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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 24, 1999
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___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of July 14, 1999 was approximately $863,761,039.
As of July 14, 1999, there were 33,660,333 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
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Proxy Statement for 1999 Annual Part III
Meeting of Shareholders
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FORM 10-K INDEX
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Page
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PART I .................................................................................................. 2
Item 1. BUSINESS............................................................................... 2
Item 2. PROPERTIES............................................................................. 10
Item 3. LEGAL PROCEEDINGS...................................................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 11
PART II .................................................................................................. 11
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................... 11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA................................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................ 18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE... 32
PART III .................................................................................................. 32
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 32
Item 11. EXECUTIVE COMPENSATION................................................................. 32
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 32
PART IV .................................................................................................. 33
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................ 33
SIGNATURES................................................................................................... 35
SCHEDULE II.................................................................................................. 36
INDEX TO EXHIBITS............................................................................................ 37
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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 also provides a variety of printed
products and office supplies to office-based healthcare providers including
medical and dental offices, and 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 dental products and services through over 900
direct sales representatives and equipment specialists who operate through 92
sales offices in the United States and Canada. The Company processes an average
of more than 10,000 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. To support its marketing efforts and
facilitate order entry, Patterson publishes a catalog containing approximately
15,000 dental products; a semiannual publication, Patterson Today, featuring
dental equipment; and periodic direct mail advertisements highlighting popular
and specially priced items. Customers may order through a sales representative
or directly from the Company by mail, telephone or electronically through
various media, including the internet.
In May 1985, a holding company formed by the Company's management and
certain investors purchased the Company's predecessor, then a Delaware
corporation, from a subsidiary of The Beatrice Companies, Inc. Following the
acquisition, management implemented strategies to enhance profitability through
improving operating efficiency and the quality and breadth of customer service.
The Company instituted a computerized order processing network, improved
inventory tracking and other management information systems, introduced
centralized purchasing, and reduced the number of distribution locations in the
U.S. from 56 to 8. Management also enhanced revenue growth through internal
expansion and strategic acquisitions, including the 1987 acquisition of the
third largest U.S. distributor of dental products, the 1993 acquisition of the
second largest distributor of dental products in Canada and the October 1996
acquisition of Colwell Systems, a direct marketer of stationery and office
products to healthcare providers, and other dental distributors. As a result of
implementing these strategies, net sales increased from $165.8 million for
fiscal 1986 to $878.8 million for fiscal 1999, operating margins increased every
year since fiscal 1985 and profitability increased from an operating loss for
fiscal 1986 to operating income of $77.5 million for fiscal 1999.
Industry Background
Total expenditures for dental services in the United States increased
from $13.3 billion in 1980 to over $53 billion in 1998. Domestic dental care
expenditures are projected by the Health Care Financing Administration to grow
6% annually reaching $95 billion by the year 2007. 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 272
million in 1998, and is expected to reach 290 million by 2007. 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 50% of the
over $53 billion in total expenditures for 1998 as compared to
approximately 30% of the $13.3 billion in total expenditures for 1980.
See, "Factors That May Affect Future Operating Results."
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According to the American Dental Association, there are over 150,000
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 permit customers to place orders from
their offices directly to Patterson 24 hours a day, seven days a week. Remote
Order Entry (REMO(TM), introduced in 1987 and the Windows(R) based version
(REMO(TM)ware) introduced in 1998, give customers direct and immediate ordering
access through a personal computer to a database containing Patterson's complete
inventory. In September 1991, the Company began offering customers PDXpress(R),
a hand held order entry system that 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 Plus(TM) is a smart phone which
incorporates automated ordering and bar code scanning with credit card
processing. REMO(TM), REMO(TM)ware, PDXpress(R) and PassPort Plus(TM) are
provided at no additional charge to customers who maintain certain minimum
purchase requirements. The Company recently introduced a new system, REMOTMnet,
which allows customers to access the online ordering system, as well as their
order history and other inventory management reports, via the Internet. 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. The Company believes that it is
well positioned to take advantage of expected continued consolidation in the
dental products distribution industry. Over the past twelve years the Company
has made the following acquisitions:
Dental distribution acquisitions in the United States
. 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 1999, Patterson acquired the customer
base and certain assets of smaller dental dealers in Boston;
Portland, Maine; Memphis; Salt Lake City; the Washington, D.C. area;
Raleigh, North Carolina; Akron, Ohio; St. Louis; Erie (Pa.), Kansas
City, Omaha, Youngstown, San Antonio and the Tampa-Orlando-Miami
area. In addition, Patterson also expanded by opening additional
sales offices and hiring established sales representatives in
Baltimore; Tulsa; Charlotte, North Carolina; and Greenville, Columbia
and Charleston, South Carolina. In fiscal 1998 the Company acquired
Hill Dental Company, Inc. with locations in Atlanta, Georgia;
Birmingham and Mobile, Alabama; New Orleans, Louisiana; Jackson,
Mississippi; Houston and San Antonio, Texas; and Memphis, Tennessee.
This past year the Company acquired Dentaplex, Inc. located in the
Detroit metropolitan area and J&S Dental Supply Co., Inc. of
Hollywood, Florida. Subsequent to year-end, the Company acquired Barr
Dental Supply, Inc. of Medford, Oregon.
Dental distribution acquisitions in Canada
. 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 440 people,
115 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.
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Printed office products acquisitions
. 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 562 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 February 1999, the Company acquired Professional Business
Systems, Inc. (PBS), Colwell's largest supplier, to expand production
capacity and gain a commissioned sales force to service the medical
market. PBS manufactures and distributes from its headquarters in
Roselle, Illinois and has sales offices in Massachusetts, Missouri
and California.
Software acquisitions
. In July 1997, the Company acquired EagleSoft, Inc., a developer and
marketer of Windows(R) based practice management software for dental
offices. EagleSoft employs approximately 116 people and is
headquartered in Effingham, Illinois.
The Company has operations in the U.S. and Canada and conducts business
in one segment, dental distribution. This segment, which is comprised of the
Company's dental supply, printed office products and software groups,
distributes consumable supplies, equipment, services and software primarily to
dental professionals in the U.S. and Canada. Approximately half of the printed
office products are sold to non-dental healthcare practitioners.
Products
Dental Supply 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:
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1999 1998 1997
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Dental & Office Supplies.................................... 64% 64% 63%
Equipment................................................... 27 27 27
Other....................................................... 9 9 10
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Total.............................................. 100% 100% 100%
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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 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
29(TM), 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.
