor of finished goods
manufactured by third parties. In the event that a manufacturer of a defective
product is unable to pay a judgment for which the Company may be jointly liable,
the Company could have liability for the entire judgment. Since May 1985 the
Company has maintained product liability insurance coverage for any potential
liability for claims arising out of products sold by the Company. The Company
believes that any liabilities which might result from pending cases and claims
relating to events occurring after May 1985 would be adequately covered by such
insurance and that any unfavorable results in such cases would not have a
material adverse effect on the Company's business or financial condition. With
respect to claims relating to events occurring prior to May 1985, the agreement
providing for the acquisition of Patterson from The Beatrice Companies, Inc.
provides that Beatrice and its successors are obligated to indemnify the Company
for losses exceeding a litigation reserve established at the time of the
acquisition plus $200,000. Beatrice has not been notified of pending litigation
and has not contested its obligation to indemnify the Company. Although the
Company has insurance coverage for product liability claims relating to events
occurring after May 1985 and is entitled to indemnification from third parties
under certain circumstances, there is no assurance that any such additional
litigation would not have a material adverse effect on the Company's business or
financial condition in the future.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended April 26, 1997.
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading under the symbol "PDCO" on the
NASDAQ National Market System in October 1992.
The following table sets forth the range of high and low sale prices for
the Company's Common Stock for each full quarterly period within the two most
recent fiscal years. Quotations for such periods are as reported by NASDAQ for
National Market System issues.
<TABLE>
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High Low
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<S> <C> <C>
Fiscal 1996
First Quarter.................. 27-1/4 21-3/4
Second Quarter................. 28-1/2 22-3/4
Third Quarter.................. 28-5/16 23-1/2
Fourth Quarter................. 31-3/4 24-1/2
Fiscal 1997
First Quarter.................. 36-7/8 28-3/4
Second Quarter................. 30-1/4 20
Third Quarter.................. 28-3/4 25-1/2
Fourth Quarter................. 35-7/8 26-1/2
</TABLE>
On July 11, 1997, the number of holders of record of Common Stock was
1,546. The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota, 55075-
0738, telephone: (612) 450-4064.
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The Company has not paid any dividends on its Common Stock since its
initial public offering and expects that for the foreseeable future it will
follow a policy of retaining earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
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6. 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, April 25,
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
- ----------------------------
Net sales $661,518 $581,893 $532,598 $466,882 $342,826 $277,057
Cost of sales 423,911 376,507 342,868 301,239 223,501 180,226
-------- -------- -------- -------- -------- --------
Gross profit 237,607 205,386 189,730 165,643 119,325 96,831
Operating expenses 186,956 161,676 151,640 134,317 99,032 83,319
-------- -------- -------- -------- -------- --------
Operating income 50,651 43,710 38,090 31,326 20,293 13,512
Other income (expense) - net 1,304 1,998 1,043 643 134 (945)
-------- -------- -------- -------- -------- --------
Income before income taxes and extraordinary item 51,955 45,708 39,133 31,969 20,427 12,567
Income taxes 19,540 16,961 14,953 12,683 7,219 4,041
-------- -------- -------- -------- -------- --------
Income before extraordinary item 32,415 28,747 24,180 19,286 13,208 8,526
Extraordinary item (1)
(less income tax benefit of $281) -- -- -- -- (453) --
-------- -------- -------- -------- -------- --------
Net income $ 32,415 $ 28,747 $ 24,180 $ 19,286 $ 12,755 $ 8,526
======== ======== ======== ======== ======== ========
Earnings per common and common
equivalent share: (2)
Earnings before extraordinary item $ 1.50 $ 1.31 $ 1.10 $ 0.87 $ 0.62 $ 0.38
Loss - extraordinary item (1) -- -- -- -- (0.02) --
-------- -------- -------- -------- -------- --------
Net earnings $ 1.50 $ 1.31 $ 1.10 $ 0.87 $ 0.60 $ 0.38
