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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
For the fiscal year ended April 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 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 including Zip Code)
Registrant's telephone number, including area code: (651) 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 14, 1998 was approximately $829,298,613.
As of July 14, 1998, there were 33,303,143 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 1998 Annual Meeting of Shareholders Part III
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FORM 10-K INDEX
Page
PART I........................................................................ 2
Item 1. BUSINESS..................................................... 2
Item 2. PROPERTIES................................................... 9
Item 3. LEGAL PROCEEDINGS............................................ 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........10
PART II.......................................................................10
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS..........................................10
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.........................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................16
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.....................................30
PART III......................................................................30
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........30
Item 11. EXECUTIVE COMPENSATION.......................................30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............30
PART IV.......................................................................31
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.....................................................31
SIGNATURES....................................................................33
SCHEDULE II...................................................................35
INDEX TO EXHIBITS.............................................................36
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PART I
1. BUSINESS
Certain information of a non-historical nature contained in Items 1, 2,
3 and 7 of this Form 10-K include forward-looking statements. Reference is made
to Item 7 - Management's Discussion and Analysis of Operations and Financial
Condition - Factors that May Affect Future Operating Results, for a discussion
of certain factors which could in the future affect the Company's actual
operating results which could differ materially from those expressed in any
forward-looking statements.
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 82,500 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 2,000 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. Patterson's EagleSoft division
provides Windows(R) based practice management software for 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 nearly 900 direct
sales representatives and equipment specialists who operate through 91 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 10 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 certain
customers, electronically through the Company's personal computer-based remote
order entry system (REMO), a hand-held bar code scanner (PDXpress(R)), 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, the October 1996
acquisition of Colwell Systems, a direct marketer of stationery and office
products to healthcare providers, and other dental distributors. As a result of
implementing these strategies, net sales increased from $165.8 million for
fiscal 1986 to $778.2 million for fiscal 1998, operating margins increased every
year since fiscal 1985 and profitability increased from an operating loss for
fiscal 1986 to operating income of $64.4 million for fiscal 1998.
INDUSTRY BACKGROUND
Total expenditures for dental services in the United States increased
from $13.3 billion in 1980 to over $50 billion in 1997. Domestic dental care
expenditures are projected by the Health Care Financing Administration to grow
6.3% annually reaching $79.1 billion 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
270 million in 1997, and is expected to reach 286 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
49% of the over $50 billion in total expenditures for 1997 as compared
to approximately 30% of the $13.3 billion in total expenditures for
1980.
See, "Factors That May Affect Future Operating Results."
According to the American Dental Association, there are over 151,000
dentists practicing in the United States in approximately 113,000 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 a 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 82,500 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(R), PassPort Plus and
an internet based system, 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. This past
year the Company acquired Hill Dental Supply Co., Inc. with locations in
Atlanta, Georgia; Birmingham and Mobile, Alabama; New Orleans, Louisiana;
Jackson, Mississippi; Houston and San Antonio, Texas; and Memphis, Tennessee. 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 460 people, 126 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 a distribution center.
In August 1997, the Company acquired Canadian Dental Supply Ltd. which expanded
the Company's market share in British Columbia, Alberta, Saskatchewan and
Ontario. As a result of the acquisition, a new distribution center was added in
Edmonton, Alberta to service the western provinces. 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 381 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. In July 1997, the Company acquired EagleSoft,
Inc., a developer and marketer of Windows based practice management software for
dental offices. EagleSoft employs approximately 88 people and is headquartered
in Effingham, Illinois.
PRODUCTS
Patterson distributes approximately 82,500 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 three fiscal
years:
1996 1997 1998
---- ---- ----
Dental & Office Supplies............. 60% 63% 64%
Equipment............................ 29 27 27
Other................................ 11 10 9
--- --- ---
Total....................... 100% 100% 100%
=== === ===
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, diamonds and office supplies. Patterson
markets its own private label line of dental supplies consisting of
approximately 2,000 items, including anesthetics, instruments, preventative and
restorative products, and cotton and
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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.
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 also distributes various high-productivity products including CEREC
2TM, a chair side restoration system, air abrasion systems, digital x-rays, the
Welch Allyn Reveal(R) intra oral camera, and the Triangle Sterilization Center.
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. Patterson also offers repair parts and labor as well as teeth
for use in dentures and software.
SERVICES
Patterson offers a broad range of services to its customers to
complement and support its supply and equipment sales business.
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 (REMOTM),
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.
PassPort PlusTM is a new smart phone which incorporates automated ordering with
credit card processing. REMOTM, PDXpress(R) and PassPort PlusTM are provided at
no additional charge to customers who maintain certain minimum purchase
requirements. The Company recently introduced a new system which allows
customers to access the online ordering system via the internet.
DENTAL OFFICE DESIGN. Patterson provides dental office layout and
design services 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 or leasing through a third
party. In fiscal 1998, the Company originated over $68 million of equipment
finance contracts.
Equipment leasing 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 April 1996, the Company entered into a Contract Purchase Agreement
with U. S. Bank, National Association, under which U. S. Bank committed to
purchase from the Company, on a limited recourse basis, the Company's
installment sale contracts secured by dental equipment. The Company continues to
service the accounts. In 1996, U. S. 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. In April 1998, the combined
Contract Purchase Agreement and unsecured revolving credit agreement with U. S.
Bank and two additional banks was increased to $85 million. As of April 25,
1998, contracts with an outstanding principal balance of $52 million had been
purchased under the Contract Purchase Agreement.
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SALES AND MARKETING
During fiscal 1998, Patterson sold dental products to over 78,000
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 1998, 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 25, 1998, Patterson employed approximately
886 trained sales representatives, 118 of whom were equipment specialists. Each
representative works within an assigned sales territory from one of 91 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 PlusTM 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 order entry systems, REMOTM,
PDXpress(R) and PassPort PlusTM 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 10 distribution centers. The
Company's 91 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.
Customers can place an order through a sales representative, by
telephone, the internet and, for selected customers, electronically utilizing
REMOTM, PDXpress(R) or PassPort PlusTM. 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 fiscal 1998, the Company's top 10 vendors and single largest vendor accounted
for approximately 36% and 14%, 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.
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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 one other national,
full-service firm, Henry Schein, Inc. ("Schein"), there are at least 20
full-service distributors which operate on a regional level, and hundreds of
small local distributors. Although the Company does not have reliable
information regarding the market share of mail-order companies, it believes that
Schein is the largest distributor in the industry. 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.
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 employs 146 people at its printing plant and 235 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.
EAGLESOFT
EagleSoft, acquired in July 1997, is a developer and marketer of dental
practice management software. Products include software for scheduling, billing,
charting and storage/retrieval of digital images, service agreements and
electronic claims processing. EagleSoft is based in Effingham, Illinois and has
88 employees.
