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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission file number 0-16211
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, York, Pennsylvania 17405-0872
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 845-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 20, 1999, the aggregate market value of voting common stock
held by non-affiliates of the registrant, based upon the last reported sale
price for the registrant's Common Stock on the Nasdaq National Market on such
date, as reported in The Wall Street Journal, was $1,353,902,020 (calculated by
excluding shares owned beneficially by directors and executive officers as a
group from total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's Common Stock outstanding as of the
close of business on February 20, 1999 was 52,566,138.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of DENTSPLY
International Inc. to be used in connection with the 1999 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K to the extent provided herein. Except as
specifically incorporated by reference herein, the Proxy Statement is not to be
deemed filed as part of this Annual Report on Form 10-K.
PART I
Item 1. Business
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General
DENTSPLY International Inc. ("DENTSPLY" or the "Company"), a Delaware
corporation, designs, develops, manufactures and markets products in two
principal categories: dental consumable and laboratory products, and dental
equipment. Dental consumable and laboratory products include dental prosthetics,
endodontic instruments and materials, impression materials, restorative
materials, crown and bridge materials, prophylaxis paste, dental sealants,
cutting instruments, dental needles, dental anesthetics, and orthodontic
appliances. Dental equipment includes dental x-ray systems, intraoral cameras,
computer imaging systems and related software, handpieces, ultrasonic scalers
and polishers, and air abrasion systems. The Company also develops and markets
practice management software for managing the dental office and software for
maintaining a data base of information generated in the dental operatory's
clinical environment.
In January 1998, the Company purchased from Procter & Gamble its Blendax
Professional Dental Business ("Blendax"), a distributor doing business
principally in Germany, Austria and the United Kingdom. The Blendax product line
consists of rotary cutting instruments, impression materials, composite filling
material and fluoride rinses and gels.
In March 1998, DENTSPLY acquired the assets of InfoSoft, Inc. ("InfoSoft"),
a developer and marketer of full-featured, practice management software for
managing the dental office as well as maintaining a data base of information
generated in the operatory's clinical environment. InfoSoft is also one of the
largest processors of electronic dental insurance claims in the United States.
In April and December 1998, the Company purchased 100 percent of the
capital stock of GAC International, Inc. ("GAC"), an internationally recognized
orthodontic company selling a full line of high quality orthodontic appliances
to orthodontists throughout the world.
In May 1998, DENTSPLY purchased 100 percent of the capital stock of
Crescent Dental Manufacturing Co., one of the leading manufacturers in the
United States of prophy cups and brushes, amalgamators and other professional
equipment and supplies.
Also in May 1998, the Company purchased 100 percent of the capital stock of
Herpo Productos Dentarios Ltda., a leading Brazilian manufacturer of alginate
impression material, artificial teeth and dental anesthetics which are
distributed throughout South America.
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In December 1998, DENTSPLY purchased 100 percent of the capital stock of
Vereingte Dentalwerke GmbH ("VDW") and related companies. VDW manufactures
endodontic files and accessory products which are marketed worldwide.
In the second quarter of 1998, the Company recorded a $29 million pre-tax
charge for restructuring and other costs. The major portion of the charge
included costs of $26 million to rationalize and restructure our worldwide
laboratory business (primarily for closing the German tooth manufacturing
facility, which was completed by March 31, 1999). The remaining $3 million of
the charge was recorded to cover termination costs related to the arbitration
proceedings associated with the former implant product line.
The Company took a pre-tax restructuring charge of $42.5 million in the
fourth quarter of 1998 to integrate the New Image intraoral camera line into
Gendex, its major dental equipment franchise. The charge is primarily for the
write-off of intangibles including goodwill associated with the business and
also includes the closing costs associated with the discontinuance of the New
Image division in Carlsbad, California. The restructuring is expected to be
completed by the close of the second quarter of 1999.
Market Overview
Professional Dental Products
General. The worldwide professional dental industry encompasses the
diagnosis, treatment and prevention of disease and ailments of the teeth, gums
and supporting bone. DENTSPLY believes that demand in a given geographic market
for dental procedures and products varies according to the stage of social,
economic and technical development that the market has attained. Geographic
markets for DENTSPLY's dental products can be categorized into the three stages
of development described below.
The United States, Canada, Western Europe, the United Kingdom, Japan, and
Australia are highly developed markets that demand the most advanced dental
procedures and products and have the highest level of expenditure on dental
care. In these markets, the focus of dental care is increasingly upon preventive
care and specialized dentistry. In addition to basic procedures such as the
excavation and filling of cavities and tooth extraction and denture replacement,
dental professionals perform an increasing volume of preventive and cosmetic
procedures, including periodontia (the treatment of the structure supporting the
teeth), endodontia (the revitalization of teeth that would otherwise require
extraction), orthodontia (the movement and realignment of teeth for improved
function and aesthetics), gnathology (the treatment of temporomandibular joint
(TMJ) dysfunction and occlusive modification), implantology (the insertion of
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prosthetic devices to provide support for partial or full dentures) and cosmetic
dentistry. These markets require varied and complex dental products, such as
advanced cleaning and scaling equipment and related solutions, light-cured
bonding and restorative compounds, precision-molded and customized crowns,
bridges, orthodontic appliances, bone grafting materials, implants and other
prosthodontic devices, materials and instruments used in endodontic procedures,
and aesthetically accurate stains and tints. These markets also utilize
sophisticated diagnostic and imaging equipment, and demand high levels of
attention to protection against infection and patient cross-contamination.
In certain countries in Central America, South America and the Pacific Rim,
dental care is often limited to the excavation and filling of cavities and other
restorative techniques, reflecting more modest per capita expenditures for
dental care. These markets demand diverse products such as high and low speed
handpieces, restorative compounds, finishing devices and custom restorative
devices.
In the People's Republic of China, India, Eastern Europe, the countries of
the former Soviet Union, and other developing countries, dental ailments are
treated primarily through tooth extraction and denture replacement. These
procedures require basic surgical instruments, artificial teeth for dentures and
bridgework, and anchoring devices such as posts.
The Company offers products and equipment for use in markets at each of
these stages of development. The Company believes that as each of these markets
develops, demand for more technically advanced products will increase. The
Company also believes that its recognized brand names, high quality and
innovative products, technical support services and strong international
distribution capabilities position it well to take advantage of any
opportunities for growth in all of the markets that it serves.
United States
The market for professional dental products in the United States has
experienced steady growth in recent years. Statistics published by the U.S.
Department of Health and Human Services indicate that annual United States
spending on dental products and services increased from $39.5 billion to $50.6
billion from 1993 to 1997, or 6.4% per annum.
The Company believes that the United States market will continue to be
influenced by favorable demographic trends, increasing coverage of dental care
by private insurance and government programs, and an intensifying focus on
preventive dental care. The percentage of the United States population over age
65 is expected to more than double by the year 2035, to 20.5%, and this segment
of the population commands a relatively high level of discretionary income. The
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Company believes that as the number of older, more affluent Americans increases,
the demand for restorative and cosmetic dental procedures will increase as these
individuals seek to retain their natural teeth and improve their appearance.
The Company also believes that the United States market will continue to
demand products which reduce the risks of infection and patient
cross-contamination. This demand reflects increasing government regulation,
professional practice guidelines and public attention focused on preventing the
transmission in the dental office of infectious diseases such as hepatitis-B and
the virus that causes acquired immune deficiency syndrome. The Company offers
products to address the growing market for infection control products, such as
sterilizable dental handpieces and cutting instruments, single-use prophylaxis
pastes, disposable prophy angles and air-water syringe tips, and infection
control barriers, and intends to continue to develop and acquire products to
address this market.
DENTSPLY expects insurance coverage of dental care to play an important
role in the United States market. It is generally believed that approximately
40% of the United States population is covered by some form of dental insurance.
While insurance covers a significant portion of expenditures for dental products
and services, the Health Care Finance Review indicates that, in 1997,
approximately 50% of dental expenditures were paid for directly by the consumer.
Products
DENTSPLY's two principal dental product lines are consumable and laboratory
products, and equipment. These products are produced by the Company in the
United States and internationally and are distributed throughout the world under
some of the most well-established brand names and trademarks in the industry,
including ASH(R), CAULK(R), CAVITRON(R), CERAMCO(R), DENTSPLY(R), DETREY(R),
GENDEX(R), MIDWEST(R), R&R(R), RINN(R), TRUBYTE(R), MAILLEFER(R), PROFILE(R),
THERMAFIL(R), ACUCAM(R), SANI-TIP(R), OVATION(TM), ANTAEOUS(R), BEUTELROCK(R)
and ZIPPERER(R). Sales of the Company's professional dental products accounted
for approximately 95% of DENTSPLY's consolidated sales for 1998, 1997 and 1996,
respectively.
Consumable and Laboratory Products. Consumable and laboratory products
consist of dental sundries used in dental offices in the treatment of patients
and in dental laboratories in the preparation of dental appliances, such as
crowns and bridges. The Company manufactures approximately 1,200 different
consumable and laboratory products marketed under more than 70 brand names.
Consumable and laboratory products include:
Resin-Based and Porcelain Artificial Teeth: Artificial teeth replace
natural teeth lost through deterioration, disease or injury. The Company's
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artificial teeth are marketed under the TRUBYTE(R) and PORTRAIT(R) IPN(R)
brand names, among others, and are produced by the Company in York,
Pennsylvania, Brazil and China in some 15,000 combinations of shapes, sizes
and shades.
Impression Materials: Impression materials are used to make molds of
teeth for fitting crowns, bridges and dentures. DENTSPLY's JELTRATE(R),
BLUEPRINT(TM), REPROSIL(R) and AQUASIL LV Smart Wetting Impression Material
are designed to increase the rate of successful impressions without retakes
and to set quickly to minimize patient discomfort.
Restorative Materials: Restorative materials are used in sealing,
lining and filling excavated tooth cavities and repairing broken or damaged
teeth, and include amalgams, bonding agents, light-cured composites and
glass ionomer filling materials for more aesthetic restorations. DENTSPLY'S
SUREFIL(TM) High Density Composite Restorative is condensable, just like
amalgam and offers true amalgam-like packability with the aesthetics of a
composite or tooth-colored filling material. SUREFIL(TM) exhibits a natural
appearance but, unlike currently available composites, does not need to be
placed in multiple increments, therefore saving valuable time for the
dentist. These features, combined with fluoride release, assure both the
dentist and patient of strong, long lasting and esthetically pleasing
posterior restorations. In addition, its wear rates are equal to or less
than an amalgam restoration. The Company's DYRACT(R) AP is a patented,
single component restorative material featuring simplicity in delivery
combined with excellence in restorative results. Formulated with a resin
mix, it delivers the compressive strength of a hybrid composite. Due
to its wear resistance and strength, DYRACT(R) AP is indicated for
all classes of cavities. DYRACT(R) Flow is an easy handling flowable
compomer restorative with excellent adaption to tooth structures;
sustained, rechargeable fluoride release; ideal flow consistency for air
abrasion procedures; and availability in seven popular shades. The
Company's PRISMA(R) AP.H(R), PRISMA(R) TPH(R) and TPH SPECTRUM(TM)
universal composite materials permit restorations to be performed on either
the anterior or posterior teeth using the same material. PRINCIPLE(TM)
cement delivers high strength, low solubility and the best dimensional
stability of the recent generation of cements. These properties are
combined with self adhesion, ease of use and high sustained, rechargeable
fluoride release of traditional glass ionomers. Added photo initiators
allow PRINCIPLE(TM) cement to be dual cured, providing "on command", easy
cleanup. PRIME & BOND(R) NT (Nano Technology) is a revolutionary dental
adhesive material that incorporates the use of nanofillers which are 100
times smaller than traditional fillers and have the perfect size to
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penetrate the typical micro-sized keyhole etch pattern of enamel as well as
the smallest dentin channels. These tiny particles support the natural
components of dentin while building the foundation for a perfect link
between tooth structure and restorative materials. PRIME & BOND(R) NT is a
true one coat liquid adhesive system offering the dentist reduced procedure
time coupled with excellent physical properties. It can be used in
composite or compomer tooth restorations, cementation procedures, adhesive
repairs and as an adhesive cavity varnish. DENTSPLY also markets the
DISPERSALLOY(R), UNISON(R) and MEGALLOY(R) lines of restorative amalgams;
and DELTON(R) and DELTON(R) PLUS (with fluoride release) brand dental
sealants.
Crown and Bridge Porcelains and Ceramics: These porcelain and ceramic
products are used by dental laboratories in making crowns, bridges, inlays
and onlays for restorative dental procedures, where aesthetics are
particularly important, and to provide functional biting and
chewing surfaces that appear and feel natural. The Company produces
specialty crown and bridge porcelain materials and fully automatic
programmable porcelain furnaces, as well as castable ceramic materials,
used by dental laboratories. Product offerings include the CERAMCO(R) line,
and in Europe, the DETREY(R) CARAT(R) line of specialty crown and bridge
porcelain products for use as fixed prosthetics. FINESSE(TM) Porcelain from
Ceramco, features superb shade matching and permits the dental laboratory
to fire restorations with extraordinary aesthetics. FINESSE(R) Porcelain
restorations also allow dentists to adjust and repolish at chairside
without reglazing. FINESSE(TM) All Ceramic provides superior wear
characteristics, kindness to opposing detition and chair side
polishability on a ceramic core. The translucent fluorescent ceramic
substructure helps optimize esthetics of DENTSPLY's low fusing porcelains.
Endodontic Instruments and Materials: These products are used in root
canal treatment of severely damaged or decayed teeth. Through its
Maillefer, DENTSPLY Endodontics and VDW subsidiaries, the Company has an
extensive endodontic product offering including broaches, files, and other
endodontic materials and instruments. The SUREFLEX(R) Nickel Titanium File
features superior flexibility and shape memory which allows the instrument
to follow the path of the root canal. The Company's PROFILE(R) SERIES 29(R)
line of endodontic files offer a standard 29 percent increase between the
tip diameters of each size instrument for a smooth, progressive enlargement
from one file to the next. PROFILE(R) .04 TAPERS(R) feature non-standard
tapers constructed from super-flexible nickel titanium for use in a
controlled, slow-speed, high-torque rotary dental handpiece. PROFILE(R) GT
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Rotary Engine Driven Nickel Titanium Endodontic Files are specifically
designed with unparalleled strength and flexibility to simplify root canal
operations, by giving dentists an automated method to achieve the
clinically necessary root canal funnel shape. They are used in conjunction
with PROFILE(R) .04 TAPERS(R) to efficiently create a predefined taper.
THERMASYSTEM(R) PLUS includes THERMASEAL(R) PLUS, a patented root canal
filling material which is fast, effective and tissue- friendly and the
THERMAPREP(R) PLUS Oven which cuts required heating time for plastic
THERMAFIL(R) PLUS Obturators from up to seven minutes to as little as
seventeen seconds. THERMASYSTEM(R) PLUS provides a three dimensional root
canal fill in a fraction of the time it takes for traditional lateral
condensation procedures. Pro Root MTA(TM) is a root repair material that
uses water based chemistry which allows for normal setting in the presence
of moisture. It out performs other material in providing a stable barrier
to bacterial and fluid leakage. Pro Root MTA(TM) is unlike any other root
canal repair material, in that in many cases where a tooth was previously
considered a lost cause, it may now be saved. GLYDE FILE PREP(TM) is a new
root canal therapy gel used to facilitate the cleaning and shaping of the
root canal. Used as a lubricant and irrigating agent, it lifts debris
coronally while it cleans and lubricates. It offers two distinct
advantages. First, the packaging respects asepsis concerns. The disposable
syringe tips eliminate the possibility of cross contamination and allow for
clean, single-dose dispensing. Second, GLYDE FILE PREP(TM) has a gel-like
consistency that clings better to files. This improved consistency makes
its placement in the canal easier and more convenient. It works by
effervescing when it reacts with sodium hypochlorite. The resulting
bubbling effect lifts dentinal mud and necrotic tissue for easy removal. It
also encourages lightening of the tooth if discloration exists from
non-vitality. The use of sodium hypochlorite promotes internal bleaching of
the tooth. This process is enhanced by the release of oxygen from the
carabamide peroxide.
Protective Supplies: These products are designed to ameliorate
possible sources of patient cross-contamination of infectious disease, and
include RITE-ANGLE(R) and NUPRO(R) Disposable Prophy Angles (disposable
mechanical devices used by dentists and hygienists to clean and polish
teeth), hand cleansers, disposable barriers, enzymatic cleansers, needle
stick prevention devices and disposable air-water syringe tips. The
SANI-TIP(R) Disposable Air-Water Syringe Tip features a central water
channel encircled by six separate air channels. This innovative design,
when coupled with a SANI-TIP(R) adaptor, produces precise separation or
atomization of air and water while its clear cellulose- based plastic does
not obstruct the practioner's vision and allows office staff to determine
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if a tip was previously used.
Dental Cutting Instruments: The Company distributes
MIDWEST(R) carbide and specialty burs. Regular carbide burs are the most
commonly used dental cutting instruments in the North American market.
Carbide burs mounted in handpieces are used as milling tools. While these
burs are primarily used for cavity excavation, the variety of available
shapes allows for alternative uses such as limited trimming and finishing
techniques. Specialty burs are designed to cut and remove metal alloy
dental restorations, to produce smooth surfaces on composite materials,
amalgams, gold, enamel and dentin, and for gross reduction of tooth anatomy
in preparation for fitting crowns and normal cavity excavations.
Tooth Whitener: DENTSPLY also offers a tooth whitening system. The
NUPRO(R) Gold Tooth Whitening System is a complete, professionally
administered program. Patients receive a tooth whitening system in a
convenient, easy-to-use take home kit. Clinical studies for this innovative
product showed that teeth averaged eight shades whiter which far exceeds
the American Dental Association recommendation which states that whiteners
must change teeth by a least two shades.
