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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 29, 2000
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, 2000, was approximately $ 1,195,129,382.
As of July 14, 2000, there were 67,400,118 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 2000 Annual Meeting of Shareholders Part III
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FORM 10-K INDEX
Page
PART I........................................................................2
Item 1. BUSINESS...........................................................2
Item 2. PROPERTIES.........................................................9
Item 3. LEGAL PROCEEDINGS.................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............10
PART II......................................................................11
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.............................................11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA..............................11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 31
PART III.....................................................................31
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................31
Item 11. EXECUTIVE COMPENSATION............................................31
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................31
PART IV......................................................................31
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................31
SIGNATURES...................................................................33
SCHEDULE II..................................................................34
INDEX TO EXHIBITS............................................................35
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6 PART I
1. BUSINESS
Certain information of a non-historical nature contained in Items 1, 2, 3
and 7 of this Form 10-K includes forward-looking statements. Reference is made
to Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - 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") is one of the two
largest distributors of dental products in North America. The Company, a
full-service, value-added supplier to dentists, dental laboratories,
institutions, physicians, and other healthcare professionals, provides:
consumable products (including x-ray film, restorative materials, hand
instruments and sterilization products); advanced technology dental equipment;
practice management software; and office forms and stationery. The Company
offers its customers a broad selection of dental products including more than
82,500 stock keeping units ("SKU's") of which approximately 2,800 are
private-label products sold under the Patterson name. Patterson also offers
customers a full range of related services including dental equipment
installation, maintenance and repair, dental office design and equipment
financing. Unless otherwise indicated, all references to Patterson or the
Company include its subsidiaries: Direct Dental Supply Co.; Patterson Dental
Canada, Inc.; Patterson Dental Supply, Inc.
The Company markets its dental products and services through over 1,000
direct sales representatives, 161 of whom are equipment specialists, operating
from 94 sales offices in the United States and Canada. The Company processes
nearly 12,000 customer orders each business day using a computerized order
processing network that links the Company's sales offices and 11 distribution
centers. The Company estimates that 96% 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 electronically through various media, including the
Internet, or by mail or telephone.
Patterson Dental Company was founded by M.F. Patterson in 1877. In May
1985, the Company's management and certain investors purchased the Company from
a subsidiary of The Beatrice Companies, Inc. Patterson became a publicly traded
company in October 1992. Net sales have increased from $165.8 million in fiscal
1986 to $1,040.3 million in fiscal 2000, operating margins have increased every
year since fiscal 1985 and profitability has increased from an operating loss in
fiscal 1986 to operating income of $97.5 million in fiscal 2000.
Industry Background
Total expenditures for dental services in the United States increased from
$13 billion in 1980 to $57 billion in 1999. Domestic dental care expenditures
are projected by the Health Care Financing Administration to grow 6% annually,
reaching $93 billion by the year 2008. The Company believes that the demand for
dental services and dental equipment and supplies will continue to be influenced
by the following factors:
o Demographics. The U.S. population grew from 235.1 million in 1980 to
272.8 million in 1999, and is expected to reach 295.0 million by 2008.
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.
o Dental products and techniques. Technological developments in dental
products have contributed to advances in dental techniques and
procedures, including cosmetic dentistry and dental implants.
o 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.
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o 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.
o 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 $57 billion in total expenditures for
1999 as compared to approximately 30% of the $13 billion in total
expenditures for 1980.
See, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results.
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. There are
approximately 17,000 licensed dentists in Canada according to the Canadian
Dental Association. 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 value-added, full-service
capabilities, using technology to enhance customer service, continuing to
improve operating efficiencies, and growing through internal expansion and
acquisitions.
Emphasizing Value-Added, 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 its full line of dental supplies 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 are performed by Patterson's trained service technicians.
Using Technology, Including the Internet, to Enhance Customer Service. The
Company has been in E-commerce since 1987 when it first introduced Remote Order
Entry (REMOTM). The Company believes that its computerized order entry systems
help to establish relationships with new customers and increase loyalty among
existing customers. The remote order entry systems permit customers to place
orders from their offices directly to Patterson 24 hours a day, seven days a
week. Over the years, the Company has continued to introduce new order entry
systems designed to meet the varying needs of its customers. Today the Company
offers five systems, REMOSM, REMO-NetSM, REMO-WareSM, PDXpress(R) and PassPortSM
Plus. These systems are used by customers as well as the Company's sales force.
Over the years, the number of orders transmitted electronically has grown
steadily to approximately 50% of Patterson's consumable dental products volume
or $310 million in fiscal year 2000.
The Company's current Internet system, REMO-NetSM, in addition to on-line
ordering capabilities, provides order status and shipment tracking, product
look-up, comparison shopping, new product introduction and access to "Patterson
Today" articles. Longer term, the goal of the Company's Internet strategy will
be to distribute information and service related products over the Internet to
enhance customers' practices and to increase sales force productivity. Over the
next year the Company plans to augment
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its Internet system with an enhanced order entry process, continuing education
products, manufacturers' product information, an office design application and a
tool to provide real time customer and Company information to the Company's
sales force.
For those customers not using the Internet, the Company offers four
alternative products. REMOSM and REMO-WareSM give customers direct and
immediate ordering access through a personal computer to a database containing
Patterson's complete inventory. PDXpress(R) is a handheld 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.
PassPortSM Plus is a smart phone which incorporates automated ordering and
bar-code scanning with credit card processing. These systems are provided at no
additional charge to customers who maintain certain minimum purchase
requirements.
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 customers, 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 thirteen years the Company has made the
following acquisitions:
Dental distribution acquisitions in the United States
o 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 2000, Patterson acquired the customer
base and certain assets of 22 smaller dental dealers throughout the
United States. This past year the Company acquired Guggenheim Brothers
Dental Supply Company of Los Angeles, California; Kentucky Dental
Supply of Lexington, Kentucky; and Barr Dental Supply located in
Medford, Oregon.
Dental distribution acquisitions in Canada
o 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 423 people, 115
of whom are sales representatives. In August 1997, the Company
acquired Canadian Dental Supply Ltd. which expanded the Company's
market share in British Columbia, Alberta, Saskatchewan and Ontario.
Printed office products acquisitions
o In October 1996, the Company acquired the Colwell Systems division of
Deluxe Corporation. Colwell Systems produces and sells a variety of
printed office products used in medical and dental offices. 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.
Software acquisitions
o In July 1997, the Company acquired EagleSoft, Inc., a developer and
marketer of Windows(R)-based practice management software for dental
offices. EagleSoft is located in Effingham, Illinois.
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The Company has operations in the U.S. and Canada and conducts business in
one segment, dental distribution. This segment is comprised of the Company's
dental supply, printed office products and software groups. Approximately half
of the printed office products are sold to non-dental healthcare practitioners.
