Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 27, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0886515
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of principal executive offices including Zip Code)
Registrant's telephone number, including area code: (651) 686-1600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of July 15, 2002, was approximately $2,002,398,000.
As of July 15, 2002, there were 68,174,282 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 2002 Annual Meeting of Shareholders Part III
FORM 10-K INDEX
Page
PART I ................................................................................ 2
Item 1. BUSINESS ............................................................ 2
Item 2. PROPERTIES .......................................................... 13
Item 3. LEGAL PROCEEDINGS ................................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 13
PART II ............................................................................... 14
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ................................................. 14
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ................................ 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................. 15
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......... 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ................................. 37
PART III .............................................................................. 37
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................. 37
Item 11. EXECUTIVE COMPENSATION .............................................. 37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...... 37
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................... 38
PART IV ............................................................................... 38
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..... 38
SIGNATURES ............................................................................ 40
SCHEDULE II ........................................................................... 41
INDEX TO EXHIBITS ..................................................................... 42
i
PART I
1. BUSINESS
Certain information of a non-historical nature contained in Items 1, 2, 3
and 7 of this Form 10-K includes forward-looking statements. Reference is made
to Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors that May Affect Future Operating Results, for a
discussion of certain factors which could cause the Company's actual operating
results to differ materially from those expressed in any forward-looking
statements.
General
Patterson Dental Company ("Patterson" or the "Company") is a value-added
distributor serving the North American dental supply and companion-pet (dogs,
cats and other common household pets) veterinary supply markets. Unless
otherwise indicated, all references to Patterson or the Company include its
subsidiaries: Direct Dental Supply Co.; Patterson Dental Canada, Inc.; Patterson
Dental Supply, Inc,; Webster Veterinary Supply, Inc.; PDC Funding Company, LLC;
Patterson Technology Center Inc.; Colwell Systems, Inc. and Webster Management
LP.
In May 1985, the Company's management and certain investors purchased the
Company from a subsidiary of The Beatrice Companies, Inc. Patterson became a
publicly traded company in October 1992.
The Company historically reported under one operating segment, dental
supply. In July 2001, the Company purchased the assets of J. A. Webster, Inc.
The acquisition became a reportable business segment of the Company, and now
Patterson Dental Company is comprised of two reportable segments, dental supply
and veterinary supply. The Company's reportable segments are strategic business
units that offer similar products and services to different customer bases.
Dental Supply
As Patterson's largest business, Patterson Dental Supply is one of the two
largest distributors of dental products in North America. Patterson Dental
Supply, a full-service, value-added supplier to dentists, dental laboratories,
institutions, physicians, and other healthcare professionals, provides:
consumable products (including x-ray film, restorative materials, hand
instruments and sterilization products); advanced technology dental equipment;
practice management and clinical software; and office forms and stationery. The
Company offers its customers a broad selection of dental products including more
than 85,000 stock keeping units ("SKU's") of which approximately 4,000 are
private-label products sold under the Patterson name. Patterson Dental Supply
also offers customers a full range of related services including dental
equipment installation, maintenance and repair, dental office design and
equipment financing. The Company markets its dental products and services
through over 1,200 direct sales representatives, 253 of whom are equipment
specialists.
Founded in 1877, Patterson Dental Supply has over 125 years of experience
providing quality service to dental professionals. Net sales of this segment
have increased from $165.8 million in fiscal 1986 to $1,280.7 million in fiscal
2002, operating margins have increased every year since fiscal 1985 and
profitability has increased from an operating loss in fiscal 1986 to operating
income of $138.6 million in fiscal 2002.
According to the American Dental Association, there are over 150,000
dentists practicing in the United States in approximately 120,000 dental
practices, representing a fragmented, geographically diverse market. There are
approximately 17,000 licensed dentists in Canada according to the Canadian
Dental Association. The average general practitioner generated approximately
$450,000 in annual revenue in 1999, while the average specialty practitioner
produced about $600,000. The Company believes that a dentist uses between 5% and
7% of annual revenue to purchase consumable supplies which translates into
between $22,000 and $42,000 of supplies each year. However, dentists generally
do not maintain a large supply of inventory on hand.
2
The Company believes that the underlying structure of the dental supply
market is attractive for its role as a value-added full-service distributor. The
dental supply market is large and growing and consists of a sizeable
geographically dispersed number of fragmented dental practices. Total
expenditures for dental services in the United States increased from $13 billion
in 1980 to $64 billion in 2001. Domestic dental care expenditures are projected
by the Health Care Financing Administration to grow 5% annually, reaching $105
billion by the year 2011. The Company believes that the demand for dental
services, 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
277.8 million in 2001, and is expected to reach 299.9 million by 2010.
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 implants.
. Demand for certain dental procedures. Demand is growing for preventive
dentistry and periodontic (the treatment of gums), endodontic (root
canals), orthodontic (braces) and other dental procedures which enable
patients to keep their natural teeth longer and improve their appearance.
. Demand for infection control products. Greater public awareness and new
regulations and guidelines instituted by OSHA, the American Dental
Association and state regulatory authorities have resulted in increased
use of infection control (asepsis) products such as protective clothing,
gloves, facemasks and sterilization equipment to prevent the spread of
communicable diseases such as AIDS, hepatitis and herpes.
. Coverage by dental plans. An increasing percentage of dental services are
being funded by private dental insurance. The Health Care Financing
Administration statistics on expenditures for dental services in the
United States indicate that private dental insurance paid approximately
50% of the $64 billion in total expenditures for 2001 as compared to
approximately 30% of the $13 billion in total expenditures for 1980.
Veterinary Supply
Webster Veterinary Supply is the leading distributor of veterinary supplies
to companion-pet (dogs, cats and other common household pets) veterinary clinics
in the eastern United States and the third largest nationally. Webster provides
products used for the treatment and/or prevention of diseases in companion pets
and, to a lesser extent, equine animals. Founded in 1946 and headquartered in
Sterling, Massachusetts, Webster has developed a strong regional brand identity
as a value-added, full-service distributor of a virtually complete range of
consumable supplies, equipment, diagnostic supplies, biologicals (vaccines) and
pharmaceuticals. Webster does not distribute pet foods. Webster's offerings,
totaling more than 8,000 products, are sold by over 70 field representatives. In
addition to its core business of distributing veterinary products, Webster
Veterinary Supply has a significant agency commission business with a few large
pharmaceutical manufacturers. Under the agency relationships, the Company
typically earns a commission for soliciting orders through its sales force
representatives. Webster's agency commissions accounted for approximately 2% of
net sales in fiscal 2002. Net sales by this segment in fiscal 2002 were $134.8
million. Operating income totaled $8.5 million.
Similar to the dental supply market, the veterinary supply market is
fragmented and geographically diverse. There are approximately 60,000
veterinarians practicing at 21,700 animal health clinics. The vast majority,
approximately 65%, of veterinarians work in private animal health clinics
specializing in small animals, predominately companion pets. The average private
veterinary practice generates approximately $550,000 of annual revenue. These
practices purchase between $80,000 and $120,000 of supplies each year but
similar to the dental practitioner do not maintain a large supply of inventory
on hand. The typical veterinary practice purchases approximately 80% of its
supplies from its top two suppliers. The average purchase of consumables by the
veterinary practice is noticeably higher than that of the dental practitioner
due predominately to pharmaceutical products which are administered and
dispensed by veterinarians.