Other Consumable and Laboratory Products: Other products produced by
the Company for use in dental offices and laboratories include the
VERTEX(R) disposable articulator used in dental laboratories to simulate
the dynamic movement of teeth against one another; pre-sterilized dental
needles in a variety of gauges and lengths; and NUPRO(R) prophylaxis paste
that is used in cleaning and polishing teeth. NUPRO(R) Prophy Paste BUBBLE
EXTREME(TM) is a new "big bubble" bubble gum flavor. This completes the
seven flavors NUPRO(R) Prophy Paste line which has been a favorite in the
dental office for years for its excellent stain removal, superior polishing
and great flavors.
Dental Equipment. DENTSPLY's dental equipment product lines include high
and low speed handpieces, intraoral lighting systems, ultrasonic scalers and
polishers, x-ray systems and related support equipment and accessories, and air
abrasion systems.
Handpieces: Under the MIDWEST(R) brand name, DENTSPLY manufactures and
distributes a line of high-speed and low-speed air-driven handpieces and
intraoral lighting systems. High-speed handpieces are the primary
instruments utilized by dentists for restorative, prosthodontic and
aesthetic procedures. Low-speed handpieces may also be used in these
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procedures and in procedures which require more control and higher torque,
such as removal of soft decay, tooth cleaning and polishing, and chairside
adjustment of dentures. Handpiece intraoral lighting systems supply light
to the fiber optic bundles in the handpieces through tubes that also
provide air and water to the handpiece. Midwest's RDH(R) Hygienist
Handpiece is a more comfortable, ergonomically sound and lightweight
handpiece for the dental hygienist. Its one piece "twist and click"
connection avoids cumbersome sterilization protocols and provides faster
handpiece changes.
Air Abrasion Unit: The AIRTOUCH(TM) Cavity Preparation System is an
air-abrasion unit that delivers aluminum oxide particles with pressurized
air to cut tooth structure. This unit features directed spray control, an
evacuation system to safely remove the powder from the oral cavity and an
ergonomically designed handpiece. The system is monitored by a highly
sophisticated software program which provides dentists with simple
instructions for basic use and maintenance. The need for anesthetic is
absent from many procedures when using the AIRTOUCH(TM) Cavity Preparation
System and there is a lower level of vibration, pressure and noise when
compared with traditional cavity preparation methods.
Ultrasonic Scalers and Polishers: DENTSPLY manufactures and
distributes the CAVITRON(R) SPS(TM) Ultrasonic Scaler (which uses
ultrasonic waves to remove hardened tooth calculus which results from the
interaction of plaque, saliva and food particles). SPS(TM) stands for
Sustained Performance System, a patent-pending technology which acts much
like an automobile's cruise control that measures tip motion and
compensates for reduction in tip motion once the insert tip contacts the
tooth surface. By doing this, SPS(TM) provides more power for improved
scaling efficiency and permits the dentist to set the power control at a
lower level, providing a more comfortable scaling procedure for the
patient. Additional product offerings include the CAVITRON(R) JET with
SPS(TM) Technology (which combines both ultrasonic scaling and air
polishing prophylaxis in one multi-function unit) and the PROPHY-JET(R) 30
Air Polishing Prophylaxis Unit (which cleans, polishes and buffs the tooth
surface after scaling is completed). DENTSPLY manufactures a variety of
inserts for use with its ultrasonic prophylaxis units. The FOCUSED
SPRAY(TM) Insert brings water directly to the instrument tip and focuses
water where it is most needed. The SLIMLINE(R) Ultrasonic Insert is 40
percent thinner than standard ultrasonic inserts and allows subgingival
ultrasonic instrumentation at depths up to 7 mm. The FSI(R) SLIMLINE(R)
combines the best features of the
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FOCUSED SPRAY(TM) Insert and the SLIMLINE(R) Ultrasonic Insert.
Dental X-Ray Systems: The Company offers a full line of
dental x-ray equipment for intraoral, panoramic and cephalometric
procedures. Intraoral films provide a view of a particular area of tooth
and jaw structure. Panoramic x- rays utilize a moving x-ray tube and
provide an image of the entire oral cavity, an image that is particularly
valuable to oral surgeons and orthodontists. The ORTHORALIX(R) 9000
panoramic x-ray system comes with a mechanical drive and advanced
microprocessor control which minimizes spinal shadow for sharp detail
throughout the x-ray film. A scientifically derived, software controlled
motion path ensures proper density, contrast and sharpness on any size
patient. Cephalometric systems permit precise, repeatable positioning of
the patient's skull so that images taken at different times can be
compared. The Company markets a real time, digital video x-ray system,
VISUALIX(TM). This system uses a solid state, intraoral x-ray sensor and
associated computer which allows the dentist to produce radiographic images
without using film. X-rays generated by a standard system strike the
sensor. The image is then displayed on a computer screen, where it can be
enlarged, enhanced and manipulated. The image may also be stored for future
retrieval. The extremely sensitive sensor provides excellent image quality
with a significantly lower x-ray dosage compared to film. The DENOPTIX(R)
Digital Imaging System is a patented, digital x-ray imaging product
compatible with the installed base of both intraoral and panoramic units.
This system uses storage phosphor imaging technology to create digital
x-ray images on imaging plates. These imaging plates are thin and flexible
and are available in every intraoral and panoramic size. They are reusable,
do not require chemical processing like conventional film, and allow the
dentist to reduce the amount of radiation to the patient by as much as 90%.
When placed in a laser scanner, the information on the imaging plate is
converted to a digital image via a computer. Imaging software is then used
to enhance the image through magnification, sharpening, inverting,
reversing, adding color or embossing for simulated three-dimensional depth.
The DENOPTIX(R) Ceph System is designed to produce superior digital images
for cephalometric, panoramic and intraoral x-ray systems. It will
especially benefit orthodontists and oral surgeons in planning their
treatment. The DENOPTIX(R) Ceph System is compatible with most software
used for treatment planning and practice management. Both VISUALIX(TM) and
DENOPTIX(R) digital imaging systems use VIXWIN 32 Software, a 32 bit
imaging software which enhances the features of both systems.
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X-Ray Support Equipment: Under the RINN(R) brand name, DENTSPLY
manufactures and distributes x-ray film mounts, film holders and related
equipment and accessories. X-ray film mounts are used as organizing,
storage and retrieval holders for dental x-ray films. Film holders are film
positioning devices used in taking dental x-ray films which ensure the
alignment of the x-ray beam to the intraoral film. Equipment and
accessories include film viewers, film duplicators, chair-side darkrooms,
patient aprons, developing chemicals and x-ray collimating devices.
The GXP(R) Processor, which develops intraoral, panoramic, and
cephalometric x-ray film, features a closed chemical recirculation system
so that potentially environmentally hazardous solutions may be disposed of
properly. Film enters and exits in the front of the processor, thereby
allowing placement of the unit flush against a wall to conserve space.
The Company offers SOFTDENT(R) practice management software through its
InfoSoft division. This fully integrated software is used in managing both the
dental "front" office as well as in maintaining a data base of information
generated in the operatory's clinical environment. SOFTDENT(R) is used in more
than 11,000 dental offices throughout the United States. The InfoSoft division
is also one of the leading processors of electronic dental insurance claims in
the United States. InfoSoft also provides statement preparation and mailing at a
substantial savings over what dentists can do on their own.
DENTSPLY also supplies specialty chemical binders, refractory particles,
investment mold materials and related products to the precision investment
casting industry, which produces metal parts of complex geometry and "near net"
shapes requiring little or no subsequent machining or finishing. Marketing,
Sales and Distribution
The market for DENTSPLY's dental products is primarily comprised of
dentists, dental hygienists, dental assistants, dental laboratories and dental
schools. DENTSPLY focuses its primary marketing efforts on the dental
professionals who are the end users of its products. DENTSPLY employs highly
trained, product-specific sales and technical staffs to provide comprehensive
marketing and service tailored to the particular sales and technical support
requirements of its customers. DENTSPLY's marketing efforts seek to capitalize
on the strength of the Company's brand names and international infrastructure to
expand sales of new and existing products throughout the world, including
emerging dental markets in the Pacific Rim, Central and South America and
Eastern Europe.
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DENTSPLY's product-specific sales force is divided into domestic and
foreign field selling organizations, each of which is responsible for
maintaining contact with both dealers and dental professionals. The dental sales
force includes approximately 350 domestic representatives, approximately 450
international representatives and approximately 50 telemarketers who support the
domestic representatives. This sales force is further divided into product-based
teams. Each specialized sales force tailors its sales strategy to the particular
sales and technical support requirements of its customers. Sales personnel
attend over 100 dental trade shows each year where the Company's products are
exhibited to dental professionals and dealers. Sales personnel also routinely
participate with dealers to disseminate product information and conduct product
demonstrations, seminars, study groups and lectures for dental professionals. In
addition, DENTSPLY invests significant amounts in advertising in national and
international dental publications.
DENTSPLY distributes its dental products primarily through approximately
350 domestic and over three thousand foreign dealers and importers. While the
overwhelming majority of DENTSPLY's products are distributed through dental
dealers, certain highly technical products such as the Company's CERAMCO(R) line
of crown and bridge porcelain products, DENTSPLY Endodontics' instruments and
materials and GAC's orthodontic appliances are sold directly to the dental
laboratory or dentist.
The Company operates in one operating segment within the meaning
of SFAS 131. See Note 4 - "Segment and Geographic Information".
DENTSPLY also maintains ten educational facilities. The Company's
facilities in York, Pennsylvania; Burlington, New Jersey; Dreieich, Germany; and
Weybridge, England are used for training, product demonstrations and seminars
and to promote interest in and understanding of the use of DENTSPLY's dental
laboratory products. The DENTSPLY Educational Center in York provides
personalized training in both fixed and removable prosthodontic specialties.
Additional teaching facilities are maintained in Milford, Delaware; Konstanz,
Germany; Ballaigues, Switzerland; Hong Kong, China; Mexico City, Mexico and
Munich, Germany for training dental professionals in the use of consumable
dental products. The Company also offers many seminars throughout the world in
such areas as endodontics, crown and bridge porcelain and ceramics and
restoratives.
Product Development
During 1998, 1997 and 1996, approximately $18.2 million, $16.8 million and
$14.7 million, respectively, was invested by the Company in connection with the
development of new products and in the improvement of existing products.
DENTSPLY employs over 200 scientists, engineers and technicians dedicated to
12
product development. The Company believes that its product development programs
are critical in meeting market demands and achieving future growth. The Company
also sponsors independent clinical research projects aimed at developing,
adapting and testing new technologies for use in DENTSPLY products. From time to
time, the Company contracts with independent consultants and engineers to
augment efforts to develop new products.
Manufacturing and Technical Expertise
DENTSPLY believes that its manufacturing capabilities are important to its
success. The Company continues to automate its global manufacturing operations
in order to remain a low cost producer.
The manufacture of the Company's products requires substantial and varied
technical expertise. Complex materials technology and processes are necessary to
manufacture the Company's products.
The manufacture of artificial teeth and dental composites involves
expertise in polymer chemistry. A polymer is a compound of high molecular weight
derived through the combination of many smaller molecules or by the condensation
of many smaller molecules through the elimination of water or alcohol. DENTSPLY
manufactures certain lines of artificial teeth by a process that disperses the
polymeric molecules found within cross-linked polymers, thereby improving the
tooth's resistance to blanching, whitening, crazing and disintegration. Another
line of artificial teeth utilizes an ultra-high viscosity polypropylene that
significantly increases wear resistance.
Visible light-cured composites utilize a single paste that immediately
polymerizes when exposed to a light source. DENTSPLY's PRISMA(R) TPH(R)
light-cured composites contain non-radiopaque fillers of approximately .02-.08
microns in size. The small size of this filler increases the bonding power of
the composite. It also permits the material to be polished in order to more
accurately replicate the color of a natural tooth. Basic, self-cured
(self-hardened) composites are formed by combining two pastes that trigger
polymerization when reacted.
Nanofiller technology adds tiny nanofillers to PRIME & BOND(R) NT,
DENTSPLY's new one-bottle bonding agent. Nanofillers, which are 100 times
smaller than the fillers in hybrid composite, allow PRIME & BOND(R) adhesive to
thoroughly penetrate dentin tubules with only one application. Nanofillers also
fill and reinforce both the hydride layer as well as the collagen fibril which
conventional adhesives may not be able to achieve. PRIME & BOND(R) NT features
application in a one-coat technique, reducing treatment steps and chair time. It
13
has superior stress resistance, enhanced marginal integrity and is suitable for
both dentin and enamel with a strong and durable bond.
DENTSPLY's new SUREFIL(TM) light cured High Density Composite Restorative
utilizes "interlocking particle technology", developed by DENTSPLY, to
synergistically couple the proven performance of the urethane modified Bis-GMA
resin system with filler particle composition, proportion, size distribution and
morphology. This unique technology provides an equivalent alternative to
mercury-silver amalgam. SUREFIL(TM) matches the handling, strength and
durability of classic amalgam, combined with the appearance of natural
dentition. SUREFIL(TM) places, packs, sculpts and finishes remarkably similar to
amalgam.
The Company manufactures high quality endodontic instruments using
production equipment designed and manufactured in-house. In general, the
equipment used is not available on the external market.
Dental handpiece manufacturing technology requires precision machining of
component parts to extremely tight tolerances in order to accommodate the
operating speed of the air-driven turbine, which exceeds 350,000 r.p.m. in high
speed handpieces, and the wide range of applications for which the unit is used.
These tolerances require dimensional machining to as little as 15 millionths of
an inch to produce the delicate balance necessary for a quiet, smooth-running
turbine with minimal vibration. The Company utilizes "computer numerically
controlled" (CNC) machines and computer-assisted design software in its
handpiece manufacturing processes.
Production of the Company's x-ray products involves a variety of
manufacturing disciplines. For example, the manufacture of x-ray tubes requires
expertise in high-temperature metallurgy, sophisticated glass blowing
techniques, and the ability to evacuate molecular impurities from the x-ray tube
through degasification. The Company also designs and fabricates printed circuit
boards, assembles electrical harnesses, fabricates sheet metal, and engages in
precision machining, painting and high-tension coil winding in connection with
the manufacturing of its x-ray products.
Foreign Operations
The Company conducts its business in over 100 foreign countries,
principally through its foreign subsidiaries which operate 43 foreign facilities
(including 15 manufacturing operations). DENTSPLY has a long-established
presence in Canada and in the European market, particularly in Germany,
Switzerland and England. The Company also has a significant market presence in
Central and South America, Australia, China (including Hong Kong), Thailand,
India, Philippines, Taiwan, Korea and Japan. DENTSPLY has established marketing
activities in Moscow, Russia to serve the countries of the former Soviet Union.
14
In 1996, a wholly-owned subsidiary, including a manufacturing facility, was
established in the People's Republic of China. Manufacturing operations in India
also commenced in 1996. During 1998, wholly owned subsidiaries were established
in Taiwan, Korea, Colombia and Chile.
For 1998, 1997 and 1996, the Company's sales outside the United States,
including export sales, accounted for approximately 46%, 48% and 49%,
respectively, of consolidated net sales. For information about the Company's
United States and foreign sales and assets for 1998, 1997 and 1996, see Note 4
of the Notes to the Company's Consolidated Financial Statements.
As a result of the Company's significant international operations, DENTSPLY
is subject to fluctuations in exchange rates of various foreign currencies and
other risks associated with foreign trade. The impact of currency fluctuations
in any given period can be favorable or unfavorable. The impact of foreign
currency fluctuations of European currencies on operating income is partially
offset by sales in the United States of products sourced from plants and third
party suppliers located overseas, principally in Germany and Switzerland.
Competition
The Company conducts its operations, both domestic and foreign, under
highly competitive market conditions. Competition in the dental materials and
equipment industries is based primarily upon product performance, quality,
safety and ease of use, as well as price, customer service, innovation and
acceptance by professionals and technicians. DENTSPLY believes that its
principal strengths include its well-established brand names, its reputation for
high-quality and innovative products, its leadership in product development and
manufacturing, and its commitment to customer service and technical support.
The size and number of the Company's competitors vary by product line and
from region to region. There are many companies which produce some, but not all,
of the same types of products as those produced by the Company. Certain of
DENTSPLY's competitors may have greater resources than does the Company in
certain of its product offerings.
Regulation
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration (the
"FDA"). In general, if a dental "device" is subject to FDA regulation,
compliance with the FDA's requirements constitutes compliance with corresponding
15
state regulations. In order to ensure that dental products distributed for human
use in the United States are safe and effective, the FDA regulates the
introduction, manufacture, advertising, labeling, packaging, marketing and
distribution of, and record-keeping for, such products.
Dental devices of the types sold by the Company are generally classified by
the FDA into a category that renders them subject only to general controls that
apply to all medical devices, including regulations regarding alteration,
misbranding, notification, record-keeping and good manufacturing practices. The
Company believes that it is in compliance with FDA regulations applicable to its
products and manufacturing operations.
All dental amalgam filling materials, including those manufactured and sold
by the Company, contain mercury. Various groups have alleged that dental amalgam
containing mercury is harmful to human health and have actively lobbied state
and federal lawmakers and regulators to pass laws or adopt regulatory changes
restricting the use, or requiring a warning against alleged potential risks, of
dental amalgams. The FDA's Dental Devices Classification Panel, the National
Institutes of Health and the United States Public Health Service have each
indicated that no direct hazard to humans from exposure to dental amalgams has
been demonstrated to them. If the FDA were to reclassify dental mercury and
amalgam filling materials as classes of products requiring FDA premarket
approval, there can be no assurance that the required approval would be obtained
or that the FDA would permit the continued sale of amalgam filling materials
pending its determination.