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Printed Office Products
The Company provides a variety of printed products, office filing
supplies, and practice management systems to office-based healthcare providers
including medical and dental offices. 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. Products
are sold through three channels:
. The Company's dental distribution sales force,
. catalogs distributed to over 160,000 customers several times a year,
. and a dedicated office products sales organization, acquired with
PBS.
All three channels are supported by a telemarketing staff located in
Champaign, Illinois. Orders are received by telephone, through the mail or
electronically from the dental distribution order processing system.
The business operates from two facilities located in Champaign,
Illinois, and one each in Roselle, Illinois, Marlboro, Massachusetts, Jefferson
City, Missouri and San Diego, California. The largest facility is an 86,200
square foot printing plant located in Champaign specializing in short-run
printing and 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. The Roselle facility is a 32,000
square foot building that houses printing, assembly, distribution and sales
operations. The Marlboro, Jefferson City, and San Diego facilities are sales
offices with limited distribution and product assembly capabilities. The printed
office products business employs a total of 562 people.
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.
Software Products
The Company develops and markets practice management software for
dental professionals. Products include software for scheduling, billing,
charting and storage/retrieval of digital images, service agreements and
electronic claims processing. The business is based in Effingham, Illinois and
has a total of 116 employees.
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.
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 1999, the Company originated over $76 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.
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In April 1996, the Company entered into a Contract Purchase Agreement
with U.S. Bank National Association, under which U.S. Bank National Association
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. As of April 1999, the combined Contract
Purchase Agreement and unsecured revolving credit agreement with U.S. Bank
National Association and two additional banks allows for a maximum credit line
of $85 million. As of April 24, 1999, contracts with an outstanding principal
balance of $77 million had been sold under the Contract Purchase Agreement. The
Company had no outstanding borrowings under the Revolving Credit Agreement
Sales and Marketing
During fiscal 1999, Patterson sold dental products to over 90,000
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 1999, and
Patterson is not dependent on any single customer or geographic 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 24, 1999, Patterson employed approximately
935 trained dental sales representatives, 138 of whom were equipment
specialists. Each representative works within an assigned sales territory from
one of 92 sales offices under the supervision of a branch sales manager. Sales
representatives are all Patterson employees and are generally compensated on a
commission basis, with some representatives receiving a base salary and
commission.
To assist its sales representatives, Patterson publishes a variety of
catalogs and fliers containing product and service information. Patterson's
customers receive a full-line product catalog containing over 10,000 inventoried
items. 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,
REMO(TM), REMO(TM)ware, REMO(TM)net, PDXpress(R) and PassPort Plus(TM) 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 92 dental 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.
Orders can be placed by telephone or electronically 24 hours a day,
seven days a week. All orders are routed through the Company's computerized
ordering, shipping and inventory management system, which is linked to 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. Purchasing is centralized and
inventory levels are managed by the purchasing department using a real-time
perpetual inventory system. 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 1999, the Company's top 10 vendors and single largest vendor accounted
for approximately 45% and 12%, 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 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.
Employees
As of April 24, 1999, the Company employed 3,623 people in the United
States and Canada on a full-time basis, consisting of 986 sales representatives,
131 telemarketing employees, 721 service technicians, 465 distribution
employees, 229 manufacturing employees, and 1,091 general and administrative
employees. Patterson has not experienced a shortage of qualified personnel in
the past, and believes that it will be able to attract such employees in the
future. None of Patterson's employees is subject to collective bargaining
agreements or represented by a union. The Company considers its relations with
its employees to be good.
Governmental Regulation
The 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.
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Peter L. Frechette 61 President and Director - Patterson Dental Company
Ronald E. Ezerski 53 Executive Vice President, Treasurer and Director - Patterson Dental
Company
James W. Wiltz 54 Vice President - Patterson Dental Company and President - Patterson
Dental Supply, Inc.
Mary H. Baglien 56 Vice President, Human Resources - Patterson Dental Company
John V. Dodd 62 Vice President, Management Information Systems - Patterson Dental
Company
Gary D. Johnson 52 Vice President - Patterson Dental Supply, Inc.
R. Reed Saunders 51 Vice President - Patterson Dental Supply, Inc.
Normand Senecal 54 President - Patterson Dental Canada, Inc.
Brian S. Watson 39 Vice President - Patterson Dental Supply, Inc.
</TABLE>
On July 1, 1999 Mr. Ezerski resigned as Executive Vice President and
Treasurer effective July 31, 1999. R. Stephen Armstrong, 48, was elected to the
positions of Executive Vice President and Treasurer effective July 31, 1999.
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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 of 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 MBA degree
from Northwestern University and a BS 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 resigned as Executive Vice President, Treasurer and Chief
Financial Officer effective July 31, 1999. Mr. Ezerski has been a director of
Patterson since March 1983. Mr. Ezerski holds a BS degree in accounting from
DePaul University and is a certified public accountant.
R. Stephen Armstrong was elected Executive Vice President, Treasurer
and Chief Financial Officer of the Company effective July 31, 1999 to replace
Mr. Ezerski. Mr. Armstrong has been a Senior Assurance Partner with Ernst &
Young LLP since 1986. Ernst & Young LLP is currently the Company's independent
public accountants. Mr. Armstrong holds a BS degree from St. John's 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
President of Human Resources. Ms. Baglien holds an MA degree from Bowling Green
State University and a BA 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.
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 BS degree in Marketing from Indiana
University.
9
<PAGE>
2. PROPERTIES
The following table summarizes Patterson's properties as of April 24,
1999:
<TABLE>
<CAPTION>
Number Total Square Cost Per
of Properties Footage Square Foot
------------- ------------ -----------
<S> <C> <C> <C>
Leased facilities
Branch sales offices 93 496,887 $ 6.86
Distribution centers 4 113,110 4.82
Combined sales & distribution 2 70,068 6.30
Software support 1 11,715 11.37
--- -------- ------
Total leased 100 691,780 $ 6.62
Owned facilities
Distribution centers 4 208,000
Combined sales & distribution 2 98,000
Corporate office 1 50,800
Printing plant 1 82,600
--- --------
Total owned 8 439,400
--- --------
Total 108 1,131,180
=== =========
</TABLE>
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 product related and employment
related 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 judgement.
Among the product liability cases in which the Company is a defendant,
thirteen 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.
10
<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, any additional litigation could 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 24, 1999.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
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
High Low
---- ---
Fiscal 1999
First Quarter............................... $ 39.50 $ 29.00
Second Quarter.............................. $ 39.25 $ 29.50
Third Quarter............................... $ 46.38 $ 36.63
Fourth Quarter.............................. $ 45.75 $ 33.13
</TABLE>
On July 14, 1999, the number of holders of record of Common Stock was
2,282. The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, NA, 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.