The following table shows the approximate percentages of net sales contributed
by sales category for the last three fiscal years:
2000 1999 1998
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Consumable Dental and Printed Products......... 64% 64% 64%
Equipment and Software......................... 28 28 27
Other (1)..................................... 8 8 9
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Total................................. 100% 100% 100%
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(1) Consists of other value-added products and services.
Consumable Dental and Printed Products
Dental Supplies. Patterson offers a broad product line of consumable dental
supplies such as x-ray film and solutions; impression materials; restorative
materials (composites and alloys); hand instruments; sterilization products;
infection control products such as protective clothing, gloves and facemasks;
paper, cotton and other disposable products; toothbrushes and a full line of
dental accessories including instruments, burs, and diamonds. Patterson markets
its own private label line of dental supplies including anesthetics,
instruments, preventive 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.
Printed 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:
o The Company's dental distribution sales force
o Catalogs distributed to over 160,000 customers several times a year
o 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 printed office products group employs 533 people and operates from two
facilities located in Champaign, Illinois, and one in Roselle, Illinois. 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.
Equipment and Software
Equipment. Patterson offers a wide range of dental equipment products
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 newer technology equipment that
provides customers with the tools to improve productivity and patient
satisfaction. Examples of such innovative and high-productivity products include
the CEREC product family, a chair side restoration system; air abrasion systems;
digital x-rays; the Welch Allyn Reveal(R) intraoral camera; and the Triangle
Sterilization Center. The Company recently announced its strategic distribution
agreement with Schick Technologies, a leading supplier of digital sensors in the
industry.
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Software. The Company develops and markets practice management software for
dental professionals. Products include software for scheduling, billing,
charting and storage/retrieval of digital images. The Company also sells
software products developed by third parties including Sidexis by Sirona, Dimax2
by Planmeca and VixWin by Gendex. These value-added products are designed to
help achieve office productivity improvements which translates into higher
profitability for the customer. To support its customers as they continue to
integrate newer technology into their dental practice, the Company is
establishing the Patterson Technology Call Center at EagleSoft to assist
customers with problems or questions related to digital software integration. A
key element of the Company's strategy is to provide seamless integration of
digital imaging products with practice management software so that customers can
quickly store, retrieve and transfer images. The Company has also realigned its
EagleSoft sales force to report directly to Patterson's sales offices. As
Patterson technology representatives they will team with other sales
representatives and be responsible for selling digital products as well as
practice management software. EagleSoft has a total of 124 employees, of whom 94
are dedicated to software development, sales and product support.
Other
Software Services. The Company offers a variety of services to complement
its software products such as service agreements, electronic claims processing
and billing statement processing. These services provide value to customers by
allowing them to receive payments more rapidly while obtaining greater
productivity.
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 793 service technicians call on dental offices throughout the United
States and Canada. 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 provides a variety of options to fulfill
its customers' financing needs. For qualified purchasers of equipment, the
Company will arrange financing for the customer through Patterson or a third
party, or will arrange a leasing program with an outside party. These
alternatives allow the Company to offer its customers convenience while still
meeting their diverse financing needs. In fiscal 2000, the Company originated
over $85 million of equipment finance contracts.
Equipment leasing is provided by Banc of America Vendor Finance, a unit of
BankAmerica, pursuant to an agreement entered into in July 1993. Applications
for financing originated by the Company are reviewed by Banc of America Vendor
Finance, which upon approval may purchase the equipment and lease it to the
customer or purchase an installment sale contract from the Company without
recourse. In November 1998, Patterson entered into a finance referral agreement
with The Matsco Companies. Referral fees are received for financing contracts
that are initiated by Patterson. There are no recourse provisions under this
agreement.
The Company has entered into a combined Contract Purchase and Revolving
Credit Agreement with U.S. Bank National Association, under which U.S. Bank
National Association and three additional banks 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 2000, the combined Contract Purchase Agreement and unsecured revolving
credit facility with the banks allows for a maximum credit line of $100 million.
As of April 29, 2000, contracts with an outstanding principal balance of $84.6
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 2000, Patterson sold consumable dental products in the U.S.
and Canada to over 100,000 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 2000, and Patterson is not dependent on any single customer or geographic
group of customers.
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A primary component of the Company's value-added approach is its sales
force. 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. Each representative works within an assigned sales
territory from one of 94 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.
Distribution
Patterson ships its dental supplies and printed office products from 11
distribution centers with 486 warehouse employees. The Company's dental sales
offices 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 for consumable supplies can be placed by telephone or electronically
24 hours a day, seven days a week. All orders are routed through the Company's
centralized computer ordering, shipping and inventory management system, which
is linked to each of the Company's strategically located 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. Rapid and accurate order fulfillment is another principal component of
the Company's value-added approach. The Company estimates that 96% of its
consumable goods orders are shipped complete within 24 hours. The Company
believes it averages only one error per every 1,150 items ordered.
In order to assure the availability of the Company's broad product lines
for prompt delivery to customers, the Company must maintain sufficient
inventories at its distribution centers. Purchasing is centralized and inventory
levels are managed by the purchasing department using a real-time perpetual
inventory system. The Company's inventory consists mostly of dental supply
items; equipment is generally custom-ordered for 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
Effective purchasing is a key strategy the Company has adopted in order to
achieve its objective of continuing to improve profitability. Recently, the
Company began a program to effectuate electronic data interchange (EDI) with its
major vendor partners. In fiscal 2000, the Company processed 40% of its vendor
invoices using EDI capabilities. In addition, by April of this year 38% of
Patterson's purchase order activity was conducted employing EDI, which
represented almost 60% of purchase order dollars placed in April. Utilizing EDI
allows the Company to improve efficiencies and reduce administrative costs.
The Company obtains dental products from approximately 1,100 vendors. In
addition, the Company has exclusive distribution agreements with several quality
dental equipment manufacturers including Sirona on the CEREC, Triangle for
sterilization centers, and Welch-Allyn for intraoral cameras. The Company is the
only national dealer for A-dec equipment, including chairs, units and cabinetry.
In fiscal 2000, the Company's top 10 vendors and single largest vendor accounted
for approximately 46% 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., there are at least 20 full-service
distributors which operate on a regional level, and hundreds of small local
distributors. Also, some manufacturers sell directly to end-users, and thereby
eliminate the role of the Company. Patterson believes that it competes with
full-service distributors, mail-order distributors and direct-sellers 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.
The Company also experiences competition in Canada. Principal competitors
include two national, full-service distributors Ash Temple and Arcona, a
division of Henry Schein, Inc. The Company believes it competes in Canada on
essentially the same basis as in the United States.