The introduction and sale of dental products of the types produced by the
Company are also subject to government regulation in the various foreign
countries in which they are produced or sold. Some of these regulatory
requirements are more stringent than those applicable in the United States.
DENTSPLY believes that it is in substantial compliance with the foreign
regulatory requirements that are applicable to its products and manufacturing
operations.
Sources and Supply of Raw Materials
All of the raw materials used by the Company in the manufacture of its
products are purchased from various suppliers and are available from numerous
sources. No single supplier accounts for a significant percentage of DENTSPLY's
raw material requirements.
Trademarks and Patents
The Company's trademark properties are important and contribute to the
Company's marketing position. To safeguard these properties, the Company
maintains trademark registrations in the United States and in significant
international markets for its products, and carefully monitors trademark use
16
worldwide. DENTSPLY owns and maintains several hundred domestic and foreign
patents. The Company believes its patents are important to its business,
although no aspect of its business is materially dependent on any particular
patent.
Employees
As of March 15, 1999, the Company and its subsidiaries had approximately
6,000 employees, of whom approximately 3,225 were engaged in manufacturing
operations, approximately 1,930 were engaged in sales and distribution,
approximately 625 were engaged in finance and administration, and approximately
220 were engaged in research and product development activities. Hourly workers
at the Company's Ransom & Randolph facility in Maumee, Ohio are represented by
Local No. 12 of the International Union, United Automobile, Aerospace and
Agriculture Implement Workers of America under a collective bargaining agreement
that expires on January 31, 2000; and hourly workers at the Company's Midwest
Dental Products facility in Des Plaines, Illinois are represented by Tool & Die
Makers Local 113 of the International Association of Machinists and Aerospace
Workers under a collective bargaining agreement that expires on May 31, 2000.
The Company believes that its relationship with its employees is good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The factors described below are important risk factors. The occurrence of
any of these risks could have a material adverse effect on the Company's
business or operating results, causing actual results to differ materially from
those expressed in forward-looking statements made by the Company or its
representatives in this report or in any other written or oral reports or
presentations. These factors are intended to serve as meaningful cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995.
Rate of Growth
- --------------
The Company's ability to continue to increase revenues depends on a number
of factors, including the rate of growth in the market for dental supplies and
equipment, the ability of the Company to continue to develop innovative and
cost-effective new products, and the acceptance by dental professionals of new
products and technologies. The demand for dental services can be adversely
affected by economic conditions, healthcare reform, government regulation or
more stringent limits in expenditures by dental insurance providers. There is
also a risk that dental professionals may resist new products or technologies or
may not be able to obtain reimbursement from dental insurance providers for the
use of new procedures or equipment.
17
Acquisitions
- ------------
The Company's growth in recent years has depended to a significant extent
on acquisitions. The Company completed fourteen acquisitions in 1996, 1997 and
1998, the largest of which were Tulsa Dental Products LLC in 1996 and GAC, Inc.
and Vereingte Dentalwerke GmbH in 1998. There can be no assurance that the
Company will be able to continue to identify and complete acquisitions which
will add materially to the Company's revenues. Among the risks that could affect
the Company's ability to complete such acquisitions are competition for
appropriate acquisition candidates and the relatively small size of many such
candidates. Moreover, there can be no assurance that the Company will
successfully integrate into its operations the businesses that it acquires or
that any such integration will not take longer and cost more than anticipated.
Fluctuating Operating Results
- -----------------------------
The Company's business is subject to quarterly variations in operating
results caused by seasonality and by business and industry conditions, making
operating results more difficult to predict. The timing of acquisitions, the
impact of purchase accounting adjustments and consolidations among distributors
of the Company's products may also affect the Company's operating results in any
particular period.
Currency Translation and International Business Risks
- -----------------------------------------------------
Because approximately 40% of the Company's revenues have been generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the Company's operating results. The strength of the
U.S. dollar relative to foreign currencies can have a negative effect on the
Company's revenues and operating results. If the U.S. dollar strengthens in
relation to other currencies, the Company's revenues and operating results will
be adversely affected. In addition, approximately 50% of the Company's revenues
result from sales in markets outside of the United States. Europe has been an
important market for the Company, and although Asia and South America have not
historically been the source of significant revenues, the Company has made
investments in Asian and South American markets because it believes that
long-term future growth prospects in these geographic areas are good. Weakness
in economic conditions in Europe could have a material adverse effect on the
Company's sales and operating results, and continued economic turmoil in Asia
and South America could have a material adverse effect on the Company's future
rate of growth.
18
Margin Improvements
- -------------------
The Company strives to increase its margins by controlling its costs and
improving manufacturing efficiencies. However, there can be no assurance that
the Company's efforts will continue to be successful. Margins can be adversely
affected by many factors, including competition, product mix and the effect of
acquisitions.
Ability to Attract and Retain Personnel
- ---------------------------------------
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Year 2000
- ---------
The following information contains Year 2000 Readiness Disclosures under
the Year 2000 Information and Readiness Disclosure Act.
An issue affecting DENTSPLY and all other companies is whether computer
systems and applications will recognize and process data for the Year 2000 and
beyond. In 1995, the Company commenced an upgrade of its information technology
("IT") systems for all of its locations. A primary software was chosen to
upgrade the Company's computerized business applications to world class
standards and enable the Company to become Year 2000 compliant. Most of the
identification, planning and development phases of the Year 2000 project have
been completed. The Company is in the process of implementing the information
system upgrade with an anticipated completion date of mid-1999.
Possible Year 2000 issues not covered by the IT upgrades are being
addressed separately and may require software replacement, reprogramming or
other remedial action. The Company is engaged in a program to identify affected
systems and applications and to develop a plan to correct any issues in the most
effective manner. The Company is in the process of formulating contingency plans
to the extent necessary in fiscal 1999.
The Year 2000 initiative also presents a number of uncertainties including
the status and planning of third parties. The Company is currently surveying its
significant customers and vendors as to their Year 2000 compliance. Based on the
nature of their responses, the Company will develop contingency plans as
appropriate.
19
There is no assurance that the Year 2000 project will be completed by
mid-1999 or that Year 2000 issues not covered by the IT upgrade will not
interrupt the Company's operations and cause unanticipated costs or reduce
sales. In addition, the Company cannot be certain that its suppliers or
customers will complete Year 2000 conversions which could have a material
adverse impact on the Company's financial results.
Competition
- ------------
The worldwide market for dental supplies and equipment is highly
competitive. There can be no assurance that the Company will successfully
identify new product opportunities and develop and market new products
successfully, or that new products and technologies introduced by competitors
will not render the Company's products obsolete or noncompetitive.
Antitakeover Provisions
- -----------------------
Certain provisions of the Company's Certificate of Incorporation and
By-Laws and of Delaware law could have the effect of making it difficult for a
third party to acquire control of the Company. Such provisions include the
division of the Board of Directors of the Company into three classes, with the
three-year term of each class expiring each year, a provision allowing the Board
of Directors to issue preferred stock having rights senior to those of the
Common Stock and certain procedural requirements which make it difficult for
stockholders to amend the Company's by-laws and which preclude stockholders from
calling special meetings of stockholders. In addition, members of the Company's
management and participants in the Company's Employee Stock Ownership Plan
collectively own approximately 15% of the outstanding Common Stock of the
Company, which may discourage a third party from attempting to acquire control
of the Company in a transaction that is opposed by the Company's management and
employees.
Item 2. Properties
- -------------------
As of March 15, 1999, DENTSPLY maintains manufacturing facilities at the
following locations:
Leased
Location Function or Owned
- -------- -------- --------
York, Pennsylvania Manufacture and distribution of Owned
artificial teeth and other dental
laboratory products; export of
dental products; corporate
headquarters
20
York, Pennsylvania Manufacture and distribution of Owned
dental equipment and preventive
dental products
Des Plaines, Illinois Manufacture and assembly of dental Leased
handpieces and components and
dental x-ray equipment
Franklin Park, Manufacture and distribution of Owned
Illinois needles and needle-related
products, primarily for the dental
profession
Milford, Delaware Manufacture and distribution of Owned
consumable dental products
Las Piedras, Manufacture of crown and bridge Owned
Puerto Rico materials
Elgin, Illinois Manufacture of dental x-ray film Owned
holders, film mounts and
accessories
Maumee, Ohio Manufacture and distribution of Owned
investment casting products
Lakewood, Colorado Manufacture and distribution of Leased
bone grafting materials and
Hydroxylapatite plasma-feed
coating materials
Commerce, California Manufacture and distribution of Leased
investment casting products
Carlsbad, California Manufacture and distribution of Leased(1)
intraoral cameras and computer
imaging systems
Johnson City, Manufacture and distribution of Leased
Tennessee endodontic instruments and
materials
West Palm Beach, Manufacture and distribution of Leased
Florida endodontic instruments and
materials
Petropolis, Brazil Manufacture and distribution of Owned
artificial teeth and consumable
dental products
21
Petropolis, Brazil Manufacture and distribution of Owned
dental anesthetics
Dreieich, Germany Manufacture and distribution of Owned(2)
artificial teeth and other dental
laboratory products
Konstanz, Germany Manufacture and distribution of Owned
consumable dental products;
distribution of dental equipment
Munich, Germany Manufacture and distribution of Owned
endodontic instruments and
materials
Milan, Italy Manufacture and distribution of Leased
dental x-ray equipment
Mexico City, Mexico Manufacture and distribution of Owned
dental products
Plymouth, England Manufacture and distribution of Leased
dental hand instruments
Blackpool, England Manufacture and distribution of Leased
dental materials
Ballaigues, Manufacture and distribution of Owned
Switzerland endodontic instruments
Ballaigues, Manufacture and distribution of Owned
Switzerland plastic components and packaging
material
Le Creux, Manufacture and distribution of Owned
Switzerland endodontic instruments
Moscow, Russia Manufacture and distribution of Leased
consumable dental products
New Delhi, India Manufacture and distribution of Leased
dental products
Tianjin, China Manufacture and distribution of Leased
dental products
(1) Facility closed March 31, 1999
(2) Manufacturing discontinued March 31, 1999.
22
In addition, the Company maintains sales and distribution offices at
certain of its foreign and domestic manufacturing facilities, as well as at four
other United States locations and at 22 international locations in 17 foreign
countries. Of the 26 United States and international sites used exclusively for
sales and distribution, one is owned by the Company and the remaining 25 are
leased. The Company also maintains sales offices in various countries throughout
the world.
DENTSPLY believes that its properties and facilities are well maintained
and are generally suitable and adequate for the purposes for which they are
used.
Item 3. Legal Proceedings
- --------------------------
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that pending
litigation to which DENTSPLY is a party will not have a material adverse effect
upon its consolidated financial position or results of operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigating regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a complaint against the company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and are seeking an order for the Company to
discontinue its practices. A follow on private class action suit on behalf of
dentists was filed January 12, 1999 in the Supreme Court of the State of New
York for New York County. It is the Company's position that the conduct and
activities of the Trubyte Division do not violate the antitrust laws and any
outcome will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of March 15, 1999.
23
Name Age Position
---- --- --------
John C. Miles II 57 Chairman of the Board and Chief
Executive Officer
Gerald K. Kunkle Jr. 52 President and Chief Operating Officer
W. William Weston 51 Senior Vice President
Michael R. Crane 58 Senior Vice President
Thomas L. Whiting 56 Senior Vice President
William R. Jellison 41 Senior Vice President and Chief
Financial Officer
Brian M. Addison 45 Vice President, Secretary and
General Counsel
John C. Miles II was named Chairman of the Board effective May 20, 1998.
Prior thereto, he was Vice Chairman of the Board since January 1, 1997. He was
named Chief Executive Officer of the Company upon the resignation of Burton C.
Borgelt from that position on January 1, 1996. Prior to that he was President
and Chief Operating Officer and a director of the Company since the Merger and
of Old Dentsply commencing in January 1990.
Gerald K. Kunkle Jr. was named President and Chief Operating Officer
effective January 1, 1997. Prior thereto, Mr. Kunkle served as President of
Johnson and Johnson's Vistakon Division, a manufacturer and marketer of contact
lenses, from January 1994 and, from early 1992 until January 1994, was President
of Johnson and Johnson Orthopaedics, Inc., a manufacturer of orthopaedic
implants, fracture management products and trauma devices.
Michael R. Crane was named Senior Vice President of the following profit
centers effective February 1, 1998: Ceramco, CeraMed, Dentsply Argentina,
Dentsply Brazil, Dentsply Canada, Dentsply Mexico, DeTech, Latin American
Export, Rinn, MPL, North American Group Marketing, Preventive Care, Ransom &
Randolph and Trubyte. Effective January 1, 1999, MPL, Rinn and the 1998
acquisition, Crescent, were reassigned from Mr. Crane to Thomas L. Whiting.(1)
Mr. Crane retained responsibilities for Herpo, acquired in May 1998 along with
the remaining profit centers assigned to him effective February 1, 1998. From
January 1, 1996 until February 1, 1998, Mr. Crane was Senior Vice President,
North American Group. Prior to that he was Senior Vice President, Europe,
Mideast, Africa and Commonwealth of Independent States of the Company effective
in early 1995. Prior thereto he served as Senior Vice President, International
Operations of the Company since the Merger, and in a similar capacity with Old
Dentsply commencing in November 1989. Prior to that time, he served as Vice
President Sales/Marketing for Whaledent International, a division of IPCO
Corporation.
W. William Weston was named Senior Vice President of the following profit
centers effective February 1, 1998: DeDent, Dentsply France, Dentsply Italy,
24
Dentsply United Kingdom, L.D. Caulk, SIMFRA, SPAD and StomaDent. Effective
January 1, 1999, Mr. Weston also assumed responsibility for Dentsply Asia,
Dentsply Australia and Dentsply Japan in addition to the profit centers assigned
to Mr. Weston effective February 1, 1998. From January 1, 1996 until February 1,
1998 Mr. Weston was Senior Vice President, European Group. Prior to that Mr.
Weston served as the Vice President and General Manager of DENTSPLY's DeDent
Operations in Europe from October 1, 1990 to January 1, 1996. Prior to that time
he was Pharmaceutical Director for Pfizer in Germany.
Thomas L. Whiting was named Senior Vice President of the following profit
centers effective February 1, 1998: Dentsply Asia, Dentsply Australia, Dentsply
Japan, Gendex, Maillefer, Midwest, New Image, Tulsa Dental, Gendex Germany, and
Gendex Italy. Effective January 1, 1999, Dentsply Asia, Dentsply Australia, and
Dentsply Japan were reassigned from Mr. Whiting to Mr. Weston. Mr. Whiting
retains responsibility for GAC, InfoSoft and VDW, acquired in 1998, along with
the remaining profit centers assigned to him February 1, 1998 and Rinn, MPL and
Crescent reassigned from Mr. Crane. From early 1995 until February 1, 1998 Mr.
Whiting was Senior Vice President, Pacific Rim, Latin America and Gendex; his
responsibilities and title were expanded to encompass Tulsa Dental and New Image
upon the Company's acquisitions of those businesses. Prior to this appointment,
Mr. Whiting was Vice President and General Manager of the Company's L.D. Caulk
Division since the Merger, and prior thereto served in the same capacity with
Old Dentsply since joining Old Dentsply in 1987. Prior to that time, Mr. Whiting
held management positions with Deseret Medical and the Parker-Davis Company.
William R. Jellison was named Senior Vice President and Chief Financial
Officer of the Company effective April 20, 1998. Prior to that time, Mr.
Jellison held the position of Vice President of Finance, Treasurer and Corporate
Controller for Donnelly Corporation of Holland, Michigan since 1994. From 1991
to 1994, Mr. Jellison was Donnelly's Vice President of Financial Operations,
Treasurer and Corporate Controller. Prior to that, he served one year as
Treasurer and Corporate Controller, and in other financial management positions
for Donnelly. Mr. Jellison is a Certified Management Accountant.
Brian M. Addison has been Vice President, Secretary and General Counsel of
the Company since January 1, 1998. Prior to that he was Assistant Secretary and
Corporate Counsel since December 1994. From August 1994 to December 1994 he was
a Partner at the Harrisburg, Pennsylvania law firm of McNees, Wallace & Nurick.
Prior to that he was Senior Counsel at Hershey Foods Corporation.
(1) The reassignment of profit centers among Messrs. Crane, Weston and Whiting
was part of the implementation of a new organizational structure for the
Company's profit center locations.
25
PART II
Item 5. Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters
- -------------------
The information set forth under the caption "Supplemental Stock
Information" in Part IV of this Annual Report on Form 10-K is incorporated
herein by reference in response to this Item 5.
Item 6. Selected Financial Data
- --------------------------------
The information set forth under the caption "Selected Financial Data" in
Part IV of this Annual Report on Form 10-K is incorporated herein by reference
in response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
- -----------------------------------
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part IV of this
Annual Report on Form 10-K is incorporated herein by reference in response to
this Item 7.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
The table below provides information about the Company's market sensitive
financial instruments and includes "forward-looking statements" that involve
risks and uncertainties. Actual results cold differ materially from those
expressed in the forward-looking statements. The Company's major market risk
exposures are changing interest rates, primarily in the United States and
movements in foreign currency exchange rates. The Company's policy is to manage
interest rates through the use of floating rate debt and interest rate swaps to
adjust interest rate exposures when appropriate, based upon market conditions. A
portion of the Company's borrowings are denominated in foreign currencies which
exposes the Company to market risk associated with exchange rate movements. The
Company's policy generally is to hedge major foreign currency exposures through
foreign exchange forward contracts. These contracts are entered into with major
financial institutions thereby minimizing the risk of credit loss. The Company
does not hold or issue derivative financial instruments for speculative or
trading purposes. The Company is subject to other foreign exchange market risk
exposure as a result of non-financial instrument anticipated foreign currency
cash flows which
26
are difficult to reasonably predict, and have therefore not been included in the
table below. All items described are non-trading and are stated in U.S.
dollars.