Recent Sales of Unregistered Securities
On February 5, 1999 the Company issued 214,317 shares of common stock
to two persons who were the shareholders of Professional Business Systems, Inc.
("PBS"), an Illinois corporation, which was acquired by merger with the
Company's subsidiary.
11
<PAGE>
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 506. The securities issued
to the stockholders of PBS 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 PBS material
information concerning the Company, including the information specified in Rule
502 of Regulation D. These shares were registered under the Act for resale on
May 28, 1999.
6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------
April 24, April 25, April 26, April 27, April 29,
1999 1998 1997(2) 1996(2) 1995(2)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Net sales $ 878,773 $778,169 $ 687,895 $ 606,983 $ 558,648
Cost of sales 552,937 488,279 440,262 392,091 358,868
----------- ----------- ----------- ----------- -----------
Gross profit 325,836 289,890 247,633 214,892 199,780
Operating expenses 248,364 225,508 196,448 170,958 160,501
----------- ----------- ----------- ----------- -----------
Operating income 77,472 64,382 51,185 43,934 39,279
Other income (expense) - net 2,239 1,324 1,119 1,711 946
----------- ----------- ----------- ----------- -----------
Income before income taxes 79,711 65,706 52,304 45,645 40,225
Income taxes 29,815 24,937 19,687 16,997 15,396
----------- ----------- ----------- ----------- -----------
Net income $ 49,896 $ 40,769 $ 32,617 $ 28,648 $ 24,829
=========== ============ =========== =========== ===========
Earnings per share - diluted/(1)/ $ 1.49 $ 1.23 $ 1.00 $ 0.86 $ 0.75
----------- ----------- ----------- ----------- -----------
Weighted average dilutive potential
shares outstanding (1) 33,496 33,163 32,689 32,477 32,400
----------- ----------- ----------- ----------- -----------
Dividends per common share -- -- -- -- --
Balance Sheet Data:
- -------------------
Working capital $ 187,952 $133,256 $ 96,893 $ 114,883 $ 90,392
Total assets 373,250 316,373 255,311 212,973 179,307
Total debt 2,097 7,202 10,792 10,681 9,664
Stockholders' equity 265,199 210,303 163,662 127,852 97,555
</TABLE>
(1) Amounts are adjusted for three-for-two stock split on January 12,
1998. See Note 1, "Earnings per Share," to the Consolidated Financial
Statements.
(2) Consolidated results have been restated to include the operations of
Canadian Dental Supply, Ltd. acquired in August 1997, and accounted
for as a pooling-of-interests. See Note 2, "Acquisitions," of the
Consolidated Financial Statements.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Patterson has established certain operating goals which call for
increasing sales four percentage points greater than the average industry growth
rate, and achieving double-digit net income growth. The Company exceeded these
goals in fiscal year 1999, reporting a 12.9% increase in sales, a 22.4% increase
in net income, and a 50 basis point expansion in net margin versus fiscal 1998.
Over the recent five-year period, sales have grown 12.3% and net income
advanced 20.3% compounded annually. Net income over the five years benefited
from cost controls that reduced operating expenses in relation to sales to 28.3%
of sales in fiscal 1999 versus 28.7% in fiscal 1995, and improved gross profit
margin that was 37.1% in fiscal 1999 compared with 35.8% in fiscal 1995.
12
<PAGE>
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 11 acquisitions of companies with annual sales of $143
million and gained a total of 109 sales representatives. The number of direct
sales representatives has increased 36% since 1995, and sales per direct sales
representative have increased more then 18%, evidencing the effectiveness of the
Company's strategies.
The Company operates in one segment, dental distribution. The Company
distributes consumable supplies, equipment, printed office products, services
and software primarily to dental professionals in the U.S. and Canada.
Results of Operations
The following table summarizes the results of operations over the past
three fiscal years as a percent of sales:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.9% 62.7% 64.0%
-------- -------- --------
Gross profit 37.1% 37.3% 36.0%
Operating expenses 28.3% 29.0% 28.6%
-------- -------- --------
Operating income 8.8% 8.3% 7.4%
Other income 0.3% .1% .2%
-------- -------- --------
Income before taxes 9.1% 8.4% 7.6%
Income taxes 3.4% 3.2% 2.9%
-------- -------- --------
Net income 5.7% 5.2% 4.7%
======== ======== ========
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales for fiscal 1999 increased 12.9% or $100.6 million
to $878.8 million from $778.2 in fiscal 1998. Expansion in customer base, an
increase in the number of sales representatives and acquisitions were the
primary factors that drove the increase. The number of dental customers that
purchased supplies increased 12,000 or 15% in fiscal 1999, while the average
amount of consumables sold to these customers remained approximately the same at
$5,400 in comparison to fiscal 1998. The number of sales representatives in
North America increased 100 from 886 reported at the end of last year to 986 at
the end of fiscal 1999. Acquisitions, including Hill Dental Company which was
acquired in the fourth quarter of fiscal 1998, contributed approximately $19
million or 19% to the increase. Sales mix remained consistent with prior year
levels. Sales of dental products and services, which represents 92% of sales,
increased $92.5 million or 13% reflecting strong demand for both sundries and
equipment in the U.S. dental market. Sales of printed office products, which
represent 7% of sales, increased $3.9 million or 7% as a result of marketing
these products through the dental sales force and the introduction of new
products. Software, at 1% of sales, increased 68% in response to strong demand
for Windows(R) based software products and support services.
Gross Profit. Gross profit increased 12.4% to $325.8 million for fiscal
1999 compared to $289.9 million for fiscal 1998 due to increased sales volume.
Gross margin decreased to 37.1% in fiscal 1999 versus 37.3% reported last year
due primarily to a reduction in dental equipment gross margins in the U.S. and
Canada.
Operating Expenses. Operating expenses increased 10.1% to $248.4
million for fiscal 1999 versus $225.5 million for fiscal 1998. Operating
expenses as a percent of sales decreased to 28.3% in fiscal 1999 from 29.0% in
fiscal 1998. The reduction of operating expenses in proportion to sales occurred
in the U.S. and Canadian operations where operating expenses as a percent of
sales declined due to improved operating leverage.
Operating Income. Operating income increased 20.3% to $77.5 million in
fiscal 1999 from $64.4 million in fiscal 1998. As a percent of net sales,
operating income increased to 8.8% in fiscal 1999 from 8.3% in fiscal 1998 due
principally to improved operating leverage in the U.S. and Canada.
13
<PAGE>
Other Income. Other income was $2.2 million in fiscal 1999, up $0.9
million from the $1.3 million reported last year. Finance income and interest
earned on short-term investments increased $0.8 million and interest expense
declined $0.1 million from prior year levels.