======== ======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding (2) 21,681 21,539 21,488 21,485 19,842 18,498
Dividends per common share (2) -- -- -- -- -- --
Balance Sheet Data:
- ------------------
Working capital $ 94,528 $111,869 $ 87,229 $ 72,301 $ 56,546 $ 35,227
Total assets 244,462 202,800 170,768 136,196 104,630 75,250
Total debt 2,976 3,175 3,324 9,064 21 19,224
Stockholders' equity 162,747 127,121 97,191 72,179 53,142 10,686
Fiscal Year Ended
---------------------------------------------
April 27, April 28, April 29, April 30,
1991 1990 1989 1988
--------- --------- --------- ---------
Statement of Operations Data:
- ----------------------------
Net sales $243,130 $220,583 $218,177 $198,188
Cost of sales 156,785 142,138 143,684 129,833
-------- -------- -------- --------
Gross profit 86,345 78,445 74,493 68,355
Operating expenses 75,017 70,459 67,761 62,315
-------- -------- -------- --------
Operating income 11,328 7,986 6,732 6,040
Other income (expense) - net (871) 1,061 1,176 1,305
-------- -------- -------- --------
Income before income taxes and extraordinary item 10,457 9,047 7,908 7,345
Income taxes 3,128 3,015 2,680 63
-------- -------- -------- --------
Income before extraordinary item 7,329 6,032 5,228 7,282
Extraordinary item (1)
(less income tax benefit of $281) -- -- -- --
-------- -------- -------- --------
Net income $ 7,329 $ 6,032 $ 5,228 $ 7,282
======== ======== ======== ========
Earnings per common and common
equivalent share: (2)
Earnings before extraordinary item $ 0.32 $ 0.30 $ 0.26 $ 0.36
Loss - extraordinary item (1) -- -- -- --
-------- -------- -------- --------
Net earnings $ 0.32 $ 0.30 $ 0.26 $ 0.36
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding (2) 18,474 20,334 20,111 20,124
Dividends per common share (2) -- -- $ 0.49 --
Balance Sheet Data:
- ------------------
Working capital $ 30,616 $ 31,355 $ 37,584 $ 41,166
Total assets 64,554 61,267 63,055 69,041
Total debt 21,634 3,640 14,173 14,137
Stockholders' equity 2,202 17,086 10,934 15,066
</TABLE>
(1) Relates to retirement of bank debt from proceeds of initial public offering.
(2) Amounts are adjusted for stock splits: 60 shares of Patterson for each share
of PDA held, on June 2, 1992, and a three-for-two split on June 17, 1994.
10
<PAGE>
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
The Company's string of record performances results from an effective
growth strategy that has been successfully implemented over the last several
years. Patterson, the leader in the dental supplies industry, continues to
exceed its goal of growing four percentage points faster than the average
industry growth rate. Since 1992, sales grew 19% compounded annually, exceeding
the Company's sales goal. Net income had a five-year growth rate of 31%
compounded annually. 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 eight 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. Sales of consumable
supplies rose 20% compounded annually over the five-year period, and equipment
sales grew 18% compounded annually. On average, consumables make up 62 % of
total sales; equipment represents 28%.
The Company has achieved an average five-year return on equity of 29%,
return on assets of 15% and return on sales of 4%.
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........ 64.1% 64.7% 64.4%
----- ----- -----
Gross profit......... 35.9% 35.3% 35.6%
Operating expenses... 28.2% 27.8% 28.5%
----- ----- -----
Operating income..... 7.7% 7.5% 7.1%
Other income......... .2% .3% .2%
----- ----- -----
Income before taxes.. 7.9% 7.8% 7.3%
Income taxes......... 3.0% 2.9% 2.8%
----- ----- -----
Net income........... 4.9% 4.9% 4.5%
===== ===== =====
</TABLE>
Fiscal 1997 Compared with Fiscal 1996
Net Sales. Net sales for fiscal 1997 grew 13.7% to $661.5 million from
$581.9 million in fiscal 1996. Colwell, acquired on October 1, 1996, contributed
5.8 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%, equal to 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. The number of
dental practitioners who purchased consumable dental supplies from Patterson
increased from 73,600 in fiscal 1996 to 74,000 in fiscal 1997, while at the same
time, average sales per customer increased 9.2% to over $5,000. 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 15.7% to $237.6 million for fiscal
1997 compared with $205.4 million for fiscal 1996, primarily as a result of
increased sales volume. Gross margin increased to 35.9% versus 35.3% 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.