27
Fair
There- Value
Expected Maturity Dates 1999 2001 2002 2003 after Total 12/31/98
(in thousands) -------- -------- -------- -------- ------ -------- --------
ASSETS
Forward purchase
agreements
Swiss denominated $ 7,600 $ 7,600 $ 7,600
Dollar denominated 1,200 1,200 1,254
DEBT
Current:
Dollar denominated 2,400 2,400
Average interest rates 7.0%
Hong Kong denominated 3,718 3,718
Average interest rates 6.1%
Duetschmark denominated 2,167 2,167
Average interest rates 4.1%
Non-current:
Sterling denominated 13,608 13,608
Average interest rates 7.2%
Swiss Franc denominated 16,051 16,051
Average interest rates 1.8%
Australian $ denominated 3,061 3,061
Average interest rates 5.4%
US$ denominated 100,000 100,000
Average interest rates 5.6%
Interest rate swaps 40,000 20,000 20,000 80,000 (2,579)
28
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information set forth under the captions "Consolidated Statements of
Income," "Consolidated Balance Sheets," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," "Management's Financial Responsibility" and
"Independent Auditors' Report" of KPMG LLP in Part IV of this Annual Report on
Form 10-K is incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on
- ---------------------------------------------------------
Accounting and Financial Disclosure
- -----------------------------------
Not applicable.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the captions "Election of Directors", "Section 16(a) Beneficial
Ownership Reporting compliance" and "Other Matters" in the Proxy Statement is
incorporated herein by reference in response to this Item 10.
Item 11. Executive Compensation
- --------------------------------
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management
- ----------
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the subcaptions "Compensation of
Directors", "Human Resources Committee Interlocks and Insider Participation"
and "Reports on Executive Compensation" in the Proxy Statement is incorporated
herein by reference to this Item 13.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
- ----------------------------------------------------------------
Form 8-K
- --------
Sequential
(a) Documents filed as part of this Report Page No.
-------------------------------------- ----------
1. Supplemental Stock Information 36
2. Selected Financial Data 37
3. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 38
4. Financial Statements and Supplementary
Data
--------------------------------------
The following consolidated financial
statements of the Company are filed as
part of this Annual Report on Form 10-K:
Management's Financial Responsibility 45
Independent Auditors' Report of
KPMG LLP 46
Consolidated Statements of Income
for the years ended December 31,
1998, 1997 and 1996 47
Consolidated Balance Sheets as of
December 31, 1998 and 1997 48
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 1998, 1997 and
1996 49
Consolidated Statements of Cash
Flows for the years ended
December 31, 1998, 1997 and 1996 52
Notes to Consolidated Financial
Statements 56
31
Sequential
5. Financial Statement Schedules Page No.
----------------------------- ----------
The following financial statement
schedule is filed as part of
this Annual Report on Form 10-K:
Schedule II - Valuation and qualifying 77
accounts
Financial statement schedules not
listed above have been omitted because
they are inapplicable, are not required
under applicable provisions of
Regulation S-X, or the information that
would otherwise be included in such
schedules is contained in the
registrant's consolidated financial
statements or accompanying notes.
6. Exhibits. The Exhibits listed below are filed or
incorporated by reference as part of this Annual
Report on Form 10-K.
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws, as amended (2)
4.1 364-Day and 5-Year Competitive Advance,
Revolving Credit and Guaranty Agreements
dated as of October 23, 1997 among the
Company, the guarantors named therein,
the banks named therein, the Chase
Manhattan Bank as Administrative Agent,
and ABN Amro Bank, N.V. as Documentation
Agent. (11)
10.1 1992 Stock Option Plan adopted May 26,
1992 (4)
10.2 1993 Stock Option Plan (2)
10.3 1998 Stock Option Plan (1)
10.4 Nonstatutory Stock Option Agreement
between the Company and Burton C.
Borgelt (3)
10.5 (a) Employee Stock Ownership Plan as amended
effective as of December 1, 1982,
restated as of January 1, 1991 (7)
(b) Second amendment to the DENTSPLY
Employee Stock Ownership Plan (10)
32
(c) Third Amendment to the DENTSPLY
Employee Stock Ownership Plan
10.6 (a) Retainer Agreement dated December 29,
1992 between the Company and State Street
Bank and Trust Company ("State Street")
(5)
(b) Trust Agreement between the Company and
State Street Bank and Trust Company dated
as of August 11, 1993 (6)
(c) Amendment to Trust Agreement between the
Company and State Street Bank and Trust
Company effective August 11, 1993 (6)
10.7 Employment Agreement dated January 1,
1996 between the Company and Burton C.
Borgelt (9)*
10.8 (a) Employment Agreement dated as of
December 31, 1987 between the Company
and John C. Miles II (5)*
(b) Amendment to Employment Agreement between
the Company and John C. Miles II dated
February 16, 1996, effective January 1,
1996 (9)*
10.9 Employment Agreement dated as of December
31, 1987, as amended as of February 8,
1990, between the Company and Leslie A.
Jones (5)*
10.10 Employment Agreement dated as of December
10, 1992 between the Company and Michael
R. Crane (5)*
10.11 Employment Agreement dated as of December
10, 1992 between the Company and Edward
D. Yates (5)*
10.12 Employment Agreement dated January 1,
1996 between the Company and W. William
Weston (9)*
10.13 Employment Agreement dated January 1,
1996 between the Company and Thomas L.
Whiting (9)*
10.14 Employment Agreement dated October 11,
1996 between the Company and Gerald K.
Kunkle Jr. (10)*
10.15 Employment Agreement dated April 20,
1998 between the Company and William R.
Jellison
10.16 Employment Agreement dated September 10,
1998 between the Company and Brian M.
Addison
10.17 Midwest Dental Products Corporation
Pension Plan as amended and restated
effective January 1, 1989 (7)*
33
10.18 Revised Ransom & Randolph Pension Plan,
as amended effective as of September 1,
1985, restated as of January 1, 1989 (7)*
10.19 DENTSPLY International Inc. Directors'
Deferred Compensation Plan effective
January 1, 1997 (10)*
10.20 Asset Purchase and Sale Agreement, dated
January 10, 1996, between Tulsa Dental
Products, L.L.C. and DENTSPLY
International Inc. (8)
10.21 Supplemental Executive Retirement Plan
effective January 1, 1999
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- -------------------
* Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-52616).
(5) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993, File No. 0-16211.
(6) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 0-16211.
(7) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
December 31, 1994, File No. 0-16211.
(8) Incorporated by reference to exhibit included in the
Company's Current Report on Form 8-K dated January 10,
1996, File No. 0-16211.
(9) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-16211.
34
(10) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 0-16211.
(11) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 0-16211.
Loan Documents
The Company and certain of its subsidiaries have entered into various loan
and credit agreements and issued various promissory notes and guaranties of such
notes, listed below, the aggregate principal amount of which is less than 10% of
its assets on a consolidated basis. The Company has not filed copies of such
documents but undertakes to provide copies thereof to the Securities and
Exchange Commission supplementally upon request.
(1) Master Grid Note dated November 4, 1996 executed in favor of The Chase
Manhattan Bank in connection with a line of credit up to $20,000,000
between the Company and The Chase Manhattan Bank.
(2) Agreement dated December 19, 1997 between Midland Bank PLC and Dentsply
Limited for 2,500,000 pounds.
(3) Promissory Note dated August 14, 1998 in the principal amount of $6,000,000
of the Company in favor of First Union National Bank.
(4) Credit Agreement dated September 14, 1998 between Dentsply Canada Limited
("DCL") and Bank of Montreal for C$3,500,000.
(5) Promissory Note dated December 1, 1995 in connection with a line of credit
up to $20,000,000 between the Company and Mellon Bank.
(6) Form of "comfort letters" to various foreign commercial lending
institutions having a lending relationship with one or more of the
Company's international subsidiaries.
(7) Unsecured Note dated June 26, 1998 between the Company and Harris Trust and
Savings Bank in the principal amount of $500,000.
(b) Reports on Form 8-K
-------------------
The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1998.
* * * * * *
35
Supplemental Stock Information
- ------------------------------
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high and low sale prices
of the Company's common stock for the periods indicated as reported on the
NASDAQ National Market (after giving effect to the two-for-one stock split
effective on October 29, 1997):
Market Range of Common Stock Cash
---------------------------- Dividend
1998 High Low Declared
- ---- -------- -------- --------
First Quarter $35-1/4 $26-1/4 $.05125
Second Quarter 34-3/4 23-1/4 .05125
Third Quarter 26-3/4 21-1/4 .05125
Fourth Quarter 28 20 .05625
1997
- ----
First Quarter $27-1/2 $23-3/8 $.04625
Second Quarter 26-3/16 22-5/16 .04625
Third Quarter 28-15/16 24-5/16 .05125
Fourth Quarter 31-3/4 26-1/8 .05125
1996
- ----
First Quarter $20-3/8 $18-3/4 $.04125
Second Quarter 22-3/8 20 .04125
Third Quarter 22-1/4 18-5/8 .04125
Fourth Quarter 24-1/2 20-7/8 .04625
The Company estimates, based on information supplied by its transfer agent,
that there are approximately 15,014 holders of common stock, including 553
holders of record.
36
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Statement of Income Data: (in thousands, except per share amounts)
Net sales $795,122 $720,760 $656,557 $572,028 $524,758
Gross profit 416,423 368,726 324,670 280,852 257,724
Restructuring and other costs 71,500 --- --- --- ---
Operating income from continuing operations 69,852 132,456 119,464 100,735 97,400
Income from continuing operations
before income taxes 55,101 122,006 110,960 90,017 91,662
Net income from continuing operations 34,825 74,554 67,222 53,963 54,144
Discontinued operations and extraordinary items --- --- --- --- 7,854
-------- -------- -------- -------- --------
Net income $ 34,825(1) $ 74,554 $ 67,222 $ 53,963(1) $ 61,998
======== ======== ======== ======== ========
Earnings per Common Share:
Income from continuing operations-basic $ .65 $ 1.38 $ 1.25 $ 1.00 $ .98
Net income-basic .65 1.38 1.25 1.00 1.12
Income from continuing operations-diluted .65 1.37 1.25 .99 .97
Net income-diluted .65 1.37 1.25 .99 1.11
Cash dividends declared per common share .21 .195 .17 .1538 .075
Weighted Average Common Shares Outstanding:
Basic 53,330 53,937 53,840 54,024 55,552
Diluted 53,597 54,229 53,994 54,255 56,094
Balance Sheet Data:
Working capital $128,076 $107,678 $113,547 $122,706(2) $ 92,206(2)
Total assets 895,322 774,376 667,662 582,383(2) 466,930(2)
Total debt 233,761 129,510 101,820 76,291 21,939
Stockholders' equity 413,801 423,933 365,590 315,922 299,337
Average return on stockholders' equity 19.2%(3) 18.9% 19.9% 17.9% 21.8%(4)
Other Data:
Depreciation and amortization $ 37,474 $ 32,405 $ 28,108 $ 21,488 $ 18,133(5)
Capital expenditures 31,430 27,660 20,804(5) 17,421(5) 12,504(5)
Interest expense, net 14,168 11,006 10,071 7,879 6,472
Property, plant and equipment, net 158,998 147,130 141,458 140,101 91,140
Goodwill and other intangibles, net 346,073 336,905 256,199 188,409 176,508
(1) Includes restructuring and other costs of $45.4 million in 1998 and unusual or non-recurring charges of $1.8
million in 1995.
(2) Excludes net assets of discontinued operations.
(3) Excludes income statement effect of restructuring and other costs.
(4) Excludes income statement effect of discontinued operations.
(5) Excludes discontinued operations.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements made by the Company that are forward-looking, including
without limitation, statements containing the words "plans", "anticipates",
"believes", "expects', or words of similar import may be deemed to be
forward-looking statements and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects and should be read in
conjunction with the risk factors set forth in the section "Factors That May
Affect Future Results" in item 1, part 1 of this Annual Report on Form 10-K.
Results of Operations, 1998 Compared to 1997
- --------------------------------------------
Net sales increased $74.4 million, or 10.3% from $720.8 million in 1997 to
$795.1 million in 1998. Acquisitions, net of divestitures, accounted for 7.0% of
the sales growth for the year. Base business sales were up 4.3% due to sales
increases of 7.7% in the U.S. and 2.1% in Europe, offset by a decline of 6.5% in
the Pacific Rim and Latin America. The European base business sales increase
included a decline in sales to the Commonwealth of Independent States (C.I.S.)
and a decline in the German laboratory business sales. Sales in the Pacific Rim
and Latin America were adversely impacted by the downturn in the Asian and Latin
American economies and the termination of distributors in Taiwan, Korea,
Colombia and Chile which were replaced by newly established local DENTSPLY
subsidiaries in 1998. The translation impact of exchange rate fluctuations in
Europe, Asia and Latin America had a negligible impact on sales in 1998. Base
business sales growth in other territories (including Canada, Australia and
Japan) was strong but was offset by the adverse impact of the translation effect
of the strong U.S. dollar.
Gross profit increased $47.7 million, or 12.9% due primarily to higher net
sales and an increase in the gross profit percentage in 1998. As a percentage of
net sales, gross profit increased from 51.2% in 1997 to 52.4% in 1998. Favorable
product and geographical mix, operational improvements and discontinuing the
implant product line all contributed to the improved percentage.
Selling, general and administrative ("SG&A") expenses increased $38.8
million, or 16.4%. As a percentage of sales, expenses increased from 32.8% in
1997 to 34.6% in 1998. The main reasons for the percentage increase were: a
higher expense to sales ratio for businesses acquired during 1998; higher
expenses for upgrading information systems in the United States, Europe and
Asia; bad debt provisions, principally for customers in the C.I.S.; costs
associated with establishing new local DENTSPLY subsidiaries in countries where
third party distributors have been terminated; and increased research and
development expenses.
Restructuring and other costs of $29.0 million were recorded in the second
quarter of 1998. The major component of the charge includes costs of $26.0
million to rationalize and restructure the Company's worldwide laboratory
38
business (primarily for the closure of the Company's German tooth manufacturing
facility). The restructuring is expected to be complete by the end of 1999. The
after-tax cash flow of the charge is expected to be approximately $10-12
million, most of which should occur in 1999.
In the fourth quarter of 1998, the Company took a restructuring charge of
$42.5 million primarily for the write-off of intangibles, including goodwill,
and closing costs associated with the discontinuance of the New Image division
in Carlsbad, California. Following the restructuring, certain intraoral camera
products will be sold and supported by the Gendex Dental X-ray division in Des
Plaines, Illinois.
The increase in net interest expense of $3.2 million was mainly due to debt
resulting from $106.8 million spent for acquisitions and $42.0 million to
repurchase approximately 1.8 million shares of common stock during 1998. Other
expense was $.6 million in 1998 compared to other income of $.6 million in 1997.
The change is primarily due to exchange losses in 1998 compared to a small gain
in 1997.
Income before income taxes decreased $66.9 million from $122.0 million in
1997 to $55.1 million in 1998 mainly due to the $71.5 million of restructuring
and other costs. Without these costs, income before income taxes increased $4.6
million, or 3.8%.
The effective tax rate (before restructuring and other costs) of 36.8% in
1998 compares to 38.9% in 1997. The 1998 rate reflects savings resulting from
federal, state and foreign tax planning.
Net income decreased $39.7 million due to the after-tax cost of $45.4
million for restructuring and other costs. Without these costs, net income
increased $5.7 million, or 7.6% in 1998 due to higher sales, an improvement in
the gross profit percentage and a lower effective tax rate for the Company in
1998.
Basic and diluted earnings per common share were $.65 in 1998 compared to
$1.38 basic and $1.37 diluted earnings per common share in 1997. Both basic and
diluted earnings per common share in 1998 included $.85 per common share for
restructuring and other costs. Without these costs, basic earnings per common
share increased from $1.38 in 1997 to $1.50 in 1998, or 8.7% and diluted
earnings per common share increased from $1.37 to $1.50 in 1998, or 9.5%.
Results of Operations, 1997 Compared to 1996
- --------------------------------------------
Net sales increased $64.2 million, or 9.8% from $656.6 million in 1996 to
$720.8 million in 1997. About one half of this increase was due to strong growth
in the United States from a moderate increase in base business and incremental
sales from acquisitions. The growth in the United States was partially offset by
the adverse impact of the termination of the Implant Distribution Agreement
between Core-Vent Corporation and DENTSPLY in the first quarter of 1997. In
Europe, strong growth in base business plus incremental sales from the
39
acquisitions was adversely impacted by the translation effect of the strong U.S.
dollar. Sales growth in the Pacific Rim and Latin America remained strong.
Gross profit increased $44.1 million, or 13.6% due primarily to higher net
sales. As a percentage of net sales, gross profit increased from 49.5% in 1996
to 51.2% in 1997. The percentage improved in 1997 due to better operating
performance in manufacturing facilities in both the United States and Europe and
a favorable mix of higher margin products in each major geographic region. In
1996, purchase price accounting for the acquisitions of Maillefer Instruments
S.A., Tulsa Dental Products LLC and CeraMed Dental, LLC had an adverse impact on
the gross profit percentage.
SG&A expenses increased $31.1 million, or 15.1%. As a percentage of net
sales, expenses increased from 31.3% in 1996 to 32.8% in 1997. This increase was
mainly due to the high ratio of expenses to sales for certain direct selling
businesses acquired in 1997 which typically have a high ratio of SG&A expenses
to sales; increased amortization from 1997 acquisitions; expansion of the
endodontic sales force and start-up of the group practices business unit in the
United States; continued emphasis on upgrading the information systems in the
United States and Europe; increased spending for the new China subsidiary in the
Pacific Rim; increased research and development expenses; and costs associated
with certain legal proceedings.