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 29, 2000, the Company employed 3,789 people in the United
States and Canada on a full-time basis. 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.
Peter L. Frechette 62 President and Director-Patterson Dental
Company
R. Stephen Armstrong 49 Executive Vice President and Treasurer-
Patterson Dental Company
James W. Wiltz 55 Vice President-Patterson Dental Company and
President-Patterson Dental Supply, Inc.
Mary H. Baglien 57 Vice President, Human Resources - Patterson
Dental Company
Lynn E. Askew 39 Vice President, Management Information
Systems-Patterson Dental Company
Gary D. Johnson 53 Vice President, Sales-Patterson Dental
Supply, Inc.
R. Reed Saunders 52 Vice President-Patterson Dental Supply, Inc.
and President-Colwell Systems
Normand Senecal 55 President-Patterson Dental Canada, Inc.
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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.
R. Stephen Armstrong was elected Executive Vice President, Treasurer and
Chief Financial Officer of the Company effective July 31, 1999. Prior to joining
Patterson, Mr. Armstrong had been an Assurance Partner with Ernst & Young LLP.
Ernst & Young LLP is currently the Company's independent public auditor.
James W. Wiltz has been a Vice President of the Company since prior to its
acquisition 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.
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.
Lynn E. Askew became Vice President, Management Information Systems, on
September 1, 1999. Mr. Askew joined Patterson in 1994 as Manager, Distributed
Systems, and was promoted to Director, Systems and Development in 1996. Prior to
joining Patterson, Mr. Askew provided advanced technology consulting and project
management services to various organizations, including Patterson.
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.
Normand Senecal has been President of the Company's Canadian subsidiary
Patterson Dental Canada Inc., since it was acquired from Healthco International,
Inc. in 1993. Mr. Senecal was employed by Healthco Canada since 1982 as Vice
President, Sales and Marketing, and President.
2. PROPERTIES
The Company's principal executive offices are owned and located in St.
Paul, Minnesota.
Distribution facilities are located in California, Florida, Illinois,
Indiana, Iowa, Pennsylvania, Texas, Washington and Canada. Approximately 75%, or
378,000 square feet, of the total distribution space is owned by the Company and
the balance is leased.
The Company also maintains sales and administrative offices inside the
United States at 85 locations in 45 states and outside the United States at 11
locations in Canada. All of these locations are leased. The Company has 2 owned
manufacturing facilities, which are used in the Colwell division.
In management's opinion, all buildings, machinery and equipment are in good
condition, suitable for their purposes and are maintained on a basis consistent
with sound operations. Currently, the Company does not have substantial idle
facilities.
9
<PAGE>
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 judgment.
Among the product liability cases in which the Company is currently a
defendant, sixteen involve claims by healthcare workers claiming damages from
allergic reactions from 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.
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 29, 2000.
10
<PAGE>
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq Stock Market(R) under the
symbol PDCO.
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. Sales prices are adjusted for the two-for-one stock split
on June 13, 2000. See Note 1, "Earnings per Share," to the Consolidated
Financial Statements.
High Low
---- ---
Fiscal 1999
First Quarter............................... $19.75 $14.50
Second Quarter.............................. $19.63 $14.75
Third Quarter............................... $23.19 $18.31
Fourth Quarter.............................. $22.88 $16.56
High Low
---- ---
Fiscal 2000
First Quarter............................... $21.00 $16.75
Second Quarter.............................. $25.06 $18.38
Third Quarter............................... $24.13 $19.44
Fourth Quarter.............................. $24.75 $16.25
On July 14, 2000, the number of holders of record of common stock was
2,573. The transfer agent for the Company's common stock is Wells Fargo Bank
Minnesota, NA, 161 North Concord Exchange, South St. Paul, Minnesota,
55075-0738, telephone: (651) 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.
6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
April 29, April 24, April 25, April 26, April 27,
2000 1999 1998 1997(2) 1996(2)
---------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
----------------------------
Net sales $1,040,348 $878,773 $778,169 $687,895 $606,983
Cost of sales 657,302 552,937 488,279 440,262 392,091
---------- -------- -------- -------- --------
Gross profit 383,046 325,836 289,890 247,633 214,892
Operating expenses 285,587 248,364 225,508 196,448 170,958
---------- -------- -------- -------- --------
Operating income 97,459 77,472 64,382 51,185 43,934
Other income (expense) - net 5,540 2,239 1,324 1,119 1,711
---------- -------- -------- -------- --------
Income before income taxes 102,999 79,711 65,706 52,304 45,645
Income taxes 38,527 29,815 24,937 19,687 16,997
---------- -------- -------- -------- --------
Net income $ 64,472 $ 49,896 $ 40,769 $ 32,617 $ 28,648
========== ======== ======== ======== ========
Earnings per share - diluted(1) $ 0.95 $ 0.75 $ 0.61 $ 0.50 $ 0.43
---------- -------- -------- -------- --------
Weighted average dilutive potential
shares outstanding(1) 67,544 66,993 66,325 65,379 64,954
---------- -------- -------- -------- --------
Dividends per common share -- -- -- -- --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
-------------------
Working capital $238,502 $187,952 $133,256 $ 96,893 $114,883
Total assets 451,976 373,250 316,373 255,311 212,973
Total debt 1,719 2,097 7,202 10,792 10,681
Stockholders' equity 330,470 265,199 210,303 163,662 127,852
</TABLE>
(1) Amounts are adjusted for two-for-one stock split on June 13, 2000 and
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 include increasing
sales four percentage points faster than the average industry growth rate and
achieving net income growth of 20% on average. In fiscal 2000 the Company had
advised that it believed it could increase revenues by as much as six percentage
points greater than the industry growth rate which it believes is 7% to 9%. The
Company exceeded these goals in fiscal year 2000, reporting an 18.4% increase in
sales, a 29.2% increase in net income, and a 50 basis point expansion in net
margin versus fiscal 1999.
Over the recent five-year period, sales have grown 13.2% and net income
advanced 21.0% compounded annually. Net income over the five years benefited
from cost controls that reduced operating expenses in relation to sales to 27.4%
of sales in fiscal 2000 versus 28.2% in fiscal 1996, and improved gross profit
margin that was 36.8% in fiscal 2000 compared with 35.4% in fiscal 1996.