Income Taxes. The effective tax rate was 37.4% for fiscal 1999 down
slightly from 38.0% reported in fiscal 1998 due to $1.0 million reduction in the
loss in Canada where no net tax benefit was recognized.
Net Income. Net income increased $9.1 million, or 22.4%, to $49.9
million in fiscal 1999 versus $40.8 million in the prior year. Net margin
increased one-half percentage point to 5.7% of sales in fiscal 1999 due
primarily to improved operating leverage.
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. 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 Company, purchased in February 1998, contributed
approximately $11 million to the increase. Dental products and services
represented 92% of sales in fiscal 1998 versus 95% in fiscal 1997, and printed
office products accounted for 7% of sales in fiscal 1998 versus 5% in the prior
year due to having only seven months of results in the prior year. Software
represented 1% of sales and was new in fiscal 1998. 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 had 886 sales representatives throughout the
U.S. and Canada at the end of fiscal 1998 versus 786 reported at the end of the
prior year. Sales of high-technology products such as the CEREC 2(TM), 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 printed
office product lines and software, which have higher gross margins than the
dental products and services and higher margins in the U.S. dental products.
Excluding printed office products and software, margins in dental products and
services were up 50 basis points over last year.
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 higher operating expenses in the software and printed office products product
lines where expenses were higher as a percent of sales. Operating expenses in
relation to sales in dental products and services 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, and improved
operating margins, brought on by increased prices and lower operating expenses
in relation to sales in dental products and services.
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 net tax benefit was 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.
14
<PAGE>
Liquidity and Capital Resources
The following table summarizes certain balance sheet items as a percent
of total assets.
<TABLE>
<CAPTION>
April 24, April 25,
1999 1998
-------- --------
<S> <C> <C>
Total assets 100.0% 100.0%
Current assets 76.8% 72.0%
Current liabilities 26.4% 29.8%
Long-term debt 0.6% 0.9%
Stockholders' equity 71.1% 66.5%
</TABLE>
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 24, 1999
consisted of $78.7 million cash and cash equivalents and $8 million available
under existing bank lines, as amended on April 30, 1999.
Working capital increased $54.7 million during fiscal 1999 to $188.0
million at April 24, 1999. Cash and cash equivalents increased $43.1 million
reflecting cash generated from operating activities of $51.6 million offset by
$6.2 million used in investing activities and $2.3 million used in financing
activities, principally the repayment of debt. Non-cash related working capital
increased $ 11.6 million or 11.8% in response to an 12.9% increase in sales in
fiscal 1999 versus fiscal 1998. Liquidity as measured by the current ratio at
the end of fiscal year 1999 increased to 2.9 to 1 from 2.4 to 1 reported last
year.
Capital expenditures net of dispositions were $7.1 million in fiscal
1999 versus $6 million in fiscal 1998.
One of the acquisitions in fiscal year 1999 was made using common
shares and two were made using cash. All of the acquisitions in fiscal 1998 were
made using common shares.
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Days sales outstanding 43 45 46
Inventory turnover (1) 6.0 7.2 7.4
Sales per employee (000's) $243 $242 $223
</TABLE>
(1) The inventory values used in this calculation are the LIFO
inventory values for U.S. dental inventories and the FIFO inventory
value for Canadian and Colwell inventories.
The inventory balance increased $ 9.9 million to $ 91.7 million at the
end of fiscal 1999 from $81.8 million at the end of fiscal 1998. The increase
was due primarily to purchases made in anticipation of increased demand in the
first quarter of fiscal 2000.
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.
15
<PAGE>
Impact of Year 2000
The Year 2000 issue is the result of the widespread use of computer
programs which were written using two digits rather than four to define the
applicable year in performing computations or decision-making functions. The
Company has completed its assessment of its major information technology and
technology reliant operating systems, including its internal accounting, general
ledger, billing, inventory and accounts payable systems. Necessary modifications
or replacements of existing systems, including testing of these systems, have
been substantially completed. The Company anticipates that the remaining
remediation and testing of these systems will be completed by September 30,
1999. The Company has also assessed the need for modifications or replacements
of existing hardware, particularly personal computers, and has completed this
assessment phase. The remediation and testing of existing hardware has been
completed. As a result, the Company believes that substantially all critical
business systems and hardware are Year 2000 compliant. The Company has been
implementing the necessary modifications and replacements of its operating
systems in the ordinary course of its business over the last four years and
believes the incremental costs to complete this program were less than $200,000.
Over the past four years the Company has invested approximately $500,000 in new
systems.
The Company is also dependent on its vendors to supply the products it
sells and on service providers, including transportation providers and
utilities. The Company has sought assurances from its significant suppliers of
products and services to determine the impact on the Company if such suppliers
fail to convert their computer systems. While many of the Company's significant
suppliers have assured the Company that their systems are currently Year 2000
compliant, or will be made Year 2000 compliant prior to December 31, 1999, the
Company has not yet received such assurances from a sufficient number of its
product suppliers to enable the Company to complete its assessment of the impact
on the Company if a substantial number of significant suppliers fail to convert
their systems.
The Year 2000 efforts of third parties are ultimately beyond the
Company's control. The risk to the Company if significant product vendors fail
to convert their computer systems and, as a result, are unable to ship products
to the Company in a timely manner after the year 2000 is that the Company may
not be able to offer such products to its customers and will be able to offer
only replacement products, if available. The Company generally has more than one
source of supply for almost all categories of products it sells. The risks to
the Company if significant service providers fail to timely convert their
computer systems may include, in the case of vital utility services, the
inability of a branch office or distribution center to operate. In such an
event, the Company does have the ability to shift its distribution and branch
office operations to other distribution centers and branches within its system.
However, notwithstanding the Company's efforts to substitute products or shift
distribution or branch operations, the inability of significant suppliers of
products and services to complete their Year 2000 resolution process in a timely
fashion could materially adversely affect the Company. The amount of lost
revenue and impact on the Company can not be reasonably estimated at this time.
The Company currently has no contingency plans in place in the event
all phases of the Year 2000 program are not completed or significant suppliers
of products and services fail to complete their Year 2000 resolution process.
The Company is in the process of evaluating whether such a plan is necessary.
The Company believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the failure of
significant suppliers of products and services to the Company to resolve their
own Year 2000 issues could materially adversely affect the Company. In addition,
disruptions in the economy generally as a result of Year 2000 issues also could
materially adversely affect the Company.
The foregoing discussion regarding Year 2000, including the discussion
of the timing and effectiveness of the Company's Year 2000 remediation efforts,
contains forward-looking statements which are based on management's best
estimates derived using assumptions and information considered reasonable. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated by such statements.
