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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0886515
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 686-1600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of July 15, 1996 was approximately $427,296,000.
As of July 15, 1996, there were 21,551,616 shares of Common Stock of the
registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
--------------------- -----------------
Proxy Statement for 1996 Annual Meeting of Shareholders Part III
FORM 10-K INDEX
Page
PART I........................................................................... 1
Item 1. BUSINESS......................................................... 1
Item 2. PROPERTIES....................................................... 7
Item 3. LEGAL PROCEEDINGS................................................ 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
PART II.......................................................................... 8
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.............................................. 8
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 10
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 28
PART III......................................................................... 28
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 28
Item 11. EXECUTIVE COMPENSATION........................................... 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 29
PART IV.......................................................................... 29
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................... 29
SIGNATURES.................................................................. 31
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PART I
ITEM 1. BUSINESS
GENERAL
Patterson Dental Company ("Patterson" or the "Company") distributes dental
supplies and equipment in the United States and Canada. The Company currently
supplies a full line of over 70,000 products to dentists, dental laboratories
and institutions. These products include supplies such as x-ray film and
solutions, impression materials and restorative materials, hand instruments and
sterilization and protective products and equipment such as x-ray machines,
handpieces, dental chairs, dental handpiece control units, diagnostic equipment,
sterilizers, dental lights and compressors. The Company's product line includes
approximately 1,500 private-label products sold under the Patterson name.
Patterson also offers customers a full range of related services including
dental equipment installation, maintenance and repair, dental office design and
equipment financing. Unless otherwise indicated, all references to Patterson or
the Company include its subsidiaries: Direct Dental Supply Co.; Patterson Dental
Canada, Inc.; and Patterson Dental Supply, Inc.
The Company markets its products and services through more than 750 direct
sales representatives and equipment specialists who operate through 90 sales
offices in the United States and Canada. The Company processes an average of
more than 8,000 customer orders each business day using a computerized order
processing network that links the Company's sales offices and 9 distribution
centers. The Company estimates that 97% of its consumable goods orders are
shipped complete within 24 hours. Customers may order through a sales
representative or directly from the Company by mail, telephone and, for selected
customers, electronically through the Company's personal computer-based remote
order entry system (REMO) or hand-held bar code scanner (PDXpress/TM/). To
support its marketing efforts and facilitate order entry, Patterson publishes an
annual catalog containing approximately 10,000 dental products; a semiannual
publication, Patterson Today, featuring dental equipment; and periodic direct
mail advertisements highlighting popular and specially priced items.
In May 1985, a holding company formed by the Company's management and
certain investors purchased the Company's predecessor, then a Delaware
corporation, from a subsidiary of The Beatrice Companies, Inc. Following the
acquisition, management implemented strategies to enhance profitability through
improving operating efficiency and the quality and breadth of customer service.
The Company instituted a computerized order processing network, improved
inventory tracking and other management information systems, introduced
centralized purchasing, and reduced the number of distribution locations in the
U.S. from 56 to 8. Management also enhanced revenue growth through internal
expansion and strategic acquisitions, including the 1987 acquisition of the
third largest U.S. distributor of dental products and the 1993 acquisition of
the second largest distributor of dental products in Canada. As a result of
implementing these strategies, net sales increased from $165.8 million for
fiscal 1986 to $581.9 million for fiscal 1996, operating margins increased every
year since fiscal 1985 and profitability increased from an operating loss for
fiscal 1986 to operating income of $43.7 million for fiscal 1996.
INDUSTRY BACKGROUND
Patterson estimates that sales of dental supplies and equipment in the
United States and Canada were approximately $2.5 billion in 1995. Total
expenditures for dental services in the United States increased from $13.3
billion in 1980 to $40.0 billion in 1994. Per capita expenditures increased from
$60 in 1980 to $150 in 1994 and are forecasted to reach $270 by the year 2005.
The Company believes that the demand for dental services and dental equipment
and supplies will continue to be influenced by the following factors:
. Demographics. The U.S. population grew from 235.1 million in 1980 to
271.0 million in 1994, and is expected to reach 295.7 million by 2005.
The median age of the population is also
increasing and Patterson believes that older dental patients spend
more on a per capita basis for dental services.
. Dental products and techniques. Technological developments in dental
products have contributed to advances in dental techniques and
procedures, including cosmetic dentistry and dental implantation.
. Demand for certain dental procedures. Demand is growing for preventive
dentistry and periodontic (the treatment of gums), endodontic (root
canals), orthodontic (braces) and other dental procedures which enable
patients to keep their natural teeth longer and improve their
appearance.
. Demand for infection control products. Greater public awareness and
new regulations and guidelines instituted by OSHA, the American Dental
Association and state regulatory authorities have resulted in
increased use of infection control (asepsis) products such as
protective clothing, gloves, facemasks and sterilization equipment to
prevent the spread of communicable diseases such as AIDS, hepatitis
and herpes.
. Coverage by dental plans. An increasing percentage of dental services
are being funded by private dental insurance. The Health Care
Financing Administration statistics on expenditures for dental
services in the United States indicate that private dental insurance
paid approximately 51% of the $42.2 billion in total expenditures for
1994 as compared to approximately 30% of the $14.4 billion in total
expenditures for 1980.
According to the American Dental Association, there are over 140,000
dentists practicing in the United States in approximately 100,000 dental
practices, representing a fragmented, geographically diverse market. Dental
supplies and equipment are purchased by dentists from full-service dental
distributors such as Patterson, through mail order distributors, or, as to
certain products, directly from manufacturers. Full-service distributors
typically employ a sales force to make calls on dental offices and to provide
quick response time, personal attention and product knowledge. With the
introduction of new products and technologies, dentists are demanding more
sophisticated, personalized service from distributors of dental products. The
Company believes that it is well positioned to compete as a full-service
distributor of dental products, based primarily on its qualified and motivated
sales force, experienced service technicians, broad range of products and
services, accurate and timely delivery, strategic location of sales offices and
distribution centers, and competitive pricing.
PATTERSON'S STRATEGY
Patterson's objective is to remain the leading national distributor of
dental supplies, equipment and related services while continuing to improve its
profitability and enhance its value to customers. To achieve this objective,
Patterson has adopted a strategy of emphasizing its full-service capabilities,
using technology to enhance customer service, continuing to improve operating
efficiencies, and growing through internal expansion and acquisitions.
Emphasizing Full-Service Capabilities. Patterson believes that its
customers value full service and responsive delivery of quality supplies and
equipment, in addition to competitive prices. Customers also increasingly expect
suppliers to be knowledgeable about products and services. Patterson currently
supplies a full line of over 70,000 different inventoried items. Patterson
generally ships within 24 hours from distribution centers located strategically
throughout the United States. The Company's knowledgeable sales representatives
and equipment specialists assist customers in the selection and purchasing of
supplies and equipment and provide consultation on office design, equipment
requirements and financing. Equipment installation, maintenance and repair is
performed by Patterson's trained service technicians.
2
Using Technology to Enhance Customer Service. The Company's computerized,
remote order entry systems, REMO and PDXpress/TM/, permit Patterson's customers
to order products rapidly and accurately from Patterson 24 hours a day, seven
days a week. In addition, by utilizing technologies such as computer-aided
design (CAD), Patterson is able to provide faster generation and revision of
dental office blueprints and a more effective dental office design presentation.
Continuing to Improve Operating Efficiencies. Patterson continues to
implement programs designed to improve operating efficiencies. These programs
include enhancing its management information and product handling systems and
consolidating its distribution centers to improve product availability and to
reduce redundancies in personnel, equipment and certain inventories. In
addition, by offering its electronic order entry systems to dentists, Patterson
enables its sales representatives to spend more time with existing customers and
to call on additional customers.
Growing through Internal Expansion and Acquisitions. The Company intends to
continue to grow by opening additional sales offices, hiring established sales
representatives, hiring and training college graduates as territory sales
representatives, and acquiring other distributors in order to enter new markets
and expand its customer base. In August 1987, Patterson acquired the D.L. Saslow
Co., which at the time was the third largest distributor of dental products in
the United States. Between 1989 and 1996, Patterson acquired the customer base
and certain assets of smaller distributors in Boston; Portland, Maine; Memphis;
Salt Lake City; the Washington, D.C. area; Raleigh, North Carolina; Akron, Ohio;
St. Louis; Erie (Pa.), Kansas City, Omaha, Youngstown, San Antonio and the
Tampa-Orlando-Miami area. In addition, Patterson also expanded by opening
additional sales offices and hiring established sales representatives in
Baltimore; Tulsa; Charlotte, North Carolina; and Greenville, Columbia and
Charleston, South Carolina. In October 1993, the Company completed the
acquisition of Healthco International, Inc.'s Canadian subsidiary, Healthco
Canada, Inc. Now known as Patterson Dental Canada, Inc., this subsidiary, which
the Company believes is one of the two largest full service dental products
distributors in Canada, employs approximately 385 people, 107 of whom are sales
representatives. Patterson Dental Canada, Inc. has eleven sales offices
throughout Canada, including its headquarters facility in Montreal, which also
serves as its distribution center for Canada. The Company believes that it is
well positioned to take advantage of expected continued consolidation in the
dental products distribution industry.