EMPLOYEES
As of April 25, 1998, the Company employed 3,214 people in the United
States and Canada on a full-time basis, consisting of 886 sales representatives,
120 telemarketing employees, 670 service technicians, 384 distribution
employees, 146 manufacturing employees, and 1,008 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.
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GOVERNMENTAL REGULATION
The marketing, distribution and sale of certain dental products sold by
the Company is subject to the requirements of various state, local and federal
laws and regulations. Among the federal laws which impact the Company are the
Federal Food, Drug and Cosmetic Act, which regulates the advertising, record
keeping, labeling, handling, storage and distribution of drugs and medical
devices, and which requires the Company to be registered with the Federal Food
and Drug Administration, and the Safe Medical Devices Act of 1990, which imposes
certain reporting requirements on distributors in the event of an incident
involving serious illness, injury or death caused by a medical device. In
addition, the company is required to be licensed as a distributor of drugs and
medical devices by each state in which it conducts business. The Company
believes that it is in substantial compliance with all of the foregoing laws and
that it possesses all licenses required in the conduct of its business.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the executive
officers of the Company.
<TABLE>
<CAPTION>
<S> <C> <C>
Peter L. Frechette 60 President and Director - Patterson Dental Company
Ronald E. Ezerski 52 Executive Vice President, Treasurer and Director - Patterson Dental
Company
James W. Wiltz 53 Vice President - Patterson Dental Company and President - Patterson
Dental Supply, Inc.
Mary H. Baglien 55 Vice President, Human Resources - Patterson Dental Company
John V. Dodd 61 Vice President, Management Information Systems - Patterson Dental
Company
Gary D. Johnson 51 Vice President - Patterson Dental Supply, Inc.
R. Reed Saunders 50 Vice President - Patterson Dental Supply, Inc.
Normand Senecal 53 President - Patterson Dental Canada, Inc.
Brian S. Watson 37 Vice President - Patterson Dental Supply, Inc.
</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 and Chief Executive Officer 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 and Chief Financial Officer
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. In 1997 Mr. Ezerski became Executive Vice President of the
Company. Mr. Ezerski has been a director of Patterson since March 1983. Mr.
Ezerski holds a B.S. degree in accounting from DePaul University and is a
certified public accountant.
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.
MARY H. BAGLIEN joined Patterson Dental Company in November of 1977 as
Sales Training Director. In 1981 Ms. Baglien became Director of Human Resources
and continued in that capacity until June of 1998 when she was named Vice
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President of Human Resources. Ms. Baglien holds an M.A. degree from Bowling
Green State University and a B.A. from Carthage College.
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.
GARY D. JOHNSON has been Vice President, Sales, of Patterson Dental
Supply, Inc. since October 1996. Mr. Johnson has served in various sales and
management positions since he joined the Company in August 1981.
R. REED SAUNDERS has been a Vice President of Patterson Dental Supply,
Inc. since March 1997 and is President of its Colwell Systems division. Prior to
joining Patterson, Mr. Saunders spent 15 years with American Express Company as
Senior Vice President - Chief Marketing Officer of its division, American
Express Financial Advisors. He holds an MBA from Amos Tuck School, and an
undergraduate degree from Dartmouth College.
NORMAND SENECAL has been President of the Company's Canadian subsidiary
Patterson Dental Canada Inc. since it was acquired from Healthco International,
Inc. in 1993. Mr. Senecal was employed by Healthco Canada since 1982 as Vice
President Sales and Marketing and President.
BRIAN S. WATSON has been Vice President, Marketing of Patterson Dental
Supply, Inc. since October 1996. Mr. Watson joined the Company in May 1982.
During his career with the Company, Mr. Watson has served in various sales and
management capacities. Mr. Watson holds a B.S. degree in Marketing from Indiana
University.
2. PROPERTIES
As of April 25, 1998, Patterson's 103 facilities consisted of 89 sales
offices, 8 distribution centers, two combined sales office/distribution centers,
its Colwell production facility and telemarketing/distribution facility, the
EagleSoft 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 25, 1998, the Company leased approximately 656,000 square feet at an
annual cost of $6.56 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.
3. LEGAL PROCEEDINGS
The Company has been involved in various legal proceedings arising in
the ordinary course of business. Some of these proceedings involve product
liability claims arising out of the use of dental products manufactured by third
parties and distributed by the Company. The Company believes that if any such
product liability 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 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.
Among the product liability cases in which the Company is a defendant,
five involve claims by healthcare workers claiming damages from allergic
reactions to exposure to latex gloves distributed by the Company. In each of
these cases the Company acted as a distributor of "Patterson" private label
gloves manufactured by third parties, as well as gloves bearing the brand names
of other suppliers. In each of these cases the Company intends to seek
indemnification from or assert claims against the glove manufacturers pending
completion of product identification.
9
<PAGE>
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. The successor to Beatrice has not
been asked to indemnify the Company regarding any pending cases 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 may be entitled to indemnification from third parties under
certain circumstances, there is no assurance that any 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 25, 1998.
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 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 issues.
HIGH LOW
---- ---
Fiscal 1997
First Quarter............................... $24.58 $19.17
Second Quarter.............................. $20.17 $13.33
Third Quarter............................... $19.17 $17.00
Fourth Quarter.............................. $23.92 $17.67
Fiscal 1998
First Quarter............................... $24.33 $20.58
Second Quarter.............................. $28.08 $22.50
Third Quarter............................... $31.83 $23.92
Fourth Quarter.............................. $32.67 $28.13
On July 14, 1998, the number of holders of record of Common Stock was
1,876. 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.
The Company has not paid any cash dividends on its Common Stock since
its initial public offering in 1992 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.
10
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
On February 2, 1998 the Company issued 86,872 shares of common stock to
five persons who were the shareholders of Hill Dental Company, Inc. ("Hill"), an
Alabama corporation, which was acquired by merger with the Company's subsidiary,
Patterson Dental Supply, Inc. No underwriters were involved and no underwriting
compensation was paid to any person. The shares were issued in a transaction not
involving a public offering and were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Act") and Regulation D, Rule
505. The securities issued to the stockholders of Hill contained restrictive
legends and are restricted as to transfer, subject to compliance with applicable
registration requirements under the Act. The Company furnished to the
stockholders of Hill material information concerning the Company, including the
information specified in Rule 502 of Regulation D.
6. SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------
April 25, April 26, April 27, April 29, April 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Net sales $778,169 $687,895 $606,983 $558,648 $492,561
Cost of sales 488,279 440,262 392,091 358,868 316,628
-------- -------- -------- -------- --------
Gross profit 289,890 247,633 214,892 199,780 175,933
Operating expenses 225,508 196,448 170,958 160,501 143,915
-------- -------- -------- -------- --------
Operating income 64,382 51,185 43,934 39,279 32,018
Other income (expense) - net 1,324 1,119 1,711 946 591
-------- -------- -------- -------- --------
Income before income taxes 65,706 52,304 45,645 40,225 32,609
Income taxes 24,937 19,687 16,997 15,396 12,824
-------- -------- -------- -------- --------
Net income $ 40,769 $ 32,617 $ 28,648 $ 24,829 $ 19,785
======== ======== ======== ======== ========
Earnings per share - basic and diluted(1) $ 1.23 $ 1.00 $ 0.86 $ 0.75 $ 0.59
Weighted average and dilutive potential
shares outstanding (1) 33,163 32,689 32,477 32,400 32,395
Dividends per common share -- -- -- -- --
Balance Sheet Data:
- -------------------
Working capital $133,256 $ 96,893 $114,883 $ 90,392 $ 76,100
Total assets 316,373 255,311 212,973 179,307 144,475
Total debt 7,202 10,792 10,681 9,664 13,557
Stockholders' equity 210,303 163,662 127,852 97,555 73,897
</TABLE>
(1) Amounts are adjusted for three-for-two stock splits on June 17, 1994 and
January 12, 1998. See Note 1, "Earnings per Share," to the Consolidated
Financial Statements.
11
<PAGE>
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Patterson's established goals of increasing sales four percentage points greater
than the average industry growth rate, and achieving double-digit net income
growth have been successfully met for the last nine years. Over the recent
five-year period, sales grew 12% and net income advanced 20% compounded
annually. Sales were supported by a continually expanded sales force, improved
sales training programs, leading-edge new product introductions and effective
marketing programs. Net income over the five years benefited from conscientious
cost controls that held operating expenses in line with sales growth, and an
improved gross profit margin that was 37% in fiscal 1998 compared with 36% in
fiscal 1994.
The Company's effective strategy for growth focused on the acquisition of
smaller dental distributors to achieve a broader customer base and expanded
direct sales representation. The acquisition strategy also featured the addition
of complementary product lines, such as supplies and forms for the dentist's
front office, and practice management software.
Over the last five years, Patterson completed 10 acquisitions of companies with
annual sales of $187 million and gained a total of 185 sales representatives.
The number of direct sales representatives has increased 76% since 1993, and
sales per direct sales representative have risen 29%, evidencing the
effectiveness of the Company's strategies.
Patterson has achieved an average three-year return on equity of 23%, return on
assets of 14% and return on sales of 5%.
RESULTS OF OPERATIONS
The following table summarizes the results of operations over the past
three fiscal years as a percent of sales:
1998 1997 1996
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 62.7% 64.0% 64.6%
----- ----- -----
Gross Profit 37.3% 36.0% 35.4%
Operating Expenses 29.0% 28.6% 28.2%
----- ----- -----
Operating Income 8.3% 7.4% 7.2%
Other Income .1% .2% .3%
--- --- ---
Income Before Taxes 8.4% 7.6% 7.5%
Income Taxes 3.2% 2.9% 2.8%
---- ---- ----
Net Income 5.2% 4.7% 4.7%
---- ---- ----
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. Net sales for fiscal 1998 increased 13.1% or $90.3 million to
$ 778.2 million from $687.9 million in fiscal 1997 due to contributions from
newly acquired businesses and increased demand for dental supplies and
equipment. Consolidated results for the prior year periods have been restated to
include the operations of Canadian Dental Supply, acquired in August 1997, and
accounted for as a pooling-of-interests. Colwell, which was acquired in the
second quarter of fiscal year 1997, and accounted for as a purchase, affects the
year-to-year comparisons as only seven months of sales for the operation are
included in prior year results versus a full twelve months in the current year.
Excluding the impact of Colwell, sales were up 10.8%. EagleSoft, acquired July
1997 in a pooling transaction, and Hill Dental Supply, purchased in February
1998, contributed approximately $11 million to the increase. Sales mix remained
consistent with prior years. Supplies represented 64% of sales in fiscal 1998
vs. 63% in fiscal 1997, and equipment accounted for 27% of sales, the same as
last year, while other products and services were 9% of sales in fiscal 1998
versus 10% a year ago. The number of dental practitioners who purchased
consumable dental supplies from Patterson grew 6% increasing from 74,000 in
fiscal 1997 to 78,500 in fiscal 1998, while at the same time, average sales per
customer increased 8% to $5,400 from $5,000 reported last year. The Company now
has 886 sales representatives throughout the U.S. and Canada versus 786 reported
at the end of last year. Sales of high-technology products such as the CEREC
2TM, air abrasion systems and digital imaging products, continue to drive the
growth of equipment sales.
GROSS PROFIT. Gross profit grew 17.1% to $ 289.9 million for fiscal
1998 compared to $247.6 million for fiscal 1997 due to a combination of
increased sales volume and higher margins. Gross margin increased to 37.3% in
fiscal 1998 versus 36.0% reported last year reflecting greater contribution from
Colwell and EagleSoft which have a higher gross margin than the dental supply
business and higher margins in the U.S. dental business. Excluding Colwell and
EagleSoft, margins were up 50 basis points over last year.
12
<PAGE>
OPERATING EXPENSES. Operating expenses grew 14.8% to $ 225.5 million for
fiscal 1998 versus $196.4 million for fiscal 1997. Operating expenses as a
percent of sales increased to 29.0% in fiscal 1998 from 28.6% in fiscal 1997 due
to EagleSoft and Colwell where expenses were higher as a percent of sales.
Operating expenses in relation to sales in the dental supply business were down
10 basis points from prior year levels.
OPERATING INCOME. Operating income increased to $64.4 million or 8.3% of
sales in fiscal 1998. This represented a 25.8% increase from $51.2 million or
7.4% of sales reported in fiscal 1997. Operating margins improved slightly
reflecting the higher margin contribution from acquisitions, Colwell and
EagleSoft, and improved operating margins in the dental supply business, brought
on by increased prices and lower operating expenses in relation to sales.
OTHER INCOME. Other income was $ 1.3 million in fiscal 1998 compared to
$1.1 million in fiscal 1997. Interest costs were lower due to a reduction in
borrowing levels in fiscal year 1998.
INCOME TAXES. The effective tax rate was 38.0% for fiscal 1998 up
slightly from 37.6% reported in fiscal 1997 due to an increase in the loss in
Canada, for which no tax benefit is recognized.