The Company's effective strategy for growth has focused on internal growth
and 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 14 acquisitions of companies with annual sales
of $164.3 million and gained a total of 145 sales representatives. The Company
estimates its internal growth excluding acquisitions was approximately 10%
during this period. The number of direct sales representatives has increased 36%
since fiscal 1996, and sales per direct sales representative have increased more
than 23%, 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:
2000 1999 1998
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.2% 62.9% 62.7%
----- ----- -----
Gross profit 36.8% 37.1% 37.3%
Operating expenses 27.4% 28.3% 29.0%
----- ----- -----
Operating income 9.4% 8.8% 8.3%
Other income 0.5% 0.3% 0.1%
----- ----- -----
Income before taxes 9.9% 9.1% 8.4%
Income taxes 3.7% 3.4% 3.2%
----- ----- -----
Net income 6.2% 5.7% 5.2%
===== ===== =====
12
<PAGE>
Fiscal 2000 Compared to Fiscal 1999
Net Sales. Net sales for fiscal 2000 increased 18.4% to $1,040.3 million
from $878.8 million in fiscal 1999. Results for fiscal 2000 are based on a
53-week year versus 52 weeks in 1999. Excluding the impact of the additional
week, sales increased approximately 16%. Significant improvements in Canada,
acquisitions and increases in both sales representatives and customer base were
the primary contributors to the sales increase. In fiscal 2000, Patterson Dental
Canada sales increased by 18.5% to $88.6 million. Acquisitions added
approximately $18.6 million or 2 percentage points to the overall sales
increase. During 2000 the Company's sales force grew by 60 representatives and
the total number of customers who purchased supplies from the Company increased
approximately 16%. Sales mix was consistent with prior year. Sales references in
parentheses exclude the additional week. Sales of dental and printed products
increased 19.0% (17%) due primarily to contributions from an expanded sales
force, an increase in the number of customers and the PBS acquisition. Excluding
the impact of the acquisition of PBS, and the additional week, consumable dental
products were up 14.5%. Equipment and software sales increased 18.5% (17%) due
to strong demand across the equipment product lines and incremental software
sales from customers upgrading their systems to be year 2000 compliant. Other
revenues increased 13.0% (11%) reflecting growth in equipment repair and
maintenance services and electronic claims processing and software service
contract sales.
Gross Profit. Gross profit margin decreased to 36.8% in fiscal 2000 from
37.1% in 1999 due primarily to the absence of certain buying opportunities that
were available last year. Point-of-sale margins were the same as fiscal 1999.
Gross profit increased 17.6% to $383.0 million for fiscal 2000. The increase in
gross profit was due primarily to the increase in sales volume.
Operating Expenses. Operating expenses increased 15.0% to $285.6 million
for fiscal 2000 from $248.4 million in 1999. The majority of the increase in
operating expenses was related to greater sales volume, incentive compensation
and higher healthcare costs. Operating expenses as a percent of sales declined
from 28.3% to 27.4% reflecting increased productivity across all business lines.
Operating Income. Operating income increased 25.8% to $97.5 million for
fiscal 2000 from $77.5 million for fiscal 1999. The Company was able to leverage
its infrastructure against the strong sales increase which improved the
operating margin to 9.4% of sales versus 8.8% reported a year ago.
Finance Income. Finance income, net of expenses, was $5.5 million for
fiscal 2000 compared to $2.2 million for fiscal 1999. Finance income increased
due primarily to increased average short-term investments of cash.
Income Taxes. The effective income tax rate at 37.4% remained the same as
last year.
Net Income. Net income increased to $64.5 million, up $14.6 million or
29.2% over last year due to strong sales performance and the improved
utilization of the Company's cost structure.
Earnings Per Share. Diluted earnings per share increased to $0.95 versus
$0.75 reported a year ago, a 20 cent or 26.7% increase. Intuitively earnings
were increased by the additional week in fiscal 2000; however, the impact on
earnings of that additional week cannot be reasonably measured.
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 million 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 by 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% of the increase. Sales mix remained consistent with prior year
levels. Sales of consumable dental products increased $63.9 million, or 12.9%,
reflecting an increase in the number of sales representatives calling on
customers and the introduction of new printed office supply products. Other
sales revenue increased 6.2% due to increases in equipment repair and
maintenance revenues.
13
<PAGE>
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 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.
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 a 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.
Earnings Per Share. Earnings per share were $0.75, which represents a 14
cent or 23.0% increase over 1998.
Liquidity and Capital Resources
Patterson's operating cash flow which generally parallels net earnings has
been the Company's principal source of liquidity in 2000, 1999 and 1998. Cash
generated from operating activities was invested in working capital, capital
expenditures and acquisitions.
Operating activities generated cash of $67.9 million in 2000 compared with
$51.6 million in 1999 and $39.0 million in 1998. The $16.3 million increase in
2000 over 1999 and the $12.6 million increase in 1999 over 1998 reflect the
Company's continuing increase in profitability and improved productivity in the
use of working capital.
Capital expenditures net of dispositions were $15.4, $7.1, and $6.0 million
in 2000, 1999 and 1998, respectively. The increase in fiscal 2000 reflects
spending for the new distribution center which came on line in February 2000.
The Company expects to invest about $12.5 million in capital spending in 2001 to
upgrade its facilities, enhance information systems and integrate operations.
In 2000, the Company invested $12.6 million to acquire three dental
distribution businesses compared to a $1.3 million investment in 1999 to
purchase two smaller dental distributors. The 1999 PBS acquisition was accounted
for as a pooling of interests.
The year-over-year decreases in cash used for financing activities are
attributed to declining debt repayments from 1998 to 2000.
Available liquid resources at April 29, 2000, consisted of $118.2 million
of cash and short-term investments and $19.1 million available under existing
bank lines, as amended in April 2000. The Company believes that these resources
and funds generated from operations are sufficient to meet any existing and
presently anticipated cash needs. In addition, the Company believes it has
sufficient debt capacity to obtain the necessary funds for use in accomplishing
its corporate objectives.
14
<PAGE>
Asset Management
The following table summarizes the Company's days sales outstanding (DSO),
inventory turnover, and sales per employee over the past three fiscal years:
2000 1999 1998
---- ---- ----
Days sales outstanding 43 43 45
Inventory turnover (1) 6.5 6.0 7.2
Sales per employee (000's) $275 $243 $242
(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,
Colwell and EagleSoft inventories.
The accounts receivable balance increased $19.9 million to $132.4 million
at the end of fiscal 2000 from $112.5 million at the end of fiscal 1999. The
increase was due primarily to stronger equipment sales in April 2000.
Foreign Operations
Foreign sales are derived primarily from operations in Canada. Fluctuation
in currency exchange rates have not significantly impacted earnings. Changes in
currency exchange rates is a risk accompanying foreign operations, but this risk
is not considered material with respect to the Company's business.
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.
o Reduced growth in expenditures for dental services by private dental
insurance plans.
o 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.
o 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.
o 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.
o Ability of the Company to retain its base of customers and to increase
its market share.
o The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
15
<PAGE>
o 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.
o 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.
o 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.
o Because the cost of paper stock represents over half the cost of the
Company's paper and printed products, future operating results may be
subject to fluctuations in paper prices.