PRODUCTS
Patterson distributes approximately 70,000 dental products categorized as
supplies, equipment and other. The following table shows the approximate
percentages of net sales contributed by sales category for the last four fiscal
years:
1993 1994 1995 1996
----- ----- ----- -----
Supplies.... 61% 62% 62% 60
Equipment... 29 27 27 29
Other....... 10 11 11 11
--- --- --- ---
Total.... 100% 100% 100% 100%
=== === === ===
Supplies. Patterson offers a wide range of consumable dental products such
as x-ray film and solutions; impression materials; restorative materials
(composites and alloys); hand instruments; sterilization products; infection
control products such as protective clothing, gloves and facemasks; paper,
cotton and other disposable products; toothbrushes and a full line of dental
accessories including instruments, burs and diamonds. Patterson markets its own
private label line of dental supplies consisting of approximately 1,500 items,
including anesthetics, instruments, preventative and restorative products, and
cotton and paper products. Compared to most name brand supplies, the private
label line provides lower prices for the Company's customers and higher margins
for the Company.
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Equipment. Patterson offers a wide range of dental equipment including x-
ray machines, high and low speed handpieces, dental chairs, dental handpiece
control units, diagnostic equipment, sterilizers, dental lights and compressors.
The Company has obtained distribution rights for the KCP-1000/TM/, an innovative
product for cavity preparation. In addition, the Company is the exclusive
distributor of the Welch Allyn Reveal(R) intra-oral camera, and its lighted
mouth mirror, Denlight(R). Since fiscal 1995, the Company began distributing two
new products, a thermal disinfector for cleaning dental instruments prior to
sterilization, and the Virtual i O(R) eyeglasses, an audio-video patient
distraction device with which the patient can view movies or television while
undergoing dental treatment. Patterson estimates that approximately 90% of its
equipment sales are made to established dentists, dental laboratories and
institutions and that the remainder are made to dentists and dental clinics
establishing new practices. Most of the equipment sold by Patterson is custom-
ordered.
Other. Other includes repair parts and labor, and teeth for use in
dentures.
SERVICES
Patterson offers a broad range of services to its customers to support
supply and equipment sales.
Equipment Installation, Repair and Maintenance. To keep their practices
running efficiently, dentists require reliable performance from their equipment.
All major equipment sold by Patterson includes installation and Patterson's 90-
day labor warranty at no additional charge. Patterson also provides complete
repair and maintenance service for all dental equipment, whether or not
purchased from Patterson, including 24-hour handpiece repair service.
Patterson's service technicians call on dental offices throughout the United
States for equipment repair and maintenance. A computerized scheduling, tracking
and billing system documents and instantly retrieves customer repair histories,
and helps Patterson to keep frequently needed repair items in inventory.
Electronic Order Entry Systems. Patterson's computerized remote order entry
systems permit customers to place orders from their offices directly to
Patterson 24 hours a day, seven days a week. Remote Order Entry (REMO),
introduced in 1987, gives customers direct and immediate access through a
personal computer to a database containing Patterson's complete inventory. In
September 1991, the Company began offering "use installed" customers PDXpress, a
computerized order entry system utilizing a hand-held bar code scanner. PDXpress
eliminates handwritten order forms by permitting a user to scan a product bar
code from an inventory tag system or from Patterson's bar-coded catalog. More
than 5,500 Patterson customers currently utilize either REMO or PDXpress to
order dental supplies. REMO and PDXpress are provided at no additional charge to
customers who maintain certain minimum purchase requirements.
Dental Office Design. Patterson provides dental office layout and design
services through its staff of 94 equipment specialists. Through the use of
Patterson's own computer-aided design (CAD) program, equipment specialists can
create original or revised dental office blueprints in a fraction of the time
required to produce conventional drawings. Customers purchasing major equipment
items receive dental office design services at no additional charge.
Equipment Financing. The Company arranges financing for qualified
purchasers of equipment. The Company sells its retail installment contracts to a
third party or, alternatively, arranges financing/leasing through a third party.
In fiscal 1996, the Company originated over $42 million of equipment finance
contracts.
Equipment financing is provided by BA Credit Corp., a unit of BankAmerica,
pursuant to an agreement entered into in July 1993. Applications for financing
originated by the Company are reviewed by BA Credit Corp. which upon approval
may purchase the equipment and lease it to the customer or purchase an
installment sale contract from the Company without recourse.
In May 1994, the Company entered into a Receivables Purchase Agreement with
PNC Bank, National Association, under which PNC Bank committed to purchase, on a
limited recourse basis, the Company's
4
installment sale contracts secured by dental equipment. The Company services the
accounts, for which it receives servicing fees. PNC Bank's initial commitment of
$15 million was increased to $25 million effective August 1995. As of April 27,
1996, no significant amount was available for purchase under this facility by
PNC Bank. PNC Bank's commitment to purchase additional contracts expired
effective May 1996.
In April 1996, the Company entered into a Contract Purchase Agreement with
First Bank National Association, under which First Bank committed to purchase
from the Company, on a limited recourse basis, the Company's installment sale
contracts secured by dental equipment. The Company services the accounts. First
Bank has committed up to a combined $30 million for both installment contract
receivables outstanding and unsecured borrowings under a revolving credit
agreement with the Company. As of April 27, 1996, First Bank had purchased $6.7
million under the Contract Purchase Agreement.
SALES AND MARKETING
During fiscal 1996, Patterson sold its products to over 73,000 customers
who made one or more purchases of supplies during the year. Patterson's
customers include dentists, dental laboratories and institutions. No single
customer accounted for more than 1% of sales during fiscal 1995, and Patterson
is not dependent on any customer or group of customers.
Due to the fragmented nature of the dental products market, Patterson
believes that a large sales force is necessary to reach potential customers and
to provide full service. As of April 27, 1996, Patterson employed approximately
750 trained sales representatives, 94 of whom were equipment specialists. Each
representative works within an assigned sales territory from one of 90 sales
offices under the supervision of a branch sales manager. Sales representatives
are all Patterson employees and are generally compensated on a commission basis,
with some representatives receiving a base salary and commission.
To assist its sales representatives, Patterson publishes a variety of
catalogs and fliers containing product and service information. Patterson's
customers receive an annual, full-line product catalog containing over 10,000
inventoried items. A separate catalog limited to high-volume products contains
bar coding and product numbers, permitting PDXpress/TM/ users to enter orders
electronically 24 hours a day, seven days a week. Selected consumable supplies,
new products, specially priced items and high-demand items such as asepsis
products are promoted through merchandise fliers printed bimonthly and
distributed to over 100,000 dentists nationwide. In addition, equipment sold by
the Company is featured in the Company's semiannual publication, Patterson
Today, which also includes articles on dental office design, trends in dental
practice, products and services offered by Patterson, and information on
equipment maintenance.
The Company believes that its computerized remote order entry systems, REMO
and PDXpress/TM/, help to establish relationships with new customers and
increase loyalty among existing customers. Patterson provides these systems at
no additional cost to customers who maintain certain minimum purchase
requirements.
DISTRIBUTION
Patterson ships its supplies from 9 distribution centers. The Company's 90
sales offices in the United States and Canada are configured with display areas
where the latest dental equipment can be demonstrated. Equipment inventory is
also staged at sales offices before delivery to dental offices for installation.
Patterson processes an average of more than 8,000 orders per day. A
customer can place an order through a sales representative, by telephone
utilizing a Patterson catalog or other publication and, for selected customers,
electronically utilizing REMO or PDXpress. All orders are routed through one of
the Company's branch offices and are entered into a computerized ordering,
shipping and inventory system, which links each of the Company's distribution
centers. If an item is not available in the distribution center nearest to the
customer, the computer system automatically directs shipment of the item from
another center. As items are
5
ordered, the system automatically records reductions in the inventory of the
items. Each order is printed out in the shipping department of the appropriate
distribution center, where employees pick and pack the order. All orders are
checked for accuracy before shipment by common carrier. The Company estimates
that 97% of its consumable goods orders are shipped complete within 24 hours.
In order to assure the availability of products for delivery to
customers, the Company must maintain significant working capital to enable it to
carry substantial inventories at its distribution centers. The Company's
inventory consists mostly of dental supply items; equipment is generally custom-
ordered by customers. By utilizing its computerized inventory management and
ordering systems, the Company is able to accurately predict inventory turns in
order to minimize inventory levels for each item.
Sources of Supply
The Company obtains dental products from approximately 1,100 vendors.
In calendar 1996, the Company's top 10 vendors and single largest vendor
accounted for approximately 58% and 9%, respectively, of the cost of products
sold. There is more than one source of supply for almost all of the categories
of products sold by the Company.