11
<PAGE>
Operating Expenses. Operating expenses grew 15.6% to $187.0 million for
fiscal 1997 versus $161.7 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, 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 28.1% versus 27.8% for fiscal 1996.
Operating Income. Operating income expanded to $50.7 million, or 7.7% of
sales, in fiscal 1997. This represents a 15.9% increase from $43.7 million, or
7.5% of sales, in fiscal 1996. Operating margins improved slightly, reflecting
the higher margins associated with Colwell.
Other Income. Other income was $1.3 million in fiscal 1997 compared with
$2.0 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 37.1% reported in fiscal 1996 due to the loss in Canada, for which no tax
benefit has been recognized.
Net Income. Net income increased $3.7 million, or 12.8%, to $32.4 million
for fiscal 1997 on a 13.7% increase in sales. The net margin remained unchanged
from fiscal 1996 at 4.9%.
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 9.3% to $581.9 million for fiscal 1996
compared with $532.6 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, which accounted for 2.8% of the 9.3% sales
increase. The number of customers who purchased consumable dental supplies from
the Company was 73,600 and the average consumable sales per customer increased
9.2% to $4,600 in fiscal 1996.
Gross Profit. As a result of increased sales, gross profit increased 8.3%
to $205.4 million for fiscal 1996 compared with $189.7 million for fiscal 1995.
Gross margin decreased to 35.3% in fiscal 1996 from 35.6% 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 6.6% to $161.7 million
for fiscal 1996 compared with $151.6 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
remained unchanged at 35.0%. As a result, the consolidated operating expense
ratio declined to 27.8% from 28.5%.
Operating Income. Operating income increased 14.8% to $43.7 million for
fiscal 1996 compared with $38.1 million for fiscal 1995. Operating income as a
percent of sales increased to 7.5% from 7.1% due primarily to the decrease in
operating expenses as a percent of sales.
Other Income. Other income was $2.0 million in fiscal 1996 compared with
$1.0 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 37.1% for fiscal 1996
and 38.2% for fiscal 1995. The decrease in the effective tax rate results
primarily from higher profits in our Canadian subsidiary and utilization of the
Canadian
12
<PAGE>
subsidiary's net operating loss carryforwards, and an increase in tax-exempt
interest income. The Company's Canadian subsidiary's income before taxes
increased 95% to $1.4 million for fiscal 1996 from $0.7 million in fiscal 1995.
Net Income. Net income increased $4.6 million, or 18.9%, to $28.7 million
for fiscal 1996 on a 9.3% increase in sales. Net income of $28.7 million
represented a 25.6% return on average equity compared with a return on average
equity of 28.6% for fiscal 1995.
Liquidity and Capital Resources
The following table summarizes certain balance sheet items as a percent of
total assets.
<TABLE>
<CAPTION>
April 26, April 27,
1997 1996
--------- ---------
<S> <C> <C>
Total assets..................... 100.0% 100.0%
Current assets................... 67.2 86.1
Current liabilities.............. 28.5 31.0
Long-term debt................... 1.1 1.5
stockholder's equity............. 66.6 62.7
</TABLE>
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 $17.3 million during fiscal 1997 to $94.5 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 2.4 to 1 from 2.8 to 1
reported last year.
Capital expenditures, net of dispositions, were $4.9 million in fiscal 1997
versus $6.9 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.
13
<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) 7.5 7.1 7.1
Sales per employee (000's) $251 $233 $228
</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 $11.5 million to $60.3 million at the end
of fiscal 1997 from $48.8 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.
14
<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.