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is subject to market risk associated with changes in interest
rates and foreign currency exchange rates.
The Company's earnings are affected by changes in short-term interest rates
as a result of its investment in short-term commercial paper and government
securities. As of the end of fiscal 2000 and 1999, the fair market value of the
investments approximated the carrying value. If market interest rates for these
investments averaged 10 percent more or less in 2000 and 1999, the Company's
interest income would have changed by approximately $0.3 million in 2000 and
$0.1 million in 1999.
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 experienced translation
adjustments of $0.2 million in 2000 and $(0.6) million in 1999 which were
reflected in the balance sheet as an adjustment to stockholders' equity. The
cumulative translation adjustment at the end of 2000 showed a negative
translation adjustment of $(2.1) 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 foreign exchange rates is not
material as a majority of these purchases are denominated in the U.S. dollar.
16
<PAGE>
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the accompanying consolidated balance sheets of Patterson
Dental Company as of April 29, 2000 and April 24, 1999, 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 29, 2000. 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 auditing standards generally
accepted in the United States. 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 29, 2000, and April 24, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended April 29, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 25, 2000
17
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 29, April 24,
ASSETS 2000 1999
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $113,453 $ 78,746
Short-term investments................................................................. 4,720 --
Receivables, net of allowance for doubtful accounts of $4,208 and $4,096
at April 29, 2000 and April 24, 1999, respectively................................. 132,419 112,521
Inventory.............................................................................. 92,838 91,722
Prepaid expenses and other current assets.............................................. 7,978 3,655
-------- --------
Total current assets................................................................... 351,408 286,644
Property and equipment, net.............................................................. 46,022 37,018
Intangibles, net......................................................................... 50,730 46,867
Other.................................................................................... 3,816 2,721
-------- --------
Total assets......................................................................... $451,976 $373,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 80,097 $ 67,213
Accrued payroll expense................................................................ 15,194 14,342
Income taxes payable................................................................... 1,110 166
Other accrued liabilities.............................................................. 16,505 16,971
-------- --------
Total current liabilities............................................................ 112,906 98,692
Non-current liabilities.................................................................. 3,458 3,332
-------- --------
Total liabilities.................................................................... 116,364 102,024
Deferred credits......................................................................... 5,142 6,027
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 - 67,363,446 and 33,649,313 at
April 29, 2000, and April 24, 1999, respectively.................................. 674 336
Additional paid-in capital............................................................... 67,022 66,992
Accumulated other comprehensive loss..................................................... (2,060) (2,222)
Retained earnings........................................................................ 277,896 213,761
Note receivable from ESOP................................................................ (13,062) (13,668)
-------- --------
Total stockholders' equity........................................................... 330,470 265,199
-------- --------
Total liabilities and stockholders' equity........................................... $451,976 $373,250
======== ========
</TABLE>
See accompanying notes
18
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
April 29, April 24, April 25,
2000 1999 1998
-------------- ----------- ---------
<S> <C> <C> <C>
Net sales.............................................. $1,040,348 $878,773 $778,169
Cost of sales.......................................... 657,302 552,937 488,279
---------- -------- --------
Gross profit........................................... 383,046 325,836 289,890
Operating expenses..................................... 285,587 248,364 225,508
---------- -------- --------
Operating income....................................... 97,459 77,472 64,382
Other income and expense:
Amortization of deferred credits.............. 885 885 885
Finance income, net .......................... 4,826 2,012 1,188
Interest expense.............................. (132) (517) (670)
Loss on currency exchange..................... (39) (141) (79)
---------- -------- --------
Income before income taxes............................. 102,999 79,711 65,706
Income taxes........................................... 38,527 29,815 24,937
---------- -------- --------
Net income............................................. $ 64,472 $ 49,896 $ 40,769
========== ======== ========
Earnings per share -- basic............................ $0.96 $0.75 $0.62
===== ===== =====
Earnings per share -- diluted.......................... $0.95 $0.75 $0.61
===== ===== =====
Weighted average shares outstanding:
Basic......................................... 67,346 66,793 66,141
Diluted....................................... 67,544 66,993 66,325
</TABLE>
See accompanying notes
19
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Acccumulated
Other
Additional Compre- Note
Common Paid-in hensive Retained Receivable
Stock Capital loss Earnings from ESOP Total
----- ------- ---- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at April 26, 1997........ $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)
Payment on ESOP note............. -- -- -- -- 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........ 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
Payment on ESOP note............. -- -- -- -- 669 669
Pooling-of-interests - PBS....... 2 (202) -- 1,068 -- 868
Stock issued for acquisition..... -- 371 -- -- -- 371
---- ------- ------- -------- -------- --------
Balance at April 24, 1999........ 336 66,992 (2,222) 213,761 (13,668) 265,199
Change in translation adjustment. -- -- 162 -- -- 162
Net income....................... -- -- -- 64,472 -- 64,472
------
Comprehensive income............. 64,634
Common stock issued, net......... 1 3,784 -- -- -- 3,785
Payment on ESOP note............. -- -- -- -- 606 606
Share repurchases................ -- (3,754) -- -- -- (3,754)
Stock split (2 for 1)............ 337 -- -- (337) -- --
---- ------- ------- -------- -------- --------
Balance at April 29, 2000........ $674 $67,022 $(2,060) $277,896 $(13,062) $330,470
==== ======= ======= ======== ========= ========
</TABLE>
See accompanying notes
20
<PAGE>
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
April 29, April 24, April 25,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income .................................................................. $ 64,472 $ 49,896 $ 40,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................ 7,161 6,366 5,924
Amortization of deferred credit ......................................... (885) (885) (885)
Amortization of goodwill ................................................ 3,029 2,716 2,423
Bad debt expense ........................................................ 1,267 1,148 1,092
Deferred taxes .......................................................... (3,141) (367) 655
Change in assets and liabilities net of acquired:
Increase in receivables ................................................ (17,367) (6,364) (8,706)
(Increase) decrease in inventory ....................................... 3,211 (9,212) (13,983)
Increase in accounts payable ........................................... 10,154 6,127 7,479
Increase in accrued liabilities ........................................ 163 3,216 5,341
Other changes from operating activities, net ........................... (183) (1,028) (1,113)
--------- --------- ---------
Net cash provided by operating activities ................................... 67,881 51,613 38,996
Investing activities:
Proceeds from sale of facility .............................................. -- 2,215 --
Additions to property and equipment, net .................................... (15,373) (7,088) (5,962)
Purchase of investments ..................................................... (4,720) -- --
Acquisitions ................................................................ (12,569) (1,280) 231
--------- --------- ---------
Net cash used in investing activities ....................................... (32,662) (6,153) (5,731)
Financing activities:
Payments and retirement of long-term debt ................................... (425) (4,825) (8,169)
Repayments of revolving credit borrowings ................................... -- (1,850) (1,707)
Cash payments received on note receivable from ESOP ......................... 606 669 732
Repurchases of common stock ................................................. (3,754) -- --
Common stock issued, net .................................................... 3,135 3,690 2,730
--------- --------- ---------
Net cash used in financing activities ....................................... (438) (2,316) (6,414)
Effect of exchange rate changes on cash ..................................... (74) (17) (327)
--------- --------- ---------
Net increase in cash and cash equivalents ................................... 34,707 43,127 26,524
Cash and cash equivalents at beginning of period ............................ 78,746 35,619 9,095
--------- --------- ---------
Cash and cash equivalents at end of period .................................. $ 113,453 $ 78,746 $ 35,619
========= ========= =========
Supplemental disclosures:
Income taxes paid ........................................................... $ 37,148 $ 32,062 $ 23,811
Interest paid ............................................................... 134 575 646
</TABLE>
See accompanying notes
21
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 29, 2000
(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. Significant intercompany transactions and
balances have been eliminated in consolidation. Certain reclassifications of
previously reported amounts have been made to conform to the current year
presentation.