Competition
The highly competitive U.S. dental products distribution industry
consists principally of national, regional and local full-service distributors
and mail-order distributors. In addition to Patterson and two other national,
full-service firms, Sullivan Dental Products, Inc. and the Henry Schein Company
("Schein"), there are at least 20 full-service distributors which operate on a
regional level, and hundreds of small local distributors. Approximately 28 of
these independent distributors are members of a purchasing group known as the
ADC buying group ("ADC"). ADC purchases dental products and obtains volume
discounts for the benefit of its members. ADC members, who market and sell
products independently, are believed to have combined sales exceeding those of
the Company. Although the Company does not have reliable information regarding
the market share of mail-order companies, it believes that Schein is the largest
mail-order company. Patterson believes that it competes with full-service
distributors and mail-order distributors based primarily on its qualified and
motivated sales force, experienced service technicians, broad range of products
and services, accurate and timely delivery, strategic location of sales offices
and distribution centers, and competitive pricing.
Trademarks
Patterson has registered with the United States Patent and the
Trademark Office the marks "Patterson" and "PDXpress." The Company believes that
the Patterson mark is well recognized in the dental products industry and by
dental professionals, and is therefore a valuable asset of the Company.
Employees
As of April 27, 1996, the Company employed 2,500 people in the United
States and Canada on a full-time basis, consisting of 108 management employees,
769 sales representatives, 607 service technicians, 619 office, clerical and
administrative employees and 397 distribution employees. Patterson has not
experienced a shortage of qualified personnel in the past, and believes that it
will be able to attract such employees in the future. None of Patterson's
employees is subject to collective bargaining agreements or represented by a
union. The Company considers its relations with its employees to be good.
Governmental Regulation
The manufacture of certain dental equipment and devices distributed by
the Company is subject to regulation by the United States Food and Drug
Administration (the "FDA") pursuant to the Federal Food,
6
Drug and Cosmetic Act and the Medical Device Amendments of 1976, and regulations
promulgated thereunder. Such regulation is imposed primarily on manufacturers of
medical devices. The Safe Medical Devices Act of 1990 (the "SMDA") requires
manufacturers, distributors and end-users to report information that "reasonably
suggests" that there is a probability that a device marketed by a distributor
has caused or contributed to a death, serious illness or serious injury. The
Company believes that it is in compliance with the SMDA.
Item 2. PROPERTIES
As of April 27, 1996, Patterson's 98 facilities consisted of 88 sales
offices, 7 distribution centers, two combined sales office/distribution centers,
and its headquarters building. All but six facilities are leased and, with few
exceptions, such leases are for three to five-year terms. As of April 27, 1996,
the Company leased approximately 631,000 square feet at an annual cost of $6.40
per square foot. The Company considers its facilities to be well-maintained and
suitable for its purposes.
The Company has made a significant investment in computer, data
processing and automated office equipment systems and it plans to continuously
upgrade these systems. The Company believes that technology-based systems are
crucial in supporting its operating efficiency and providing it with a
competitive advantage.
Item 3. LEGAL PROCEEDINGS
The Company has been involved in various legal proceedings arising in
the ordinary course of business. Some of these proceedings involve claims
against the Company for alleged personal injuries arising out of the use of
dental products manufactured by third parties and distributed by the Company.
The Company believes that if any of such cases are determined in favor of the
claimants, the manufacturers of such products would have primary responsibility
for any damages because Patterson is a distributor of finished goods
manufactured by third parties. In the event that a manufacturer of a defective
product is unable to pay a judgment for which the Company may be jointly liable,
the Company could have liability for the entire judgment. Since May 1985 the
Company has maintained products liability insurance coverage for any potential
liability for claims arising out of products sold by the Company. The Company
believes that any liabilities which might result from pending cases and claims
relating to events occurring after May 1985 would be adequately covered by such
insurance and that any unfavorable results in such cases would not have a
material adverse effect on the Company's business or financial condition. With
respect to claims relating to events occurring prior to May 1985, the agreement
providing for the acquisition of Patterson from The Beatrice Companies, Inc.
provides that Beatrice and its successors are obligated to indemnify the Company
for losses exceeding a litigation reserve established at the time of the
acquisition plus $200,000. As of April 27, 1996, the litigation reserve had a
balance of $49,000. Beatrice has not been notified of pending litigation and has
not contested its obligation to indemnify the Company. In the past, lawsuits
have been brought against the Company and other defendants, including product
manufacturers and distributors, by individuals claiming injuries allegedly
suffered as a result of exposure to amalgam alloys containing mercury. Each of
these lawsuits was dismissed with a result favorable to the Company, and no such
claims are currently pending. While the Company believes that such claims will
not have a material adverse effect on its business or financial condition, no
assurance can be given that additional litigation will not be commenced in the
future against the Company and manufacturers of amalgams if adverse regulatory
actions concerning the use and exposure to such products are adopted, or
reliable scientific data are released concerning harmful effects of amalgams
containing mercury. Further, although the Company has insurance coverage for
product liability claims relating to events occurring after May 1985 and is
entitled to indemnification from third parties under certain circumstances,
there is no assurance that any such additional litigation would not have a
material adverse effect on the Company's business or financial condition in the
future.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's
shareholders during the three-month period ended April 27, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading under the symbol "PDCO" on
the NASDAQ National Market System in October 1992.
The following table sets forth the range of high and low sale prices
for the Company's Common Stock for each full quarterly period within the two
most recent fiscal years. Quotations for such periods are as reported by NASDAQ
for National Market System issues.
HIGH LOW
------- ------
Fiscal 1995
First Quarter... 23-13/16 16-3/4
Second Quarter.. 21 15-3/4
Third Quarter... 22-5/8 17-1/4
Fourth Quarter.. 25-1/2 20-1/4
Fiscal 1996
First Quarter... 27-1/4 21-3/4
Second Quarter.. 28-1/2 22-3/4
Third Quarter... 28-5/16 23-1/2
Fourth Quarter.. 31-3/4 24-1/2
On July 15, 1996, the number of holders of record of Common Stock was
1,232. The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota, 55075-
0738, telephone: (612) 450-4064.
The Company has not paid any dividends on its Common Stock since its
initial public offering and expects that for the foreseeable future it will
follow a policy of retaining earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
Fiscal Years Ended
---------------------------------------------------------------------------------------------------
April April April April April April April April April April
27, 29, 30, 24, 25, 27, 28, 29, 30, 25,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Statement of Operations Data:
- -----------------------------
Net sales $581,893 $532,598 $466,882 $342,826 $277,057 $243,130 $220,583 $218,177 $198,188 $157,979
Cost of sales 376,507 342,868 301,239 223,501 180,226 156,785 142,138 143,684 129,833 103,089
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit 205,386 189,730 165,643 119,325 96,831 86,345 78,445 74,493 68,355 54,890
Operating expenses 161,676 151,640 134,317 99,032 83,319 75,017 70,459 67,761 62,315 53,727
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income 43,710 38,090 31,326 20,293 13,512 11,328 7,986 6,732 6,040 1,163
Other income (expense) -
net 1,998 1,043 643 134 (945) (871) 1,061 1,176 1,305 1,731
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and extraordinary item 45,708 39,133 31,969 20,427 12,567 10,457 9,047 7,908 7,345 2,894
Income taxes 16,961 14,953 12,683 7,219 4,041 3,128 3,015 2,680 63 3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item $ 28,747 24,180 19,286 13,208 8,526 7,329 6,032 5,228 7,282 2,891
Extraordinary item (less
income tax benefit of
$281) --- --- --- (453) --- --- --- --- --- ---
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 28,747 $ 24,180 $ 19,286 $ 12,755 $ 8,526 $ 7,329 $ 6,032 $ 5,228 $ 7,282 $ 2,891
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Earnings per common
and common
equivalent share:(1)
Earnings before
extraordinary item $ 1.31 $ 1.10 $ 0.87 $ 0.62 $ 0.38 $ 0.32 $ 0.30 $ 0.26 $ 0.36 $ 0.14
Loss - extraordinary
item -- -- -- (0.02) -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- -------- -------- -------- --------
Net Earnings $1.31 $1.10 $0.87 $0.60 $0.38 $0.32 $0.30 $0.26 $0.36 $0.14
======== ======== ======== ======= ======== ======== ======== ======== ======== ========
Weighted average common
and common
equivalent shares
outstanding (1) 21,539 21,488 21,485 19,842 18,498 18,474 20,334 20,111 20,124 20,690
Dividends per common share
(1) --- --- --- --- --- --- --- $0.49 --- ---
Balance Sheet Data:
- ---------------------------
Working capital $111,869 $ 87,229 $ 72,301 $ 56,546 $ 35,227 $ 30,616 $ 31,355 $ 37,584 $ 41,166 $ 33,781
Total assets 202,800 170,768 136,196 104,630 75,250 64,554 61,267 63,055 69,041 53,918
Total debt 3,175 3,324 9,064 21 19,224 21,634 3,640 14,173 14,137 16,780
Stockholders' equity 127,121 97,191 72,179 53,142 10,686 2,202 17,086 10,934 15,066 7,724
____________
(1) Amounts are adjusted for stock splits.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that involve risks
and uncertainties relating to the future performance of the Company, and actual
events or results may differ materially. In evaluating such statements,
shareholders and prospective investors should specifically review the various
factors identified under the caption "Factors That May Affect Future Operating
Results" which could cause actual results to differ materially from those
indicated in such forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
The following table summarizes the results of operations over the past
three fiscal years. Each item is shown as a percent of that year's net sales:
1996 1995 1994
------ ------ ------
Net sales............ 100.0% 100.0% 100.0%
Cost of sales........ 64.7 64.4 64.5
----- ----- -----
Gross profit......... 35.3 35.6 35.5
Operating expenses... 27.8 28.5 28.8
----- ----- -----
Operating income..... 7.5 7.1 6.7
Other income......... 0.3 0.2 0.1
----- ----- -----
Income before taxes.. 7.8 7.3 6.8
Income taxes......... 2.9 2.8 2.7
----- ----- -----
Net income........... 4.9% 4.5% 4.1%
===== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased 9.3% to $581.9 million for fiscal 1996
compared with $532.6 million in fiscal 1995. Supplies constituted 60% of sales
in fiscal 1996 vs. 62% in fiscal 1995, and equipment accounted for 29% vs. 27%.