NET INCOME. Net income grew $8.2 million, or 25%, to $40.8 million in
fiscal 1998. The net margin increased from 4.7% of sales in fiscal 1997 to 5.2%
of sales in fiscal 1998 due to increased gross margin.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Net sales for fiscal 1997 grew 13.3% to $687.9 million from
$607.0 million in fiscal 1996. Colwell, acquired on October 1, 1996, contributed
5.5 percentage points of the sales increase. Excluding Colwell, dental supplies
represented 61% of the sales versus 60% in fiscal 1996, and equipment accounted
for 29%, the same as the previous year, while other products and services were
10% versus 11% a year ago. The growth in sales of dental products reflects the
success of aggressive sales and marketing efforts to expand market share with
existing and new customers, and lead the introduction of new technologies. Sales
of high-technology products, such as the CEREC 2, which makes available
chairside restorations in one visit, and air abrasion products continue to drive
the growth of equipment sales.
GROSS PROFIT. Gross profit increased 15.2% to $247.6 million for fiscal
1997 compared with $214.9 million for fiscal 1996, primarily as a result of
increased sales volume. Gross margin increased to 36.0% versus 35.4% in fiscal
1996, reflecting the impact of higher margin Colwell sales for the last seven
months of the year. Excluding Colwell, margins were essentially flat with prior
year.
OPERATING EXPENSES. Operating expenses grew 15.0% to $196.4 million for
fiscal 1997 versus $171.0 million for fiscal 1996, primarily due to the increase
in sales and the related variable expenses. Excluding Colwell, the rate of
growth in operating expenses outpaced the increase in gross margin due to the
conversion of ESOP shares from preferred to common, which increased operating
expense, and higher healthcare costs for employees. Excluding the impact of the
change in ESOP funding, operating expenses as a percent of sales would have been
28.4% versus 28.2% for fiscal 1996.
OPERATING INCOME. Operating income expanded to $51.2 million, or 7.4%
of sales, in fiscal 1997. This represents a 16.5% increase from $43.9 million,
or 7.2% of sales, in fiscal 1996. Operating margins improved slightly,
reflecting the higher margins associated with Colwell.
OTHER INCOME. Other income was $1.1 million in fiscal 1997 compared
with $1.7 million in fiscal 1996. The decrease was due to lower interest income
related to reduced short-term investment of excess cash.
INCOME TAXES. The effective tax rate was 37.6% for fiscal 1997 up
slightly from 37.2% reported in fiscal 1996 due to the loss in Canada, for which
no tax benefit has been recognized.
NET INCOME. Net income increased $4.0 million, or 13.9%, to $32.6
million for fiscal 1997 on a 13.3% increase in sales. The net margin remained
unchanged from fiscal 1996 at 4.7%.
13
<PAGE>
Refer to Note 1 in Notes to Consolidated Financial Statements for the
impact of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain balance sheet items as a percent
of total assets.
April 25, April 26,
1998 1997
--------- -------
Total assets............................ 100.0% 100.0%
Current assets.......................... 72.0 68.1
Current liabilities..................... 29.8 30.1
Long-term debt.......................... 0.9 2.2
Stockholders' equity.................... 66.5 64.1
Patterson's operating cash flow which generally parallels net earnings
continued to grow reflecting higher profitability and improved productivity in
the use of working capital. Available liquid resources at April 25, 1998
consisted of $35.6 million cash and cash equivalents and $33.9 million available
under existing bank lines, as amended on April 30, 1998.
Working capital increased $36.4 million during fiscal 1998 to $133.3
million at April 25, 1998. Cash and cash equivalents grew $26.5 million
reflecting cash generated from operations offset by repayment of debt assumed in
the Hill Dental Supply and Canadian Dental Supply acquisitions. Non-cash related
working capital increased $9.8 million or 11.2% in response to a comparable
increase in sales. Liquidity as measured by the current ratio at the end of
fiscal year 1998 increased to 2.4 to 1 from 2.3 to 1 reported last year.
Capital expenditures net of dispositions were $6 million in fiscal 1998
versus $5 million in fiscal 1997.
All three acquisitions in fiscal year 1998 were made using common
shares while $61.2 million of cash was invested in acquisitions last year.
The Company believes that funds from operations and the remainder of
its committed bank lines are sufficient to meet any 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.
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:
1998 1997 1996
------ ------ ------
Days sales outstanding 45 46 45
Inventory turnover (1) 7.2 7.4 6.6
Sales per employee (000's) $242 $223 $228
(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.
The inventory balance increased $16.3 million to $81.8 million at the
end of fiscal 1998 from $65.5 million at the end of fiscal 1997. The increase
was due primarily to the forward buying opportunities that were taken advantage
of at the end of fiscal 1998, which were not available at the end of fiscal
1997, and inventory acquired through acquisitions.
14
<PAGE>
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.
IMPACT OF YEAR 2000.
The Company has addressed the Year 2000 issue by performing an
assessment of its major information technology and technology reliant operating
systems and expects that all necessary modifications or replacements of existing
systems will be completed by the end of fiscal 1999. Progress in this effort is
being monitored by senior management. Based on current expenditures and
estimates, the costs of addressing the Year 2000 issue are not expected to be
material to the financial results or operations of the Company. The Company
intends to contact its significant vendors and suppliers regarding the Year 2000
issue and the status of their compliance. At this time, the impact on the
Company if significant vendors or suppliers are not in compliance cannot be
reasonably estimated. However, the Company intends to develop plans to mitigate
the impact on the Company's operations of vendors or suppliers who are not in
compliance with the Year 2000 issue.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain information of a non-historical nature contained in Items 1, 2,
3 and 7 of this Form 10-K include forward-looking statements. Words such as
"believes," "expects," "plans," "estimates" and variations of such words are
intended to identify such forward-looking statements. The statements are not
guaranties of future performance and are subject to certain risks, uncertainties
or assumptions that are difficult to predict; therefore, the Company cautions
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. 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.
* The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
* Changes in the 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.
15
<PAGE>
* 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.
* The ability of the company and its suppliers to upgrade their computer
systems in order to address the Year 2000 issue.
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.