The increase in interest expense of $1.6 million was due to acquisition
debt, largely offset by cash generated from operations. Other income was $.6
million in 1997 compared to $1.6 million in 1996. The reduction was primarily
due to a legal settlement of $1.2 million the Company's favor in 1996.
Income before income taxes increased $11.0 million, or 10.0% from $111.0
million in 1996 to $122.0 million in 1997. Net income in 1997 was $74.6 million,
compared with $67.2 million reported in 1996, an increase of 10.9%.
Basic earnings per common share (after giving effect to the two-for-one
stock split effective on October 29,1997) of $1.38 for 1997 increased $.13 or
10.4% from $1.25 in 1996. Diluted earnings per common share of $1.37 for 1997
increased $.12, or 9.6% from $1.25 in 1996.
Foreign Currency
- ----------------
Since approximately 40% of the Company's revenues have been generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the results of operations of the Company. The impact
of currency fluctuations in any given period can be favorable or unfavorable.
The impact of foreign currency fluctuations of European currencies on operating
income is partially offset by sales in the U.S. of products sourced from plants
and third party suppliers located overseas, principally in Germany and
Switzerland.
Liquidity and Capital Resources
- -------------------------------
In January 1998, the Company purchased the assets of Procter & Gamble's
40
Blendax Professional Dental Business for approximately DM13 million or $6.9
million. In March 1998, the Company purchased the assets of InfoSoft Inc. for
approximately $8.6 million. In April and December 1998, the Company purchased
100% of the capital stock of GAC International, Inc. for approximately $26.5
million. In May 1998, the Company purchased 100% of the capital stock of Herpo
Productos Dentarios Ltda. for $7.4 million and all of the capital stock of
Crescent Dental Manufacturing Co. for $5.2 million. In December 1998, the
Company purchased all of the capital stock of Vereingte Dentalwerke GmbH and
related companies for approximately $50.9 million in cash and a deferred payment
of $.9 million. These cash transactions were funded from the Company's $175
million and $125 million revolving credit agreements and short-term bank
borrowings.
Investment activities for 1998 included capital expenditures of $31.4
million.
During 1998, the Company repurchased 1.8 million shares of its common stock
for $42.0 million. In December 1998, the Board of Directors authorized for 1999
the repurchase of up to .5 million additional shares of common stock on the open
market or in negotiated transactions. The timing and amounts of any additional
purchases will depend upon many factors, including market conditions and the
Company's business and financial condition.
At December 31, 1998, the Company's current ratio was 1.7 with working
capital of $128.1 million. This compares with a current ratio of 1.6 and working
capital of $107.7 million at December 31, 1997.
Under its revolving credit agreements, the Company is able to borrow up to
$175 million on an unsecured basis through October 2002 and $125 million through
October 1999. The $175 million facility may be extended, subject to certain
conditions, until October 2004. The $125 million 364-day facility terminates in
October 1999, but contains a one-year term-out provision and may be extended,
subject to certain conditions, for additional periods of 364 days. The revolving
credit agreements are unsecured and contain various financial and other
covenants.
Under its bank multi-currency revolving credit agreement, the Company is
able to borrow up to $25 million for foreign working capital purposes on an
unsecured basis through October 1999. The multi-currency facility contains a
one-year term-out provision and may be extended, subject to certain conditions,
for additional periods of 364 days.
The Company has unused lines of credit of $178.5 million at December 31,
1998.
The Company expects to be able to finance its cash requirements, including
capital expenditures, stock repurchases, debt service and acquisitions from
funds generated from operations and amounts available under the Revolving Credit
Agreements.
Cash flows from operating activities were $93.7 million in 1998 compared to
$94.3 million in 1997.
41
Derivative Instruments and Hedging Activities
- ---------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
This Statement is effective for fiscal years beginning after June 15, 1999,
and it may be implemented as of the beginning of any fiscal quarter after June
15, 1998. The Statement must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in contracts that were issued, acquired,
or substantially modified after December 31, 1997 (and, at the company's
election, before January 1, 1998). The transition adjustments resulting from
adopting this statement shall be reported in net income or other comprehensive
income, as appropriate, as the effect of a change in accounting principle and
presented in a manner similar to the cumulative effect of a change in accounting
principle.
The Company has not yet quantified the impacts of adopting this statement
on the financial statements or the risk management processes. Additionally, the
Company expects to adopt this standard in the first quarter of fiscal year 2000.
Start-Up Costs
- --------------
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities". SOP 98-5, which becomes effective for the fiscal year ended
December 31, 1999, sets accounting standards in connection with accounting and
financial reporting related to costs of start-up activities. This SOP requires
that, at the effective date of adoption, costs of start-up activities previously
capitalized be reported as a cumulative effect of a change in accounting
principle, and further requires that such costs incurred subsequent to adoption
be expensed. Management anticipates that adoption of SOP 98-5 will not have a
material effect on the Company's financial position or results of operations.
Year 2000
- ---------
The following discussion contains Year 2000 Readiness Disclosures under the
Year 2000 Information and Readiness Disclosure Acts.
An issue affecting DENTSPLY and all other companies is whether computer
systems and applications will recognize and process data for the Year 2000 and
beyond. The Year 2000 issue arose because many existing computer programs use
42
only the last two digits to refer to a year. These computer programs do not
recognize a year that begins with "20" instead of "19". The inability of many
computer applications to interpret the Year 2000 correctly may cause potential
business disruptions affecting all aspects of normal operations. The Year 2000
issue has global ramifications affecting not only the Company's operations but
also the operations of the Company's suppliers, vendors and customers.
In 1995, the Company commenced an upgrade of its information technology
("IT") systems for all of its locations. A primary software was chosen to
upgrade the Company's computerized business application systems to world class
standards and enable the Company to become Year 2000 compliant. The upgrade
included necessary hardware and software improvements, training, data
conversion, systems testing and implementation, and Year 2000 compliance.
Most of the identification, planning and development phases of the Year
2000 project have been completed. The Company is in the process of implementing
the information system upgrade with an anticipated completion date of mid-1999.
Work has been completed on 95% of North American, 90% of Latin American and
Asian systems, as well as 70% of European systems. To date, the Company has
spent approximately $14.5 million for the IT project. An additional $2.3 million
of spending is anticipated for 1999. These costs encompass the total upgrade of
the Company's manufacturing, distribution and financial reporting systems. The
Company has not deferred other IT projects due to its Year 2000 initiative, but
rather, the Year 2000 initiative has been part of the upgrade of its current IT
system. Possible Year 2000 issues that are not covered by the IT upgrade are
being addressed separately and may require software replacement, reprogramming
or other remedial action. The Company is engaged in a program to identify
affected systems and applications and to develop a plan to correct any issues in
the most effective manner. The Company is in the process of formulating
contingency plans to the extent necessary in fiscal 1999.
The Year 2000 initiative presents a number of uncertainties including the
status and planning of third parties. The Company is currently surveying its
significant customers and vendors as to their Year 2000 compliance. Based on the
nature of their responses, the Company will develop contingency plans as
appropriate. However, the Company has no means of assuring that external
customers and vendors will be Year 2000 compliant. The inability of third
parties to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
The Company's Year 2000 remediation efforts along with the information
system upgrade are funded from the Company's operating cash flows and its
borrowing facilities. The following table contains historical and estimated
future costs of the total IT system upgrade, which includes the Year 2000
initiative. Infrastructure and daily IT-related operating expenses have been
excluded from the reported costs.
43
Project Costs Anticipated
To Date Future Costs
------------- ------------
Capital Expenditures $ 7,697 $ 837
Expenses 6,807 1,467
-------- --------
Total $ 14,504 $ 2,304
======== ========
Euro Currency Conversion
- ------------------------
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates between
their legacy currencies and the newly established Euro currency. The legacy
currencies will remain legal tender in the participating countries between
January 1, 1999 and January 1, 2002 (the "transition period"). On January 1,
2002 the European Central Bank will issue Euro-denominated bills and coins for
use in cash transactions. On or before July 1, 2002, the legacy currencies of
participating countries will no longer be legal tender for any transactions.
The Company's various operating units which are affected by the Euro
conversion intend to keep their books in their respective legacy currency
through a portion of the three year transition period. At this time, the Company
does not expect the reasonable foreseeable consequences of the Euro conversion
to have material adverse effects on the Company's business, operations or
financial condition.
Impact of Inflation
- -------------------
The Company has generally offset the impact of inflation on wages and the
cost of purchased materials by reducing operating costs and increasing selling
prices to the extent permitted by market conditions.
44
Management's Financial Responsibility
The management of DENTSPLY International Inc. is responsible for the
preparation and integrity of the consolidated financial statements and all other
information contained in this Annual Report. The financial statements were
prepared in accordance with generally accepted accounting principles and include
amounts that are based on management's informed estimates and judgements.
In fulfilling its responsibility for the integrity of financial
information, management has established a system of internal accounting controls
supported by written policies and procedures. This provides reasonable assurance
that assets are properly safeguarded and accounted for and that transactions are
executed in accordance with management's authorization and recorded and reported
properly.
The financial statements have been audited by our independent public
accountants, KPMG LLP, whose unqualified report is presented below. The
independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the internal control structure and perform such tests and
other procedures as they deem necessary to reach and express an opinion on the
fairness of the financial statements.
The Audit Committee of the Board of Directors, consisting solely of outside
Directors, meets with the independent public accountants with and without
management to review and discuss the major audit findings, the adequacy of the
internal control structure and quality of financial reporting. The independent
accountants also have access to the Audit Committee to discuss auditing and
financial reporting matters with or without management present.
John C. Miles II Gerald K. Kunkle William R. Jellison
Chairman and President and Chief Senior Vice President and
Chief Executive Officer Operating Officer Chief Financial Officer
45
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
DENTSPLY International Inc.
We have audited the accompanying consolidated balance sheets of DENTSPLY
International Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DENTSPLY
International Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania KPMG LLP
January 21, 1999
46
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
(in thousands, except per share amounts)
Net sales $795,122 $720,760 $656,557
Cost of products sold 378,699 352,034 331,887
-------- -------- --------
Gross profit 416,423 368,726 324,670
Selling, general and administrative
expenses 275,071 236,270 205,206
Restructuring and other costs 71,500 --- ---
-------- -------- --------
Operating income 69,852 132,456 119,464
Other income and expenses:
Interest expense 15,367 12,660 11,095
Interest income (1,199) (1,654) (1,024)
Other (income) expense, net 583 (556) (1,567)
-------- -------- --------
Income before income taxes 55,101 122,006 110,960
Provision for income taxes 20,276 47,452 43,738
-------- -------- --------
Net income $ 34,825 $ 74,554 $ 67,222
======== ======== ========
Earnings per common share:
Basic $ .65 $ 1.38 $ 1.25
Diluted .65 1.37 1.25
Cash dividends declared per common share $ .21 $ .195 $ .17
Weighted average common shares outstanding:
Basic 53,330 53,937 53,840
Diluted 53,597 54,229 53,994
The accompanying Notes are an integral part of these Financial Statements.
47
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
1998 1997
Assets -------------------
Current assets: (in thousands)
Cash and cash equivalents $ 8,690 $ 9,848
Accounts and notes receivable - trade, net 134,218 114,366
Inventories 139,235 124,748
Prepaid expenses and other current assets 40,309 28,065
-------- --------
Total Current Assets 322,452 277,027
Property, plant and equipment, net 158,998 147,130
Other noncurrent assets, net 67,799 13,314
Identifiable intangible assets, net 80,537 103,513
Costs in excess of fair value of net assets
acquired, net 265,536 233,392
-------- --------
Total Assets $895,322 $774,376
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term debt $ 16,270 $ 24,005
Accounts payable 42,654 38,942
Accrued liabilities 99,427 71,563
Income taxes payable 36,025 34,839
-------- --------
Total Current Liabilities 194,376 169,349
Long-term debt 217,491 105,505
Other liabilities 48,113 43,954
Deferred income taxes 18,803 27,647
-------- --------
Total Liabilities 478,783 346,455
-------- --------
Minority interests in consolidated subsidiaries 2,738 3,988
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued --- ---
Common stock, $.01 par value; 100 million shares
authorized; 54.3 million shares and 54.2 million
shares issued at December 31, 1998 and 1997,
respectively 543 542
Capital in excess of par value 152,871 150,738
Retained earnings 324,745 301,058
Accumulated other comprehensive income (14,730) (16,720)
Employee stock ownership plan reserve (7,977) (9,497)
Treasury stock, at cost, 1.7 million and .1 million
shares at December 31, 1998 and 1997, respectively (41,651) (2,188)
-------- --------
Total Stockholders' Equity 413,801 423,933
-------- --------
Total Liabilities and Stockholders' Equity $895,322 $774,376
======== ========
The accompanying Notes are an integral part of these Financial Statements.
48
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Employee Stock Total
Common Excess of Retained Comprehensive Ownership Treasury Stockholders'
Stock Par Value Earnings Income Plan Reserve Stock Equity
---------- ------------ ----------- ----------- -------------- ---------- ------------
(in thousands)
Balance at December 31, 1995 $ 271 $149,999 $179,231 $ 3,234 $(12,536) $ (4,277) $315,922
Comprehensive Income:
Net income - - 67,222 - - - 67,222
Other comprehensive income:
Foreign currency translation
adjustment, net of $(2,960) tax - - - (7,512) - - (7,512)
--------
Comprehensive Income 59,710
--------
Exercise of stock options and
warrants - (146) - - - 1,384 1,238
Tax benefit related to stock
options and warrants exercised - 218 - - - - 218
Compensatory stock options
lapsed - (40) - - - - (40)
Repurchase of .2 million
shares of common stock - - - - - (3,825) (3,825)
Cash dividends declared, $.17
per common share - - (9,153) - - - (9,153)
Net change in ESOP reserve - - - - 1,520 - 1,520
------- -------- -------- ------- -------- -------- --------
Balance at December 31, 1996 $ 271 $150,031 $237,300 $(4,278) $(11,016) $ (6,718) $365,590
The accompanying Notes are an integral part of these Financial Statements.
49
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Employee Stock Total
Common Excess of Retained Comprehensive Ownership Treasury Stockholders'
Stock Par Value Earnings Income Plan Reserve Stock Equity
---------- ------------ ----------- ----------- -------------- ---------- ------------
(in thousands)
Balance at December 31, 1996 $ 271 $150,031 $237,300 $(4,278) $(11,016) $ (6,718) $365,590
Comprehensive Income:
Net income - - 74,554 - - - 74,554
Other comprehensive income:
Foreign currency translation
adjustment, net of $(4,839) tax - - - (12,442) - - (12,442)
--------
Comprehensive Income 62,112
--------
Exercise of stock options and
warrants - (133) - - - 5,458 5,325
Tax benefit related to stock
options and warrants exercised - 840 - - - - 840
Repurchase of forty thousand
shares of common stock - - - - - (928) (928)
Cash dividends declared, $.195
per common share - - (10,525) - - - (10,525)
Two-for-one stock split effected
in the form of a stock dividend 271 - (271) - - - -
et change in ESOP reserve - - - - 1,519 - 1,519
------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 542 $150,738 $301,058 $(16,720) $ (9,497) $ (2,188) $423,933
The accompanying Notes are an integral part of these Financial Statements.
50
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Employee Stock Total
Common Excess of Retained Comprehensive Ownership Treasury Stockholders'
Stock Par Value Earnings Income Plan Reserve Stock Equity
---------- ------------ ----------- ----------- -------------- ---------- ------------
(in thousands)
Balance at December 31, 1997 $ 542 $150,738 $301,058 $(16,720) $ (9,497) $ (2,188) $423,933
Comprehensive Income:
Net income - - 34,825 - - - 34,825
Other comprehensive income:
Foreign currency translation
adjustment, net of $732 tax - - - 1,990 - - 1,990
--------
Comprehensive Income 36,815
--------
Exercise of stock options and
warrants 1 1,227 - - - 2,586 3,814
Tax benefit related to stock
options and warrants exercised - 906 - - - - 906
Repurchase of 1.76 million
shares of common stock - - - - - (42,049) (42,049)
Cash dividends declared, $.21
per common share - - (11,138) - - - (11,138)
Net change in ESOP reserve - - - - 1,520 - 1,520
------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 $ 543 $152,871 $324,745 $(14,730) $ (7,977) $(41,651) $413,801
======= ======== ======== ======== ======== ======== ========
The accompanying Notes are an integral part of these Financial Statements.
51
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities: (in thousands)
Net income $ 34,825 $ 74,554 $ 67,222
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 17,634 15,341 14,799
Amortization 19,840 17,064 13,309
Deferred income taxes (22,084) (1,828) (3,008)
Restructuring and other costs 71,500 --- ---
Other non-cash transactions (513) 263 289
Loss on disposal of property, plant and equipment 107 559 367
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures of
businesses, effects of exchange, and restructuring
and other costs:
Accounts and notes receivable-trade, net (7,305) (13,080) (6,777)
Inventories (5,605) 1,694 256
Prepaid expenses and other current assets (3,990) (305) (4,574)
Other noncurrent assets, net 1,167 (82) 497
Accounts payable (2,932) (1,795) 472
Accrued liabilities (10,171) (483) 945
Income taxes payable 1,462 4,250 1,467
Other liabilities (193) (1,864) (2,075)
-------- -------- --------
Net cash provided by operating activities 93,742 94,288 83,189
-------- -------- --------
The accompanying Notes are an integral part of these Financial Statements.