Other products and services were 11% of sales for both periods. The increase in
sales is attributable primarily to higher unit sales in most of the Company's
product lines and to a lesser extent price increases. The unit increases
occurred primarily in equipment sales and more specifically in the sale of
Reveal interoral cameras, which accounted for 2.8% of the 9.3% sales increase.
The number of customers who purchased consumable dental supplies from the
Company was 73,600 and the average consumable sales per customer increased 9.2%
to $4,600 in fiscal 1996.
Gross Profit. As a result of increased sales, gross profit increased 8.3%
to $205.4 million for fiscal 1996 compared to $189.7 million for fiscal 1995.
Gross margin decreased to 35.3% in fiscal 1996 from 35.6% in fiscal 1995. The
reduction in gross margin was primarily the result of the increase in equipment
sales as a percent of total sales and the lower margin on equipment sales
compared to supply sales, and a larger LIFO adjustment in fiscal 1996.
Operating Expenses. Operating expenses increased 6.6% to $161.7 million for
fiscal 1996 compared with $151.6 million for fiscal 1995. Increased sales volume
was the main reason for the increase in operating expenses. The U.S. operating
expenses as a percent of sales decreased in fiscal 1996. The U.S. operation's
decrease in operating expense ratio was due mainly to its ability to move more
product through its distribution system without incurring a proportionate
increase in expenses. The U.S. operating expense ratio declined to 27.0% from
27.7%, and the Company's Canadian subsidiary operating expense ratio remained
unchanged at 35.0%. As a result, the consolidated operating expense ratio
declined to 27.8% from 28.5%.
10
Operating Income. Operating income increased 14.8% to $43.7 million for
fiscal 1996 compared with $38.1 million for fiscal 1995. Operating income as a
percent of sales increased to 7.5% from 7.1% due primarily to the decrease in
operating expenses as a percent of sales.
Other Income. Other income was $1,998,000 in fiscal 1996 compared with
$1,043,000 in fiscal 1995. The gain was due mainly to an increase in interest
income from financing customers' equipment purchases and short-term investment
of excess cash.
Income Taxes. The Company's effective tax rate was 37.1% for fiscal 1996
and 38.2% for fiscal 1995. The decrease in the effective tax rate results
primarily from higher profits in our Canadian subsidiary and utilization of the
Canadian subsidiary's net operating loss carryforwards, and an increase in tax-
exempt interest income. The Company's Canadian subsidiary's income before taxes
increased 95% to $1.4 million for fiscal 1996 from $0.7 million in fiscal 1995.
Net Income. Net income increased $4.6 million, or 18.9%, to $28.7 million
for fiscal 1996 on a 9.3% increase in sales. Net income of $28.7 million
represented a 25.6% return on average equity compared with a return on average
equity of 28.6% for fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales increased 14.1% to $532.6 million for fiscal 1995
compared with $466.9 million in fiscal 1994. The sales mix was identical for
both years, with supplies constituting 62%, equipment 27% and other products and
services 11%. Fiscal 1995 consisted of 52 weeks of Canadian subsidiary sales
and fiscal 1994 consisted of 30 weeks of Canadian subsidiary sales (the Canadian
subsidiary was acquired on October 1, 1993). The additional 22 weeks of Canadian
subsidiary sales contributed 4.9% of the total 14.1% increase in sales. The
remaining 9.2% increase in sales is attributable primarily to higher unit sales
in most of the Company's product lines and to a lesser extent price increases.
The growth in unit sales was offset by one less selling week in the U.S. for
fiscal 1995. The number of customers who purchased consumable dental supplies
from the Company was 75,200 and the average consumable sales per customer
increased 12.7% to $4,200 in fiscal 1995.
Gross Profit. As a result of increased sales, gross profit increased 14.5%
to $189.7 million for fiscal 1995 compared with $165.6 million for fiscal 1994.
Gross margin as a percent of sales increased to 35.6% in fiscal 1995 from 35.5%
in fiscal 1994. The improvement in gross margin can be attributed to the
additional 22 weeks of the Company's Canadian subsidiary sales in fiscal 1995,
and the higher margins associated with the Company's Canadian subsidiary sales.
The improvement in gross margin was partially offset by the higher LIFO
adjustment in fiscal 1995 ($785,000) versus fiscal 1994 ($190,000). See note 1
of Notes to Consolidated Financial Statements - Summary of Significant
Accounting Policies - Inventory.
Operating Expenses. Operating expenses increased 12.9% to $151.6 million
for fiscal 1995 compared with $134.3 million for fiscal 1994. Increased sales
volume was the main reason for the increase in operating expenses. Both the U.S.
and the Company's Canadian subsidiary operating expenses as a percent of sales
decreased in fiscal 1995. The U.S. operation's decrease in operating expense
ratio was due mainly to its ability to move more product through its
distribution system without incurring a proportionate increase in expenses. The
Canadian subsidiary's decrease in operating expense ratio results from cost
reductions and increased sales. The rate at which the Canadian subsidiary's
ratio declined is not expected to be as great next year. The U.S. operating
expense ratio declined to 27.7% from 28.0%, and the Company's Canadian
subsidiary operating expense ratio declined from 40.6% to 35.0%. As a result,
the consolidated operating expense ratio declined to 28.5% from 28.8%.
Operating Income. Operating income increased 21.6% to $38.1 million for
fiscal 1995 compared with $31.3 million for fiscal 1994. Operating income as a
percent of sales increased to 7.1% from 6.7% due
11
primarily to the decrease in operating expenses as a percent of sales, and to a
lesser extent from the increase in gross margin.
Other Income. Other income was $1,043,000 in fiscal 1995 compared with
$643,000 in fiscal 1994. The gain was due mainly to a $315,000 increase in
income earned on financing of customer equipment purchases.
Income Taxes. The Company's effective tax rate was 38.2% for fiscal 1995
and 39.7% for fiscal 1994. The decrease in the effective tax rate results
primarily from a profit in our Canadian subsidiary and utilization of the
Canadian subsidiary's net operating loss carryforwards, versus a loss in the
prior year for which no tax benefit was recognized.
Net Income. Net income increased $4.9 million, or 25.4%, to $24.2 million
for fiscal 1995 on a 14.1% increase in sales. The Company's Canadian subsidiary
net income increased by $1.9 million to a profit of $0.7 million for fiscal 1995
from a loss of $1.2 million for fiscal 1994. Net income of $24.2 million
represented a 28.6% return on average equity compared with return on average
equity of 30.8% for fiscal 1994.
Liquidity and Capital Resources
The following table summarizes certain balance sheet items as a percent of
total assets.
April 27, 1996 April 29, 1995
--------------- ---------------
Total assets 100.0% 100.0%
Current assets 86.1 86.3
Current liabilities 31.0 35.2
Long-term debt 1.5 1.9
Deferred tax liability 0.6 0.4
Stockholders' equity 62.7 56.9
Working capital rose 28.2% to $111.9 million at the end of fiscal 1996
compared with $87.2 million in fiscal 1995. The increase in working capital
occurred primarily in cash and cash equivalents which resulted from net profits
of $28.7 million for the fiscal year ended April 27, 1996. The current ratio
increased from 2.4 to 1 to 2.8 to 1 during this period.
Patterson continues to maintain appropriate balance sheet liquidity with
cash and receivables representing 61% of total assets at fiscal year end 1996.
The quick ratio was at 2.0 to 1 at year-end 1996.
Capital expenditures net of dispositions were $6.9 million in fiscal 1996
compared with $6.2 million in fiscal 1995. In fiscal 1996, $4.3 million was
invested in the new California distribution center, and $1.1 million was
invested in new data processing equipment including remote order entry systems
(REMO and PDXpress/TM/). The planned fiscal 1997 capital expenditures are $5.7
million, which includes $3.2 million in new data processing equipment.