Factors that might cause material differences include, but are not limited to,
the Company's ability to locate and correct all relevant Year 2000 computer code
and the ability of significant suppliers of products and services to effectively
address the Year 2000 issue. Such material differences could result in business
disruption, operational problems, and similar risks.
16
<PAGE>
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 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 economics of dentistry affecting dental practice growth
and the demand for dental products, including the ability and
willingness of dentists to invest in high-technology diagnostic and
therapeutic products.
. The Company's ability to meet increased competition from national,
regional and local full-service distributors and mail-order
distributors of dental products, while maintaining current or
improved profit margins.
. Continued ability of the company 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 to adequately address the Year 2000 issue.
. Future operating results of the Company's printed office products
group depends upon its ability to attract and retain customers by
offering quick response time and innovative products that meet
industry reporting standards. 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. The
introduction of computer-based technologies into the management of
health care practices may affect future demand for printed products.
17
<PAGE>
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company has operations in Canada which it considers to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company has experienced negative
translation adjustments of $0.6 million and $0.7 million in 1999 and 1998,
respectively, which were reflected in the balance sheet as an adjustment to
stockholders' equity. The cumulative translation adjustment at the end of 1999
showed a negative translation adjustment of $2.2 million.
The Company purchases a portion of the products it sells from suppliers
located in countries other than where the products are sold. The risk of
transaction gains and losses from changes in the Company's foreign exchange
position is not material as a majority of these purchases are denominated in the
functional currency.
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 24, 1999 and April 25, 1998, 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 24, 1999. 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 24, 1999 and April 25, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended April 24, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 20, 1999
18
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 24, April 25,
ASSETS: 1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 78,746 $ 35,619
Receivables, net of allowance for doubtful accounts of $4,096 and $3,954
at April 24, 1999 and April 25, 1998, respectively................................. 112,521 106,252
Inventory.............................................................................. 91,722 81,810
Prepaid expenses and other current assets.............................................. 3,655 3,980
---------- ----------
Total current assets..................................................................... 286,644 227,661
Property and equipment, net.............................................................. 37,018 37,998
Intangibles, net......................................................................... 46,867 48,013
Other.................................................................................... 2,721 2,701
---------- ----------
Total assets......................................................................... $ 373,250 $ 316,373
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable....................................................................... $ 67,213 $ 60,652
Accrued payroll expense................................................................ 14,342 13,852
Other accrued expenses................................................................. 16,556 13,426
Bank indebtedness...................................................................... -- 2,033
Income taxes payable................................................................... 166 2,009
Current maturities of long-term debt................................................... 415 2,433
---------- ----------
Total current liabilities............................................................ 98,692 94,405
Long-term debt........................................................................... 1,682 2,736
Deferred taxes........................................................................... 1,650 2,017
---------- ----------
Total liabilities.................................................................... 102,024 99,158
Deferred credits......................................................................... 6,027 6,912
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 - 33,649,313 and 33,282,493 at
April 24, 1999, and April 25, 1998, respectively.................................. 336 333
Additional paid-in capital............................................................... 66,992 63,134
Retained earnings........................................................................ 213,761 162,797
Accumulated other comprehensive loss..................................................... (2,222) (1,624)
Note receivable from ESOP................................................................ (13,668) (14,337)
---------- ----------
Total stockholders' equity........................................................... 265,199 210,303
---------- ----------
Total liabilities and stockholders' equity........................................... $ 373,250 $ 316,373
========== ==========
</TABLE>
See accompanying notes
19
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------
April 24, April 25, April 26,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.............................................. $ 878,773 $ 778,169 $ 687,895
Cost of sales.......................................... 552,937 488,279 440,262
---------- ---------- ----------
Gross profit........................................... 325,836 289,890 247,633
Operating expenses..................................... 248,364 225,508 196,448
---------- ---------- ----------
Operating income....................................... 77,472 64,382 51,185
Other income and expense:
Amortization of deferred credits.............. 885 885 885
Finance income, net .......................... 2,012 1,188 1,289
Interest expense.............................. (517) (670) (1,021)
Loss on currency exchange..................... (141) (79) (34)
---------- ---------- ----------
Income before income taxes............................. 79,711 65,706 52,304
Income taxes........................................... 29,815 24,937 19,687
---------- ---------- ----------
Net income............................................. $ 49,896 $ 40,769 $ 32,617
========== ========== ==========
Earnings per share -- basic and diluted................ $ 1.49 $ 1.23 $ 1.00
========== ========== ==========
Weighted average and dilutive potential
shares outstanding.................................. 33,496 33,163 32,689
========== ========== ==========
</TABLE>
See accompanying notes
20
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Preferred Additional Compre- Note
Stock Common Paid-in hensive Retained Receivable
Series A Stock Capital loss Earnings from ESOP Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 27, 1996........ $ 21,885 $ 178 $ 32,382 $ (411) $ 89,718 $ (15,900) $ 127,852
Change in translation adjustment. -- -- -- (488) -- -- (488)
Net income....................... -- -- -- -- 32,617 -- 32,617
----------
Comprehensive income............. 32,129
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
--------- ------ -------- -------- --------- --------- ----------
Balance at April 26, 1997....... $ 0 $ 219 $ 56,168 $ (899) $ 123,243 $ (15,069) $ 163,662
Change in translation adjustment. -- -- -- (725) -- -- (725)
Net income....................... -- -- -- -- 40,769 -- 40,769
----------
Comprehensive income............. 40,044
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
--------- ------ -------- -------- --------- --------- ----------
Balance at April 25, 1998........ $ 0 $ 333 $ 63,134 $ (1,624) $ 162,797 $ (14,337) 210,303
Change in translation adjustment. -- -- -- (598) -- -- (598)
Net income....................... -- -- -- -- 49,896 -- 49,896
----------
Comprehensive income............. 49,298
Common stock issued, net......... -- 1 3,689 -- -- -- 3,690
Cash payments received on note
receivable from ESOP......... -- -- -- -- -- 669 669
Pooling-of-interests - PBS....... -- 2 (202) -- 1,068 -- 868
Stock issued for acquisition..... -- -- 371 -- -- -- 371
--------- ------ -------- -------- --------- --------- ----------
Balance at April 24, 1999........ $ 0 $4 336 $ 66,992 $ (2,222) $ 213,761 $ (13,668) $ 265,199
========= ====== ======== ======== ========= ========= ==========
</TABLE>
See accompanying notes
21
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
April 24, April 25, April 26,
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income............................................................. $49,896 $40,769 $32,617