3
The Company estimates the market for pharmaceuticals and supplies sold to
small animal, companion pet veterinarians is approximately $2.2 billion on an
annual basis. This market breaks down further due to certain manufacturers
wanting more influence over the marketing of specific products. Webster
estimates that approximately $1.5 billion of the market is served through
distributors while the remainder is served through agency relationships between
the manufacturers and the distributors (approximately $500 million), or directly
by the manufacturer. In the agency relationship, the distributor processes the
order to the manufacturer but handles none of the product nor do they bill and
collect from the customer. The agency commissions that Webster Veterinary Supply
earns range from 4% to 8%, a portion of which is shared with the direct sales
personnel.
According to a market study prepared by KMPG LLP for three veterinary
professional organizations in 1999, the demand for veterinary services has grown
significantly faster than growth in the overall economy. Total expenditures for
veterinary services in the United States grew at an inflation adjusted real
annual rate of 7.2% from 1980 through 1997, and are projected to grow 5% on a
real basis annually, through the year 2015. The companion pet segment is the
fastest growing area of the overall U.S. veterinary supply market. The Company
believes this growth is sustainable due to the following favorable factors:
. Number of households with companion pets. The number of households with
companion pets is steadily expanding which increases the demand for
veterinary services. Approximately 58.2 million of the 98.9 million
households in the United States had at least one companion animal in
1996, representing a penetration of 58.9%. The number of households that
had companion animals grew by 3.4 million from 1991 to 1996, with the
penetration rate increasing to 58.9% from 57.9%.
. Veterinary expenditures per household. A factor that affects the total
demand for veterinary services is how actively or regularly pet-owning
households seek veterinary care for their pets. The willingness of
companion pet owners to spend more money at the veterinarian is
increasing substantially. Between 1991 and 1996, the average expenditure
per visit for dog-owning and cat-owning households increased at a
compound annual growth rate of 8.1% and 8.2%, respectively.
. Veterinary products and techniques. Many new therapeutic and preventive
products are being developed for the companion pet market. Technological
developments have resulted in new innovative veterinary products and
advances in veterinary services.
For further information on the Company's operating segments and operations
by geographic area, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this document and Note 8 to
the Consolidated Financial Statements.
Patterson's Strategy
Patterson's objective is to remain a leading national distributor of
supplies, equipment and related services while continuing to improve its
profitability and enhance its value to customers. To achieve this objective,
Patterson has adopted a strategy of emphasizing its value-added, full-service
capabilities, using technology to enhance customer service, continuing to
improve operating efficiencies, and growing through internal expansion and
acquisitions.
Emphasizing Value-Added, Full-Service Capabilities. The Company 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,
and generally a superior sales representative can create a special relationship
with the practitioner by providing an education link to the overall industry.
The Company's knowledgeable sales representatives assist customers in the
selection and purchasing of supplies. In addition, the high quality sales force
allows Patterson to offer broader product lines. Most dentists and veterinarians
are independent, sole practitioners who are unable to store and manage large
volumes of supplies in their offices. Patterson meets its customer's
requirements by delivering frequent, small quantity orders rapidly and reliably
from its strategically located distribution centers. Equipment specialists and
service technicians also support the Company's value-added strategy in the
dental supply market. Equipment specialists provide consultation on office
design, equipment requirements and financing. The Company's trained service
technicians perform equipment installation, maintenance and repair services.
4
Using Technology, Including the Internet, to Enhance Customer Service. As
part of its commitment to providing superior customer service, the Company
offers its customers easy order placement. The Company has offered electronic
ordering capability to its dental supply segment since 1987 when it first
introduced Remote Order Entry (REMO(SM)). The Company believes that its
computerized order entry systems help to establish relationships with new
customers and increase loyalty among existing customers. The remote order entry
systems permit customers to place orders from their offices directly to
Patterson 24 hours a day, seven days a week. Over the years, the Company has
continued to introduce new order entry systems designed to meet the varying
needs of its customers. Today the Company offers five systems to the dental
supply segment, REMO(SM), Pattersondental.com, PDXpress(R), PassPort(SM) Plus
and eMAGINE(SM). These systems are used by customers as well as the Company's
sales force. Over the years, the number of orders transmitted electronically has
grown steadily to approximately 53% of Patterson's consumable dental product
volume or $390.9 million in fiscal year 2002.
The goal of the Company's Internet strategy is to distribute information
and service related products over the Internet to enhance customers' practices
and to increase sales force productivity. During the past year, the Company
augmented its Internet system, and launched an enhanced system,
Pattersondental.com in November 2001. The new Internet environment includes
enhanced order entry, access to "Patterson Today" articles, manufacturers'
product information, and an office design application. Additionally, Patterson
utilizes a tool, InfoSource, to provide real time customer and Company
information to the Company's sales force, managers and vendors via the Internet.
For those dental customers not using the Internet, the Company offers four
alternative products. REMO(SM) gives customers direct and immediate ordering
access through a personal computer to a database containing Patterson's complete
inventory. PDXpress(R) is a handheld order entry system that eliminates
handwritten order forms by permitting a user to scan a product bar code from an
inventory tag system or from Patterson's bar-coded catalog. PassPort(SM) Plus is
a smart phone which incorporates automated ordering and bar code scanning with
credit card processing. In fiscal 2002, the Company introduced its newest order
entry system, eMAGINE(SM). eMAGINE(SM) has become the standard platform for the
sales representative and includes many new features and upgrades including: up
to three years of order history for the customer's reference, faster searches
for products and reports, order tracking, instant information on monthly product
specials, descriptions and photographs of popular products and an electronic
custom catalog, including a printable version with scanable bar codes. These
systems, including eMAGINE(SM), are provided at no additional charge to
customers who maintain certain minimum purchase requirements.
In May 2002, the Company introduced eMAGINE(SM) to the sales force calling
on the veterinary supply market. The Company plans to make the system available
to veterinary customers in fiscal 2003. Webstervet.com, the Company's website
for the veterinary supply market, does not currently include e-commerce
capabilities. Longer-term the Company plans to implement a strategy in the
veterinary market similar to the dental market with multiple order entry systems
that suit a variety of customers' needs.
Continuing to Improve Operating Efficiencies. Patterson continues to
implement programs designed to improve operating efficiencies and allow for
continued sales growth over time. These programs include enhancing its
management information and product handling systems and consolidating its
distribution centers to improve product availability and to reduce redundancies
in personnel, equipment and certain inventories. In addition, by offering its
electronic order entry systems to customers, Patterson enables its sales
representatives to spend more time with existing customers and to call on
additional customers. Recently, the Company launched its new InfoSource program,
a web-based system that disseminates key sales information, customer purchasing
trends and other administrative reports to the Company's dental sales force and
branch managers. InfoSource allows dental sales representatives to more
effectively and efficiently market the Company's broad product line while
enabling branch managers to increase their productivity. The Company has also
improved operating efficiencies by converting its communications architecture to
faster, higher capacity data lines that combine voice and data transmissions
while reducing overall communication costs. During fiscal 2003, the Company
plans to implement a new field service management tool for its technical service
operations. This new tool will allow the Company to fundamentally change its
technical service business processes improving the Company's ability to
coordinate the actions of its service technicians and enhancing customer service
while reducing the overall cost of operations. By leveraging Patterson's
existing national distribution network, the Company has begun to implement a
growth strategy in the veterinary supply market without significant new
investments in physical infrastructure. In addition, many of the tools and
capabilities available in the dental segment can be integrated into the
veterinary segment. As a result, the Company expects to continue to improve its
operating leverage and efficiencies going forward.
5
Growing Through Internal Expansion and Acquisitions. The Company intends to
continue to grow by opening additional sales offices, hiring established sales
representatives, hiring and training college graduates as territory sales
representatives, and acquiring other distributors in order to enter new markets
and expand its customer base. The Company believes that it is well positioned to
take advantage of expected continued consolidation in both the dental and
veterinary distribution industries. Over the past 15 years the Company has made
the following acquisitions:
Dental distribution acquisitions in the United States
. In August 1987, Patterson acquired the D.L. Saslow Co., which at the
time was the third largest distributor of dental products in the
United States. Between 1989 and 2002, Patterson acquired certain
assets of 24 smaller dental dealers throughout the United States.