At the end of fiscal 1996, the Company had $46.1 million in cash; long-term
debt of $3.0 million, which consisted of the mortgage on its Montreal facility;
and a $30.0 million bank credit agreement. The bank credit agreement provides
for unsecured borrowings and sales of installment contract receivables of up to
a combined $30 million until April, 1997. The agreement requires that the
Company maintain a minimum current ratio, maximum leverage ratio and minimum net
worth. The Company was in compliance with the covenants at April 27, 1996. The
Company believes it has sufficient capital, committed bank lines and additional
borrowing capacity to meet existing and presently anticipated needs.
12
ASSET MANAGEMENT
The following table summarizes the Company's days sales outstanding,
inventory turnover, and sales per employee over the past three fiscal years:
1996 1995 1994
---- ---- ----
Day sales outstanding 45 45 46
Inventory turnover(1) 7.1 7.1 7.7
Sales per employee (000's) $233 $228 $239
(1) The inventory values used in this calculation are the LIFO inventory values
for U.S. inventories and the FIFO inventory value for Canadian inventories.
Days sales outstanding have remained relatively constant over the past
three years.
The inventory balance decreased $11.4 million to $48.8 million at the end
of fiscal 1996 from $60.2 million at the end of fiscal 1995. The decrease was
due primarily to the forward buying opportunities that were taken advantage of
at the end of fiscal 1995, which were not available at the end of fiscal 1996.
EFFECT OF INFLATION
Inflation has not had a significant effect on the Company's operations and
the Company believes that supplier price increases can be passed on to its
customers.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company wishes to caution shareholders and prospective investors that
the following important factors, among others, could in the future affect the
Company's actual operating results which could differ materially from those
expressed in any forward-looking statements made by the Company. The statements
under this caption are intended to serve as cautionary statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for such
purpose. The order in which such factors appear below should not be construed
to indicate their relative importance or priority.
. Reduced growth in expenditures for dental services by private dental
insurance plans.
. Accuracy of the Company's assumptions concerning future per capita
expenditures for dental services, including assumptions as to
population growth and the demand for preventive dental services such
as periodontic, endodontic and orthodontic procedures.
. The rate of growth in demand for infection control products currently
used for prevention of the spread of communicable diseases such as
AIDS, hepatitis and herpes.
. The effects of health care reform, increasing emphasis on controlling
health care costs and legislation or regulation of health care
pricing, all of which may affect the ability of dentists to obtain
reimbursement for use of new and state-of-the-art procedures and
technologies.
. The amount and rate of growth of the Company's selling, general and
administrative expenses.
. The effects of, and changes in, U.S. and world social and economic
conditions, monetary and fiscal conditions, laws and regulations,
other activities of governments, agencies and similar
13
organizations, trade policies and taxes, import and other charges,
inflation and monetary fluctuations; the ability or inability of the
Company to obtain or hedge against foreign currencies, foreign
exchange rates and fluctuations in those rates.
. Ability of the Company to retain its base of customers and to increase
its market share.
. The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
. Changes in economics of dentistry affecting dental practice growth and
the demand for dental products, including the ability and willingness
of dentists to invest in high-technology diagnostic and therapeutic
products.
. The Company's ability to meet increased competition from national,
regional and full-service distributors and mail-order distributors of
dental products, while maintaining current or improved profit margins.
. Continued ability to maintain satisfactory relationships with key
vendors and the ability of the Company to create relationships with
additional manufacturers of quality, innovative products.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the accompanying consolidated balance sheets of Patterson Dental
Company as of April 27, 1996 and April 29, 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended April 27, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the consolidated financial position of
Patterson Dental Company at April 27, 1996 and April 29, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended April 27, 1996, in conformity with generally accepted
accounting principles.
As discussed in the notes to the financial statements, the Company changed its
method of estimating inventory cost indices used in its LIFO inventory valuation
in fiscal 1995.
Minneapolis, Minnesota Ernst & Young LLP
May 29, 1996, except for Note 7
as to which the date is July 3, 1996
15
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
ASSETS
APRIL 27, APRIL 29,
1996 1995
Current assets:
Cash and cash equivalents...................................................... $ 46,056 $ 13,570
Receivables, net of allowance for doubtful accounts of $4,872 and $5,412
at April 27, 1996 and April 29, 1995, respectively............................. 77,215 70,736
Inventory...................................................................... 48,787 60,188
Prepaid expenses............................................................... 1,729 2,079
Deferred taxes................................................................. 898 847
-------- --------
Total current assets......................................................... 174,685 147,420
Property and equipment, net...................................................... 25,740 22,486
Other............................................................................ 2,375 862
-------- --------
Total assets................................................................. $202,800 $170,768
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 42,520 $ 42,998
Accrued payroll expense....................................................... 9,504 7,958
Other accrued expenses........................................................ 8,421 7,383
Income taxes payable.......................................................... 2,220 1,716
Current maturities of long-term debt.......................................... 151 136
-------- --------
Total current liabilities.................................................. 62,816 60,191
Long-term debt................................................................... 3,024 3,188
Deferred taxes................................................................... 1,157 631
-------- --------
Total liabilities................................................................ 66,997 64,010
Deferred credits................................................................. 8,682 9,567
Commitments and contingent liabilities
Stockholders' equity:
Preferred Stock Series A, $.01 par value, $11.20 per share liquidation value:
Authorized shares - 10,000,000
Issued and outstanding shares - 3,553,627, and 3,564,050 at
April 27, 1996 and April 29, 1995, respectively....................... 21,885 21,949
Preferred Stock, $.01 par value:
Authorized shares - 20,000,000............................................ - -
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 17,701,435, and 17,627,949 at
April 27, 1996 and April 29, 1995, respectively....................... 177 176
Additional paid-in capital.................................................... 31,435 30,360
Cumulative translation adjustment............................................. (189) (92)
Retained Earnings............................................................. 89,713 61,587
Note receivable from ESOP..................................................... (15,900) (16,789)
-------- --------
Total stockholders' equity................................................. 127,121 97,191
-------- --------
Total liabilities and stockholders' equity................................. $202,800 $170,768
======== ========
16
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
YEAR ENDED
-----------------------------------
APRIL 27, APRIL 29, APRIL 30,
1996 1995 1994
---------- ---------- -----------
Net sales................................. $581,893 $532,598 $466,882
Cost of sales............................. 376,507 342,868 301,239
-------- -------- --------
Gross profit.............................. 205,386 189,730 165,643
Operating expenses........................ 161,676 151,640 134,317
-------- -------- --------
Operating income.......................... 43,710 38,090 31,326
Other income and expense:
Amortization of deferred credits...... 885 885 885
Finance income, net................... 1,518 632 317
Interest expense...................... (410) (503) (533)
Profit (loss) on currency exchange.... 5 29 (26)
-------- -------- --------
Income before income taxes................ 45,708 39,133 31,969
Income taxes.............................. 16,961 14,953 12,683
-------- -------- --------
Net income................................ $ 28,747 $ 24,180 $ 19,286
======== ======== ========
Net income available for
common shareholders................... $ 28,125 $ 23,572 $ 18,685
======== ======== ========
Earnings per common and common
equivalent share...................... $1.31 $1.10 $0.87
======== ======== ========
Weighted average common and
common equivalent shares outstanding.. 21,539 21,488 21,485
======== ======== ========
17
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
PREFERRED ADDITIONAL CUMULATIVE NOTE
STOCK COMMON PAID-IN TRANSLATION RETAINED RECEIVABLE
SERIES A STOCK CAPITAL ADJUSTMENT EARNINGS FROM ESOP TOTAL
--------- ------ ---------- ----------- -------- ---------- --------
Balance at April 24, 1993......... $22,000 $117 $30,088 $ - $19,389 $(18,452) $ 53,142
Tax benefit on unallocated
ESOP Shares.................. - - - - 292 - 292
Change in translation
adjustment..................... - - - (420) - - (420)
Common stock issued, net........ (4) - 4 - - - -
Dividend paid................... - - - - (893) - (893)
Cash payments received on note
receivable from ESOP........... - - - - - 772 772
Stock split (3 for 2)........... - 59 - - (59) - -
Net income...................... - - - - 19,286 - 19,286
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 30, 1994......... 21,996 176 30,092 (420) 38,015 (17,680) 72,179
Tax benefit on unallocated
ESOP shares.................... - - - - 283 - 283
Change in translation
adjustment..................... - - - 328 - - 328
Common stock issued, net........ (47) - 268 - - - 221
Dividend paid................... - - - - (891) - (891)
Cash payments received on note
receivable from ESOP........... - - - - - 891 891
Net income...................... - - - - 24,180 - 24,180
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 29, 1995......... 21,949 176 30,360 (92) 61,587 (16,789) 97,191
Tax benefit on unallocated
ESOP shares.................... - - - - 268 - 268
Change in translation
adjustment..................... - - - (97) - - (97)
Common stock issued, net........ (64) 1 1,075 - - - 1,012
Dividend paid................... - - - - (889) - (889)
Cash payments received on note
receivable from ESOP........... - - - - - 889 889
Net income...................... - - - - 28,747 - 28,747
--------- ------ ---------- ----------- ------- ---------- --------
Balance at April 27, 1996......... $21,885 $177 $31,435 $(189) $89,713 $(15,900) $127,121
========= ====== ========== =========== ======= ========== ========
18
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED
--------------------------------
APRIL 27, APRIL 29, APRIL 30,
1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income................................................. $28,747 $ 24,180 $ 19,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation............................................ 3,776 3,305 2,510
Amortization of deferrals............................... (1,024) (876) (875)
Bad debt expense........................................ 472 681 792
Deferred taxes.......................................... 475 234 10
Change in assets and liabilities net of acquired:
Increase in receivables.............................. (7,017) (6,599) (10,499)
(Increase) decrease in inventory..................... 12,539 (15,641) (9,167)
Increase (decrease) in accounts payable.............. (657) 13,319 4
Increase in accrued liabilities...................... 2,488 2,927 952
Other changes from operating activities, net......... 1,164 (107) 245
------- -------- --------
Net cash provided by operating activities............ 40,963 21,423 3,258
INVESTING ACTIVITIES:
Additions to property and equipment, net................... (6,906) (6,175) (8,951)
Acquisitions............................................... (2,401) - (8,399)
------- -------- --------
Net cash used in investing activities...................... (9,307) (6,175) (17,350)
FINANCING ACTIVITIES:
Payments and retirement of long-term debt and obligations
under capital leases...................................... (138) (118) (4,717)
Increase (decrease) in revolving credit.................... - (5,685) 5,685
Payment of dividend........................................ (889) (891) (893)
Cash payments received on note receivable from ESOP........ 889 891 772
Common stock issued, net................................... 1,012 229 -
------- -------- --------
Net cash (used in) provided by financing activities........ 874 (5,574) 847
Effect of exchange rate changes on cash.................... (44) 18 (5)
------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 32,486 9,692 (13,250)
Cash and cash equivalents at beginning of period........... 13,570 3,878 17,128
------- -------- --------
Cash and cash equivalents at end of period................. $46,056 $ 13,570 $ 3,878
======= ======== ========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid.......................................... $15,977 $ 14,993 $ 12,109
Interest paid.............................................. 413 509 804
19
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company's
wholly owned subsidiaries Direct Dental Supply Company and Patterson Dental
Canada Inc. All significant intercompany transactions have been eliminated in
consolidation.