Description of Business
The Company is one of the two largest distributors of dental products in
North America. The Company, a full-service, value-added supplier to dentists,
dental laboratories, institutions, physicians, and other healthcare
professionals, provides: consumable products (including x-ray film, restorative
materials, hand instruments and sterilization products); advanced technology
dental equipment; practice management software; office forms and stationery; and
related dental services. The Company markets its products and services through
more than 1,000 sales representatives and equipment specialists in the United
States and Canada.
Fiscal Year End
The Company utilizes a fifty-two, fifty-three week fiscal year ending on
the Saturday nearest April 30. Fiscal year 2000 consisted of fifty-three weeks
and fiscal years 1999 and 1998 each consisted of fifty-two weeks.
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.
Cash and Cash Equivalents
Cash equivalents consist of investments in money market funds, highly-rated
commercial paper and government securities. The maturities of these securities
at the time of purchase is 90 days or less. Short-term investments consist of
highly-rated commercial paper and government securities with maturities longer
than 90 days at the date of purchase. All cash equivalents and short-term
investments are classified as available for sale and cost approximates market
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 85% and 83% of total
inventories at April 29, 2000, and April 24, 1999, respectively.
The accumulated LIFO provision was $15,355 at April 29, 2000, and $13,991
at April 24, 1999. The Company believes that inventory replacement cost exceeds
the inventory balance by an amount approximating the LIFO reserve.
22
<PAGE>
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.
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
on a straight-line basis over a period of 20 years. Accumulated amortization at
April 29, 2000 and April 24, 1999 was $9,858 and $6,829, respectively. The
Company periodically reviews its long-lived assets, including fixed assets, for
indicators of impairment using an estimate of the undiscounted cash flows
generated by those assets. The Company's financial statements for fiscal years
1998 through 2000 reflect no such impairments.
Revenue Recognition
The Company recognizes revenues as products are shipped and when services
are rendered to the customer.
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 $7,799, $9,224 and $8,573 for fiscal years 2000, 1999
and 1998, respectively.
Deferred Credits
Negative goodwill (deferred credits) arose from 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.
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 (ESOP)
Compensation expense related to the Company's defined contribution ESOP is
computed based on the shares allocated method.
Stock-Based Compensation
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 fiscal years 2000, 1999 and 1998.
23
<PAGE>
Stock Split
On June 13, 2000, the Company declared a two-for-one stock split in the
form of a 100% stock dividend payable July 21, 2000, to shareholders of record
June on 30, 2000. 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. The Company had also
declared a three-for-two stock split in the form of a 50% stock dividend on
January 12, 1998.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares during the period. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of outstanding common shares and common share equivalents, when dilutive.
Certain director and employee stock options are not included in the April 29,
2000, and April 24, 1999 calculations because they are anti-dilutive.
The following table sets forth the denominator for the computation of basic and
diluted earnings per share. There were no adjustments to the numerator.
Fiscal Year
--------------------------
2000 1999 1998
---- ---- ----
Denominator: (in thousands)
Denominator for basic earnings per
share - weighted-average shares 67,346 66,793 66,141
Effect of dilutive securities:
Stock Option Plans 111 114 135
Employee Stock Purchase Plan 10 10 14
Capital Accumulation Plan 77 76 35
------ ------ ------
Dilutive potential common shares 198 200 184
------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted average
shares 67,544 66,993 66,325
====== ====== ======
2. Acquisitions
Effective August 26, 1997, the Company acquired Canadian Dental Supply Ltd.
("CDS") a Vancouver, British Columbia based dental distributor. Each share of
CDS common stock was converted into 12.648 shares of Company common stock. The
Company issued 337,296 shares to CDS shareholders. The transaction was accounted
for as a pooling-of-interests. The accompanying financial statements, for all
periods presented, have been restated to include the results of CDS.
24
<PAGE>
Separate results of operations for the period prior to the merger with CDS
are as follows:
Period from
April 27, 1997 to
August 26, 1997
---------------
Net Sales
---------
Patterson Dental Company $231,350
CDS 8,190
--------
Total Combined $239,540
========
Net Income
----------
Patterson Dental Company $ 11,292
CDS 31
--------
Total Combined $ 11,323
========
Other Changes in Stockholders' Equity
-------------------------------------
Patterson Dental Company $ 1,106
CDS (24)
--------
Total Combined $ 1,082
========
The Company also made the following acquisitions that affect the periods
covered by these financial statements:
<TABLE>
<CAPTION>
Entity Closing date Consideration
------ ------------ -------------
<S> <C> <C>
Guggenheim Brothers Dental Supply Co. March 27, 2000 Cash & Earn-out
Kentucky Dental Supply Company, Inc. October 25, 1999 Cash
Barr Dental Supply, Inc. June 28, 1999 Cash
J&S Dental Supply Company, Inc. February 9, 1999 Cash & Earn-out
Professional Business Systems ("PBS") February 5, 1999 428,634 shares
Dentaplex, Inc. July 27, 1998 Cash & Earn-out
Hill Dental Company, Inc. February 2, 1998 201,540 shares & Earn-out
EagleSoft, Inc. July 17, 1997 560,002 shares
</TABLE>
The above acquisitions have been recorded using the purchase method of
accounting, except PBS and EagleSoft, which were accounted for as
pooling-of-interests. The aggregate purchase price for the purchase acquisitions
was allocated as follows:
Fiscal Year
--------------------------------
2000 1999 1998
------- ------ -------
Purchase price $12,569 $1,280 $9,051
Allocated to the following:
Cash -- -- 162
Accounts receivable 4,082 271 3,383
Inventory 4,351 326 2,807
Other assets -- -- 2,946
Fixed assets 802 29 2,448
Accounts payable (2,765) -- (4,810)
Accrued expenses (336) -- (346)
-------- ------- -------
Goodwill $ 6,435 $ 654 $2,461
======== ======= =======
25
<PAGE>
The purchase price allocation for the Guggenheim acquisition is
preliminary. The Company expects that any adjustments to the preliminary
allocation would be recorded in fiscal 2001. The operating results of each of
these acquisitions are included in the Company's consolidated statements of
income from the date of each acquisition. Pro forma results of operations have
not been presented for the acquisitions since the effects of these business
acquisitions were not material to the Company either individually or in the
aggregate. The financial statements do not reflect the financial position and
results of operations prior to the date of acquisitions for the
pooling-of-interests acquisitions based on materiality.