During fiscal 2002, the Company acquired Thompson Dental Company of
Columbia, SC, a leading value-added distributor of dental supplies,
equipment and services in the mid-Atlantic and southeastern U.S.
Thompson ranked among the 10 largest dental distributors in the
country.
Dental distribution acquisitions in Canada
. In October 1993, the Company completed the acquisition of Healthco
International, Inc.'s Canadian subsidiary, Healthco Canada, Inc. In
August 1997, the Company acquired Canadian Dental Supply Ltd. which
expanded the Company's market share in British Columbia, Alberta,
Saskatchewan and Ontario. As a combined operation 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 476 people, 131 of whom are sales
representatives. In July 2002, the Company acquired Distribution
Quebec Dentaire, Inc., which expanded the Company's market share in
Quebec.
Printed office products acquisitions
. In October 1996, the Company acquired the Colwell Systems division of
Deluxe Corporation. Colwell Systems produces and sells a variety of
printed office products used in medical and dental offices. In
February 1999, the Company acquired Professional Business Systems,
Inc. (PBS), Colwell's largest supplier, to expand production capacity.
Software acquisitions
. In July 1997, the Company acquired EagleSoft, Inc., a developer and
marketer of Windows(R)-based practice management software for dental
offices. EagleSoft is located in Effingham, Illinois. In September
2000, the Company acquired eCheck-up.com, a web-based, value-added
service that complements and expands the Company's current product
offerings to the front office of the dental practice. eCheck-up.com is
an Internet service that provides on-line payroll, human resources,
payables processing and benchmarking services to subscribing dental
customers through its website. Most recently, the Company purchased
Modern Practice Technologies, a company which provides custom
computing solutions to the dental industry. This acquisition will help
Patterson to position itself to provide all of the custom hardware and
networking required for interfacing the entire dental office.
Veterinary acquisitions
. In July 2001, the Company acquired the assets of J. A. Webster, Inc.
the leading distributor of veterinary supplies to companion pet
veterinary clinics in the eastern United States and the third largest
nationally. Webster is an excellent strategic fit with Patterson's
core competencies in value-added distribution. Like Patterson, Webster
serves a large, fragmented market with similar growth and customer
characteristics and has an ingrained sales culture that emphasizes
customer relationships and unparalleled customer service. Webster will
enable Patterson to capitalize upon a significant growth opportunity
in the companion pet veterinary supply market.
6
The Company has operations in the U.S. and Canada and conducts business in
two segments, dental supply and veterinary supply. The veterinary segment
operates entirely in the U.S. Each segment provides similar products albeit to
different customer bases. The following table sets forth the principal
categories of products offered by the Company:
2002 2001 2000
---- ---- ----
Consumable and Printed Products ...... 64% 63% 63%
Equipment and Software ............... 28 28 28
Other (1) ............................ 8 9 9
---- ---- ----
Total ........................... 100% 100% 100%
==== ==== ====
(1) Consists of other value-added products and services.
Consumable and Printed Products
Dental Supplies. Patterson offers a broad product line of consumable dental
supplies such as x-ray film and solutions; impression materials; restorative
materials (composites and alloys); hand instruments; sterilization products;
infection control products such as protective clothing, gloves and facemasks;
paper, cotton and other disposable products; toothbrushes and a full line of
dental accessories including instruments, burs, and diamonds. Patterson markets
its own private label line of dental supplies including anesthetics,
instruments, preventive and restorative products, and cotton and paper products.
Compared to most name brand supplies, the private label line provides lower
prices for the Company's customers and higher margins for the Company.
Veterinary Supplies. Webster offers its customers a broad selection of
veterinary supply products including consumable supplies, pharmaceuticals,
diagnostics, and biologicals. Consumable supplies distributed by Webster include
lab supplies, various types and sizes of paper goods, needles and syringes,
gauze and wound dressings, sutures, latex gloves, orthopedic and casting
products. Webster's pharmaceutical products are FDA licensed products including
anesthetics, antibotics, injectables, ointments and neutraceuticals. The
diagnostics product category includes on-site testing products for heartworm,
FIV, FELV and Parvo virus. Biological products are comprised of vaccines and
injectibles.
Printed Products. The Company provides a variety of printed products,
office filing supplies, and practice management systems to office-based
healthcare providers including dental, medical and veterinary offices. Products
include custom printed products, insurance and billing forms, stationery,
envelopes and business cards, labels, file folders, appointment books and other
stock office supply products. Products are sold through three channels:
. The Company's dental supply sales force
. The Company's veterinary supply sales force
. Catalogs distributed to over 150,000 customers several times a year
All three channels are supported by a telemarketing staff located in
Champaign, Illinois. Orders are received by telephone, through the mail or
electronically from the dental distribution order processing system.
Equipment and Software
Dental Equipment. Patterson offers a wide range of dental equipment
products including x-ray machines, high-and low-speed handpieces, dental chairs,
dental handpiece control units, diagnostic equipment, sterilizers, dental lights
and compressors. The Company also distributes newer technology equipment that
provides customers with the tools to improve productivity and patient
satisfaction. Examples of such innovative and high-productivity products include
the CEREC(R) product family, a chair-side restoration system; air abrasion
systems; digital x-rays; and the Triangle Sterilization Center.
Veterinary Equipment. Equipment sold by Webster generally consists of
machines for hospital or general surgery use. Equipment sales accounted for
about 4% of veterinary segment sales in fiscal 2002.
7
Software. The Company develops and markets practice management and
clinical software for dental professionals. Products include software for
scheduling, billing, charting and storage/retrieval of digital images. The
Company also sells software products developed by third parties including
Sidexis by Sirona, Dimax2 by Planmeca and VixWin by Gendex. These value-added
products are designed to help achieve office productivity improvements which
translates into higher profitability for the customer. To support its customers
as they continue to integrate newer technology into their dental practice, the
Company established the Patterson Technology Center at EagleSoft to assist
customers with problems or questions related to digital software integration. A
key element of the Company's strategy is to provide seamless integration of
digital imaging products with practice management software so that customers can
quickly store, retrieve and transfer images. Beginning in fiscal 2001, the
Company aligned its EagleSoft sales force to report directly to Patterson's
sales offices. As Patterson Technology Representatives, they team with other
sales representatives and are responsible for selling digital products as well
as software. Management believes this alignment enables the Company to more
fully capitalize on market demand and based on results over the past two fiscal
years believes the alignment was a sound decision.
Hardware. In fiscal 2002, the Company began to offer custom hardware and
networking solutions required for interfacing the entire dental office to a
select number of its customers. The testing completed during the year was
successful and a complete rollout is underway and should be completed in all
markets by the latter half of fiscal 2003. This initiative marks another step in
Patterson's overall strategy of providing customers with the convenience and
cost-effectiveness of a virtually complete range of products and value-added
services.
Other
Software Services. The Company offers a variety of services to complement
its software products such as service agreements, electronic claims processing
and billing statement processing. These services provide value to customers by
allowing them to receive payments more rapidly while obtaining greater
productivity.
Equipment Installation, Repair and Maintenance. To keep their practices
running efficiently, dentists require reliable performance from their equipment.