52
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from investing activities: (in thousands)
Proceeds from disposal of Medical business --- --- 7,500
Proceeds from sale of property, plant and equipment, net 1,114 1,257 351
Capital expenditures (31,430) (27,660) (20,804)
Expenditures for identifiable intangible assets (5,247) (3,382) (3,000)
Acquisitions of businesses, net of cash acquired (103,250) (78,822) (82,181)
Other direct costs of acquisition and divestiture activities (63) (2,395) (259)
Additional consideration for prior purchased business (3,522) --- ---
Other, net --- (155) (355)
-------- -------- --------
Net cash used in investing activities (142,398) (111,157) (98,748)
-------- -------- --------
The accompanying Notes are an integral part of these Financial Statements.
53
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from financing activities: (in thousands)
Proceeds from exercise of stock options and warrants,
including tax benefit 4,721 6,165 1,456
Cash paid for treasury stock (42,049) (928) (3,825)
Cash dividends paid (10,954) (10,238) (8,893)
Increase (decrease) in bank overdrafts 2,552 886 (2,357)
Proceeds from long-term borrowings, net of deferred
financing costs 159,898 218,449 87,499
Payments on long-term borrowings (60,337) (184,524) (67,490)
Increase (decrease) in short-term borrowings (3,962) (7,605) 11,382
Decrease in employee stock ownership plan reserve 1,520 1,519 1,520
-------- -------- --------
Net cash provided by financing activities 51,389 23,724 19,292
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents (3,891) (2,626) (2,088)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,158) 4,229 1,645
Cash and cash equivalents at beginning of period 9,848 5,619 3,974
-------- -------- --------
Cash and cash equivalents at end of period $ 8,690 $ 9,848 $ 5,619
======== ======== ========
The accompanying Notes are an integral part of these Financial Statements.
54
DENTSPLY International Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1998 1997 1996
Supplemental disclosures of cash flow information: -------- -------- --------
information: (in thousands)
Interest paid $ 12,215 $ 9,024 $ 7,484
Income taxes paid 40,048 43,840 43,879
Supplemental disclosures of non-cash transactions:
Note receivable for fixed assets associated with
arbitration ruling terminating the Implant
Distribution Agreement --- 389 ---
Assumption of debt in connection with acquisitions --- 4,310 ---
The Company assumed liabilities in conjunction with the following acquisitions:
Fair Value Cash Paid for
of Assets Assets or Liabilities
Date Acquired Acquired Capital Stock Assumed
------------- ---------- ------------- -----------
(in thousands)
Vereingte Dentalwerke GmbH December 1998 (*) $50,895 (*)
Herpo Productos Dentarios Ltda. May 1998 $13,842 7,395 $ 6,447
Crescent Dental Manufacturing Co. May 1998 5,783 5,214 569
GAC, Inc. April-Dec 1998 38,439 26,485 11,954
InfoSoft, Inc. March 1998 10,497 8,645 1,852
Blendax January 1998 7,556 6,893 663
MPL Technologies, Inc. November 1997 5,452 4,425 1,027
EFOS Corporation July 1997 15,032 14,988 44
SIMFRA S.A. July 1997 8,431 5,464 2,967
New Image Industries, Inc. March 1997 35,643 10,957 24,686
DW Industries, Inc. January 1997 18,956 16,253 2,703
Laboratoire SPAD, S.A. January 1997 47,054 35,992 11,062
CeraMed Dental, LLC August 1996 5,000 5,000 0
Tulsa Dental Products LLC January 1996 78,662 75,114 3,548
(*) Allocation of the purchase price to the fair value of assets acquired and liabilities assumed
will be completed in 1999.
The accompanying Notes are an integral part of these Financial Statements.
55
DENTSPLY International Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Description of Business
- -----------------------
DENTSPLY (the "Company") designs, develops, manufactures and markets a
broad range of products for the dental market. The Company believes that it is
the world's leading manufacturer and distributor of dental prosthetics,
endodontic instruments and materials, prophylaxis paste, dental sealants,
ultrasonic scalers, and crown and bridge materials; the leading United States
manufacturer and distributor of dental x-ray equipment, dental handpieces,
intraoral cameras, dental x-ray film holders, film mounts and bone
substitute/grafting materials; and a leading United States manufacturer or
distributor of impression materials, dental operatory software systems, dental
cutting instruments and orthodontic appliances. The Company distributes its
dental products in over 100 countries under some of the most well-established
brand names in the industry. DENTSPLY is committed to the development of
innovative, high quality, cost-effective new products for the dental market.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions are
eliminated. Minority interests in net income of consolidated subsidiaries are
not material and are included in other (income) expense, net.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts and Notes Receivable-Trade
- -----------------------------------
The Company sells dental equipment and supplies primarily through a
worldwide network of distributors, although certain product lines are sold
directly to the end user. Revenue is recognized when products are shipped. For
customers on credit terms, the Company performs ongoing credit evaluation of
those customers' financial condition and generally does not require collateral
from them. Accounts and notes receivable-trade are stated net of an allowance
for doubtful accounts of $7.9 million and $4.6 million at December 31, 1998 and
1997, respectively.
56
Inventories
- -----------
Inventories are stated at the lower of cost or market. At December 31, 1998
and 1997, the cost of $15.3 million, or 11% and $14.9 million, or 12%,
respectively, of inventories was determined by the last-in, first-out (LIFO)
method. The cost of other inventories was determined by the first-in, first-out
(FIFO) or average cost method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Except for leasehold improvements, depreciation for financial
reporting purposes is computed by the straight-line method over the following
estimated useful lives: buildings - generally 40 years and machinery and
equipment - 4 to 15 years. The cost of leasehold improvements is amortized over
the shorter of the estimated useful life or the term of the lease. For income
tax purposes, depreciation is computed using various methods.
Identifiable Intangible Assets
- ------------------------------
Identifiable intangible assets include patents, trademarks, non-compete
agreements, licensing agreements, and product manufacturing rights and customer
lists which are amortized on a straight-line basis over their estimated useful
lives, ranging from 5 to 40 years. Identifiable intangible assets are stated net
of accumulated amortization of $44.2 million and $36.9 million at December 31,
1998 and 1997, respectively. Identifiable intangible assets are reviewed for
impairment whenever events or circumstances provide evidence that suggest that
the carrying amount of the asset may not be recoverable. Impairment is
determined by using identifiable undiscounted cash flows.
Costs in Excess of Fair Value of Net Assets Acquired
- ----------------------------------------------------
The excess of costs of acquired companies and product lines over the fair
value of net assets acquired (goodwill) is being amortized on a straight-line
basis over 25 to 40 years. Costs in excess of the fair value of net assets
acquired are stated net of accumulated amortization of $43.6 million and $34.0
million at December 31, 1998 and 1997, respectively. Costs in excess of fair
value of net assets acquired are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amount of the
asset may not be recoverable. Impairment is determined by using identifiable
undiscounted cash flows.
Fair Value of Financial Instruments
- -----------------------------------
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The fair
values of financial instruments approximate their recorded values.
Derivatives
- -----------
The Company's only involvement with derivative financial instruments is
forward contracts to hedge certain assets and liabilities denominated in foreign
currencies and interest rate swaps to convert floating rate debt to fixed rate.
Foreign Exchange Risk Management
- --------------------------------
The Company routinely enters into forward foreign exchange contracts to
selectively hedge assets and liabilities denominated in foreign currencies.
Market value gains and losses are recognized in income currently and the
57
resulting gains or losses offset foreign exchange gains or losses recognized on
the foreign currency assets and liabilities hedged. Determination of hedge
activity is based upon market conditions, the magnitude of the foreign currency
assets and liabilities and perceived risks. As of December 31, 1998, the Company
had contracts outstanding for the purchase of 7.9 million Swiss francs
(approximately $5.7 million), and the sale of 1.9 million Australian dollars
(approximately $1.2 million). As of December 31, 1997, the Company had contracts
outstanding for the purchase of 29.7 million Swiss francs (approximately $20.7
million) and 13.7 million French francs (approximately $2.3 million), and the
sale of 1.4 million Australian dollars (approximately $.9 million). These
foreign exchange contracts generally have maturities of less than six months and
counterparties to the transactions are typically large international financial
institutions.
Interest Rate Risk Management
- -----------------------------
In July 1998, the Company entered into interest rate swap agreements
totaling $80.0 million which converts a portion of the Company's variable rate
financing to fixed rates. The average fixed rate of these agreements is 5.7% and
fixes the rate for an average of five years.
Foreign Currency Translation
- ----------------------------
The functional currency for foreign operations, except for those in highly
inflationary economies, has been determined to be the local currency.
Assets and liabilities of foreign subsidiaries are translated at exchange
rates on the balance sheet date; revenue and expenses are translated at the
average year-to-date rates of exchange. The effects of these translation
adjustments are reported in a separate component of stockholders' equity.
Exchange gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved and
translation adjustments in countries with highly inflationary economies are
included in income. Exchange losses of $1.7 million in 1998 and $.3 million in
1996 and gains of $.3 million in 1997 are included in other (income) expense,
net.
Research and Development Costs
- ------------------------------
Research and development costs are charged to expense as incurred and are
included in selling, general and administrative expenses. Research and
development costs amounted to approximately $18.2 million, $16.8 million and
$14.7 million for 1998, 1997 and 1996, respectively.
58
NOTE 2 - EARNINGS PER COMMON SHARE
- ----------------------------------
The following table sets forth the computation of basic and diluted
earnings per common share:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands, except per share amounts)
Year Ended December 31, 1998
Basic EPS $ 34,825 53,330 $ .65
Incremental shares from assumed
exercise of dilutive options
and warrants - 267
-------- ------
Diluted EPS $ 34,825 53,597 $ .65
======== ======
Year Ended December 31, 1997
Basic EPS $ 74,554 53,937 $1.38
Incremental shares from assumed
exercise of dilutive options
and warrants - 292
-------- ------
Diluted EPS $ 74,554 54,229 $1.37
======== ======
Year Ended December 31, 1996
Basic EPS $ 67,222 53,840 $1.25
Incremental shares from assumed
exercise of dilutive options
and warrants - 154
-------- ------
Diluted EPS $ 67,222 53,994 $1.25
======== ======
NOTE 3 - BUSINESS ACQUISITIONS
- ------------------------------
In December 1998, the Company purchased 100% of the capital stock of
Vereingte Dentalwerke GmbH ("VDW") and related companies for $50.9 million with
an additional payment of $.9 million to be paid in 1999. The transaction is
valued at $57.1 million. The allocation of the purchase price to the fair value
of assets acquired has yet to be determined. Headquartered in Munich, Germany,
VDW manufactures endodontic files and accessory products, marketed worldwide
under the Antaeos, Beutelrock and Zipperer trade names. The company's Munich,
Germany production facility is a new, ultra-modern, fully automated
manufacturing facility.
In May 1998, the Company purchased 100% of the capital stock of Herpo
Productos Dentarios Ltda. ("Herpo") for $7.4 million. Herpo has a broad product
line focusing on alginate impression materials, artificial teeth and dental
anesthetics. Herpo operates a modern dental anesthetic production plant in
Bonsucesso, Brazil.
In May 1998, the Company purchased 100% of the capital stock of Crescent
Dental Manufacturing Co. ("Crescent") for $5.2 million. Crescent has a diverse
product offering and is one of the leading United States manufacturers of prophy
cups and brushes, amalgamators and other professional dental equipment and
supplies.
In April and December 1998, the Company purchased 100% of the capital
stock of GAC International Inc. ("GAC") for approximately $26.5 million. Located
59
in Islip, New York, GAC provides a full line of high quality orthodontic
products.
In March 1998, the Company purchased the assets of InfoSoft Inc.
("InfoSoft") for $8.6 million. Located in White Marsh, Maryland, the primary
business of InfoSoft is the development and sale of full-featured, dental
practice management software. The Company believes InfoSoft is one of the
largest dental practice management claims processor in the United States.
In January 1998, the Company purchased the assets of Blendax Professional
Dental Business ("Blendax") from Procter & Gamble in a cash transaction valued
at approximately DM13 million or $6.9 million. The Blendax product line consists
of rotary cutting instruments, impression materials, composite filling material
and fluoride rinses and gels.
Each 1998 acquisition was accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. Except for VDW, the purchase prices plus direct acquisition costs
have been allocated on the basis of preliminary estimates of the fair values of
assets acquired and liabilities assumed. The excess of acquisition cost over net
assets acquired of $8.9 million for Herpo, $2.6 million for Crescent, $16.2
million for GAC, $6.5 million for InfoSoft and $6.7 million for Blendax is being
amortized over 25 to 40 years. Assuming that all acquisitions had occurred on
January 1, 1997, consolidated net sales would have been $834 million for 1998
and $817 million for 1997. Consolidated pro forma net income and earnings per
common share would not have been materially different from the reported amounts
for 1998 and 1997. Such unaudited pro forma amounts are not indicative of what
the actual consolidated results of operations might have been if the
acquisitions had been effective at the beginning of 1997, nor are they
necessarily indicative of future consolidated results.
In November 1997, the Company purchased certain assets of MPL Technologies,
Inc. ("MPL"), a wholly-owned subsidiary of SoloPak Pharmaceuticals, for $4.4
million in cash. Located in Franklin Park, Illinois, MPL is a leading
manufacturer and distributor of needles and needle-related products, primarily
for the dental profession.
In July 1997, the Company purchased the dental assets of EFOS Corporation
("EFOS") for Canadian $20.7 million in a cash transaction valued at
approximately $15.0 million. Prior to acquisition, EFOS was the developer and
manufacturer of DENTSPLY's dental curing lights and amalgamators. Additionally,
the EFOS product line includes protective eyewear products, replacement parts
and curing light repair and service.
Also in July 1997, the Company purchased the outstanding capital stock of
SIMFRA S.A. ("SIMFRA") for FF32.1 million in a cash transaction valued at
approximately $5.5 million and assumption of $1.4 million of debt. Located in
Paris, SIMFRA is the exclusive importer of Maillefer Instruments, S.A. in
France.
In March 1997, the Company purchased all of the capital stock of New Image
Industries, Inc. ("New Image") for $2.00 per share or approximately $11.0
million and assumed $2.9 million of debt and other liabilities of $21.8 million.
Subsequently, assumed liabilities were increased to $32.1 million for
recognition of liabilities associated with certain legal cases. The primary
product line for New Image is intraoral cameras exclusively for the dental
market.
In January 1997, the Company purchased the assets of DW Industries, Inc.
("DW") in a cash transaction valued at approximately $16.3 million and an
60
earn-out based on future sales growth of the business. No payment of earn-out
has been required to date. Through this acquisition the Company acquired the
leading disposable air-water syringe tip for use in clinical dental office
procedures.
Also in January 1997, the Company purchased all of the outstanding capital
stock of Laboratoire SPAD, S.A. ("SPAD") for FF199.5 million or $36.0 million in
cash and a deferred payment of FF 21.5 million or $3.5 million which was paid in
January 1998. SPAD is a leading French distributor of dental anesthetic and
other dental products.
Each 1997 acquisition was accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of the fair values of assets acquired and liabilities
assumed. The excess of acquisition cost over net assets acquired of $4.2 million
for DW, $33.5 million for SPAD, $3.8 million for SIMFRA, $2.8 million for EFOS
and $.1 million for MPL is being amortized over 25 years. The excess of
acquisition cost over net assets acquired of New Image was considered impaired
and was written-off with the restructuring charge in December 1998 (See Note
15).
In August 1996, the Company paid $5.0 million for a 51% interest in CeraMed
Dental, LLC ("CeraMed") and the right to acquire the remaining 49% interest at a
later date. The Company believes that CeraMed, located in Lakewood, Colorado, is
the leading US manufacturer and distributor of bone grafting materials and HA
plasma-feed coating materials to dental markets.
In January 1996, the Company purchased certain assets of Tulsa Dental
Products LLC ("Tulsa Dental") in a cash transaction valued at $75.1 million and
an earn-out based on future operating performance of the business. While an
earn-out payment is expected, no payment of earn-out has been required to date.
Based in Tulsa, Oklahoma, Tulsa Dental is a manufacturer and distributor of
endodontic instruments and materials.
Each 1996 acquisition was accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of the fair values of assets acquired and liabilities
assumed. The excess of acquisition cost over net assets acquired of $.9 million
for CeraMed and $53.7 million for Tulsa Dental is being amortized over 25 years.
NOTE 4 - SEGMENT AND GEOGRAPHIC INFORMATION
- -------------------------------------------
As of January 1, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 establishes
standards for reporting information about operating segments in financial
statements. Since the Company operates in one operating segment as a designer,
manufacturer and distributor of dental products, the Company presents
Enterprise-wide Disclosures. Dental products represented approximately 95% of
sales in 1998, 1997 and 1996.
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies exist among the Company's operations
in different geographic areas. Intercompany sales of manufacturing materials
between areas are at prices which, in general, provide a reasonable profit after
coverage of all manufacturing costs. Intercompany sales of finished goods are at
prices intended to provide a reasonable profit for purchasing locations after
coverage of marketing and general and administrative costs.
61
The following table sets forth information about the Company's operations
in different geographic areas for 1998, 1997, and 1996. Net sales reported below
represents revenues from external customers of operations resident in the
country or territory identified. Assets by geographic area are those used in the
operations in the geographic area.
United
1998 States Foreign Consolidated
- ---- -------- -------- ------------
(in thousands)
Net Sales $470,947 $324,175 $795,122
Long-lived Assets 77,668 94,696 172,364
1997
- ----
Net Sales $402,743 $318,017 $720,760
Long-lived Assets 69,127 90,917 160,044
1996
- ----
Net Sales $364,221 $292,336 $656,557
Long-lived Assets 56,736 97,786 154,522
Third party export sales from the United States are less than ten percent of
consolidated net sales. One customer accounted for 13% and 12% of consolidated
net sales in 1998 and 1997, respectively. No customer accounted for 10% or more
of consolidated net sales in 1996.