Description of Business
The Company is the largest provider of dental equipment, supplies and
services to dentists, institutional customers and dental laboratories in North
America, operating from 98 locations with approximately 2,500 employees. The
Company distributes approximately 70,000 dental products from over 1,100
manufacturers, offering specialty items and services including the Patterson
private label line of dental items.
Fiscal Year End
The fiscal year end for the Company is the last Saturday in April. Fiscal
year 1994 included fifty-three weeks.
Cash and Cash Equivalents
Cash equivalents consist of investments in money market funds and floating
rate municipal bonds. Cost approximates fair value.
Inventory
Inventory consists of merchandise held for sale and is stated at the lower
of cost or market. Cost is determined using the last-in, first-out (LIFO) method
for domestic inventories and the first-in, first-out (FIFO) method for foreign
inventories. Inventories valued at LIFO represent 83% of total inventories at
April 27, 1996 and 85% at April 29, 1995. In the fourth quarter of fiscal 1995,
the Company adopted an internally-generated price index to estimate the change
in its inventory costs for use in its LIFO inventory valuation. Previously, the
Company used the consumer price index for non-prescription medical equipment and
supplies to estimate inventory cost changes. The Company believes that the
internal price index better reflects the impact of its inventory cost changes.
This change resulted in a reduction of fiscal 1995's cost of sales of
approximately $1,800 and an increase in fiscal 1995's net income of
approximately $.05 per share. The cumulative effect could not be determined.
The accumulated LIFO provision was $9,733 at April 27, 1996, and $8,179 at
April 29, 1995. The Company believes that inventory replacement cost exceeds
the inventory balance by an amount approximating the LIFO reserve.
Property and Equipment
Property and equipment are stated at cost. The Company provides
depreciation on the straight-line method over estimated useful lives of 40 years
for buildings, 3 to 20 years for leasehold improvements or the
20
term of the lease, if less, 5 years for data processing equipment, and 5 to 10
years for office furniture and equipment.
Earnings Per Common Share
Earnings per share information assumes the conversion of Patterson
Preferred to Common at the ratio of 1 to 1.08 for shares held by the ESOP.
Patterson Preferred along with dilutive stock options are common stock
equivalents. For purposes of this computation, net income was reduced by an
amount equal to the preferred stock dividends, net of applicable taxes. Such
reduction reflects the additional compensation expense necessary to fund the
ESOP, absent such dividends.
Income Taxes
The Company adopted the provisions of the Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes" in its financial
statements in the first quarter of the year ended April 30, 1994. The adoption
of the standard did not have a material impact on financial position or results
of operations.
Under Statement 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption of
Statement 109, income tax expense was determined using the liability method
prescribed by Statement 96. Statement 109 changed the recognition and
measurement criteria for deferred tax assets. In addition, Statement 109
requires that the benefit from the tax deductibility of dividends paid on
unallocated shares held by an ESOP be treated as a direct credit to
stockholder's equity whereas under Statement 96 such benefit was treated as a
reduction of income tax expense.
Employee Stock Ownership Plan
Compensation expense related to the Company's defined contribution ESOP is
computed based on the shares allocated method. Such amounts have been reduced
by related Preferred Stock dividends.
The Patterson Preferred Stock Series A (Patterson Preferred) pays an annual
dividend of $.25 per share, cumulative and is non-participating. All preferred
shares outstanding are held by Patterson's Employee Stock Ownership Plan (ESOP).
The shares are redeemable at the option of Patterson any time after June 30,
1996, or earlier upon the occurrence of certain events, some of which are
related to the market price of Patterson's Common Stock at a redemption price of
$11.20 per share. Patterson Preferred is redeemable at the option of the holder
at a redemption price equal to the greater of $11.20 per share plus accumulated
dividends, or the fair market value under certain circumstances. Upon
distribution ESOP participants receive the greater of the then fair market value
or $11.20 per share. Patterson has the option of settling all redemptions and
distributions out of the ESOP in either cash, Common Stock or a combination
thereof, except participants may elect to receive Common Stock. Patterson
Preferred is convertible to Common Stock at the ratio of 1.08 common shares for
each share of Patterson Preferred prior to redemption. The holder of Patterson
Preferred has the right to vote on a per share basis equal to the 1.08
conversion ratio. Cash dividends on Common Stock cannot be declared or paid
until accumulated dividends on Patterson Preferred have been paid or declared
and provided for.
21
Deferred Credits
Negative goodwill (deferred credit) arose through the purchase of the
Patterson business in fiscal 1986 and D.L. Saslow Co., Inc. in fiscal 1988. The
Company is amortizing the deferred credits on a straight-line basis over 20
years.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets
In 1997, the Company will be subject to the provisions of FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1997 and, based on
current circumstances, does not believe the effect of adoption will be material.
Prior Year Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 presentation.
2. ACQUISITIONS
During 1996, the Company acquired all of the common stock of Barber Dental
Supply, Inc., located in Omaha, Nebraska. Barber was merged into the Company.
The Company also acquired certain assets of Eagle Dental Supply, Inc., located
in Kansas City, Missouri. Both acquisitions have been accounted for as
purchases and, accordingly, their net assets and operating results are included
in the Company's financial statements from the respective dates of acquisition.
The pro forma impact of the acquisitions on the Company's results of operations
for all years presented was not material.
On October 1, 1993, the Company purchased for cash consideration of
approximately $8.4 million, Healthco Canada Inc., a wholly owned subsidiary of
Healthco International, Inc. Healthco Canada Inc. was engaged in the sale and
distribution of dental products in Canada. The acquisition was accounted for as
a purchase and, accordingly, the net assets and results of operations are
included in the accompanying financial statements since the date of acquisition.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition had occurred at the beginning of the 1994
fiscal period. The proforma information does not purport to be indicative of the
results of operations that would have occurred had the acquisition been made as
of those dates, or results which may occur in the future.