All major equipment sold by Patterson includes installation and Patterson's
90-day labor warranty at no additional charge. Patterson also provides complete
repair and maintenance service for all dental equipment, whether or not
purchased from Patterson, including 24-hour handpiece repair service. Over 900
Patterson service technicians call on dental offices throughout the United
States and Canada. A computerized scheduling, tracking and billing system
documents and instantly retrieves customer repair histories, and helps Patterson
to keep frequently needed repair items in inventory.
Dental Office Design. Patterson provides dental office layout and design
services through the use of Patterson's own computer-aided design (CAD) program.
Equipment specialists can create original or revised dental office blueprints in
a fraction of the time required to produce conventional drawings. Customers
purchasing major equipment items receive dental office design services at no
additional charge.
Equipment Financing. The Company provides a variety of options to fulfill
its customers' financing needs. For qualified purchasers of equipment, the
Company will arrange financing for the customer through Patterson or a third
party, or will arrange a leasing program with an outside party. These
alternatives allow the Company to offer its customers convenience while still
meeting their diverse financing needs. In fiscal 2002, the Company originated
over $166 million of equipment finance contracts.
Equipment leasing is provided by Banc of America Vendor Finance, a unit of
BankAmerica, pursuant to an agreement entered into in July 1993. Applications
for financing originated by the Company are reviewed by Banc of America Vendor
Finance, which upon approval may purchase the equipment and lease it to the
customer or purchase an installment sale contract from the Company without
recourse. In November 1998, Patterson entered into a finance referral agreement
with The Matsco Companies. Referral fees are received for financing contracts
that are initiated by Patterson. There are no recourse provisions under this
agreement. These institutions service the accounts.
To meet the needs of its customers, the Company also initiates installment
contracts (chattell mortgages) which had historically been sold under a combined
purchase agreement and revolving credit facility with a group of banks led by
U.S. Bank National Association. The banks committed to purchase from the
Company, on a limited recourse basis, the Company's installment sale contracts
secured by dental equipment. The combined contract purchase agreement and
unsecured revolving credit facility with the banks allowed for a maximum credit
line of $125 million, which had been fully utilized at April 27, 2002.
8
In June 2002, the Company created a special purpose entity ("SPE"), PDC
Funding Company, LLC, a wholly-owned subsidiary, and entered into a new
Receivables Purchase Agreement with a commercial paper conduit managed by Bank
One, N. A. The Company transfers on an on-going basis a majority of its
installment sale contracts to the SPE. In turn, the SPE sells the contracts to
the commercial paper conduit administered by Bank One. This is a one-year
agreement, renewable annually, with a current limit of $200 million of contract
purchases.
In addition, the Company renegotiated its agreement with U. S. Bank
National Association. Under the new contract, the Company has a $50 million
contract purchase facility with no revolving credit line.
The Company continues to service the accounts under both of the preceding
arrangements.
Sales and Marketing
During fiscal 2002, the Company sold products to over 125,000 customers in
the U.S. and Canada who made one or more purchases of supplies during the year.
The Company's customers include dentists, veterinarians, laboratories,
institutions and other healthcare professionals. No single customer accounted
for more than 1% of sales during fiscal 2002, and Patterson is not dependent on
any single customer or geographic group of customers. The Company's sales and
marketing efforts are designed to establish and improve customer relationships
through personal interaction with its sales representatives and frequent direct
marketing contact, which underscores the Company's value-added approach.
A primary component of the Company's value-added approach is its sales
force. Due to the fragmented nature of both the dental and veterinary supply
markets, Patterson believes that a large sales force is necessary to reach
potential customers and to provide full service. Sales representatives provide
an education link to the overall industry, assist practitioners in selecting and
purchasing products and help customers efficiently manage their supply
inventory. Each representative works within an assigned sales territory under
the supervision of a sales manager. Sales representatives are all Patterson
employees and are generally compensated on a commission basis, with some, less
experienced, representatives receiving a base salary and commission.
To assist its sales representatives, the Company publishes a variety of
catalogs and fliers containing product and service information. The Company's
dental customers receive a full-line product catalog containing over 24,000
inventoried items. Veterinary customers receive a parallel catalog which
contains the approximately 8,000 SKU's offered to the veterinary market. These
catalogs include detailed descriptions and specifications of products and are
utilized by practitioners as a reference source. Selected consumable supplies,
new products, specially priced items and high-demand items such as infection
control products are promoted through merchandise fliers printed and distributed
bimonthly to the dental supply market and monthly to the veterinary supply
market. In addition, dental equipment sold by the Company is featured in the
Company's tri-yearly 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.
To enhance the total value it brings to its customers, the Company created
value added benefit programs for its preferred customers. The Patterson Plus(SM)
program entitles its best dental customers to priority technical services,
automated supply management systems at no charge, a variety of product discounts
and reduced rates on financial, practice management and technical services. For
its preferred veterinary customers, the Company offers the Webstar Plus program.
Membership rewards include an assortment of benefits such as reduced finance
rates and deferred billing terms for equipment purchases, in-depth business
reports and product discounts.
Distribution
The Company believes that responsive delivery of quality supplies and
equipment is a key element to providing complete customer satisfaction.
The Company ships dental consumable supplies from 10 strategically located
distribution centers in the U.S. and Canada. Orders for consumable dental
supplies can be placed by telephone or electronically 24 hours a day, seven days
a week. Printed office products are shipped from the Company's manufacturing
facilities in Illinois.
9
Veterinary supplies are shipped from 6 distribution centers. Orders can be
placed by salesperson, telephone, fax or mail. Tele-sales representatives are
responsible for processing approximately 65% of customers' orders in this
segment.
All orders are routed through the Company's centralized computer ordering,
shipping and inventory management systems, which are linked to each of the
Company's strategically located distribution centers. If an item is not
available in the distribution center nearest to the customer, the computer
system automatically directs shipment of the item from another center. Rapid and
accurate order fulfillment is another principal component of the Company's
value-added approach. The Company estimates that 98% of its consumable goods
orders are shipped complete within 24 hours.
In order to assure the availability of the Company's broad product lines
for prompt delivery to customers, the Company must maintain sufficient
inventories at its distribution centers. Purchasing is centralized by segment
and inventory levels are managed by the purchasing departments using a real-time
perpetual inventory system. The Company's inventory consists mostly of
consumable supply items. 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.
The Company's 99 dental sales offices are generally configured with
display areas where the latest dental equipment can be demonstrated. Dental
equipment inventory is generally custom ordered and is staged at the Company's
sales offices before delivery to dental offices for installation. About 50% of
veterinary equipment is custom ordered and drop shipped from the manufacturer to
the customer. The balance of veterinary equipment is distributed in a fashion
similar to consumable supplies.
Sources of Supply
Effective purchasing is a key strategy the Company has adopted in order to
achieve its objective of continuing to improve profitability. The Company has a
program to effectuate electronic data interchange (EDI) with its major vendor
partners. In fiscal 2002, the Company processed 55% of its dental vendor
invoices using EDI capabilities. In addition, 42% of Patterson's dental purchase
order volume was conducted employing EDI, which represented 69% of dental
purchase order dollars placed during the fiscal year. Utilizing EDI allows the
Company to improve efficiencies and reduce administrative costs.
The Company obtains products from approximately 1,300 vendors. In
addition, the Company has exclusive distribution agreements with several quality
dental equipment manufacturers including Sirona on the CEREC(R), Triangle for
sterilization centers, and Schick Technologies for digital x-rays. The Company
is the only national dealer for A-dec equipment, including chairs, units and
cabinetry. Within the veterinary segment, the Company has several geographic
distribution agreements with certain large manufacturers like Tristate for blue
vials and Securos for cruciate repair. These agreements can generally be
characterized as having limited rather than exclusive geographic territories.