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................................... 6,366 5,924 4,942
Amortization of deferrals.......................................... (885) (885) (885)
Amortization of goodwill........................................... 2,716 2,423 1,339
Bad debt expense................................................... 1,148 1,092 356
Deferred taxes..................................................... (367) 655 (75)
Change in assets and liabilities net of acquired:
Increase in receivables........................................... (6,364) (8,706) (7,176)
Increase in inventory............................................. (9,212) (13,983) (7,879)
Increase in accounts payable...................................... 6,127 7,479 2,785
Increase in accrued liabilities................................... 3,216 5,341 1,735
Other changes from operating activities, net...................... (1,028) (1,113) (1,383)
------- -------- -------
Net cash provided by operating activities.............................. 51,613 38,996 26,376
Investing activities:
Proceeds from sale of facility........................................ 2,215 -- --
Additions to property and equipment, net............................... (7,088) (5,962) (5,010)
Acquisitions........................................................... (1,280) 231 (61,171)
------- -------- --------
Net cash used in investing activities.................................. (6,153) (5,731) (66,181)
Financing activities:
Payments and retirement of long-term debt and
obligations under capital leases..................................... (4,825) (8,169) (334)
Increase (decrease) in revolving credit agreement...................... (1,850) (1,707) 501
Cash payments received on note receivable from ESOP.................... 669 732 831
Common stock issued, net............................................... 3,690 2,730 1,902
------- -------- --------
Net cash (used in) provided by financing activities.................... (2,316) (6,414) 2,900
Effect of exchange rate changes on cash................................ (17) (327) (56)
------- -------- --------
Net increase (decrease) in cash and cash equivalents................... 43,127 26,524 (36,961)
Cash and cash equivalents at beginning of period....................... 35,619 9,095 46,056
------- -------- --------
Cash and cash equivalents at end of period............................. $78,746 $35,619 $ 9,095
======= ======== ========
Supplemental disclosures:
Income taxes paid...................................................... $32,062 $23,811 $ 20,229
Interest paid.......................................................... 575 646 1,024
Exchange of preferred shares into common stock......................... -- -- 21,885
</TABLE>
See accompanying notes
22
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 24, 1999
(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 108 locations with approximately
3,600 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, the Company
produces and sells printed office products and 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. These
investments are classified as available for sale and 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 dental inventories and the first-in, first-out (FIFO) method
for all other inventories. Inventories valued at LIFO represent 80% of total
inventories at both April 24, 1999 and April 25, 1998.
The accumulated LIFO provision was $13,991 at April 24, 1999 and
$12,131 at April 25, 1998. 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.
23
<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 24, 1999 and April 25, 1998 was
$6,829 and $3,844, respectively. The Company employs the undiscounted cash flow
method of assessment for these assets when factors indicating an impairment are
present.
Advertising
The Company expenses all advertising and promotional costs as incurred
except for certain catalog costs which are capitalized and amortized over future
periods based upon estimates of revenue to be generated. Total advertising and
promotional expenses were $9,224, $8,573, and $4,274 for 1999, 1998 and 1997,
respectively.
Income Taxes
The liability method is used to account for income tax expense. 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.
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
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. The
Company has determined that no long-lived assets have been impaired.
Stockholders' Equity
On January 12, 1998 the Company declared a three for two 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
The following table sets forth the denominator for the computation of basic and
diluted earnings per share. There were no adjustments to the numerator.
24
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per
share - weighted-average shares 33,396 33,070 32,618
Effect of dilutive securities:
Stock Option Plans 57 68 48
Employee Stock Purchase Plan 5 7 6
Capital Accumulation Plan 38 18 17
--------- --------- --------
Dilutive potential common shares 100 93 71
--------- --------- --------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 33,496 33,163 32,689
========= ========= ========
</TABLE>
Comprehensive Income
In 1999, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' investment, to be included in other comprehensive income. The
adoption of SFAS 130 resulted in revised and additional disclosures but had no
impact on the Company's consolidated financial position, results of operations
or liquidity.
Reclassification
Certain balances were reclassified to conform to the April 24, 1999
presentation.
2. Acquisitions
On July 27, 1998 and on February 8, 1999, the Company acquired the
assets of two local dental distributorships, Dentaplex, Inc. and J&S Dental
Supply Co., Inc. The acquisitions were accounted for as a purchase and,
accordingly, the net assets and operating results are included in the Company's
financial statements from the date of acquisition. The pro forma impact of these
transactions was not material to the financial statements.
On February 5, 1999, the Company acquired all of the common stock of
Professional Business Systems, Inc., (PBS) in exchange for 214,317 shares of
common stock. PBS is located in Roselle, Illinois and manufactures and
distributes filing systems and other practice management systems for healthcare
professionals. The acquisition was accounted for as a pooling-of-interests and
was not material to the financial statements on a pro forma basis. The financial
statements do not reflect the financial position and results of operations prior
to the date of acquisition based on materiality.
On February 2, 1998, the Company acquired all of the common stock of
Hill Dental Company, Inc. located in Birmingham, Alabama, in exchange for
100,770 shares of common stock. 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 results of
the operations of Hill Dental Company, Inc. prior to the acquisition date were
not material to the financial statements on a pro forma basis.
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.
25
<PAGE>
Separate results of operations for the periods prior to the merger with
CDS are as follows:
<TABLE>
<CAPTION>
Period from
April 27, 1997 to
August 26, 1997 1997
---------------- ----------
<S> <C> <C>
Net Sales
Patterson Dental Company $ 231,350 $ 661,518
CDS 8,190 26,377
--------- --------
Total Combined $ 239,540 $ 687,895
========= ========
Net Income
Patterson Dental Company $ 11,292 $ 32,415
CDS 31 202
--------- ---------
Total Combined $ 11,323 $ 32,617
========= =========
Other Changes in Stockholders' Equity
Patterson Dental Company $ 1,106 $ 3,211
CDS (24) (18)
--------- ---------
Total Combined $ 1,082 $ 3,193
========= =========
</TABLE>
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 fiscal 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 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 fiscal 1997:
<TABLE>
<CAPTION>
Year Ended
(In thousands, except per share data) April 26, 1997
------------------------------------- --------------
<S> <C>
Net sales $711,660
Income before taxes 54,386
Net income 33,887
Earnings per share $ 1.04
</TABLE>
26
<PAGE>
3. Property and Equipment
<TABLE>
<CAPTION>
April 24, 1999 April 25, 1998
-------------- --------------
<S> <C> <C>
Land $ 3,426 $ 3,446
Buildings 17,074 18,697
Leasehold improvements 1,631 1,536
Furniture and equipment 20,055 16,616
Data processing equipment 23,003 19,968
--------- ---------
65,189 60,263
Accumulated depreciation (28,171) (22,265)
--------- ---------
$ 37,018 $ 37,998
========= =========
</TABLE>
4. Long-Term Debt
<TABLE>
<CAPTION>
April 24, 1999 April 25, 1998
-------------- --------------
<S> <C> <C>
Mortgage $ 1,466 $ 2,695
Note payable to bank -- 2,100
Other 631 374
---------- ----------
2,097 5,169
Less current maturities 415 2,433
---------- ----------
$ 1,682 $ 2,736
========== ==========
</TABLE>
The Company extended its bank revolving credit agreement in April 1999
which now provides for unsecured borrowings and sales of installment contract
receivables of up to a combined $85 million until April 2000. 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 24, 1999. A total of $77 million of installment contracts receivable sold
under the agreement were outstanding at April 24, 1999.