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
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 25, 1998 and April 26, 1997, 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 25, 1998. 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 25, 1998 and April 26, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended April 25, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 20, 1998
16
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
April 25, April 26,
1998 1997
ASSETS: --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 35,619 $ 9,095
Receivables, net of allowance for doubtful accounts of $5,071
and $5,043 at April 25, 1998 and April 26, 1997, respectively . 106,252 95,132
Inventory ....................................................... 81,810 65,486
Prepaid expenses ................................................ 2,802 2,927
Deferred taxes .................................................. 1,178 1,178
--------- ---------
Total current assets .......................................... 227,661 173,818
Property and equipment, net ....................................... 37,998 35,563
Intangibles, net .................................................. 48,013 43,813
Other ............................................................. 2,701 2,117
--------- ---------
Total assets .................................................. $ 316,373 $ 255,311
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 60,652 $ 48,472
Accrued payroll expense ......................................... 13,852 12,281
Other accrued expenses .......................................... 13,426 9,268
Bank indebtedness ............................................... 2,033 3,927
Income taxes payable ............................................ 2,009 1,677
Current maturities of long-term debt ............................ 2,433 1,300
--------- ---------
Total current liabilities ..................................... 94,405 76,925
Long-term debt .................................................... 2,736 5,565
Deferred taxes .................................................... 2,017 1,362
--------- ---------
Total liabilities ............................................. 99,158 83,852
Deferred Credits .................................................. 6,912 7,797
Commitments and contingent liabilities
Stockholders' equity:
Preferred Stock Series A, $.01 par value, $11.20 per share
liquidation value:
Authorized shares - 10,000,000 ............................. -- --
Preferred Stock, $.01 par value:
Authorized shares - 20,000,000 ............................. -- --
Common Stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 33,282,493 and 21,829,905 at
April 25, 1998, and April 26, 1997, respectively ........... 333 219
Additional paid-in capital ........................................ 63,134 56,168
Cumulative translation adjustment ................................. (1,624) (899)
Retained earnings ................................................. 162,797 123,243
Note receivable from ESOP ......................................... (14,337) (15,069)
--------- ---------
Total stockholders' equity .................................... 210,303 163,662
--------- ---------
Total liabilities and stockholders' equity .................... $ 316,373 $ 255,311
========= =========
</TABLE>
SEE ACCOMPANYING NOTES
17
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------
April 25, April 26, April 27,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales .................................. $ 778,169 $ 687,895 $ 606,983
Cost of sales .............................. 488,279 440,262 392,091
--------- --------- ---------
Gross profit ............................... 289,890 247,633 214,892
Operating expenses ......................... 225,508 196,448 170,958
--------- --------- ---------
Operating income ........................... 64,382 51,185 43,934
Other income and expense:
Amortization of deferred credits .. 885 885 885
Finance income, net ............... 1,188 1,289 1,821
Interest expense .................. (670) (1,021) (1,000)
Profit (loss) on currency exchange (79) (34) 5
--------- --------- ---------
Income before income taxes ................. 65,706 52,304 45,645
Income taxes ............................... 24,937 19,687 16,997
--------- --------- ---------
Net income ................................. $ 40,769 $ 32,617 $ 28,648
========= ========= =========
Net income available for common shareholders $ 40,769 $ 32,617 $ 28,026
========= ========= =========
Earnings per share -- basic and diluted .... $ 1.23 $ 1.00 $ .86
========= ========= =========
Weighted average and dilutive potential
shares outstanding ...................... 33,163 32,689 32,477
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
18
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
Preferred Additional Trans- Note
Stock Common Paid-in lation Retained Receivable
Series A Stock Capital Adjustment Earnings from ESOP Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 29, 1995 ........ $ 21,949 $ 177 $ 30,853 $ (325) $ 61,690 $ (16,789) $ 97,555
Tax benefit on unallocated
ESOP shares .................. -- -- -- -- 269 -- 269
Change in translation adjustment -- -- -- (86) -- -- (86)
Common stock issued, net ....... (64) 1 1,529 -- -- -- 1,466
Dividend paid .................. -- -- -- -- (889) -- (889)
Cash payments received on note
receivable from ESOP ......... -- -- -- -- -- 889 889
Net income ..................... -- -- -- -- 28,648 -- 28,648
--------- --------- --------- --------- --------- --------- ---------
Balance at April 27, 1996 ........ 21,885 178 32,382 (411) 89,718 (15,900) 127,852
Change in translation adjustment . -- -- -- (488) -- -- (488)
Preferred shares exchanged
for common or cash -
ESOP redemptions ............ (21,885) 39 21,846 -- -- -- --
Common stock issued, net ......... -- 1 1,901 -- -- -- 1,902
Cash payments received on note
receivable from ESOP ......... -- -- -- -- -- 831 831
Pooling of interests-Thau Nolde .. -- 1 39 -- 908 -- 948
Net income ....................... -- -- -- -- 32,617 -- 32,617
--------- --------- --------- --------- --------- --------- ---------
Balance at April 26, 1997 ........ 0 219 56,168 (899) 123,243 (15,069) 163,662
Change in translation adjustment . -- -- -- (725) -- -- (725)
Common stock issued, net ......... -- -- 2,796 -- -- -- 2,796
Stock split (3 for 2) ............ -- 111 -- -- (130) -- (19)
Cash payments received on note
receivable from ESOP ......... -- -- -- -- -- 732 732
Pooling of interests-EagleSoft ... -- 2 1,710 -- (1,085) -- 627
Stock issued for acquisition ..... -- 1 2,460 -- -- -- 2,461
Net income ....................... -- -- -- -- 40,769 -- 40,769
--------- --------- --------- --------- --------- --------- ---------
Balance at April 25, 1998 ........ $ 0 $ 333 $ 63,134 $ (1,624) $ 162,797 $ (14,337) $ 210,303
========= ========= ========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
19
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
---------------------------------
April 25, April 26, April 27,
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .......................................... $ 40,769 $ 32,617 $ 28,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 5,923 4,942 3,934
Amortization of deferrals ....................... (884) (885) (1,024)
Amortization of goodwill ........................ 2,423 1,339 --
Bad debt expense ................................ 1,092 356 605
Deferred taxes .................................. 655 (75) 475
Change in assets and liabilities net of acquired:
Increase in receivables ........................ (8,706) (7,176) (7,727)
(Increase) decrease in inventory ............... (13,983) (7,879) 11,934
Increase (decrease) in accounts payable ........ 7,479 2,785 (324)
Increase in accrued liabilities ................ 5,341 1,735 2,256
Other changes from operating activities, net ... (1,113) (1,383) 1,313
-------- -------- --------
Net cash provided by operating activities ........... 38,996 26,376 40,090
INVESTING ACTIVITIES:
Additions to property and equipment, net ............ (5,962) (5,010) (7,653)
Acquisitions ........................................ 231 (61,171) (2,401)
-------- -------- --------
Net cash used in investing activities ............... (5,731) (66,181) (10,054)
FINANCING ACTIVITIES:
Payments and retirement of long-term debt and
obligations under capital leases .................. (8,169) (334) (128)
Increase (decrease) in revolving credit agreement ... (1,707) 501 1,156
Payment of dividend ................................. -- -- (889)
Cash payments received on note receivable from ESOP . 732 831 889
Common stock issued, net ............................ 2,730 1,902 1,466
-------- -------- --------
Net cash (used in) provided by financing activities . (6,414) 2,900 2,494
Effect of exchange rate changes on cash ............. (327) (56) (44)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 26,524 (36,961) 32,486
Cash and cash equivalents at beginning of period .... 9,095 46,056 13,570
-------- -------- --------
Cash and cash equivalents at end of period .......... $ 35,619 $ 9,095 $ 46,056
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid ................................... $ 23,811 $ 20,229 $ 16,147
Interest paid ....................................... 646 1,024 1,003
Exchange of preferred shares into common stock ...... -- 21,885 --
</TABLE>
SEE ACCOMPANYING NOTES
20
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 25, 1998
(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. and Patterson Dental Canada Inc. All significant intercompany
transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company is one of the largest providers of dental equipment,
supplies and services to dentists, institutional customers and dental
laboratories in North America, operating from 109 locations with approximately
3,200 employees. The Company distributes approximately 82,500 dental products
from over 1,100 manufacturers, offering specialty items and services including
the Patterson private label line of dental items. In addition, its Colwell
division produces and sells stationery and office products to healthcare
providers and its EagleSoft division produces and sells software applications
for dental offices.