While the Company makes purchases from many suppliers and there is
generally more than one source of supply for most of the categories of products
sold by the Company, the concentration of business with key suppliers is
considerable. In fiscal 2002, the Company's top 10 dental supply vendors and
single largest vendor accounted for approximately 45% and 12%, respectively, of
the cost of dental products sold. Likewise, the Company's top 10 veterinary
supply manufacturers and single largest manufacturer comprised 63% and 20% of
the Company's cost of veterinary supply sales.
Competition
The highly competitive U.S. dental products distribution industry consists
principally of national, regional and local full-service distributors and
mail-order distributors. The dental supply market is extremely fragmented. In
addition to Patterson and one other national, full-service firm, Henry Schein,
Inc., there are at least 19 full-service distributors which operate on a
regional level, and hundreds of small local distributors. Also, some
manufacturers sell directly to end-users, and thereby eliminate the role of the
Company.
Within the "companion pet" market segment, competitors range from small
local distributors to large national and regional full-service companies, and to
a lesser extent mail order distributors or buying groups. Webster estimates that
of the total market for companion veterinary supplies, approximately 11% is
purchased directly from pharmaceutical manufacturers, 23% is purchased through
agency relationships and the remainder is purchased through distributors.
10
The Company believes that it differentiates itself from its competition
based primarily on its value-added strategy of premium customer service, a
qualified and motivated sales force, experienced service technicians, breadth
and mix of products and services, accurate and timely delivery, strategic
location of sales offices and distribution centers, and competitive pricing.
The Company also experiences competition in Canada. Principal
competitors include two national, full-service dental distributors, Ash Temple
and Arcona, a division of Henry Schein, Inc. The Company believes it competes in
Canada on essentially the same basis as in the United States.
Trademarks
Patterson has registered with the United States Patent and Trademark
Office the marks "Patterson" and "PDXpress". The Company believes that the
Patterson mark is well recognized in the dental products industry and by dental
professionals, and is therefore a valuable asset of the Company. The Company
also claims rights in the mark "eMAGINE".
Employees
As of April 27, 2002, the Company employed 4,637 people in the United
States and Canada on a full-time basis. Patterson has not experienced a shortage
of qualified personnel in the past, and believes that it will be able to attract
such employees in the future. None of Patterson's employees is subject to
collective bargaining agreements or represented by a union. The Company
considers its relations with its employees to be good.
Governmental Regulation
The marketing, distribution and sale of certain products sold by the
Company are subject to the requirements of various state, local and federal laws
and regulations. The Company is subject to regulation by the Food and Drug
Administration, U. S. Department of Agriculture, OSHA and the Drug Enforcement
Administration. Among the federal laws which impact the Company are the Federal
Food, Drug and Cosmetic Act, which regulates the advertising, record keeping,
labeling, handling, storage and distribution of drugs and medical devices, and
which requires the Company to be registered with the Federal Food and Drug
Administration, and the Safe Medical Devices Act of 1990, which imposes certain
reporting requirements on distributors in the event of an incident involving
serious illness, injury or death caused by a medical device. In addition, the
Company is required to be licensed as a distributor of drugs and medical devices
by each state in which it conducts business. Several State Boards of Pharmacy
require the Company to be licensed in their state for the sale of animal health
products within their jurisdiction. The Company believes that it is in
substantial compliance with all of the foregoing laws and that it possesses all
licenses required in the conduct of its business.
Executive Officers of the Registrant
Set forth below are the names, ages and positions of the executive
officers of the Company as of June 30, 2002.
Peter L. Frechette 64 President, Chief Executive Officer,
and Director - Patterson Dental Company
R. Stephen Armstrong 51 Executive Vice President, Chief
Financial Officer and Treasurer -
Patterson Dental Company
James W. Wiltz 57 Vice President and Director - Patterson
Dental Company and President
Patterson Dental Supply, Inc.
Cree Z. Hanna 46 Vice President, Human Resources -
Patterson Dental Company
Lynn E. Askew 40 Vice President, Management Information
Systems - Patterson Dental Company
Gary D. Johnson 55 Vice President, Sales - Patterson
Dental Supply, Inc.
R. Reed Saunders 54 Vice President - Patterson Dental
Supply, Inc. and President - Colwell
Systems, Inc.
Richard A. Kochmann 50 Vice President, Marketing - Patterson
Dental Supply, Inc.
Normand Senecal 57 President - Patterson Dental Canada,
Inc.
Jeffrey H. Webster 40 President - Webster Veterinary Supply,
Inc.
Scott R. Kabbes 41 President - Patterson Technology
Center, Inc.
11
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors. None of the Company's officers is employed
pursuant to a written employment contract.
Background of Executive Officers
Peter L. Frechette has been President and Chief Executive Officer of
the Company since September 1982 and has been a director of Patterson since
March 1983. Prior to joining Patterson, Mr. Frechette was employed by American
Hospital Supply Corporation for 18 years, the last seven of which he served as
president of its Scientific Products Division. Mr. Frechette is also a director
of FinishMaster, Inc.
R. Stephen Armstrong was elected Executive Vice President, Treasurer
and Chief Financial Officer of the Company effective July 31, 1999. Prior to
joining Patterson, Mr. Armstrong had been an Assurance Partner with Ernst &
Young LLP. Ernst & Young LLP is currently the Company's independent public
auditor.
James W. Wiltz has been a Vice President of the Company since 1986 and
has been employed by Patterson since September 1969, initially as a territory
sales representative. In 1980, Mr. Wiltz was appointed Vice President of the
Midwestern Division and was appointed Vice President, Sales and Distribution in
1986. In 1996, Mr. Wiltz became President of the Company's subsidiary, Patterson
Dental Supply, Inc. He was appointed to the Board of Directors in March 2001.
Cree Z. Hanna joined Patterson Dental Company in June of 2002. Prior to
joining Patterson, Ms. Hanna provided human resource consulting support to
various organizations and served as Senior Vice President, Human Resources at
U.S. BANCORP for approximately 9 years.
Lynn E. Askew became Vice President, Management Information Systems, on
September 1, 1999. Mr. Askew joined Patterson in 1994 as Manager, Distributed
Systems, and was promoted to Director, Systems and Development in 1996. Prior to
joining Patterson, Mr. Askew provided advanced technology consulting and project
management services to various organizations, including Patterson.
Gary D. Johnson has been Vice President, Sales, of Patterson Dental
Supply, Inc. since October 1996. Mr. Johnson has served in various sales and
management positions since he joined the Company in August 1981.
R. Reed Saunders has been a Vice President of Patterson Dental Supply,
Inc. since March 1997 and is President of its Colwell Systems division. Prior to
joining Patterson, Mr. Saunders spent 15 years with American Express Company as
Senior Vice President - Chief Marketing Officer of its division, American
Express Financial Advisors.
Richard A. Kochmann was promoted to Vice President, Marketing, of
Patterson Dental Supply, Inc. in November 2000. Mr. Kochmann began his career
with Patterson in 1980 as a college representative and has held various sales
and management positions within the Company.
Normand Senecal has been President of the Company's Canadian subsidiary
Patterson Dental Canada Inc., since it was acquired from Healthco International,
Inc. in 1993.
Jeffrey H. Webster has been President of Webster Veterinary Supply,
Inc., since its acquisition by Patterson in July 2001. Mr. Webster held various
management positions with J. A. Webster, Inc. since 1984. At the time the
company was acquired, Mr. Webster was President of J. A. Webster, Inc.
Scott R. Kabbes is President of Patterson Technology Center, Inc., and
has been President of the Company's EagleSoft division since its acquisition by
the Company in July 1996.
12
2. PROPERTIES
The Company owns its principal executive offices in St. Paul, Minnesota.