3. Property and Equipment
April 29, 2000 April 24, 1999
-------------- --------------
Land $ 3,882 $ 3,426
Buildings 21,505 17,074
Leasehold improvements 2,042 1,631
Furniture and equipment 26,951 20,055
Data processing equipment 24,834 23,003
------- -------
79,214 65,189
Accumulated depreciation (33,192) (28,171)
------- -------
$46,022 $37,018
======= =======
4. Credit Facilities
The Company extended its bank revolving credit agreement in April 2000
which now provides for unsecured borrowings and sales of installment contract
receivables of up to a combined $100 million until April 2001. 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 29, 2000. A total of $84.6 million of installment contracts receivable
sold under the agreement were outstanding at April 29, 2000.
5. Leases
The Company leases facilities for its branch office locations, two
distribution facilities, and certain 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:
2001 $ 5,062
2002 4,613
2003 3,757
2004 3,113
2005 2,041
Thereafter 1,442
-------
Total minimum payments required $20,028
=======
Rent expense was $7,075, $6,020 and $5,293 for the years ended April 29,
2000, April 24, 1999, and April 25, 1998, respectively.
26
<PAGE>
6. Income Taxes
Significant components of the provision (benefit) for income taxes are as
follows:
Fiscal Year
-------------------------------
2000 1999 1998
------- ------- -------
Current:
Federal $37,594 $27,012 $21,722
Foreign -- -- 28
State 4,074 3,170 2,532
------- ------- -------
Total current 41,668 30,182 24,282
Deferred:
Federal (2,437) (336) 599
Foreign (481) -- --
State (223) (31) 56
------- ------- -------
Total deferred (3,141) (367) 655
------- ------- -------
Provision for income taxes $38,527 $29,815 $24,937
======= ======= =======
Significant components of the Company's deferred tax assets (liabilities)
as of April 29, 2000, April 24, 1999, and April 25, 1998 are as follows:
Fiscal Year
----------------------------
2000 1999 1998
------- ------- -------
Canadian net operating loss carryforward $ 481 $ 3,124 $ 4,807
Valuation allowance -- (3,124) (4,807)
Bad debt allowance 1,081 1,018 1,044
LIFO reserve (1,742) (975) (1,403)
Financing income (922) (2,556) (1,619)
Hospital insurance 783 423 499
Capital Accumulation Plan 1,773 845 --
Other 1,215 773 640
------- ------- -------
Total $ 2,669 $ (472) $ (839)
======= ======= =======
Income tax expense varies from the amount computed using the U.S. statutory
rate. The reasons for this difference and the related tax effects are shown
below:
Fiscal Year
-------------------------------
2000 1999 1998
------- ------- -------
Tax at U.S. statutory rate $36,048 $27,899 $22,997
State tax provision, net of
federal benefit 2,503 2,066 1,701
Effect of foreign taxes (2,130) 107 490
Tax settlements and exposures 2,350 -- --
Amortization of deferred credit (310) (310) (310)
Other 66 53 59
------- ------- -------
$38,527 $29,815 $24,937
======= ======= =======
At April 29, 2000, the Company had net operating loss carryforwards of
$1,048 for Canadian income tax purposes that expire in years 2001 through 2006.
For financial reporting purposes a valuation allowance had been recorded to
reduce the deferred tax assets to their net realizable value in prior years. The
valuation allowance has been reduced due to recognition, expiration or expected
realization of the carryforward amounts over the past two years.
27
<PAGE>
7. Segment and Geographic Data
The Company has one reportable segment, dental distribution. This segment
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:
Fiscal Year
----------------------------------
2000 1999 1998
---- ---- ----
Net Sales
Consumable dental and printed products $ 665,411 $559,032 $495,101
Equipment and software 292,018 246,380 213,971
Other 82,919 73,361 69,097
---------- -------- --------
Total $1,040,348 $878,773 $778,169
========== ======== ========
The following table presents information about the Company by geographic
area. There were no material sales between geographic areas.
Fiscal Year
------------------------------------------
2000 1999 1998
---- ---- ----
Revenues
United States $ 951,713 $803,989 $698,390
Canada 88,635 74,784 79,779
---------- -------- --------
Total $1,040,348 $878,773 $778,169
========== ======== ========
Long-lived Assets
United States $ 92,103 $ 78,868 $ 80,842
Canada 4,649 5,017 5,169
---------- -------- --------
Total $ 96,752 $ 83,885 $ 86,011
========== ======== ========
8. Shareholders' Equity
Share Repurchases
In September 1999, the Board of Directors authorized the repurchase of up
to two million shares of the Company's common stock. The Company repurchased
180,000 shares of its common stock for $3,754 during fiscal 2000.
Employee Stock Ownership Plan
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 which was subsequently converted to common
stock. At April 29, 2000, and April 24, 1999, indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheets. 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 fiscal 2000, 1999
and 1998, shares with a cost of $606, $669 and $732, respectively, were earned
and allocated to ESOP participants.
During fiscal 2000 and 1999 the ESOP was funded through Company
contributions of $606 and $669, respectively.
At April 29, 2000, 4,434,058 shares of the common stock were allocated to
participants and had a fair market value of $106,695.
28
<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 4,050,000 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 nine-year period, and expire ten years
following the date of the grant.
Director Stock Option Plan
In June 1992, the Company adopted a Director Stock Option Plan (the
"Director Plan"), pursuant to which 675,000 shares of common stock have been
reserved for the grant of non-statutory stock options to the Company's outside
directors. Options are granted at the fair market value on the date of grant and
are exercisable for a period of four years commencing one year after the date of
grant.