The remaining 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 fiscal 1998.
The note payable to bank in the amount of $2,100 at April 25, 1998 was
collateralized by the Hill Dental Company, Inc. facility. At April 25, 1998, the
loan had an interest rate of 5 3/4%. The Company sold the facility and paid off
this note during the first quarter of fiscal 1999.
The other long-term debt includes obligations under non-competition
agreements and capital leases.
Long-term debt becomes due: $415 in 2000, $374 in 2001, $207 in 2002,
$217 in 2003, $244 in 2004 and the balance thereafter. The fair value of long-
term debt approximates its carrying value.
5. Leases
The Company leases facilities for its branch office locations and
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:
<TABLE>
<S> <C>
2000 $ 5,825
2001 4,554
2002 3,711
2003 3,447
2004 1,352
Thereafter 851
-----------
Total minimum payments required $ 19,740
===========
</TABLE>
Rent expense was $6,822, $6,054 and $5,255 for the years ended April
24, 1999, April 25, 1998 and April 26, 1997, respectively.
27
<PAGE>
6. Income Taxes
Significant components of the provision (benefit) for income taxes are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 27,012 $ 21,722 $17,417
Foreign -- 28 147
State 3,170 2,532 2,198
--------- -------- -------
Total current 30,182 24,282 19,762
Deferred:
Federal (336) 599 (55)
Foreign -- -- --
State (31) 56 (20)
-------- -------- -------
Total deferred (367) 655 (75)
-------- -------- -------
Provision for income taxes $ 29,815 $ 24,937 $19,687
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax (liabilities) and
assets as of April 24, 1999 and April 25, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
Canadian net operating loss carryforward $ 3,124 $ 4,807 $ 4,017
Valuation allowance (3,124) (4,807) (4,017)
Bad debt allowance 1,018 1,044 963
LIFO reserve (975) (1,403) (1,111)
Financing income (2,556) (1,619) (1,045)
Other 2,041 1,139 1,009
------- ------- --------
Total $ (472) $ (839) $ (184)
======= ======= ========
</TABLE>
Income tax expense varies from the amount computed using the U.S.
statutory rate. The cause of this difference and the related tax effects are
shown below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 27,899 $ 22,997 $ 18,306
State tax provision, net of federal benefit 2,066 1,701 1,416
Effect of foreign losses 107 490 262
Amortization of deferred credit (310) (310) (310)
Other 53 59 13
---------- --------- ---------
$ 29,815 $ 24,937 $ 19,687
========== ========= =========
</TABLE>
At April 24, 1999, the Company had net operating loss carryforwards of
$10,977 for Canadian income tax purposes that expire in years 2000 through 2006.
Those carryforwards resulted from the Company's fiscal 1994 acquisition of
Healthco Canada Inc. For financial reporting purposes, a valuation allowance of
$3,124 has been established to reduce the deferred tax assets to their net
realizable value.
7. Segment and Geographic Data
During 1999, the Company adopted Financial Accounting Standards Board
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." The management approach required by the statement designates that
the internal reporting used by management for making operating decisions and
assessing performance is the basis for determining that Company's reportable
segment.
28
<PAGE>
The Company has one reportable segment, dental distribution. This
segment, which is comprised of the Company's dental supply, printed office
products and software groups, distributes consumable supplies, equipment,
services and software primarily to dental professionals in the U.S. and Canada.
The following table presents sales information by product for the Company:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales
Dental products and services $811,217 $ 718,671 $ 654,424
Printed office products 57,202 53,326
33,471
Software 10,354 6,172
-------- --------- ---------
-
Total $878,773 $ 778,169 $ 687,895
======== ========= =========
</TABLE>
The following table presents information about the Company by
geographic area. There were no material amounts of sales among geographic areas.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues
United States $ 803,989 $ 698,390 $ 604,698
Canada 74,784 79,779 83,197
--------- --------- ---------
Total $ 878,773 $ 778,169 $ 687,895
========= ========= =========
Long-lived Assets
United States $ 78,868 $ 80,842 $ 74,189
Canada 5,017 5,169 5,187
--------- --------- ---------
Total $ 83,885 $ 86,011 $ 79,376
========= ========= =========
</TABLE>
8. 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
1999, 1998 and 1997, shares with a cost of $669, $732 and $824, respectively,
were earned and allocated to ESOP participants.
During 1999 and 1998 the ESOP was funded through Company contributions
of $669 and $732, respectively.
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.
At April 24, 1999, 1,917,803 shares of the common stock were allocated
to participants and had a fair market value of $78,063.
At April 24, 1999, and April 25, 1998, indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheet.
29
<PAGE>
Stock Option Plan
In June 1992, the Company adopted the Patterson Dental Company 1992
Stock Option Plan (the "Employee Plan"). The Employee 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 Employee 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). Stock options
granted under the Employee Plan have exercise prices equal to the market price
on the date of the grant, vest over a three to ten year period, and once vested,
are exercisable over ten years following the date of the grant. On February 10,
1999 a total of 212,982 options were granted under the Employee Plan to
employees at an option price of $40.56.
Director Stock Option Plan
In June 1992, the company adopted a 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.
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
Employee Plan Director Option Plan
------------------------------------------------- -----------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Available Options Price Available Options Price
For Grant Outstanding Per Share For Grant Outstanding Per Share
-------------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance April 27, 1996 2,025,000 - - 189,000 126,000 $ 12.02
Granted - - - (27,000) 27,000 18.67
Exercised - - - - (22,500) 7.11
--------- ----------- --------- ---------- ----------- -----------
Balance April 26, 1997 2,025,000 - - 162,000 130,500 $ 13.73
Granted - - - (27,000) 27,000 26.92
Exercised - - - - (31,500) 9.24
--------- ----------- --------- ---------- ----------- -----------
Balance April 25, 1998 2,025,000 - - 135,000 126,000 $ 18.21
Granted (212,982) 212,982 $ 40.56 (27,000) 27,000 38.00
Exercised - - - - (18,000) 14.56
--------- ----------- --------- ---------- ----------- -----------
Balance April 24, 1999 1,812,018 212,982 $ 40.56 108,000 135,000 $ 22.65
========= =========== ========= ========== =========== ===========
</TABLE>
The 135,000 options outstanding under the Director Option Plan at April
24, 1999, have exercise prices of $12.00, $17.67, $18.67, $26.92 and $38.00. At
April 24, 1999 the outstanding options had a weighted average contractual life
of 2.4 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 and the pro forma
impact on earnings be disclosed when material. The pro forma impact was not
material for 1999, 1998 and 1997.