The Company has 12 dental and 6 veterinary distribution centers. Sales
and administrative personnel for the veterinary segment reside within the
distribution facilities. Distribution facilities are located in Alabama,
California, Florida, Illinois, Indiana, Iowa, Massachusetts, North Carolina,
Pennsylvania, South Carolina, Texas, Washington and Canada. The Company owns
approximately 55%, or 344,500 square feet, of the total distribution space and
the balance is leased.
The Company's dental segment also maintains sales and administrative
offices inside the United States at 90 locations in 45 states and outside the
United States at 11 locations in Canada. All of these locations, except one, are
leased. The Company has two owned manufacturing facilities used to produce the
printed office products.
In management's opinion, all buildings, machinery and equipment are in
good condition, suitable for their purposes and are maintained on a basis
consistent with sound operations. Currently, the Company does not have
substantial idle facilities.
3. LEGAL PROCEEDINGS
The Company has been involved in various product-related and
employment-related legal proceedings arising in the ordinary course of business.
Some of these proceedings involve product liability claims arising out of the
use of dental products manufactured by third parties and distributed by the
Company. The Company believes that if any such product liability cases are
determined in favor of the claimants, the manufacturers of such products would
have primary responsibility for any damages because Patterson is a distributor
of finished goods manufactured by third parties. In the event a manufacturer of
a defective product is unable to pay a judgment for which the Company may be
jointly liable, the Company could have liability for the entire judgment.
Among the product liability cases in which the Company is currently a
defendant, sixteen involve claims by healthcare workers claiming damages from
allergic reactions from exposure to latex gloves distributed by the Company. In
each of these cases the Company acted as a distributor of "Patterson" private
label gloves manufactured by third parties, as well as gloves bearing the brand
names of other suppliers. In each of these cases the Company intends to seek
indemnification from or assert claims against the glove manufacturers pending
completion of product identification.
Since May 1985 the Company has maintained product liability insurance
coverage for any potential liability for claims arising out of products sold by
the Company. The Company believes that any liabilities which might result from
pending cases and claims relating to events occurring after May 1985 would be
adequately covered by such insurance and that any unfavorable results in such
cases would not have a material adverse effect on the Company's business or
financial condition. With respect to claims relating to events occurring prior
to May 1985, the agreement providing for the acquisition of Patterson from The
Beatrice Companies, Inc. provides that Beatrice and its successors are obligated
to indemnify the Company for losses exceeding a litigation reserve established
at the time of the acquisition plus $200,000. The successor to Beatrice has not
been asked to indemnify the Company regarding any pending cases and has not
contested its obligation to indemnify the Company. Although the Company has
insurance coverage for product liability claims relating to events occurring
after May 1985 and may be entitled to indemnification from third parties under
certain circumstances, any additional litigation could have a material adverse
effect on the Company's business or financial condition in the future.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended April 27, 2002.
13
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq Stock Market(R) under
the symbol "PDCO".
The following table sets forth the range of high and low sale prices
for the Company's common stock for each full quarterly period within the two
most recent fiscal years. Sales prices are adjusted for the two-for-one stock
split on June 13, 2000. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
High Low
---- ---
Fiscal 2002
First Quarter ............... $ 37.24 $ 30.00
Second Quarter .............. $ 38.53 $ 31.00
Third Quarter ............... $ 42.05 $ 34.12
Fourth Quarter .............. $ 47.48 $ 38.86
High Low
---- ---
Fiscal 2001
First Quarter ............... $ 26.94 $ 21.44
Second Quarter .............. $ 31.00 $ 18.75
Third Quarter ............... $ 34.38 $ 26.06
Fourth Quarter .............. $ 33.88 $ 29.13
On July 15, 2002, the number of holders of record of common stock was
3,158. The transfer agent for the Company's common stock is Wells Fargo Bank
Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota,
55075-0738, telephone: (651) 450-4064.
The Company has not paid any cash dividends on its common stock since
its initial public offering in 1992 and expects that for the foreseeable future
it will follow a policy of retaining earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
On April 2, 2002, 332,989 unregistered shares of the Company's common
stock were issued in reliance on Regulation D of the Securities Act of 1933. The
shares were issued as part of the consideration paid by the Company for the
outstanding stock of Thompson Dental Company. See also, Note 3 to Notes to
Consolidated Financial Statements on page 29 of this Form 10-K.
14
6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
Fiscal Year Ended
-------------------------------------------------------------------------
April 27, April 28, April 29, April 24, April 25,
2002 2001 2000 1999 1998
----------- ----------- ------------- ----------- -----------
Statement of Operations Data:
- ----------------------------
Net sales $1,415,515 $1,156,455 $1,045,883 $ 883,268 $ 782,284
Cost of sales 921,335 747,301 678,766 571,698 505,069
---------- ---------- ---------- ---------- ----------
Gross margin 494,180 409,154 367,117 311,570 277,215
Operating expenses 347,000 294,039 269,658 234,098 212,833
---------- ---------- ---------- ---------- ----------
Operating income 147,180 115,115 97,459 77,472 64,382
Other income - net 5,043 7,081 5,540 2,239 1,324
---------- ---------- ---------- ---------- ----------
Income before income taxes 152,223 122,196 102,999 79,711 65,706
Income taxes 56,933 45,721 38,527 29,815 24,937
---------- ---------- ---------- ---------- ----------
Net income $ 95,290 $ 76,475 $ 64,472 $ 49,896 $ 40,769
========== ========== ========== ========== ==========
Earnings per share - diluted /(1)/ $ 1.40 $ 1.13 $ 0.95 $ 0.75 $ 0.61
---------- ---------- ---------- ---------- ----------
Weighted average shares and potentially dilutive
shares outstanding (1) 68,201 67,763 67,544 66,993 66,325
---------- ---------- ---------- ---------- ----------
Dividends per common share -- -- -- -- --
Balance Sheet Data:
- -------------------
Working capital $ 331,413 $ 310,046 $ 238,502 $ 187,952 $ 133,256
Total assets 718,376 549,180 451,976 373,250 316,373
Total debt 976 990 1,719 2,097 7,202
Stockholders' equity 514,360 408,515 330,470 265,199 210,303
(1) Amounts are adjusted for a two-for-one stock split on June 13, 2000.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Historically the Company's effective strategy for growth focused on
internal growth complemented by the acquisition of smaller dental distributors
and businesses offering dental related products and services. In 2002, the
Company expanded its strategy to take advantage of a parallel growth opportunity
in the veterinary supply market by acquiring the assets of J. A. Webster, Inc.
With its entrance into the veterinary supply market, the Company began operating
in two reportable segments in 2002, dental supply and veterinary supply.
Traditionally, Patterson established certain operating goals for the
dental segment which included increasing net sales four percentage points faster
than the average industry growth rate, which it believes is 7% to 9%, and
targeted a 50 basis point improvement in its operating margin with net income
growth between 18% and 20%. The Company achieved these goals in its dental
business in 2002. On a consolidated basis, however, the Company achieved a 40
basis point expansion in its operating margin due to the lower operating margins
of the veterinary supply business during the year. The Company believes that
over a reasonable period of time it will be able to improve upon the veterinary
segment operating margins.
The historical operating performance of the veterinary supply business
is somewhat different than the dental business. Gross margins in the veterinary
business are typically in the lower to mid 20's compared to the mid 30's for the
dental business. The operating expense rate is also lower in the veterinary
business than in the dental business. These disparities have had a fairly
dramatic impact on the Company's operating ratios in 2002 as is highlighted in
the discussion that follows.