15
<PAGE>
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the accompanying consolidated balance sheets of Patterson Dental
Company as of April 26, 1997 and April 27, 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended April 26, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated 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, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 22, 1997
16
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
ASSETS
<TABLE>
<CAPTION>
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
$4,769 and $4,872 at April 26, 1997 and April 27, 1996, respectively........ 90,897 77,215
Inventory...................................................................... 60,335 48,787
Prepaid expenses............................................................... 2,789 1,729
Deferred taxes................................................................. 1,178 898
-------- --------
Total current assets....................................................... 164,294 174,685
Property and equipment, net..................................................... 34,532 25,740
Intangibles, net................................................................ 43,747 --
Other........................................................................... 1,889 2,375
-------- --------
Total assets............................................................... $244,462 $202,800
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 46,597 $ 42,520
Accrued payroll expense........................................................ 11,941 9,504
Other accrued expenses......................................................... 9,152 8,421
Income taxes payable........................................................... 1,890 2,220
Current maturities of long-term debt........................................... 186 151
-------- --------
Total current liabilities.................................................. 69,766 62,816
Long-term debt.................................................................. 2,790 3,024
Deferred taxes.................................................................. 1,362 1,157
-------- --------
Total liabilities.......................................................... 73,918 66,997
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 - 21,717,473 and 17,701,435 at
April 26, 1997, and April 27, 1996, respectively........................... 218 177
Additional paid-in capital...................................................... 55,227 31,435
Cumulative translation adjustment............................................... (664) (189)
Retained earnings............................................................... 123,035 89,713
Note receivable from ESOP....................................................... (15,069) (15,900)
-------- --------
Total stockholders' equity................................................. 162,747 127,121
-------- --------
Total liabilities and stockholders' equity................................. $244,462 $202,800
======== ========
See accompanying notes.
</TABLE>
17
<PAGE>
PATTERSON DENTAL COMPANY
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..................................... $661,518 $581,893 $532,598
Cost of sales................................. 423,911 376,507 342,868
-------- -------- --------
Gross profit.................................. 237,607 205,386 189,730
Operating expenses............................ 186,956 161,676 151,640
-------- -------- --------
Operating income.............................. 50,651 43,710 38,090
Other income and expense:
Amortization of deferred credits......... 885 885 885
Finance income, net...................... 1,017 1,518 632
Interest expense......................... (564) (410) (503)
Profit (loss) on currency exchange....... (34) 5 29
-------- -------- --------
Income before income taxes.................... 51,955 45,708 39,133
Income taxes.................................. 19,540 16,961 14,953
-------- -------- --------
Net income.................................... $ 32,415 $ 28,747 $ 24,180
======== ======== ========
Net income available for common shareholders.. $ 32,415 $ 28,125 $ 23,572
======== ======== ========
Earnings per common and common
equivalent share........................... $ 1.50 $ 1.31 $ 1.10
======== ======== ========
Weighted average common and common
equivalent shares outstanding.............. 21,681 21,539 21,488
======== ======== ========
See accompanying notes.
</TABLE>
18
<PAGE>
PATTERSON DENTAL COMPANY
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 $176 $30,092 $(420) $ 38,015 $(17,680) $ 72,179
Tax benefit on unallocated
ESOP shares -- -- -- -- 283 -- 283
Change in translation adjustment -- -- -- 328 -- -- 328
Common stock issued, net (47) -- 268 -- -- -- 221
Dividend paid -- -- -- -- (891) -- (891)
Cash payments received on note
receivable from ESOP -- -- -- -- -- 891 891
Net income -- -- -- -- 24,180 -- 24,180
-------- ---- ------- ----- -------- -------- --------
Balance at April 29, 1995 21,949 176 30,360 (92) 61,587 (16,789) 97,191
Tax benefit on unallocated
ESOP shares -- -- -- -- 268 -- 268
Change in translation adjustment -- -- -- (97) -- -- (97)
Common stock issued, net (64) 1 1,075 -- -- -- 1,012
Dividend paid -- -- -- -- (889) -- (889)
Cash payments received on note
receivable from ESOP -- -- -- -- -- 889 889
Net income -- -- -- -- 28,747 -- 28,747
-------- ---- ------- ----- -------- -------- --------
Balance at April 27, 1996 21,885 177 31,435 (189) 89,713 (15,900) 127,121
Change in translation
adjustment -- -- -- (475) -- -- (475)
Preferred shares exchanged
for common or cash -
ESOP redemptions (21,885) 39 21,846 -- -- -- --
Common stock issued, net -- 1 1,907 -- -- -- 1,908
Cash payments received on note
receivable from ESOP -- -- -- -- -- 831 831
Pooling of interests-Thau Nolde -- 1 39 -- 907 -- 947
Net income -- -- -- -- 32,415 -- 32,415
-------- ---- -------- ----- -------- -------- --------
Balance at April 26, 1997 $ -- $218 $55,227 $(664) $123,035 $(15,069) $162,747
======== ==== ======= ===== ======== ========= ========
See accompanying notes.