FISCAL YEAR END
The fiscal year end for the Company is the last Saturday in April.
REVENUE RECOGNITION
The Company recognizes revenues as products are shipped and as services
are rendered to the customer.
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, Colwell and EagleSoft inventories. Inventories valued at LIFO represent
80% of total inventories at April 25, 1998 and 77% at April 26, 1997.
The accumulated LIFO provision was $12,131 at April 25, 1998 and
$10,943 at April 26, 1997. 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 or expected remaining life of purchased 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.
21
<PAGE>
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 25, 1998 and April 26, 1997 was
$3,844 and $1,401, respectively. The Company employs the undiscounted cash flow
method of assessment for these assets when factors indicating an impairment are
present.
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 such amount was
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.
STOCKHOLDERS' EQUITY
On January 12, 1998 the Company declared a 3 for 2 stock split in the
form of a 50% stock dividend payable February 17, 1998 to shareholders of record
January 30, 1998. All references in the financial statements and related notes
to weighted average shares outstanding, share issuances, related prices and per
share amounts have been restated to reflect the split.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which was adopted by the
Company in the third quarter of the fiscal year ended April 25, 1998. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the denominator for the computation of basic and
diluted earnings per share. There were no adjustments to the numerator.
22
<PAGE>
1998 1997 1996
------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 33,070 32,618 32,436
Effect of dilutive securities:
Director Stock Option Plan 68 48 41
Employee Stock Purchase Plan 7 6 --
Capital Accumulation Plan 18 17 --
------ ------ ------
Dilutive potential common shares 93 71 41
------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 33,163 32,689 32,477
====== ====== ======
For 1996 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 is a potentially dilutive security for computing earnings
per share. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement, which is required to be
adopted for financial statements issued for periods beginning after December 15,
1997, establishes standards for the way that public business enterprises report
information about operating segments in financial reports issued to
shareholders. The Company has not yet determined the financial statement
disclosure impact of SFAS 131.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for the reporting and presentation of
comprehensive income and its components; however, adoption in fiscal year 1999
will have no impact on the Company's net income or stockholders' equity.
Statement 130 requires foreign currency translation adjustments, which currently
are reported in stockholders' equity, to be included in other comprehensive
income and the disclosure of total comprehensive income.
2. ACQUISITIONS
Effective August 26, 1997, the Company acquired Canadian Dental Supply
Ltd. ("CDS") a Vancouver, British Columbia based dental distributor. Each share
of CDS common stock was converted into 6.324 shares of Company common stock. The
Company issued 168,648 shares to CDS shareholders. The transaction qualifies as
a tax free reorganization and was accounted for as a pooling-of-interests. The
accompanying financial statements, for all periods presented, have been restated
to include the results of CDS.
Separate results of operations for the periods prior to the merger with
CDS are as follows:
23
<PAGE>
Period from
April 27, 1997 to
August 26, 1997 1997 1996
----------------- --------- ---------
Net Sales
- ---------
Patterson Dental Company $ 231,350 $ 661,518 $ 581,893
CDS 8,190 26,377 25,090
--------- --------- ---------
Total Combined $ 239,540 $ 687,895 $ 606,983
========= ========= =========
Net Income
- ----------
Patterson Dental Company $ 11,292 $ 32,415 $ 28,747
CDS 31 202 (99)
--------- --------- ---------
Total Combined $ 11,323 $ 32,617 $ 28,648
========= ========= =========
Other Changes in Stockholders' Equity
- -------------------------------------
Patterson Dental Company $ 1,106 $ 3,211 $ 1,183
CDS (24) (18) 466
--------- --------- ---------
Total Combined $ 1,082 $ 3,193 $ 1,649
========= ========= =========
On February 2, 1998, the Company acquired all of the common stock of
Hill Dental Supply Co., Inc. located in Birmingham, Alabama, in exchange for up
to 117,366 shares of common stock. To date, a total of 86,872 shares of stock
have been issued to the former shareholders of Hill Dental Supply Co., Inc.
Issuance of the additional shares is contingent upon final settlement of
provisions related to accounts receivable, inventory and stockholders' equity
provisions in the purchase agreement. The Company expects that any adjustments
would be recorded in fiscal year 1999. 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 pro
forma impact of this transaction was not material to the financial statements.
Also in fiscal 1998, the Company acquired all of the common stock of
EagleSoft Incorporated, located in Effingham, Illinois in exchange for 280,001
shares of common stock. The transaction took place on July 17, 1997 and
EagleSoft was merged into the Company and accounted for as a
pooling-of-interests. The financial statements do not reflect the financial
position and results of operations prior to the date of the acquisition based on
materiality.
During 1997, the Company acquired all of the common stock of
Thau-Nolde, Inc., located in St. Louis, Missouri, in exchange for 125,100 shares
of common stock. Thau-Nolde was merged into the Company and accounted for as a
pooling-of-interests. The financial statements do not reflect the financial
position and results of operations of Thau-Nolde prior to the date of the
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 this acquisition 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.
24
<PAGE>
Year Ended
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
April 26, 1997 April 27, 1996
-------------- ---------------
Net sales $711,660 $663,062
Income before taxes 54,386 43,548
Net income 33,887 27,368
Earnings per share $ 1.04 $ .84
3. PROPERTY AND EQUIPMENT
April 25, 1998 April 26, 1997
-------------- --------------
Land $ 3,446 $ 3,466
Buildings 18,697 16,628
Leasehold improvements 1,536 1,561
Furniture and equipment 16,616 14,756
Data processing equipment 19,968 15,945
-------- --------
60,263 52,356
Accumulated depreciation (22,265) (16,793)
-------- --------
$ 37,998 $ 35,563
======== ========
4. LONG-TERM DEBT
April 25, 1998 April 26, 1997
-------------- --------------
Mortgage $ 2,695 $ 3,257
Note payable to bank 2,100 --
Notes payable bearing
interest at prime plus 1 1/2% -- 2,724
Bank loan bearing interest at prime plus 1/2% -- 548
Obligations under capital leases 374 336
-------- --------
5,169 6,865
Less current maturities 2,433 1,300
-------- --------
$ 2,736 $ 5,565
======== ========
The Company amended its revolving credit agreement in April 1998 which
now provides for unsecured borrowings and sales of installment contract
receivables of up to a combined $85,000 until April 1999. The agreement requires
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 25,
1998.