15
Results of Operations
The following table summarizes the results of operations over the past
three fiscal years as a percent of sales:
2002 2001 2000
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 65.1% 64.6% 64.9%
----- ----- -----
Gross margin 34.9% 35.4% 35.1%
Operating expenses 24.5% 25.4% 25.8%
----- ----- -----
Operating income 10.4% 10.0% 9.3%
Other income 0.3% 0.6% 0.5%
----- ----- -----
Income before taxes 10.7% 10.6% 9.8%
Income taxes 4.0% 4.0% 3.6%
----- ----- -----
Net income 6.7% 6.6% 6.2%
===== ===== =====
Fiscal 2002 Compared to Fiscal 2001
Net Sales. Net sales for the year totaled $1,415.5 million a 22.4%
increase from $1,156.5 million reported in fiscal 2001. The Company's sales
growth reflected solid performance across all product categories combined with
$141.5 million of incremental sales from acquisitions.
Dental supply sales increased 10.7% for the fiscal year led by a 14.9%
increase in equipment and software sales. The Company experienced double digit
growth rates across most equipment product lines. Software sales were
particularly robust growing 32% illustrating the success of a new marketing
strategy launched during fiscal 2002. Sales for the year were also helped by an
8.8% increase in consumable dental supplies. Consumable dental supply sales were
paced by a 10.0% increase in the U. S. dental market reflecting the continued
expansion of the Company's sales force and customer base. Sales of other dental
products and services, consisting of parts, technical service, software support
and insurance e-claims, grew 10.7% during fiscal 2002. Dental acquisitions,
principally Thompson Dental Company ("Thompson"), added about $6.7 million to
net sales and accounted for .6 percentage points of the 14.9% sales growth.
Thompson was acquired for approximately $21 million in cash and stock, and is
expected to contribute sales of more than $50 million on an annualized basis,
making it Patterson's second largest dental acquisition. Thompson is expected to
become accretive to earnings in the latter half fiscal 2003. In fiscal 2002,
dental acquisitions contributed approximately 2 percentage points to the overall
sales growth rate.
Canadian sales were up almost 10% for the year in local currencies due
primarily to strong equipment sales. Currency exchange rates negatively impacted
results reducing reported sales by approximately $3.5 million.
On a proforma basis, veterinary net sales increased approximately 10%
year-over-year. However, sales on a comparable basis increased approximately 9%.
This gives effect to the conversion of a product group from distribution status
to an agency arrangement at the beginning of calendar year 2001. Comparable
basis sales performance also excludes the introduction of ProHeart-6(R), a new
heart worm medication from Fort Dodge Animal Health that was introduced during
fiscal 2002. Including ProHeart-6(R), comparable basis sales increased 18%.
Gross Margin. The gross margin for the historical dental business was
better than last year by 60 basis points benefiting from, among other things,
improved point-of-sale margins in sundries, favorable changes in product mix,
and improvement in the Colwell gross margins as this product group recognized
results from its realignment efforts. Veterinary gross margins of 24.9% were
consistent with management's expectations. Gross margins on the veterinary
supply business are lower than those on the dental operations as a result of
pharmaceutical products, which carry lower margins. Reflecting this combination
of factors, the Company's consolidated gross margin for fiscal 2002 declined to
34.9% from 35.4% in fiscal 2001.
Operating Expenses. Operating expenses for the year increased 18% to
$347.0 million up from $294.0 million reported a year earlier. As a percent of
sales, operating expenses declined 90 basis points year-over-year. The dental
operating expense rate improved 30 basis points despite higher insurance costs.
The dental supply business achieved this reduction through a variety of cost
containment initiatives and improved operating leverage. Fiscal year 2002
operating expenses as a percent of sales also reflects Webster Veterinary
Supply, providing a favorable year-over-year impact of approximately 60 basis
points after the
16
amortization of certain intangible assets. The veterinary operation has a lower
operating expense rate than the historical dental operation due primarily to not
having the infrastructure of a technical service business.
Operating Income. Operating income increased 27.9% to $147.2 million up
from $115.1 million a year ago. As a percent of sales, operating income
increased 40 basis points to 10.4%. Dental supply operating income increased
20.4% and as a percent of sales improved 90 basis points. Veterinary supply
operating income was $8.5 million.
Other Income. Other income, net of expenses, was $5.0 million for fiscal
2002, a $2.0 million or 28.8% decline compared to fiscal 2001. The decrease
resulted from lower yields on investment balances and reduced investable cash
levels due to acquisitions.
Income Taxes. The effective income tax rate at 37.4% remained the same as
last year.
Net Income. Net income increased to $95.3 million, or 24.6% due to the
factors discussed above.
Earnings Per Share. Diluted earnings per share increased to $1.40 versus
$1.13 reported a year ago, a 27 cent or 23.9% increase over a year ago. The
acquisition of J. A. Webster, Inc. added approximately $0.04 per diluted share
to the Company's consolidated net earnings in fiscal 2002.
Fiscal 2001 Compared to Fiscal 2000
Net Sales. Sales for the year increased 10.6% to $1,156.5 million from
$1,045.9 million in fiscal 2000. Results for fiscal 2001 are based on a 52-week
year versus 53 weeks in fiscal 2000. Excluding the impact of the additional week
in fiscal 2000, sales increased 13%. Sales of dental equipment were the
Company's principal sales growth driver during the fiscal year increasing 18% on
a comparable basis. Equipment sales were fueled by sales of new generation
dental equipment and solid performance from the Company's core dental equipment
lines. Acquisitions added approximately 2% or $23.8 million to the overall sales
increase. Sales references in parentheses in the following discussion exclude
the impact of the additional week. Sales of consumable dental supplies,
including printed office products increased 8.1% (10%) for the year paced by the
US dental market where consumable sales increased 10.4% (13%). A nominal
increase in the Canadian market and a 4.2% (2%) decline in printed office
products tempered consumable sales growth in fiscal 2001. Printed office product
sales to the dental market increased in step with consumable dental supplies.
However, total printed office product sales were lower than last year due to
reduced sales to the non-dental markets. Equipment and software sales grew 15.4%
(17%). The Company experienced double-digit sales growth in most equipment
product offerings in the U.S. dental market. Sales of clinical software units
grew with digital equipment, but total software unit sales declined in fiscal
2001 due to reduced sales of front-office practice management software. Sales of
practice management software were enhanced significantly in fiscal 2000 by the
need of many dental offices to become Y2K compliant. Sales of other services and
products, up 13.2% (15%) from last year, benefited from strong sales of
technical service and parts, software support and insurance e-claims.
Gross Margin. Gross margins increased $42.0 million or 11.5% over fiscal
2000 due to increased sales volumes and an improvement in the gross margin rate
to 35.4% in fiscal 2001 from 35.1% in fiscal 2000. The 30 basis point increase
in the gross margin rate reflects better margins at the point-of-sale and
changes in product mix.
Operating Expenses. Operating expenses for the year increased 9.0% over
the prior year but declined as a percent of sales from 25.8% to 25.4%. Higher
sales volumes, higher commission expense resulting from the Company's margin
based commission programs, and increased spending on advertising were the
primary factors driving the 9.0% increase in operating expenses. The 40 basis
point improvement in the expense rate reflects the benefit of improved operating
leverage and cost containment efforts.
Operating Income. Operating income increased 18.1% and amounted to 10.0%
of sales in fiscal 2001. As a percent of sales, operating income was 70 basis
points better than fiscal 2000 due to both improvements in the gross margin and
operating expense rates.
Other Income. Other income, net of expenses, came to $7.1 million for
fiscal 2001 compared to $5.5 million for fiscal 2000. The increase in other
income reflects higher average short-term investments of cash.