22
Year Ended
April 30, 1994
--------------
Net sales $490,366
Income before taxes 30,706
Net income 18,095
Earnings per share $0.79
3. PROPERTY AND EQUIPMENT
APRIL 27, APRIL 29,
1996 1995
--------- ----------
Land................................... $ 2,698 $ 2,549
Buildings.............................. 12,637 9,941
Leasehold improvements................. 1,219 1,155
Furniture and equipment................ 8,138 5,778
Data processing equipment.............. 13,036 12,127
-------- -------
37,728 31,550
Accumulated depreciation............... (11,988) (9,064)
-------- -------
$ 25,740 $22,486
======== =======
4. LONG-TERM DEBT
APRIL 27, APRIL 29,
1996 1995
---------- ---------
Mortgage.......................... $ 3,095 $ 3,216
Obligations under capital leases.. 80 108
-------- -------
3,175 3,324
Less current maturities........... 151 136
-------- -------
$ 3,024 $ 3,188
======== =======
The Company has a revolving credit agreement which provides for unsecured
borrowings and sales of installment contract receivables of up to a combined $30
million until April 1997. The agreement requires that the Company maintain a
minimum current ratio, maximum leverage ratio and minimum net worth. The Company
was in compliance with the covenants at April 27, 1996.
The mortgage obligation is an 11 1/2%, 20 year mortgage starting in 1988 on
5,000 Canadian dollars. The mortgage covers Patterson Dental Canada's Montreal
building. Monthly payments are 52 Canadian dollars. Long-term debt becomes due:
$151 in 1997, $169 in 1998, $165 in 1999, $168 in 2000, $188 in 2001 and the
balance thereafter.
5. LEASES
The Company leases facilities for its branch locations and office
equipment. These leases are accounted for as operating leases. Future minimum
rental payments under noncancelable operating leases are as follows for the
years ending in April:
1997............................. $ 3,696
1998............................. 3,380
1999............................. 2,664
23
2000............................................. 1,800
2001............................................. 861
Thereafter....................................... 605
-------
Total minimum payments required.................. $13,006
=======
Rent expense was $4,542, $4,529 and $4,125 for the years ended April 27,
1996, April 29, 1995 and April 30, 1994, respectively.
6. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
1996 1995 1994
-------- ------- --------
Income (loss) before income taxes:
United States.......................... $44,290 $38,404 $33,153
Canada................................. 1,418 729 (1,184)
------- ------- -------
Total................................. $45,708 $39,133 $31,969
======= ======= =======
Significant components of the provision for income taxes are as follows
1996 1995 1994
------- ------- --------
Current:
Federal................................ $13,642 $12,022 $10,536
Foreign................................ - - -
State.................................. 2,844 2,697 2,137
------- ------- ------
Total current......................... 16,486 14,719 12,673
Deferred:
Federal................................ 418 191 9
Foreign................................ - - -
State.................................. 57 43 1
------- ------ -------
Total deferred........................ 475 234 10
------- ------- -------
Provisions for income taxes................. $16,961 $14,953 $12,683
======= ======= =======
Significant components of the Company's deferred tax liabilities and assets as
of April 27, 1996 and April 29, 1995, are as follows:
1996 1995
-------- --------
Canadian net operating loss carryforward. $ 4,162 $ 5,972
Bad debt allowance....................... 918 914
Unicap COS............................... 521 894
ESOP unearned compensation............... 351 112
Inventory obsolescence reserve........... 286 327
Hospital insurance....................... 225 280
Vacation pay accrual..................... 195 188
LIFO reserve............................. (1,288) (1,815)
Depreciation............................. (522) (597)
Financing income......................... (835) --
Other.................................... (110) (87)
Valuation allowance...................... (4,162) (5,972)
-------- -------
24
Total................................... $ (259) $ 216
======= =======
Deferred income tax expense (benefit) results from temporary differences in
the recognition of income and expense items for tax and financial statement
reporting purposes.
Income tax expense varies from the amount computed using the U.S. statutory
rate. Causes of these differences and the related tax effects are shown below:
1996 1995 1994
---- ---- ----
Tax at U.S. statutory rate................... $15,998 $13,697 $11,189
State tax provision, net of federal benefit.. 1,886 1,781 1,390
Effect of foreign (income) losses............ (496) (256) 414
ESOP dividend on allocated preferred stock... (74) (63) (54)
Amortization of deferred credit.............. (310) (310) (310)
Other........................................ (43) 104 54
------- ------- -------
$16,961 $14,953 $12,683
======= ======= =======
At April 27, 1996, the Company had net operating loss carryforwards of
$10,006 for Canadian income tax purposes that expire in years 1998 through 2001.
Those carryforwards resulted from the Company's fiscal 1994 acquisition of
Healthco Canada Inc. (see Note 2 - "Acquisitions"). For financial reporting
purposes, a valuation allowance of $4,162 has been established to reduce the
deferred tax assets to their net realizable value.
7. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan (ESOP)
During 1990, the Company's Board of Directors adopted a leveraged ESOP.
During fiscal 1991, under the provisions of the plan and related financing
arrangements, the Company loaned the ESOP $22,000 for the purpose of acquiring
its then outstanding preferred stock. The cost of the ESOP is borne by the
Company through annual contributions to the plan in amounts determined by the
Board of Directors. Shares of stock acquired by the plan are allocated to each
employee who has completed l,000 hours of service during the plan year. During
l996, 1995 and 1994, shares with a cost of $800, $900 and $800 respectively,
were earned and allocated to ESOP participants.
During 1996, 1995 and 1994, the ESOP funding was effected through a
preferred stock dividend aggregating $889, $891 and $893, respectively, which
served to reduce recorded compensation expense.
At April 27, 1996 and April 29, 1995, indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheet.
At April 27, 1996, 974,900 shares of the ESOP preferred stock were
allocated to participants and had a fair value of $33,195.
On June 24, 1996, the Company called for redemption all of the outstanding
shares of the Preferred Stock Series A which had a redemption value of $39,792
plus accrued dividends of $231. The trustee for the ESOP converted the Preferred
Shares into 3,837,083 shares of Common Stock on July 3, 1996. Had the stock
conversion occurred on April 25, 1993, earnings per share would have been
unchanged for each of the three years in the period ended April 27, 1996.
Stock Option Plan
In June 1992, the Company adopted the Patterson Dental Company 1992 Stock
Option Plan (the "Plan"). The Plan provides for the granting of options to
designated employees and non-employees, including consultants to the Company, to
purchase up to a maximum of 1,350,000 shares of Common Stock. The Plan is
administered by the Stock Option Committee, which determines the employees,
officers and others who are
25
to receive options, the type of option to be granted, and the number of shares
subject to each option and the exercise price of each option.
Stock options must be granted at an exercise price not less than the fair
market value of the Common Stock on the dates the options are granted (or, for
persons who own more than 10% of the Company's outstanding voting stock, not
less than 110% of such fair market value). No options have been granted to date
under the Plan.
Director Stock Option Plan
In June 1992, the Company adopted the 1992 Director Stock Option Plan (the
"Director Option Plan"), pursuant to which 225,000 shares of Common Stock have
been reserved for the grant of non-statutory stock options to the Company's
outside directors. Options are granted at the fair market value on the date of
grant and are exercisable for a period of four years commencing one year after
the date of grant. At April 27, 1996, the Company's current outside directors
held the following options:
Date of Grant Granted Exercised Held Price Per Share
------------- ------- --------- ------ ---------------
9/1/92 45,000 15,000 30,000 $10.67
10/1/93 18,000 - 18,000 $21.83
10/1/94 18,000 - 18,000 $18.00
10/1/95 18,000 - 18,000 $26.50
------ ------ ------
99,000 15,000 84,000
====== ====== ======
Employee Stock Purchase Plan
In June 1992, the Company adopted a employee stock purchase plan (the
"Stock Purchase Plan"). A total of 225,000 shares of Common Stock are reserved
for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code is
administered by the Board of Directors of the Company, or by a committee
appointed by the Board of Directors. Employees are eligible to participate after
a year of employment with the Company if they are employed for at least 20 hours
per week and more than five months per year. The Stock Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation, at 85% of the lower of the
fair market value of the Common Stock on the offering date or at the end of each
three-month period following the offering date during the applicable offering
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. Employees purchased 50,747 and 13,279 shares in
1996 and 1995, respectively. At April 27, 1996, 160,974 shares were available
for purchase under the plan.
The Company follows the guidance in accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations
to account for its stock-based plans.
8. LITIGATION
In the ordinary course of business, the Company is subject to a variety of
product-related and employment related liability claims. The Company's
management and legal counsel believe that the loss, if any, resulting from these
claims will be substantially covered by insurance or third party
indemnification, and any uninsured losses from such claims will not have a
materially adverse effect on its operations or financial position.
26
9. OPERATIONS BY GEOGRAPHIC AREA
The Company operates predominantly in one industry segment, the
distribution of dental supplies, equipment and related services. The following
is a summary of the Company's operations in different geographic areas:
Year Ended
-------------------------------
April 27, April 29, April 30,
1996 1995 1994
--------- --------- ---------
Net sales from unaffiliated customers:
United States $526,055 $478,361 $437,723
Canada 55,838 54,237 29,159
Operating income:
United States $ 41,744 $ 36,112 $ 31,986
Canada 1,966 1,978 (660)
Identifiable assets:
United States $176,135 $144,665 $115,026
Canada 26,665 26,103 21,170
10. QUARTERLY RESULTS (unaudited)
Quarterly results are determined in accordance with the accounting policies
used for annual data and include certain items based upon estimates for the
entire year. All fiscal quarters include results for 13 weeks. The following
table summarizes results for fiscal 1996 and 1995.