</TABLE>
19
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
Year Ended
----------------------------------
April 26, April 27, April 29,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income................................................. $ 32,415 $28,747 $ 24,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 4,854 3,776 3,305
Amortization of deferrals.......................... (885) (1,024) (876)
Amortization of goodwill........................... 1,337 -- --
Bad debt expense................................... 592 472 681
Deferred taxes..................................... (75) 475 234
Change in assets and liabilities net of acquired:
Increase in receivables........................ (6,998) (7,017) (6,599)
(Increase) decrease in inventory............... (7,833) 12,539 (15,641)
Increase (decrease) in accounts payable........ 2,436 (657) 13,319
Increase in accrued liabilities................ 1,902 2,488 2,927
Other changes from operating activities, net... (1,133) 1,164 (107)
-------- ------- --------
Net cash provided by operating activities...... 26,612 40,963 21,423
Investing activities:
Additions to property and equipment, net................... (4,942) (6,906) (6,175)
Acquisitions............................................... (61,171) (2,401) --
-------- ------- --------
Net cash used in investing activities...................... (66,113) (9,307) (6,175)
Financing activities:
Payments and retirement of long-term debt and
obligations under capital leases......................... (143) (138) (118)
Decrease in revolving credit agreement....................... -- -- (5,685)
Payment of dividend.......................................... -- (889) (891)
Cash payments received on note receivable from ESOP.......... 831 889 891
Common stock issued, net..................................... 1,908 1,012 229
-------- ------- --------
Net cash provided by (used in) financing activities.......... 2,596 874 (5,574)
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............................................ $ 19,956 $15,977 $ 14,993
Interest paid................................................ 567 413 509
Exchange of preferred shares into common stock............... 21,885 -- --
See accompanying notes.
</TABLE>
20
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO 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. and Patterson Dental Canada Inc. All significant
intercompany transactions have been eliminated in consolidation.
Description of Business
The Company is the largest provider of dental equipment, supplies and services
to dentists, institutional customers and dental laboratories in North America,
operating from 102 locations with approximately 2,900 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 84% of total
inventories at April 26, 1997 and 83% 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 $1,399. The Company employs the
undiscounted cash flow method of assessment for these assets when factors
indicating an impairment are present.
21
<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, 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.
Thau-Nolde was merged into the Company and the acquisition was accounted for as
a pooling-of-interests. The financial statements do not reflect Thau-Nolde's
financial position and results of operations prior to the date of acquisition
based on materiality. The Company also acquired certain assets of Dental
Services Co., Inc., located in Erie, Pennsylvania. 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.
22
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended
(In thousands,
except per share data)
April 26, 1997 April 27, 1996
-------------- --------------
<S> <C> <C>
Net sales $685,283 $637,972
Income before taxes 54,037 43,611
Net income 33,685 27,467
Earnings per share $ 1.55 $ 1.25
</TABLE>
3. Property and Equipment
<TABLE>
<CAPTION>
April 26, April 27,
1997 1996
--------- ---------
<S> <C> <C>
Land..................................................... $ 3,402 $ 2,698
Buildings................................................ 16,155 12,637
Leasehold improvements................................... 1,330 1,219
Furniture and equipment.................................. 13,509 8,138
Data processing equipment................................ 15,945 13,036
-------- --------
50,341 37,728
Accumulated depreciation................................. (15,809) (11,988)
-------- --------
$ 34,532 $ 25,740
======== ========
</TABLE>
4. Long-Term Debt
<TABLE>
<CAPTION>
April 26, April 27,
1997 1996
--------- ---------
<S> <C> <C>
Mortgage.................................................. $ 2,899 $ 3,095
Obligations under capital leases.......................... 77 80
-------- --------
2,976 3,175
Less current maturities................................... 186 151
-------- --------
$ 2,790 $ 3,024
======== ========
</TABLE>
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 obligation is an 11.5%, 20 year mortgage starting in 1988
on 5,000 Canadian dollars. The mortgage covers Patterson Dental Canada's
Montreal building. Monthly payments are 52 Canadian dollars. Long-term debt
becomes due: $186 in 1998, $175 in 1999, $166 in 2000, $183 in 2001, $205 in
2002 and the balance thereafter.