30
<PAGE>
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
44,699, 55,558 and 63,783 shares in 1999, 1998 and 1997, respectively. At April
24, 1999, 77,421 shares were available for purchase under the Stock Purchase
Plan.
Capital Accumulation Plan
In May 1996, the Board of Directors adopted an employee Capital
Accumulation Plan (the "CAP Plan"). The CAP Plan was approved by the
shareholders at the annual meeting held September 9, 1996. A total of 1,500,000
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 77,591, 84,345 and 55,761 shares of
restricted stock in 1999, 1998 and 1997, respectively. At April 24, 1999,
1,283,988 shares were available for purchase under the Plan.
9. 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.
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
quarter ending prior to the August 1997 acquisition of Canadian Dental Supply
has been restated to reflect the pooling-of-interests of that company. The
following table summarizes results for fiscal 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
Apr. 24, Jan. 23, Oct. 24, Jul. 25,
1999 1999 1998 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 235,199 $ 230,176 $ 213,325 $ 200,073
Gross profit 87,480 85,841 78,924 73,591
Operating income 21,055 21,498 18,676 16,243
Net income 14,022 13,748 11,897 10,229
Basic and dilutive earnings per share $ 0.42 $ 0.41 $ 0.36 $ 0.31
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
Apr. 25, Jan. 24, Oct. 25, Jul. 26,
1998 1998 1997 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
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 dilutive earnings per share $ 0.35 $ 0.33 $ .30 $ 0.25
</TABLE>
31
<PAGE>
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 3, 1999 (the "1999 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 1999 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 1999 Proxy Statement.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with officers and directors is incorporated by reference to the information set
forth under the caption "Certain Transactions" in the 1999 Proxy Statement.
32
<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 24, 1999 and April 25, 1998
Consolidated Statements of Income for the Years Ended April 24, 1999,
April 25, 1998 and April 26, 1997
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended April 24, 1999, April 25, 1998 and April 26, 1997
Consolidated Statements of Cash Flows for the Years Ended April 24,
1999, April 25, 1998 and April 26, 1997 Notes to Consolidated
Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith:
Schedule II - Valuation and Qualifying Accounts for the Years Ended April 24,
1999, April 25, 1998 and April 26, 1997.
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, as amended*
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, as amended (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*
33
<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 24, 1999.
34
<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, 1999
By /s/Peter L. Frechette
---------------------------------------
Peter L. Frechette,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date
/s/Peter L. Frechette President and Chief Executive Officer and July 16, 1999
- -------------------------------------
Peter L. Frechette Director (Principal Executive Officer)
/s/Ronald E. Ezerski Executive Vice President, Treasurer and July 16, 1999
- -------------------------------------
Ronald E. Ezerski Chief Financial Officer and Director
(Principal Financial and Accounting
Officer)
/s/David K. Beecken Director July 16, 1999
- -------------------------------------
David K. Beecken
/s/Burt E. Swanson Director July 16, 1999
- -------------------------------------
Burt E. Swanson
/s/Andre B. Lacy Director July 16, 1999
- -------------------------------------
Andre B. Lacy
</TABLE>
35
<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 24, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $3,954 $1,148 (540) (3) $ 466 (1) $ 4,096
========= ======== ========= ========= =========
LIFO inventory adjustment $ 12,131 $ 1,860 $ -- $ -- $ 13,991
Inventory obsolescence reserve 1,534 2,221 -- 1,800 (2) 1,955
--------- -------- --------- --------- ---------
Total inventory reserve $ 13,665 $ 4,081 -- $ 1,800 $ 15,946
========= ======== ========= ========= =========
Year ended April 25, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 3,711 $ 1,041 $ 176 (3) $ 974 (1) $ 3,954
========= ======== ========== ========= =========
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 $ 3,997 $ 357 $ 140 (3) $ 783 (1) $ 3,711
========= ========== ========== ========= =========
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
========= ========== ========== ========= =========
</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 and
Professional Business Systems in fiscal 1999.
36
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Exhibit 21 Subsidiaries........................................ 38
Exhibit 23 Consent of Independent Auditors..................... 39
Exhibit 27 Financial Data Schedule............................. 40
</TABLE>
37
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
Patterson Dental Supply, Inc. Minnesota
Direct Dental Supply Co. Nevada
Patterson Dental Canada, Inc. Canada
38
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-56764) pertaining to the 1992 Stock Option Plan, 1992 Director Stock
Option Plan, Employee Stock Purchase Plan and Employee Stock Ownership Plan, the
Registration Statement (Form S-8 No. 333-03583) pertaining to the Patterson
Dental Company Capital Accumulation Plan of Patterson Dental Company and the
Registration Statements on Form S-3 (No. 333-19951, 333-41199, 333-61489 and
333-79147) of our report dated May 20, 1999, with respect to the consolidated
financial statements included in this Annual Report (Form 10-K) of Patterson
Dental Company for the year ended April 24, 1999.
Our audits also included the financial statement schedule of Patterson Dental
Company listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 16, 1999
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-25-1998
<PERIOD-END> APR-24-1999
<CASH> 78,746
<SECURITIES> 0
<RECEIVABLES> 116,617
<ALLOWANCES> 4,096
<INVENTORY> 91,722
<CURRENT-ASSETS> 286,644
<PP&E> 65,189
<DEPRECIATION> 28,171
<TOTAL-ASSETS> 373,250
<CURRENT-LIABILITIES> 98,692
<BONDS> 1,682
336
0
<COMMON> 0
<OTHER-SE> 264,863
<TOTAL-LIABILITY-AND-EQUITY> 373,250
<SALES> 878,773
<TOTAL-REVENUES> 878,773
<CGS> 552,937
<TOTAL-COSTS> 552,937
<OTHER-EXPENSES> 248,364
<LOSS-PROVISION> 1,148
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> 79,711
<INCOME-TAX> 29,815
<INCOME-CONTINUING> 49,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,896
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.49
</TABLE>