Three Months Ended
---------------------------------------------
April 27, January 27, October 28, July 29,
1996 1996 1995 1995
--------- ----------- ----------- --------
Net sales................ $155,172 $148,672 $143,709 $134,340
Gross profit............. 55,295 52,148 50,265 47,678
Operating income......... 12,344 10,780 10,685 9,901
Net income............... 8,413 7,016 6,999 6,319
Earnings per common and
common equivalent share. $0.38 $0.32 $0.32 $0.29
Three Months Ended
---------------------------------------------
April 29, January 29, October 29, July 30,
1995 1995 1994 1994
--------- ---------- ----------- --------
Net sales................ $140,510 $136,536 $131,926 $123,626
Gross profit............. 52,177 47,801 46,323 43,429
Operating income......... 11,201 9,356 9,282 8,251
Net income............... 7,009 6,009 5,947 5,215
Earnings per common and
common equivalent share. $0.32 $0.27 $0.27 $0.24
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated herein
by reference to the descriptions set forth under the caption "Election of
Directors" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held September 9, 1996 (the "1996 Proxy Statement"). Set
forth below are the names, ages and positions of the executive officers of the
Company.
Peter L. Frechette 58 President and Director
Ronald E. Ezerski 50 Vice President, Treasurer, Secretary and Director
James W. Wiltz 50 Vice President, Sales and Distribution
John V. Dodd 58 Vice President, Management Information Systems
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is employed
pursuant to a written employment contract.
BACKGROUND EXECUTIVE OFFICERS
PETER L. FRECHETTE has been President of the Company since September 1982
and has been a director of Patterson since March 1983. Prior to joining
Patterson, Mr. Frechette was employed by American Hospital Supply Corporation
for 18 years, the last seven of which he served as president of its Scientific
Products Division. Mr. Frechette holds an M.B.A. degree from Northwestern
University and a B.S. degree in economics from the University of Wisconsin.
RONALD E. EZERSKI has been Vice President, Treasurer and Secretary of the
Company since December 1982 and was President of its subsidiary, Dental Capital
Corporation, from December 1982 until October 1988 when it was merged into the
Company. Mr. Ezerski has been a director of Patterson since March 1983. Prior to
joining Patterson in December 1982, Mr. Ezerski was Controller and Treasurer of
Estech, Inc., a subsidiary of Esmark, Inc. Prior to that, Mr. Ezerski was
Manager of the Special Projects Department for two years at Esmark. Prior to his
employment with Esmark, Mr. Ezerski spent eight years at Touche Ross & Co. as an
assistant and then manager on its audit staff. Mr. Ezerski holds a B.S. degree
in accounting from DePaul University and is a certified public accountant.
JAMES W. WILTZ has been Vice President of the Company since it was acquired
from The Beatrice Companies, Inc. and has been employed by Patterson since
September 1969, initially as a territory sales representative, then an equipment
specialist and later a branch manager. In 1980, Mr. Wiltz was appointed Vice
President of the Midwestern Division and was appointed Vice President, Sales and
Distribution in 1986.
JOHN V. DODD joined Patterson in February 1989 as Vice President,
Management Information Systems. Prior to joining Patterson, Mr. Dodd was
Director of System Development for Ecolab, Inc. Mr. Dodd is a graduate of the
University of Illinois and has been associated with G.D. Searle Corporation and
Wilson Companies, where he implemented data processing programs for increased
productivity in distribution organizations. Mr. Dodd has more than 25 years of
experience in the management information systems area.
28
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference to the information set forth under the caption "Compensation of
Executive Officers" in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the information
set forth under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data of
the Company and its subsidiaries, required by Part II, Item 8 are filed
herewith:
Report of Independent Auditors
Consolidated Balance Sheets as of April 27, 1996 and April 29, 1995
Consolidated Statements of Operations for the Years Ended April 27, 1996,
April 29, 1995 and April 30, 1994
Consolidated Statements of Stockholders' Equity for the Years
Ended April 27, 1996, April 29, 1995 and April 30, 1994
Consolidated Statements of Cash Flows for the Years Ended April 27, 1996,
April 29, 1995 and April 30, 1994
Notes to Consolidated Financial Statements
(A) 2. FINANCIAL STATEMENTS.
The following financial statement schedule is filed herewith: Schedule II
- - Valuation and Qualifying Accounts for the Years Ended April 27, 1996, April
29, 1995 and April 30, 1994.
Schedules other than those listed above have been omitted because they are
not applicable or the required information is included in the financial
statements or notes thereto.
(A) (3) EXHIBITS.
Exhibit
-------
3.1 The Company's Articles of Incorporation*
3.2 The Company's Bylaws, as amended*
4.1 Specimen form of the Company's Common Stock Certificate*
29
4.2 The Company's Articles of Incorporation, as amended (see Exhibit 3.1
and Exhibit 3.2)
4.3 The Company's Bylaws (see Exhibit 3.3)
10.1 Patterson Dental Company Employee Stock Ownership Plan, as amended*
10.2 Patterson Dental Company 1992 Stock Option Plan*
10.3 Patterson Dental Company 1992 Director Stock Option Plan*
10.4 Patterson Dental Company Employee Stock Purchase Plan*
10.5 Patterson Dental Company Capital Accumulation Plan
10.6 Incentive Compensation Program (Fiscal 1992)*
10.7 Dividend Payment Agreement dated June 25, 1990*
10.8 ESOP Loan Agreement dated June 15, 1990 as amended July 13, 1992*
10.9 Amended and Restated Term Promissory Note dated July 13, 1992*
11 Computation of Earnings Per Share
21 Subsidiaries**
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-51304) filed with the Securities and Exchange Commission
August 26, 1992.
** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended April 30, 1994.
(B) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended April 27, 1996.
30
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PATTERSON DENTAL COMPANY
Dated: July 15, 1996
By /s/Peter L. Frechette
-------------------------------------
Peter L. Frechette,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date
-------------
/s/Peter L. Frechette President and Director (Principal July 15, 1996
- ----------------------- Executive Officer)
Peter L. Frechette
/s/Ronald E. Ezerski Vice President, Treasurer, Secretary July 15, 1996
- ----------------------- and Director (Principal Financial and
Ronald E. Ezerski Accounting Officer)
/s/David K. Beecken Director July 15, 1996
- -----------------------
David K. Beecken
/s/Burt E. Swanson Director July 15, 1996
- -----------------------
Burt E. Swanson
/s/Andre B. Lacy Director July 15, 1996
- -----------------------
Andre B. Lacy
31
Report of Independent Auditors
The Board of Directors and Stockholders
Patterson Dental Company
We have audited the consolidated financial statements of Patterson Dental
Company as of April 27, 1996 and April 29, 1995, and for each of the three years
in the period ended April 27, 1996, and have issued our report thereon dated May
29, 1996 (included elsewhere in this Annual Report on Form 10-K). Our audits
also included the financial statement schedule listed in Item 14(a) of this
Annual Report on Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 29, 1996
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PATTERSON DENTAL COMPANY
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO
CHARGED
BEGINNING COSTS AND TO OTHER BALANCE
AT
OF PERIOD EXPENSES ACCOUNTS - DEDUCTIONS END OF
-
($) ($) DESCRIBE ($) DESCRIBE ($) PERIOD ($)
--------- --------- ------------ ------------ ----------
Year ended April 27, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts 5,412 472 - 1,012/(1)/ 4,872
====== ===== =========== =========== ======
LIFO inventory adjustment 8,179 1,554 - 9,733
Inventory obsolescence reserve 1,106 1,137 - 1,229/(2)/ 1,014
------ ----- ----------- ----------- ------
Total inventory reserve 9,285 2,691 - 1,229 10,747
====== ===== =========== =========== ======
Year ended April 29, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts 5,871 681 - 1,140/(1)/ 5,412
====== ===== =========== =========== ======
LIFO inventory adjustment 7,394 785 - - 8,179
Inventory obsolescence reserve 3,558 1,386 - 3,838/(2)/ 1,106
------ ----- ----------- ----------- ------
Total inventory reserve 10,952 2,171 - 3,838 9,285
====== ===== =========== =========== ======
Year ended April 30, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts 2,330 877 3,577/(3)/ 913/(1)/ 5,871
====== ===== =========== =========== ======
LIFO inventory adjustment 7,204 190 - - 7,394
Inventory obsolescence reserve 694 1,086 2,928/(3)/ 1,150/(2)/ 3,558
------ ----- ----------- ----------- ------
Total inventory reserve 7,898 1,276 2,928 1,150 10,952
====== ===== =========== =========== ======
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory disposed of and written off.
(3) Acquisition of Healthco Canada Inc. and effect of changes in foreign
currency exchange rates.
33