23
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
1998............................. $ 3,663
1999............................. 3,000
2000............................. 2,181
2001............................. 1,250
2002............................. 871
Thereafter....................... 235
-------
Total minimum payments required.. $11,200
=======
</TABLE>
Rent expense was $4,906, $4,542 and $4,529 for the years ended April
26, 1997, April 27, 1996 and April 29, 1995, respectively.
6 Income Taxes
For financial reporting purposes, income before income taxes includes
the following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
------- ------- -------
Income (loss) before income taxes:
United States.......................................................... $52,633 $44,290 $38,404
Canada................................................................. (678) 1,418 729
------- ------- -------
Total................................................................. $51,955 $45,708 $39,133
======= ======= =======
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
------- ------- -------
Current:
Federal................................................................ $17,417 $13,642 $12,022
Foreign................................................................ -- -- --
State.................................................................. 2,198 2,844 2,697
------- ------- -------
Total current......................................................... 19,615 16,486 14,719
Deferred:
Federal................................................................ (55) 418 191
Foreign................................................................ -- -- --
State.................................................................. (20) 57 43
------- ------- -------
Total deferred........................................................ (75) 475 234
------- ------- -------
Provision for income taxes................................................ $19,540 $16,961 $14,953
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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)
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate................... $18,184 $15,998 $13,697
State tax provision, net of federal benefit.. 1,416 1,886 1,781
Effect of foreign (income) losses............ 237 (496) (256)
ESOP dividend on allocated preferred stock... -- (74) (63)
Amortization of deferred credit.............. (310) (310) (310)
Other........................................ 13 (43) 104
------- ------- -------
$19,540 $16,961 $14,953
======= ======= =======
</TABLE>
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.
25
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Weighted Average
Date of Grant Granted Exercised Held Price Per Share
- ------------- ------- --------- ------ ----------------
<S> <C> <C> <C> <C>
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
======= ====== ======
</TABLE>
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.
26
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Year Ended
---------------------------------
April 26, April 27, April 29,
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States $604,698 $526,055 $478,361
Canada 56,820 55,838 54,237
Operating income:
United States $ 50,783 $ 41,744 $ 36,112
Canada (132) 1,966 1,978
Identifiable assets:
United States $217,941 $176,135 $144,665
Canada 26,521 26,665 26,103
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
Apr 26, Jan 25, Oct 26, Jul 27,
1997 1997 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $181,392 $176,055 $161,878 $142,193
Gross profit.......................... 66,460 63,858 57,194 50,095
Operating income...................... 15,109 14,510 11,886 9,146
Net income............................ 9,306 9,046 7,831 6,232
Earnings per common and common
equivalent share..................... $ 0.43 $ 0.42 $ 0.36 $ 0.29
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
Apr 27, Jan 27, Oct 28, Jul 29,
1996 1996 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................. $155,172 $148,672 $143,709 $134,340
Gross profit........................... 55,295 52,148 50,265 47,678
Operating income....................... 12,344 10,780 10,685 9,901
Net income............................. 8,413 7,016 6,999 6,319
Earnings per common and common
equivalent share...................... $ 0.38 $ 0.32 $ 0.32 $ 0.29
</TABLE>
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated herein
by reference to the descriptions set forth under the caption "Election of
Directors" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held September 8, 1997 (the "1997 Proxy Statement"). Set
forth below are the names, ages and positions of the executive officers of the
Company.
<TABLE>
<S> <C> <C>
Peter L. Frechette 59 President and Director
Ronald E. Ezerski 51 Executive Vice President, Treasurer,
Secretary and Director
James W. Wiltz 51 Vice President, Sales and Distribution
John V. Dodd 59 Vice President, Management Information Systems
</TABLE>
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is
employed pursuant to a written employment contract.
Background Executive Officers
Peter L. Frechette has been President of the Company since September 1982
and has been a director of Patterson since March 1983. Prior to joining
Patterson, Mr. Frechette was employed by American Hospital Supply Corporation
for 18 years, the last seven of which he served as president of its Scientific
Products Division. Mr. Frechette holds an M.B.A. degree from Northwestern
University and a B.S. degree in economics from the University of Wisconsin.