NOTE 5 - INVENTORIES
- --------------------
Inventories consist of the following:
December 31,
--------------------
1998 1997
-------- --------
(in thousands)
Finished goods $ 75,637 $ 63,987
Work-in-process 27,632 24,844
Raw materials and supplies 35,966 35,917
-------- --------
$139,235 $124,748
======== ========
Pre-tax income was $.2 million, $.4 million, and $.3 million lower in 1998,
1997,and 1996, respectively as a result of using the LIFO method as compared to
using the FIFO method. If the FIFO method had been used to determine the cost of
LIFO inventories, the amounts at which net inventories are stated would be lower
than reported at December 31, 1998 and 1997 by $1.0 million and $1.3 million,
respectively.
62
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
December 31,
--------------------
1998 1997
-------- --------
Assets, at cost: (in thousands)
Land $ 12,315 $ 15,045
Buildings and improvements 74,966 68,009
Machinery and equipment 138,644 117,243
Construction in progress 13,262 11,856
-------- --------
239,187 212,153
Less: Accumulated depreciation 80,189 65,023
-------- --------
$158,998 $147,130
======== ========
NOTE 7 - OTHER NONCURRENT ASSETS
- --------------------------------
Other noncurrent assets consist of the following:
December 31,
--------------------
1998 1997
-------- --------
(in thousands)
Investment in VDW $ 50,895 $ ---
Noncurrent deferred tax assets 3,538 400
Other 13,366 12,914
-------- --------
$ 67,799 $ 13,314
======== ========
VDW was purchased in late December 1998. The allocation of the purchase
price to the fair value of assets acquired and liabilities assumed will be
completed in 1999.
63
NOTE 8 - IDENTIFIABLE INTANGIBLE ASSETS
- ---------------------------------------
Identifiable intangible assets consist of the following:
1998 1997
-------- --------
(in thousands)
Patents $ 45,330 $ 47,519
Trademarks 26,060 47,440
Non-compete agreements 22,816 22,816
Licensing agreements 11,040 10,540
Product manufacturing rights 6,829 3,310
Customer lists 4,422 4,422
Other 8,256 4,381
-------- --------
124,753 140,428
Less: Accumulated amortization 44,216 36,915
-------- --------
$ 80,537 $103,513
======== ========
NOTE 9 - ACCRUED LIABILITIES
- ----------------------------
Accrued liabilities consist of the following:
December 31,
--------------------
1998 1997
-------- --------
Payroll, commissions, bonuses (in thousands)
and other cash compensation $ 17,480 $ 16,554
Employee benefits 7,015 6,803
General insurance 10,021 7,313
Restructuring and other costs 19,800 -
Other 45,111 40,893
-------- --------
$ 99,427 $ 71,563
======== ========
NOTE 10 - FINANCING ARRANGEMENTS
- --------------------------------
Short-Term Borrowings
- ---------------------
Short-term bank borrowings amounted to $15.4 million and $23.4 million at
December 31, 1998 and 1997, respectively. Unused lines of credit for short-term
financing at December 31, 1998 and 1997 were $70.0 million and $54.0 million,
respectively. Substantially all unused lines of credit have no major
restrictions and are provided under demand notes between the Company and the
lending institution. Interest is charged on borrowings under these lines of
credit at various rates, generally under prime or equivalent money rates.
64
Long-Term Borrowings
- -------------------- December 31,
--------------------
1998 1997
-------- --------
(in thousands)
$175.0 million revolving credit agreement maturing October
2002, Swiss Francs 22.7 million, Pounds Sterling 4.2 million,
and $130.0 million outstanding at December 31, 1998, bearing
interest at a weighted average of 1.8% for Swiss Francs
borrowings, 7.1% for Pounds Sterling borrowings,
and 5.6% for dollar borrowings $153,021 $ 91,737
$125.0 million revolving credit agreement maturing October
1999, $50 million outstanding at December 31, 1998, bearing
interest at a weighted average of 5.3% 50,000 ---
$25.0 million bank multi-currency revolving credit agreement
maturing October 1999, various currencies outstanding at
December 31, 1998, bearing interest at a weighted average
of 7.7% 13,450 12,981
Other borrowings, various currencies and rates 1,851 1,370
-------- --------
218,322 106,088
Less: Current portion (included in notes payable
and current portion of long-term debt) 831 583
-------- --------
$217,491 $105,505
In July 1998, the Company entered into interest rate swap agreements
totaling $80.0 million which converts a portion of the Company's variable rate
financing to fixed rates. The average fixed rate of these agreements is 5.7% and
fixes the rate for an average of five years.
The revolving credit agreements contain certain affirmative and negative
covenants as to the operations and financial condition of the Company, the most
restrictive of which pertain to asset dispositions, maintenance of certain
levels of net worth, and prescribed ratios of indebtedness to total capital and
operating income plus depreciation and amortization to interest expense. The
Company pays a facility fee of .125 percent annually on the amount of the
commitment under the $175.0 million five-year facility and .08 percent annually
under the 364-day facility. Interest rates on amounts borrowed under the
facility will depend on the maturity of the borrowing, the currency borrowed,
the interest rate option selected, and, in the event of a LIBOR borrowing, the
ratio of interest expense to operating income.
The bank multi-currency revolving credit agreement contains affirmative
and negative covenants as to the operations and financial condition of the
Company, which are substantially equivalent to those in the revolving credit
agreements. The Company pays a facility fee of .08 percent annually on the
entire amount of the bank multi-currency revolving credit agreement commitment.
The $ 125.0 million and $25.0 million facilities contain a one-year
term-out provision and may be extended, subject to certain conditions, for
additional periods of 364 days. The Company intends to extend the $125.0 million
and $25.0 million facilities each year for an additional period of 364 days.
65
NOTE 11 - OTHER LIABILITIES
- ---------------------------
Other liabilities consist of the following:
December 31,
--------------------
1998 1997
-------- --------
(in thousands)
Pension $ 33,648 $ 29,357
Medical and other postretirement benefits 10,102 10,307
Other 4,363 4,290
-------- --------
$ 48,113 $ 43,954
======== ========
NOTE 12 - STOCKHOLDERS' EQUITY
- ------------------------------
The Board of Directors authorized the repurchase of 2.5 million, .5 million
and 5.4 million shares of common stock for the years ended December 31, 1998,
1997 and 1996, respectively, on the open market or in negotiated transactions.
Each of these authorizations to repurchase shares expired on December 31 of
those years. The Company repurchased 1.8 million shares for $42.0 million, forty
thousand shares for $.9 million and .2 million shares for $3.8 million in 1998,
1997 and 1996, respectively. Additionally, .5 million shares of common stock
were authorized by the Board of Directors in December 1998 for repurchase in
1999.
A former Chairman of the Board holds options to purchase 30,000 shares of
common stock at an exercise price of $22.25, which was equal to the market price
on the date of grant. The options are exercisable at any time through January
2004.
The Company issued 360,000 stock purchase warrants in August 1990 in
connection with an acquisition to the principals of an investment banking firm,
one of whom is a former director of the Company. The warrants are exercisable at
any time through August 28, 2000, at an exercise price of $3.06 per share
(market price at date issued). During 1998, 18,000 of the warrants were
exercised and 34,000 remain outstanding at December 31, 1998.
The Company has four stock option plans (1987 Plan, 1992 Plan, 1993 Plan
and 1998 Plan). Under the 1987, 1992 and 1993 Plans, a committee appointed by
the Board of Directors granted to key employees and directors of the Company
options to purchase shares of common stock at an exercise price determined by
such committee, but not less than the fair market value of the common stock on
the date of grant. Options expire ten years and one month or ten years and one
day after date of grant under the 1987 Plan and 1992 Plan, respectively. Options
generally expire ten years after the date of grant under the 1993 Plan. For the
1987 Plan, 1992 Plan, and 1993 Plan, grants become exercisable over a period of
three years after the date of grant at the rate of one-third per year, except
that they become immediately exercisable upon death, disability or retirement.
The 1998 Plan authorized that 4.3 million shares of common stock may be
granted under the plan. Each January, if 7% of the outstanding common shares of
the Company exceed 4,300,000, the excess becomes available for grant under the
plan. The 1998 Plan enables the Company to grant "incentive stock options"
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, to key employees of the Company, and stock options which do not
constitute ISOs ("NSOs") to key employees and non-employee directors of the
66
Company. Each non-employee director receives automatic and non-discretionary
NSOs to purchase 6,000 shares of common stock on the date he or she becomes a
non-employee director and an additional 6,000 shares on the third anniversary of
the date the non-employee director was last granted an option. Grants of options
to key employees are solely discretionary. ISOs and NSOs generally expire ten
years from date of grant and become exercisable over a period of three years
after the date of grant at the rate of one-third per year, except that they
become immediately exercisable upon death, disability or retirement.
The committee may shorten or lengthen the exercise schedule for any or all
options granted to key employees. The exercise price of ISOs and NSOs is equal
to the fair market value on the date of grant. ISOs granted to an individual who
possesses more than 10% of the combined voting power of all classes of stock of
the Company have an exercise price not less than 110% of fair market value and
expire five years from the date of grant.
The following is a summary of the status of the Plans as of December 31,
1998, 1997, and 1996 and changes during the years ending on those dates:
----Outstanding---- ----Exercisable----
Weighted Weighted Available
Average Average for
Exercise Exercise Grant
Shares Price Shares Price Shares
--------- -------- --------- -------- ---------
December 31, 1995 1,732,122 $18.96 393,126 $16.74 1,894,378
Authorized --- (80,612)
Granted 363,600 22.66 (363,600)
Exercised (71,878) 16.71 ---
Expired/Canceled (105,856) 20.38 102,334
--------- ---------
December 31, 1996 1,917,988 19.66 805,848 18.64 1,552,500
Authorized --- (5,586)
Granted 489,300 28.00 (489,300)
Exercised (288,235) 18.26 ---
Expired/Canceled (82,456) 19.60 82,456
--------- ---------
December 31, 1997 2,036,597 21.87 1,090,921 19.71 1,140,070
Authorized --- 3,140,466
Granted 699,900 25.81 (699,900)
Exercised (201,522) 18.66 ---
Expired/Canceled (73,264) 23.87 73,264
--------- ---------
December 31, 1998 2,461,711 $23.19 1,360,967 $20.83 3,653,900
========= =========
67
The following table summarizes information about stock options outstanding
under the Plans at December 31, 1998:
-------Options Outstanding-------- -Options Exercisable-
Weighted
Number Average Number
Outstanding Remaining Weighted Exercisable Weighted
at Contractual Average at Average
Range of December 31, Life Exercise December 31, Exercise
Exercise Prices 1998 (in years) Price 1998 Price
- --------------- ----------- ----------- -------- ----------- --------
$ 2.60 - $10.00 36,000 2.6 $ 6.54 36,000 $ 6.54
10.01 - 18.00 167,665 6.4 17.48 167,665 17.48
18.01 - 20.00 486,406 6.5 19.02 481,872 19.01
20.01 - 22.50 426,242 5.6 22.06 391,510 22.12
22.51 - 25.00 888,998 9.3 24.49 157,530 23.50
25.01 - 29.50 381,200 8.9 28.89 126,390 28.89
29.51 - 33.70 75,200 9.3 32.97 --- --
--------- ---------
2,461,711 7.7 $23.19 1,360,967 20.83
========= =========
The per share weighted average fair value of stock options granted during
1998, 1997 and 1996 was $9.41, $10.43 and $8.65, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: 1998-expected dividend yield 0.8%, risk-free interest rate
4.7%, expected volatility 29%, and an expected life of 6.5 years; 1997-expected
dividend yield 0.8%, risk-free interest rate 6.0%, expected volatility 26%, and
an expected life of 6.5 years; and 1996-expected dividend yield 0.8%, risk-free
interest rate 6.4%, expected volatility 26%, and an expected life of 6.5 years.
The Black-Scholes option pricing model was developed for tradable options with
short exercise periods and is therefore not necessarily an accurate measure of
the fair value of compensatory stock options.
The Company applies APB 25 in accounting for the Plans and, accordingly, no
compensation cost has been recognized for stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
of stock options at the grant date under SFAS 123, the Company's net income and
earnings per common share would have been reduced as indicated below:
Year Ended December 31,
1998 1997 1996
-------- -------- --------
(in thousands, except per share amounts)
Net income
As reported $ 34,825 $ 74,554 $ 67,222
Pro forma under SFAS 123 32,244 72,851 66,109
Basic earnings per common share
As reported .65 1.38 1.25
Pro forma under SFAS 123 .60 1.35 1.23
Diluted earnings per common share
As reported .65 1.37 1.25
Pro forma under SFAS 123 .60 1.34 1.22
Pro forma net income reflects only options granted since January 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
68
3 years and compensation cost for options granted prior to January 1, 1995 is
not considered.
NOTE 13 - INCOME TAXES
- ----------------------
The components of income before income taxes are as follows:
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
United States $ 47,416 $ 77,398 $ 77,619
Foreign 7,685 44,608 33,341
-------- -------- --------
$ 55,101 $122,006 $110,960
======== ======== ========
The components of the provision for income taxes are as follows:
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Current: (in thousands)
U.S. federal $ 29,225 $ 27,407 $ 26,715
U.S. state 589 4,350 4,401
Foreign 10,906 17,523 15,630
-------- -------- --------
Total 40,720 49,280 46,746
-------- -------- --------
Deferred:
U.S. federal (14,401) (1,671) (886)
U.S. state (924) (191) (139)
Foreign (5,119) 34 (1,983)
-------- -------- --------
Total (20,444) (1,828) (3,008)
-------- -------- --------
$ 20,276 $ 47,452 $ 43,738
======== ======== ========
The reconciliation of the U.S. federal statutory tax rate to the actual
rate is as follows:
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effect of:
State income taxes, net of
federal benefit 0.7 2.3 2.3
Nondeductible amortization
of goodwill 3.4 1.3 1.2
Foreign losses with no tax benefit 1.7 1.2 .9
Foreign sales corporation (2.4) (0.2) ---
Other (1.6) (0.7) ---
-------- -------- --------
Actual income tax rate 36.8% 38.9% 39.4%
======== ======== ========
69
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
December 31, 1998 December 31, 1997
----------------------- -----------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
(in thousands)
Employee benefit accruals $ 1,075 $ 5,988 $ 952 $ 5,185
Product warranty accruals 1,204 --- 1,016 ---
Facility relocation accruals 261 128 425 1,040
Insurance premium accruals 3,060 --- 2,515 ---
Restructuring and other cost
accruals 7,269 14,164 --- ---
Differences in financial
reporting and tax basis for:
Inventory (286) --- 851 ---
Property, plant and equipment --- (25,283) --- (24,043)
Identifiable intangible assets --- (10,377) --- (10,126)
Other 5,255 115 2,685 697
Tax loss carryforwards in
foreign jurisdictions --- 7,834 --- 6,520
Valuation allowance for foreign tax
credit and tax loss carryforwards --- (7,834) --- (6,520)
-------- -------- -------- --------
$ 17,838 $(15,265) $ 8,444 $(27,247)
======== ======== ======== ========
Current and noncurrent deferred tax assets and liabilities are included in
the following balance sheet captions:
December 31,
--------------------
1998 1997
-------- --------
(in thousands)
Prepaid expenses and other current assets $ 19,697 $ 11,096
Income taxes payable (1,859) (2,652)
Other noncurrent assets, net 3,538 400
Deferred income taxes (18,803) (27,647)
The provision for income taxes was reduced due to utilization of tax loss
carryforwards by $297,000 in 1998. Certain foreign subsidiaries of the Company
have tax loss carryforwards of $22.6 million at December 31, 1998, of which
$12.3 million expire through 2006 and $10.3 million may be carried forward
indefinitely. The tax benefit of these tax loss carryforwards has been offset by
a valuation allowance.
Income taxes have not been provided on $64.5 million of undistributed
earnings of foreign subsidiaries, which will continue to be reinvested. If
remitted as dividends, these earnings could become subject to additional tax. It
is not practicable to estimate the amount of additional tax that might be
payable; however, the Company believes that U.S. foreign tax credits would
largely eliminate any U.S. tax payable.
70
NOTE 14 - BENEFIT PLANS
- -----------------------
Substantially all of the employees of the Company and its subsidiaries are
covered by government or Company-sponsored benefit plans. Total costs for
Company-sponsored defined benefit, defined contribution and employee stock
ownership plans amounted to $7.6 million in 1998, $7.1 million in 1997 and $7.8
million in 1996. The DENTSPLY Employee Stock Ownership Plan ("ESOP") covers
substantially all the U.S. non-union employees of DENTSPLY. Contributions to the
ESOP for 1998, 1997 and 1996 were $2.1 million, $2.1 million and $2.0 million,
respectively.
The Company makes annual contributions to the ESOP of not less than the
amounts required to service ESOP debt. In connection with the refinancing of
ESOP debt in March 1994, the Company will also make additional cash
contributions totaling at least $2.6 million over the next five years. Dividends
received by the ESOP on allocated shares are passed through to Plan
participants. Most ESOP shares were initially pledged as collateral for its
debt. As the debt is repaid, shares are released from collateral and allocated
to active employees, based on the proportion of debt service paid in the year.
At December 31, 1998, the ESOP held 7.6 million shares, of which 6.4 million
shares were allocated to Plan participants and 1.2 million shares were
unallocated and pledged as collateral for ESOP debt. Unallocated shares held by
the ESOP were acquired prior to December 31, 1992 and are accounted for in
accordance with Statement of Position 76-3. Accordingly, all shares held by the
ESOP are considered outstanding and are included in the earnings per common
share computations.