The mortgage obligation is an 11 1/2%, 20 year mortgage due in 2007.
The mortgage covers Patterson Dental Canada's Montreal building. Monthly
payments are 52 Canadian dollars. The mortgage obligation for Canadian Dental's
Alberta building was paid in full during 1998.
The note payable to bank in the amount of $2,100 at April 25, 1998 is
collateralized by the Hill Dental Company Inc. facility. The note bears an
interest rate at 1% over a specified commercial base rate that may change from
time to time. The Company has the option of selecting fixed or floating interest
rates at varying times until maturity of the loan. At April 25, 1998, the loan
had an interest rate of 5 3/4%. The Company intends to pay off this note during
the first quarter of fiscal 1999.
The notes payable consist of advances from shareholders repayable at
$27 per month and other advances repayable either on demand or one year after
demand. The notes were paid in full during 1998.
Long-term debt becomes due: $2,433 in 1999, $291 in 2000, $231 in 2001,
$200 in 2002, $223 in 2003 and the balance thereafter. The fair value of
long-term debt approximates its carrying value.
25
<PAGE>
5. LEASES
The Company leases facilities for its branch locations and office
equipment. 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:
1999 $ 3,819
2000 2,801
2001 1,880
2002 1,469
2003 660
Thereafter 348
-------
Total minimum payments required $10,977
=======
Rent expense was $6,054, $5,255 and $4,872 for the years ended April
25, 1998, April 26, 1997 and April 27, 1996, respectively.
6. INCOME TAXES
For financial reporting purposes, income before income taxes includes
the following components:
1998 1997 1996
---- ---- ----
Income (loss) before income taxes:
United States $67,025 $ 52,633 $ 44,290
Canada (1,319) (329) 1,355
------- -------- --------
Total $65,706 $ 52,304 $ 45,645
======= ======== ========
Significant components of the provision for income taxes are as follows:
1998 1997 1996
---- ---- ----
Current:
Federal $ 21,722 $ 17,417 $ 13,642
Foreign 28 147 36
State 2,532 2,198 2,844
-------- -------- --------
Total current 24,282 19,762 16,522
Deferred:
Federal 599 (55) 418
Foreign -- -- --
State 56 (20) 57
-------- -------- --------
Total deferred 655 (75) 475
-------- -------- --------
Provision for income taxes $ 24,937 $ 19,687 $ 16,997
======== ======== ========
Significant components of the Company's deferred tax liabilities and assets as
of April 25, 1998 and April 26, 1997 are as follows:
1998 1997
-------- ---------
Canadian net operating loss carryforward $ 4,807 $ 4,017
Bad debt allowance 1,044 963
Unicap COS 574 521
ESOP unearned compensation 543 428
Inventory obsolescence reserve 381 311
26
<PAGE>
Hospital insurance 499 318
Vacation pay accrual 166 158
LIFO reserve (1,403) (1,111)
Depreciation (463) (444)
Financing income (1,619) (1,045)
Goodwill (394) (149)
Other (167) (134)
Valuation allowance (4,807) (4,017)
--------- --------
Total $ (839) $ (184)
========= ========
Deferred income tax expense (benefit) results from temporary
differences in the recognition of income and expense items for tax and financial
statement reporting purposes.
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:
1998 1997 1996
-------- --------- ---------
Tax at U.S. statutory rate $ 22,997 $ 18,306 $ 15,978
State tax provision, net of federal benefit 1,701 1,416 1,886
Effect of foreign (income) losses 490 262 (440)
ESOP dividend on allocated preferred stock -- -- (74)
Amortization of deferred credit (310) (310) (310)
Other 59 13 (43)
-------- --------- ---------
$ 24,937 $ 19,687 $ 16,997
======== ========= =========
At April 25, 1998, the Company had net operating loss carryforwards of
$11,446 for Canadian income tax purposes that expire in years 1999 through 2005.
Those carryforwards resulted from the Company's fiscal 1994 acquisition of
Healthco Canada Inc. For financial reporting purposes, a valuation allowance of
$4,807 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
1998, 1997 and 1996, shares with a cost of $732, $824 and $800, respectively,
were earned and allocated to ESOP participants.
During 1998 and 1997 the ESOP was funded through Company contributions
of $732 and $831, respectively.
During 1996 the ESOP funding was effected through a preferred stock
dividend aggregating $889 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 5,755,625 shares of Common Stock on July 3, 1996. Had
the stock conversion occurred on April 30, 1995, earnings per share would have
been unchanged for each of the two years in the period ended April 26, 1997.
At April 25, 1998, 1,949,531 shares of the common stock were allocated
to participants and had a fair market value of $61,410.
27
<PAGE>
At April 25, 1998 and April 26, 1997, indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheet.
STOCK OPTION PLAN
In June 1992, the Company adopted the Patterson Dental Company 1992
Stock Option Plan (the "Plan"). The Plan provides for the granting of options to
designated employees and non-employees, including consultants to the Company, to
purchase up to a maximum of 2,025,000 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 percent 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 337,500 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 25, 1998, the Company's current outside directors
held the following options:
Weighted Average
Date of Grant Granted Exercised Held Price Per Share
---------------------------------------------------------------------
9/1/92 67,500 67,500 -- $7.11
10/1/93 27,000 9,000 18,000 $14.56
10/1/94 27,000 -- 27,000 $12.00
10/1/95 27,000 -- 27,000 $17.67
10/1/96 27,000 -- 27,000 $18.67
10/1/97 27,000 -- 27,000 $26.92
------- ------ -------
202,500 76,500 126,000
======= ====== =======
As of April 25, 1998, outstanding options had a weighted-average
remaining contractual life of 2.6 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 plans. 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 1998 and
1997 and the pro forma impact on earnings be disclosed when material. The pro
forma impact was not material for 1998 and 1997.
EMPLOYEE STOCK PURCHASE PLAN
In June 1992, the Company adopted an Employee Stock Purchase Plan (the
"Stock Purchase Plan"). A total of 337,500 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 percent of an employee's compensation, at 85 percent 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
55,558 and 63,783 shares in 1998 and 1997, respectively. At April 25, 1998,
122,120 shares were available for purchase under the plan.