Ronald E. Ezerski has been Vice President, Treasurer and Secretary of the
Company since December 1982 and was President of its subsidiary, Dental Capital
Corporation, from December 1982 until October 1988 when it was merged into the
Company. Mr. Ezerski has been a director of Patterson since March 1983. Prior
to joining Patterson in December 1982, Mr. Ezerski was Controller and Treasurer
of Estech, Inc., a subsidiary of Esmark, Inc. Prior to that, Mr. Ezerski was
Manager of the Special Projects Department for two years at Esmark. Prior to
his employment with Esmark, Mr. Ezerski spent eight years at Touche Ross & Co.
as an assistant and then manager on its audit staff. Mr. Ezerski holds a B.S.
degree in accounting from DePaul University and is a certified public
accountant.
28
<PAGE>
James W. Wiltz has been Vice President of the Company since it was
acquired from The Beatrice Companies, Inc. and has been employed by Patterson
since September 1969, initially as a territory sales representative, then an
equipment specialist and later a branch manager. In 1980, Mr. Wiltz was
appointed Vice President of the Midwestern Division and was appointed Vice
President, Sales and Distribution in 1986. Mr. Wiltz is also President of the
Company's operating subsidiary, Patterson Dental Supply, Inc.
John V. Dodd joined Patterson in February 1989 as Vice President,
Management Information Systems. Prior to joining Patterson, Mr. Dodd was
Director of System Development for Ecolab, Inc. Mr. Dodd is a graduate of the
University of Illinois and has been associated with G.D. Searle Corporation and
Wilson Companies, where he implemented data processing programs for increased
productivity in distribution organizations. Mr. Dodd has more than 25 years of
experience in the management information systems area.
11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference to the information set forth under the caption "Compensation of
Executive Officers" in the 1997 Proxy Statement.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1997 Proxy Statement.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following consolidated financial statements and supplementary data
of the Company and its subsidiaries, required by Part II, Item 8 are filed
herewith:
Report of Independent Auditors
Consolidated Balance Sheets as of April 26, 1997 and April 27, 1996
Consolidated Statements of Income for the Years Ended April 26, 1997,
April 27, 1996 and April 29, 1995
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended April 26, 1997, April 27, 1996 and April 29, 1995
Consolidated Statements of Cash Flows for the Years Ended April 26,
1997, April 27, 1996 and April 29, 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts for the Years Ended April 26,
1997, April 27, 1996 and April 29, 1995.
Schedules other than those listed above have been omitted because they
are not applicable or the required information is included in the financial
statements or notes thereto.
29
<PAGE>
3. Exhibits.
Exhibit
-------
3.1 The Company's Articles of Incorporation*
3.2 The Company's Bylaws, as amended*
4.1 Specimen form of the Company's Common Stock Certificate*
4.2 The Company's Articles of Incorporation, as amended (see Exhibit 3.1
and Exhibit 3.2)
4.3 The Company's Bylaws (see Exhibit 3.2)
10.1 Patterson Dental Company Employee Stock Ownership Plan, as amended*
10.2 Patterson Dental Company 1992 Stock Option Plan*
10.3 Patterson Dental Company 1992 Director Stock Option Plan*
10.4 Patterson Dental Company Employee Stock Purchase Plan*
10.5 Patterson Dental Company Capital Accumulation Plan**
10.6 Incentive Compensation Program (Fiscal 1992)*
10.7 Asset Purchase Agreement dated September 12, 1996 between Patterson
Dental Company and Deluxe Corporation***
10.8 ESOP Loan Agreement dated June 15, 1990 as amended July 13, 1992*
10.9 Amended and Restated Term Promissory Note dated July 13, 1992*
11 Computation of Earnings Per Share
21 Subsidiaries
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-51304) filed with the Securities and Exchange Commission
August 26, 1992.
** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended April 27, 1996.
*** Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission October 15, 1996.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended April 26, 1997.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PATTERSON DENTAL COMPANY
Dated: July 18, 1997
By /s/ Peter L. Frechette
--------------------------------------
Peter L. Frechette,
President and Chief Executive Officer
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 registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date
----
<S> <C> <C>
/s/ Peter L. Frechette President and Director (Principal July 18, 1997
- ----------------------------- Executive Officer)
Peter L. Frechette
/s/ Ronald E. Ezerski Vice President, Treasurer, Secretary July 18, 1997
- ----------------------------- and Director (Principal Financial and
Ronald E. Ezerski Accounting Officer)
/s/ David K. Beecken Director July 18, 1997
- -----------------------------
David K. Beecken
/s/ Burt E. Swanson Director July 18, 1997
- -----------------------------
Burt E. Swanson
/s/ Andre B. Lacy Director July 18, 1997
- -----------------------------
Andre B. Lacy
</TABLE>
31
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the 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 Annual Report on Form 10-K). Our audits
also included the financial statement schedule listed in Item 14(a) of this
Annual Report on Form 10-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 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
32
<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 4,872 592 140/(3)/ 835/(1)/ 4,769
====== ===== ====== ===== ======
LIFO inventory adjustment 9,733 1,210 -- -- 10,943
Inventory obsolescence reserve 1,014 1,322 202/(3)/ 1,305/(2)/ 1,233
------ ----- ------ ----- ------
Total inventory reserve 10,747 2,532 202 1,305 12,176
====== ===== ====== ===== ======
Year ended April 27, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts 5,412 472 -- 1,012/(1)/ 4,872
====== ===== ====== ===== ======
LIFO inventory adjustment 8,179 1,554 -- -- 9,733
Inventory obsolescence reserve 1,106 1,137 -- 1,229/(2)/ 1,014
------ ----- ------ ----- ------
Total inventory reserve 9,285 2,691 -- 1,229 10,747
====== ===== ====== ===== ======
Year ended April 29, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts 5,871 681 -- 1,140/(1)/ 5,412
====== ===== ====== ===== ======
LIFO inventory adjustment 7,394 785 -- -- 8,179
Inventory obsolescence reserve 3,558 1,386 -- 3,838/(2)/ 1,106
------ ----- ------ ----- ------
Total inventory reserve 10,952 2,171 -- 3,838 9,285
====== ===== ====== ===== ======
</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..
33
<PAGE>
EXHIBIT 11
PATTERSON DENTAL COMPANY
COMPUTATION OF EARNINGS PER SHARE
(in Thousands, except per share amounts)
<TABLE>
<CAPTION>
April 26, April 27, April 29,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Earnings per share:
Average shares outstanding 21,634 17,669 17,612
Net effect of assumed conversion of Patterson
Preferred based on the if-converted method (1) --- 3,843 3,854
Net effect of dilutive stock options and employee
stock purchase plans - based on the treasury stock
method using average market price (2) 47 27 22
------- ------- -------
Total 21,681 21,539 21,488
======= ======= =======
Net income available for common shareholders (3) $32,415 $28,125 $23,572
======= ======= =======
Net earnings $ 1.50 $ 1.31 $ 1.10
======= ======= =======
</TABLE>
(1) Assumes conversion of Patterson Preferred to Common at the ratio of 1 to
1.08.
(2) Additional dilution using higher of average or ending market price is not
material. Therefore, additional fully diluted presentation is not
required.
(3) Assumes the dividend eliminated upon conversion of preferred stock is
offset by incremental ESOP compensation cost.
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
---- -----------------------------
Patterson Dental Supply, Inc. Minnesota
Direct Dental Supply Co. Nevada
Patterson Dental Canada, Inc. 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, with respect to the consolidated financial statements and the financial
statement schedule included in this Annual Report (Form 10-K) of Patterson
Dental Company for the year ended April 26, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> APR-26-1997
<CASH> 9,095
<SECURITIES> 0
<RECEIVABLES> 95,666
<ALLOWANCES> 4,769
<INVENTORY> 60,335
<CURRENT-ASSETS> 164,294
<PP&E> 50,341
<DEPRECIATION> 15,809
<TOTAL-ASSETS> 244,462
<CURRENT-LIABILITIES> 69,766
<BONDS> 2,790
0
0
<COMMON> 218
<OTHER-SE> 162,529
<TOTAL-LIABILITY-AND-EQUITY> 244,462
<SALES> 661,518
<TOTAL-REVENUES> 661,518
<CGS> 423,911
<TOTAL-COSTS> 423,911
<OTHER-EXPENSES> 186,956
<LOSS-PROVISION> 592
<INTEREST-EXPENSE> 564
<INCOME-PRETAX> 51,955
<INCOME-TAX> 19,540
<INCOME-CONTINUING> 32,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,415
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
</TABLE>