The Employee Stock Ownership Plan reserve consists of a loan receivable
from the ESOP bearing interest at 3.06%, payable in equal quarterly installments
through March 31, 2004.
The Company maintains pension plans for its employees in Germany and
Switzerland. These plans provide benefits based upon age, years of service and
remuneration. The German plans are unfunded book reserve plans. The pension
provision for the German and Swiss plans included the following components:
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Service cost $ 2,295 $ 1,995 $ 2,464
Interest cost on projected benefit
obligations 2,780 2,622 3,171
Net investment return on plan assets (2,112) (1,317) (1,296)
Net amortization and deferral (709) (651) (412)
-------- -------- --------
$ 2,254 $ 2,649 $ 3,927
======== ======== ========
71
The benefit obligation reconciliation, plan asset reconciliation, and fund
status reconciliation for these retirement plans were as follows:
December 31,
------------------------
1998 1997
-------- --------
Reconciliation of Benefit Obligation: (in thousands)
Benefit obligation at beginning of year $ 47,655 $ 47,792
Service cost 2,295 1,995
Interest cost 2,780 2,622
Employer contributions 937 851
Participant contributions 781 710
Actuarial (gains)losses (2,433) 1,657
Effect of exchange rate changes 2,865 (5,888)
Benefits paid (2,438) (2,084)
-------- --------
Benefit obligation at end of year $ 52,442 $ 47,655
Reconciliation of Plan Assets:
Fair value of plan assets at beginning of year $ 27,508 $ 25,557
Actual return on assets 4,307 3,403
Foreign currency exchange rate changes 1,072 (2,181)
Employer contributions 937 851
Participant contributions 781 710
Benefits paid (1,171) (832)
-------- --------
Plan assets at fair value $ 33,434 $ 27,508
Reconciliation of Fund Status:
Actuarial present value of projected benefit
obligations $ 52,442 $ 47,655
Plan assets at fair value 33,434 27,508
-------- --------
Plan assets less than projected benefit obligations 19,008 20,147
Unrecognized obligation (1,320) (1,314)
Unrecognized net gain 11,265 7,180
-------- --------
Pension liability $ 28,953 $ 26,013
The projected benefit obligations for these plans were determined using
discount rates of 6.5 percent as of December 31, 1998 and 7.0 percent as of
December 31, 1997 in Germany and 4.5 percent as of December 31, 1998 and 1997 in
Switzerland. The assumed long-term rate of return on Swiss plan assets for 1998
and 1997 was 5.0 percent. The weighted average rate of increase used for future
compensation levels was 3.0 percent for 1998 and 1997 and 5.0 percent for 1996
in Germany and 3.0 percent for 1998, 1997 and 1996 in Switzerland.
The Company sponsors an unfunded defined benefit postretirement medical
plan that covers certain U.S. based non-union employees. This postretirement
healthcare plan is contributory, with retiree contributions adjusted annually to
limit the Company's
72
contribution to $21 per month per retiree for most participants who retired
after June 1, 1985. The Company also sponsors unfunded non-contributory
postretirement medical plans for a limited number of union employees and their
spouses and retirees of a discontinued operation.
The following table sets forth the combined status of the plans:
December 31,
--------------------
1998 1997
-------- --------
Accumulated postretirement benefit obligation: (in thousands)
Retirees $ 5,592 $ 5,839
Fully eligible active plan participants 255 283
Other active plan participants 943 813
-------- --------
Accumulated postretirement benefit obligation
at end of period 6,790 6,935
Unrecognized gain 3,312 3,372
-------- --------
Net postretirement benefit liability $ 10,102 $ 10,307
======== ========
Reconciliation of benefit obligation:
Accrued postretirement obligation at beginning
of year $ 10,307 $ 10,299
Net periodic postretirement benefit cost 478 634
Benefit payments for year 683 626
-------- --------
Accrued postretirement benefit cost $ 10,102 $ 10,307
======== ========
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net periodic postretirement benefit (in thousands)
cost included the following components:
Service cost - benefits attributed
to service during the period $ 124 $ 159 $ 188
Interest cost on accumulated
Postretirement benefit obligation 478 605 764
Net amortization and deferral (124) (130) ---
-------- -------- --------
Net periodic postretirement
benefit cost $ 478 $ 634 $ 952
======== ======== ========
For measurement purposes, the annual rate of increase in the per capita
cost of covered healthcare benefits assumed for 1998 and thereafter was 7% in
1998 and 1997 and 10% in 1996. The healthcare cost trend rate assumption can
have a significant effect on the amounts reported. To illustrate, increasing the
assumed healthcare cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1998
by $.5 million and the
73
aggregate of the service and interest cost components of net periodic
postretirement benefit cost by $.1 million for the year then ended. Decreasing
the assumed healthcare cost trend rates by one percentage point in each year
would decrease the accumulated postretirement benefit obligation at December 31,
1998 by $.4 million and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost by less than $.1
million for the year then ended.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1998 and 1997.
NOTE 15 - RESTRUCTURING AND OTHER COSTS
- ---------------------------------------
In the second quarter of 1998, the Company recorded a pre-tax charge of
$29.0 million for restructuring and other costs. This charge included costs of
$26.0 million to rationalize and restructure the Company's worldwide laboratory
business, primarily for the closure of the Company's German tooth manufacturing
facility. The remaining $3.0 million of the charge was recorded to cover
termination costs associated with its former implant products. Included in the
$26.0 million restructuring charge are costs to cover severance, the write-down
of property, plant and equipment, and tooth product rationalization. The
principal actions involve the closure of the Company's Dreieich, Germany tooth
facility and rationalization of certain tooth products in Europe, North America
and Australia. The Company anticipates the restructuring will reduce production
costs and increase operational efficiencies, contributing to future earnings.
The restructuring results in the elimination of approximately 275 administrative
and manufacturing positions, mostly in Germany. The closure of the German tooth
facility should be complete by the second quarter of 1999 with benefits of the
restructuring beginning to be realized by the end of 1999.
At December 31, 1998, $16.5 million remained in the restructuring accrual.
Through the fourth quarter 1998, the Company has paid approximately $3.5 million
for legal and professional service fees and employee related costs for the
German workforce. The Company also paid approximately $.2 million for implant
related termination costs. During this same period, the reserve has also been
reduced by approximately $2.8 million for non-cash implant termination costs and
approximately $6.0 million for a non-cash write-down of property, plant and
equipment.
The major components of the charge and remaining accruals follow:
Amounts Balance
Provision applied Dec. 31, 1998
--------- -------- -------------
(in thousands)
Severance $ 13,400 $ 1,300 $ 12,100
Write-down of property, plant,
and equipment 6,000 6,000 ---
Implant termination costs 3,000 3,000 ---
Other 6,600 2,200 4,400
-------- ------- --------
$ 29,000 $12,500 $ 16,500
======== ======= ========
74
In the fourth quarter of 1998, the Company recorded a pre-tax charge of
$42.5 million for restructuring the New Image business. This charge includes the
write-off of intangibles, including goodwill associated with the business,
write-off of discontinued products, write-down of fixed assets and other assets,
and severance and other costs associated with the discontinuance of the New
Image division in Carlsbad, California. Following the restructuring, certain
intraoral camera products will be sold and supported by the Gendex Dental X-ray
division in Des Plaines, Illinois. The restructuring includes the elimination of
approximately 115 administrative and manufacturing positions in California. The
Company plans to complete the restructuring by the end of the second quarter of
1999 with the facility in California being closed by the end of the first
quarter of 1999.
The major components of the charge and remaining accruals follow:
Amounts Balance
Provision applied Dec. 31, 1998
--------- ------- -------------
(in thousands)
Write-off of intangibles
including goodwill $ 33,200 $ 33,200 $ -
Discontinued products 3,800 3,800 -
Write-down of fixed assets 1,500 1,500 -
Severance 1,000 - 1,000
Write-down of other assets 700 700 -
Other costs 2,300 - 2,300
------- ------- -------
$42,500 $39,200 $ 3,300
======= ======= =======
NOTE 16 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases automobiles and certain office, warehouse, machinery and
equipment and manufacturing facilities under non-cancelable operating leases.
These leases generally require the Company to pay insurance, property taxes and
other expenses related to the leased property. Total rental expense for all
operating leases was $10.0 million for 1998, $8.8 million for 1997 and $9.2
million for 1996.
Rental commitments, principally for real estate (exclusive of taxes,
insurance and maintenance), automobiles and office equipment amount to: $7.6
million for 1999, $5.8 million for 2000, $3.1 million for 2001, $1.7 million for
2002, $1.4 million for 2003, and $8.0 million thereafter (net of sublease
rentals of $1.0 million in 1999, $.3 million in 2000, $.2 million in 2001, $.1
million in 2002, $.1 million in 2003, and $.4 million thereafter).
The Company has no material noncancelable purchase commitments.
The Company has employment agreements with its executive officers and
certain other management employees. These agreements generally provide for
salary continuation for a specified number of months under certain
circumstances. If all of the employees under contract were to be terminated by
the Company without cause (as defined) the Company's liability would be
approximately $6.4 million at December 31, 1998.
The Company is from time to time a party to lawsuits arising out of its
operations. The Company believes that pending litigation to which it is a party
will not have a material adverse effect upon its consolidated financial position
or results of operations.
75
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. On January 5, 1999, the Department of
Justice filed a complaint against the company in the U.S. District Court in
Wilmington, Delaware alleging that the Company's tooth distribution practices
violate the antitrust laws and are seeking an order for the Company to
discontinue its practices. A follow on private class action suit on behalf of
dentists was filed January 12, 1999 in the Supreme Court of the State of New
York for New York County. It is the Company's position that the conduct and
activities of the Trubyte Division do not violate the antitrust laws and any
outcome will not have a material adverse effect on the financial position or
results of operations of the Company.
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- -------
1998 (in thousands, except per share amounts)
- ----
Net sales $180,706 $197,126 $196,995 $220,295 $795,122
Gross profit 95,337 103,851 103,111 114,124 416,423
Operating income 31,552 6,321(1) 31,949 30(2) 69,852(1)(2)
Net income (loss) 18,997 584(1) 17,627 (2,383)(2) 34,825(1)(2)
Earnings (loss) per common
share-basic .35 .01(1) .33 (.04)(2) .65(1)(2)
Earnings (loss) per common
share-diluted .35 .01(1) .33 (.04)(2) .65(1)(2)
Cash dividends declared per
common share .05125 .05125 .05125 .05625 .21000
1997
- ----
Net sales $172,359 $178,307 $172,674 $197,420 $720,760
Gross profit 88,050 90,771 87,802 102,103 368,726
Operating income 28,055 32,519 29,888 41,994 132,456
Net income 16,924 17,843 16,256 23,531 74,554
Earnings per common
share-basic .31 .33 .30 .44 1.38
Earnings per common
share-diluted .31 .33 .30 .43 1.37
Cash dividends declared per
common share .04625 .04625 .05125 .05125 .19500
(1) Includes restructuring and other costs of $29 million ($18.8 million after tax
or $0.35 per basic and diluted common share).
(2) Includes a restructuring charge of $42.5 million ($26.6 million after tax or
$0.50 per basic and diluted common share).
76
Schedule II DENTSPLY INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
Additions
--------------------------
Charged
Balance at (Credited) Charged to Write-offs Balance
Beginning To Costs Other Net of Translation at End
Description of Period And Expenses Accounts Recoveries Adjustment of Period
- ----------- ---------- ------------ ----------- ---------- ----------- ---------
(in thousands)
Allowance for doubtful accounts:
For Year Ended December 31,
1996 $ 2,254 $ 498 $ 20 (a) $ (224) $ (73) $ 2,475
1997 2,475 590 2,496 (b) (746) (178) 4,637
1998 4,637 4,484 454 (c) (1,773) 89 7,891
Allowance for trade discounts:
For Year Ended December 31,
1996 737 2,693 - (2,920) (3) 507
1997 507 2,904 - (1,214) (71) 2,126
1998 2,126 2,297 - (2,556) 87 1,954
Inventory valuation reserves:
For Year Ended December 31,
1996 20,728 (569) 167 (a) (1,380) (2,128) 16,818
1997 16,818 (2,178) 2,282 (d) (1,679) (1,169) 14,074
1998 14,074 (5,295) 5,125 (e) (1,780) 191 12,315
- ------------------
(a) Tulsa acquisition.
(b) Includes $2,498 from acquisitions of MPL, New Image, SIMFRA and SPAD. (c)
Includes $454 from acquisitions of Crescent and GAC. (d) Includes $2,128 from
acquisitions of MPL, New Image, SIMFRA and SPAD. (e) Includes $680 from
acquisitions of Crescent and GAC and $4,445 for restructuring.
77
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.
DENTSPLY INTERNATIONAL INC.
By:/s/ John C. Miles II
-----------------------
John C. Miles II
Chairman of the Board
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.
/s/ John C. Miles II Chairman of the March 26, 1999
- ------------------------- Board and Chief Executive
John C. Miles II Officer and a Director
(Principal Executive Officer)
/s/ Gerald K. Kunkle President and Chief March 26, 1999
- ------------------------- Operating Officer
Gerald K. Kunkle
/s/ William R. Jellison Senior Vice President March 26, 1999
- ------------------------- and Chief Financial
William R. Jellison Officer (Principal
Financial and Accounting
Officer)
/s/ Burton C. Borgelt Director March 26, 1999
- -------------------------
Burton C. Borgelt
/s/ Douglas K. Chapman Director March 26, 1999
- -------------------------
Douglas K. Chapman
/s/ Michael J. Coleman Director March 26, 1999
- -------------------------
Michael J. Coleman
/s/ Arthur A. Dugoni Director March 26, 1999
- -------------------------
Arthur A. Dugoni, D.D.S., M.S.D.
78
/s/ C. Frederick Fetterolf Director March 26, 1999
- --------------------------
C. Frederick Fetterolf
/s/ Leslie A. Jones Director March 26, 1999
- -------------------------
Leslie A. Jones
/s/ Edgar H. Schollmaier Director March 26, 1999
- -------------------------
Edgar H. Schollmaier
/s/ W. Keith Smith Director March 26, 1999
- -------------------------
W. Keith Smith
79
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws, as amended (2)
4.1 364-Day and 5-Year Competitive Advance, (11)
Revolving Credit and Guaranty
Agreements dated as of October 23, 1997
among the Company, the guarantors named
therein, the Chase Manhattan Bank as
Administrative Agent, and ABN Amro
Bank, N.V. as Documentation Agent.
10.1 1992 Stock Option Plan adopted May (4)
26, 1992
10.2 1993 Stock Option Plan (2)
10.3 1998 Stock Option Plan (1)
10.4 Nonstatutory Stock Option Agreement (3)
between the Company and Burton C. Borgelt
10.5 (a) Employee Stock Ownership Plan as (7)
amended effective as of December 1,
1982, restated as of January 1,
1991
(b) Second Amendment to the DENTSPLY (10)
Employee Stock Ownership Plan
(c) Third Amendment to the DENTSPLY Employee 83
Stock Ownership Plan
10.6 (a) Retainer Agreement dated December (5)
29, 1992 between the Company and
State Street Bank and Trust Company
("State Street")
(b) Trust Agreement between the Company (6)
and State Street Bank and Trust
Company dated as of August 11, 1993
(c) Amendment to Trust Agreement (6)
between the Company and State
Street Bank and Trust Company
effective August 11, 1993
10.7 Employment Agreement dated January (9)
1, 1996 between the Company and
Burton C. Borgelt
10.8 (a) Employment Agreement dated as of (5)
December 31, 1987 between the
Company and John C. Miles II
(b) Amendment to Employment Agreement (9)
between the Company and John C.
Miles II dated February 16, 1996,
effective January 1, 1996
80
10.9 Employment Agreement dated as of (5)
December 31, 1987, as amended as of
February 8, 1990, between the
Company and Leslie A. Jones
10.10 Employment Agreement dated as of (5)
December 10, 1992 between the
Company and Michael R. Crane
10.11 Employment Agreement dated as of (5)
December 10, 1992 between the
Company and Edward D. Yates
10.12 Employment Agreement dated January (9)
1, 1996 between the Company and W.
William Weston
10.13 Employment Agreement dated January (9)
1, 1996 between the Company and
Thomas L. Whiting
10.14 Employment Agreement dated October (10)
11, 1996 between the Company and
Gerald K. Kunkle Jr.
10.15 Employment Agreement dated April 20, 85
1998 between the Company and
William R. Jellison
10.16 Employment Agreement dated September 92
10, 1998 between the Company and
Brian M. Addison
10.17 Midwest Dental Products Corporation (7)
Pension Plan as amended and re-
stated effective January 1, 1989
10.18 Revised Ransom & Randolph Pension (7)
Plan, as amended effective as of
September 1, 1985, restated as of
January 1, 1989
10.19 DENTSPLY International Inc. (10)
Directors' Deferred Compensation
Plan effective January 1, 1997
10.20 Asset Purchase and Sale Agreement, (8)
dated January 10, 1996, between
Tulsa Dental Products, L.L.C. and
DENTSPLY International Inc.
10.21 Supplemental Executive Retirement 98
Plan effective January 1, 1999
21.1 Subsidiaries of the Company 115
23.1 Consent of KPMG LLP 118
27 Financial Data Schedule 119
- --------------
81
(1) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the Company's Registration
Statement on Form S-8 (No. 33-52616).
(5) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993, File No.
0-16211.
(6) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993, File No.
0-16211.
(7) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year December 31, 1994, File No.
0-16211.
(8) Incorporated by reference to exhibit included in the Company's Current
Report on Form 8-K dated January 10, 1996, File No. 0-16211.
(9) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, File No.
0-16211.
(10) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,1996, File No.
0-16211.
(11) Incorporated by reference to exhibit included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, File No.
0-16211.
82