28
<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 1,500,000
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 84,345 and 55,761 shares of restricted stock
in 1998 and 1997, respectively. At April 25, 1998, 1,359,894 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 25, 1998 April 26, 1997 April 27, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales from unaffiliated customers:
United States $698,390 $604,698 $526,055
Canada 79,779 83,197 80,928
Operating income:
United States $ 64,825 $ 50,783 $ 41,744
Canada (443) 402 2,190
Identifiable assets:
United States $280,078 $217,941 $176,135
Canada 36,295 37,370 36,838
</TABLE>
10. QUARTERLY RESULTS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 fiscal
quarters ending prior to the August 1997 acquisition of Canadian Dental Supply
have been restated to reflect the pooling-of-interests of that company. Earnings
per share amounts have been restated to comply with SFAS 128. The following
table summarizes results for fiscal 1998 and 1997.
29
<PAGE>
Three Months Ended
---------------------------------------------------------------------------
Apr 25, Jan 24, Oct 25, Jul 26,
1998 1998 1997 1997
---- ---- ---- ----
Net sales $211,006 $195,540 $191,635 $179,988
Gross profit 79,940 73,336 70,748 65,866
Operating income 18,266 17,094 15,689 13,333
Net income 11,568 10,798 10,063 8,340
Basic and diluted
earnings per share $0.35 $0.33 $0.30 $0.25
Three Months Ended
---------------------------------------------------------------------------
Apr 26, Jan 25, Oct 26, Jul 27,
1997 1997 1996 1996
---- ---- ---- ----
Net sales $187,587 $181,996 $169,013 $149,299
Gross profit 68,836 66,137 59,886 52,774
Operating income 14,955 14,487 12,399 9,344
Net income 9,190 9,017 8,092 6,318
Basic and diluted
earnings per share $0.28 $0.28 $0.25 $0.19
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 14, 1998 (the "1998 Proxy Statement").
Information regarding executive officers of the Company is incorporated herein
by reference to Item 1 of Part I of this Form 10-K under the caption "Executive
Officers of the Registrant."
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 1998 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 1998 Proxy Statement.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
30
<PAGE>
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 25, 1998 and April 26, 1997
Consolidated Statements of Income for the Years Ended April 25, 1998,
April 26, 1997 and April 27, 1996
Consolidated Statement of Changes in Stockholders' Equity for the Years
Ended Ended April 25, 1998, April 26, 1997 and April 27, 1996
Consolidated Statements of Cash Flows for the Years Ended Ended April
25, 1998, April 26, 1997 and April 27, 1996
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 Ended April 25, 1998,
April 26, 1997 and April 27, 1996.
Schedules other than that listed above have been omitted because they
are not applicable or the required information is included in the financial
statements or notes thereto.
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)
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*
31
<PAGE>
10.9 Amended and Restated Term Promissory Note dated July 13, 1992*
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 25, 1998.
32
<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 16, 1998
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.
Date
----
/s/Peter L. Frechette President and Chief Executive Officer and July 16, 1998
- ---------------------- Director (Principal Executive Officer)
Peter L. Frechette
/s/Ronald E. Ezerski Executive Vice President, Treasurer and July 16, 1998
- ---------------------- Chief Financial Officer and Director
Ronald E. Ezerski (Principal Financial and Accounting
Officer)
/s/David K. Beecken Director July 16, 1998
- ----------------------
David K. Beecken
/s/Burt E. Swanson Director July 16, 1998
- ----------------------
Burt E. Swanson
/s/Andre B. Lacy Director July 16, 1998
- ----------------------
Andre B. Lacy
33
<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 25, 1998 and April 26, 1997, and for each of the three years
in the period ended April 25, 1998, and have issued our report thereon dated May
20, 1998 (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 20, 1998
34
<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 25, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,043 $ 1,041 $ 176(3) $ 1,189(1) $ 5,071
======= ======= ====== ======= =======
LIFO inventory adjustment $10,943 $ 1,188 -- $ -- $12,131
Inventory obsolescence reserve 1,346 1,236 -- 1,048(2) 1,534
------- ------- ------ ------- -------
Total inventory reserve $12,289 $ 2,424 -- $ 1,048 $13,665
======= ======= ====== ======= =======
Year ended April 26, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,381 $ 357 $ 140(3) $ 835(1) $ 5,043
======= ======= ====== ======= =======
LIFO inventory adjustment $ 9,733 $ 1,210 $ -- $ -- $10,943
Inventory obsolescence reserve 1,133 1,322 202(3) 1,311(2) 1,346
------- ------- ------ ------- -------
Total inventory reserve $10,866 $ 2,532 $ 202 $ 1,311 $12,289
======= ======= ====== ======= =======
Year ended April 27, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,785 $ 608 -- $ 1,012(1) $ 5,381
======= ======= ====== ======= =======
LIFO inventory adjustment $ 8,179 $ 1,554 -- $ -- $ 9,733
Inventory obsolescence reserve 1,221 1,141 -- 1,229(2) 1,133
------- ------- ------ ------- -------
Total inventory reserve $ 9,400 $ 2,695 -- $ 1,229 $10,866
======= ======= ====== ======= =======
</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. in fiscal 1997;
Hill Dental Company, Inc. and EagleSoft, Inc. in fiscal 1998.
35
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 21 Subsidiaries............................... 37
Exhibit 23 Consent of Independent Auditors............ 38
Exhibit 27 Financial Data Schedule.................... 39
36
<PAGE>
EXHIBIT 21
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
Patterson Dental Supply, Inc. Minnesota
Direct Dental Supply Co. Nevada
Patterson Dental Canada, Inc. Canada
37
<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, the
Registration Statement on Form S-3 (No. 333-19951) and the Registration
Statement on Form S-3 (No. 333-41199) of our reports dated May 20, 1998, 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 25, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 16, 1998
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PATTERSON DENTAL COMPANY FOR THE TWELVE
MONTHS ENDED APRIL 25, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> APR-25-1998
<CASH> 35,619
<SECURITIES> 0
<RECEIVABLES> 111,323
<ALLOWANCES> 5,071
<INVENTORY> 81,810
<CURRENT-ASSETS> 227,661
<PP&E> 60,263
<DEPRECIATION> 22,265
<TOTAL-ASSETS> 316,373
<CURRENT-LIABILITIES> 94,405
<BONDS> 72,736
0
0
<COMMON> 333
<OTHER-SE> 209,970
<TOTAL-LIABILITY-AND-EQUITY> 316,373
<SALES> 778,169
<TOTAL-REVENUES> 778,169
<CGS> 488,279
<TOTAL-COSTS> 488,279
<OTHER-EXPENSES> 225,508
<LOSS-PROVISION> 1,041
<INTEREST-EXPENSE> 670
<INCOME-PRETAX> 65,706
<INCOME-TAX> 24,937
<INCOME-CONTINUING> 40,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,769
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