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
Employee Plan Director 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 26, 1997 4,050,000 -- -- 324,000 261,000 $ 6.87
Granted -- -- -- (54,000) 54,000 13.46
Exercised -- -- -- -- (63,000) 4.62
--------- ------- ------ ------- ------- ------
Balance April 25, 1998 4,050,000 -- -- 270,000 252,000 9.11
Granted (425,964) 425,964 $20.28 (54,000) 54,000 19.00
Exercised -- -- -- -- (36,000) 7.28
--------- ------- ------ ------- ------- ------
Balance April 24, 1999 3,624,036 425,964 20.28 216,000 270,000 11.33
Granted (74,298) 74,298 18.12 (72,000) 72,000 23.81
Exercised -- -- -- -- (54,000) 6.00
Canceled 45,178 (45,178) 20.28 -- -- --
--------- ------- ------ ------- ------- ------
Balance April 29, 2000 3,594,916 455,084 $19.93 144,000 288,000 $13.87
========= ======= ====== ======= ======= ======
</TABLE>
The 455,084 options outstanding under the Employee Plan have exercise
prices ranging from $17.41 to $20.28. The 288,000 options outstanding under the
Director Plan at April 29, 2000, have exercise prices ranging from $8.83 to
$23.81. At April 29, 2000, the outstanding options had a weighted average
contractual life of 6.6 years.
29
<PAGE>
Employee Stock Purchase Plan
In June 1992, the Company adopted an Employee Stock Purchase Plan (the
"Stock Purchase Plan"). A total of 675,000 shares of common stock are reserved
for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code, is
administered by the Board of Directors of the Company or by a committee
appointed by the Board of Directors. Employees are eligible to participate after
a year of employment with the Company if they are employed for at least 20 hours
per week and more than five months per year. The Stock Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed 10 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
100,716, 89,398 and 111,116 shares in fiscal 2000, 1999 and 1998, respectively.
At April 29, 2000, 54,126 shares were available for purchase under the Stock
Purchase Plan.
Capital Accumulation Plan
In 1996, the Company adopted an employee Capital Accumulation Plan (the
"CAP Plan"). A total of 3,000,000 shares of common stock are reserved for
issuance under the CAP Plan. Officers and other key employees of the Company or
its subsidiaries are eligible to participate by purchasing common stock through
payroll deductions, which must be between 5% and 25% of an employee's
compensation, at 75% of the average closing price of the common stock for the
calendar year. The shares issued are restricted stock and are held in the
custody of the Company until the restrictions lapse. The restriction period is
three years from the beginning of the plan year. Employees purchased 160,734,
155,182 and 168,690 shares of restricted stock in fiscal 2000, 1999 and 1998,
respectively. At April 29, 2000, 2,477,872 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)
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 except for the
fiscal 2000 first quarter ending July 31, 1999, which included 14 weeks. The
following table summarizes results for fiscal 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
Apr. 29, Jan. 29, Oct. 30, Jul. 31,
2000 2000 1999 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $277,142 $260,172 $248,435 $254,599
Gross profit 102,309 96,416 90,790 93,531
Operating income 27,035 25,971 22,310 22,143
Net income 17,980 17,192 14,811 14,489
Basic earnings per share $ 0.27 $ 0.25 $ 0.22 $ 0.22
Dilutive earnings per share $ 0.27 $ 0.25 $ 0.22 $ 0.21
Three Months Ended
------------------------------------------------------------
Apr. 24, Jan. 23, Oct. 24, Jul. 25,
1999 1999 1998 1998
-------- -------- -------- -------
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 $ 0.21 $ 0.21 $ 0.18 $ 0.15
</TABLE>
30
<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 11, 2000 (the "2000 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 2000 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 2000 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 2000 Proxy Statement.
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, are included in Part II, Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of April 29, 2000 and April 24, 1999
Consolidated Statements of Income for the Years Ended April 29, 2000,
April 24, 1999 and April 25, 1998
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended April 29, 2000, April 24, 1999 and April 25, 1998
Consolidated Statements of Cash Flows for the Years Ended April 29,
2000, April 24, 1999 and April 25, 1998
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 29, 2000, April 24,
1999 and April 25, 1998.
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.
31
<PAGE>
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)*
10.8 ESOP Loan Agreement dated June 15, 1990 as amended
July 13, 1992*
10.9 Amended and Restated Term Promissory Note dated
July 13, 1992*
10.10 Second Amended and Restated Contract Purchase Agreement
dated April 28, 2000 between Patterson Dental Company and
U.S. Bank National Association
10.11 Amended and Restated Credit Agreement dated April 28, 2000
between Patterson Dental Company and U.S. Bank National
Association
21 Subsidiaries
23 Consent of Independent Auditors
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.
32
<PAGE>
(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 29, 2000.
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 20, 2000
By /s/ Peter L. Frechette
--------------------------------------
Peter L. Frechette,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date
----
<S> <C> <C>
/s/Peter L. Frechette President and Chief Executive Officer and July 20, 2000
------------------------ Director (Principal Executive Officer)
Peter L. Frechette
/s/R. Stephen Armstrong Executive Vice President, Treasurer, and July 20, 2000
------------------------ Chief Financial Officer (Principal
R. Stephen Armstrong Financial and Accounting Officer)
/s/Ronald E. Ezerski July 20, 2000
------------------------ Director
Ronald E. Ezerski
/s/David K. Beecken July 20, 2000
------------------------ Director
David K. Beecken
/s/Burt E. Swanson July 20, 2000
------------------------ Director
Burt E. Swanson
/s/Andre B. Lacy July 20, 2000
------------------------ Director
Andre B. Lacy
</TABLE>
33
<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 29, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 4,096 $1,267 $ 8 (3) $1,163(1) $ 4,208
======= ====== ===== ====== =======
LIFO inventory adjustment $13,991 $1,364 $ -- $ -- $15,355
Inventory obsolescence reserve 1,955 4,058 -- 2,864(2) 3,149
------- ------ ----- ------ -------
Total inventory reserve $15,946 $5,422 $ -- $2,864 $18,504
======= ====== ===== ====== =======
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
======= ====== ===== ====== =======
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory disposed of and written off.
(3) Acquisition of Hill Dental Company, Inc. and EagleSoft, Inc. in fiscal 1998
and Professional Business Systems in fiscal 1999 and Dentaplex, Inc. in
fiscal 2000.
34
<PAGE>
INDEX TO EXHIBITS
Exhibit 10.10 Second Amended and Restated Contract Purchase
Agreement dated April 28, 2000 between
Patterson Dental Company and U.S. Bank
National Association
Exhibit 10.11 Amended and Restated Credit Agreement dated
April 28, 2000 between Patterson Dental Company and
U.S. Bank National Association
Exhibit 21 Subsidiaries
Exhibit 23 Consent of Independent Auditors
Exhibit 27 Financial Data Schedule