17
Income Taxes. The effective income tax rate at 37.4% remained the same as
last year.
Net Income. Net income increased to $76.5 million, or 18.6% due to the
factors discussed above.
Earnings Per Share. Diluted earnings per share increased to $1.13 versus
$0.95 reported a year ago, an 18 cent or 18.9% increase over a year ago.
Liquidity and Capital Resources
Patterson's operating cash flow, which generally parallels net earnings,
has been the Company's principal source of liquidity in fiscal 2002, 2001 and
2000. Cash generated from operating activities was invested in working capital,
capital expenditures and acquisitions.
Operating activities generated cash of $90.5 million in 2002 compared
with $80.1 million in 2001 and $67.9 million in 2000. The $10.4 million increase
in 2002 over 2001 and the $12.2 million increase in 2001 over 2000 reflected the
Company's continuing increase in profitability and improved productivity in the
use of working capital.
Capital expenditures net of dispositions were $11.1, $10.0, and $15.4
million in 2002, 2001 and 2000, respectively. The higher level of spending in
fiscal 2000 reflected spending for a new distribution center which came on line
in February 2000. The Company expects to invest about $14.0 million in capital
spending in 2003 to enhance information systems and upgrade facilities.
The Company leases various facilities under noncancelable operating lease
arrangements. Future minimum lease payments under these leases are as follows:
$7,915 in 2003; $7,036 in 2004; $5,143 in 2005; $3,322 in 2006; $1,652 in 2007
and $964 in years thereafter.
In 2002, the Company invested cash of $109.3 million to acquire the
assets of J. A. Webster Inc., a veterinary supply distributor, Thompson Dental
Company, a dental distribution business, and Modern Practice Technologies, a
company which provides custom computing solutions to the dental industry. In
comparison, the Company invested $3.8 million to acquire one dental distribution
business and eCheck-Up.com, a web-based value-added service company in 2001. In
2000, the Company spent $12.6 million to obtain three dental distribution
businesses.
The Company repurchased 247,000, 125,000 and 180,000 shares of its common
stock for $8,308, $3,583 and $3,754 during fiscal 2002, 2001 and 2000,
respectively. The 247,000 shares repurchased during 2002 minimized the dilutive
effect of the 322,524 shares issued to purchase J. A. Webster, Inc.
The Company expects funds generated by operations and existing cash and
cash equivalents to continue to be its most significant sources of liquidity.
The Company currently believes funds generated from the expected results of
operations and available cash and cash equivalents of $151.2 million will be
sufficient to meet the Company's working capital needs and finance anticipated
expansion plans and strategic initiatives for the next fiscal year. Should
additional investment opportunities arise, management believes that the strength
of the Company's earnings, cash flows and balance sheet will permit the Company
to obtain additional debt or equity capital, if necessary.
The Company will sell a significant portion of its installment sale
contracts to a commercial paper funded conduit managed by a third party bank,
and as a result commercial paper will become an important source of liquidity
for the Company. The Company is allowed to participate in the conduit due to its
financial strength. Cash flow could be impaired if the Company's financial
strength diminished to a level that precluded the Company from taking part in
this facility or other similar facilities.
18
Asset Management
The following table summarizes the Company's days sales outstanding (DSO)
and inventory turnover over the past three fiscal years:
2002 2001 2000
---- ---- ----
Days sales outstanding 50/(1)/ 43 43
Inventory turnover/(3)/ 6.5/(2)/ 7.1 6.5
(1) DSO increased due to the partial year impact of the Webster and
Thompson acquisitions and the level of contracts the Company was
carrying at year-end. On a pro forma basis, DSO would have been about
42 days. Strong March and April equipment sales resulted in higher
levels of financing activity. This higher level of financing exceeded
the Company's capacity with the bank arrangement under which the
Company sold its financing contracts. The Company was unable to
complete a new agreement in time to sell these contracts before the
end of the year and, accordingly, held a higher level of contracts in
receivables than the Company typically carries. Subsequent to
year-end, the Company signed a new agreement and has sold these
contracts during the first quarter of fiscal 2003.
(2) Reflects the non-annualized impact of the Webster and Thompson
acquisitions during the 2002.
(3) The inventory values used in this calculation are the LIFO inventory
values for U.S. dental and veterinary inventories and the FIFO
inventory value for Canadian and Colwell inventories.
Foreign Operations
Foreign sales are derived primarily from operations in Canada.
Fluctuations in currency exchange rates have not significantly impacted
earnings. However, net sales in fiscal 2002 and 2001 were adversely affected by
the strengthening of the U.S. dollar. Without foreign currency effects, net
sales would have increased by an additional $3.5 million and $2.5 million in
fiscal 2002 and 2001, respectively. The Company expects the unfavorable
US/Canadian exchange rate to continue to impact its rate of year-over-year sales
growth during the first half of fiscal 2003. Changes in currency exchange rates
is a risk accompanying foreign operations, but this risk is not considered
material with respect to the net operations of the Company's business.
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies," management considered
whether there are accounting policies which could materially impact the
Company's financial status. Management believes that the Company's policies are
conservative and its philosophy is to adopt accounting policies, which minimize
the risk of adverse events having a material impact on recorded assets and
liabilities. However, the preparation of financial statements requires the use
of estimates and judgements regarding the realization of assets and the
settlements of liabilities based on the information available to management at
the time. Changes subsequent to the preparation of the financial statements in
economic, technological and competitive conditions may materially impact the
recorded values of the Company's assets and liabilities. Therefore, the users of
the financial statements should read all the Notes to the Consolidated Financial
Statements and be aware that conditions currently unknown to management will
develop in the future. This may require a material adjustment to a recorded
asset or liability to consistently apply the Company's significant accounting
principles and policies that are discussed in Note 1 to the Consolidated
Financial Statements. The financial performance and condition of the Company may
also be materially impacted by transactions and events that the Company has not
previously experienced and for which the Company has not been required to
establish an accounting policy or adopt a generally accepted accounting
principle.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in
Note 1 of the Notes to Consolidated Financial Statements.
19
Factors That May Affect Future Operating Results
Certain information of a non-historical nature contained in Items 1, 2, 3
and 7 of this Form 10-K include forward-looking statements. Words such as
"believes," "expects," "plans," "estimates," "intends" and variations of such
words are intended to identify such forward-looking statements. The statements
are not guaranties of future performance and are subject to certain risks,
uncertainties or assumptions that are difficult to predict; therefore, the
Company cautions shareholders and prospective investors that the following
important factors, among others, could cause the Company's actual operating
results to differ materially from those expressed in any forward-looking
statements. The statements under this caption are intended to serve as
cautionary statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The following information is not intended to limit in any
way the characterization of other statements or information under other captions
as cautionary statements for such purpose. The order in which such factors
appear below should not be construed to indicate their relative importance or
priority.
. The Company's ability to meet increased competition from national,
regional and local full-service distributors and mail-order
distributors of dental and veterinary products, while maintaining
current or improved profit margins.
. The 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.
. The continued ability of the Company to maintain satisfactory
relationships with key vendors and the ability of the Company to
create relationships with additional manufacturers of quality,
innovative products.
. Changes in the economics of dentistry affecting dental practice growth
and the demand for dental products, including the ability and
willingness of dentists to invest in high-technology diagnostic and
therapeutic products.
. Reduced growth in expenditures for dental services by private dental
insurance plans.
. The 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.
. Changes in the economics of the veterinary supply market, including
reduced growth in per capita expenditures for veterinary services and
reduced growth in the number of households owning pets.
20
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is subject to market risk associated with changes in
interest rates and foreign currency exchange rates.
The Company's earnings are affected by changes in short-term interest
rates as a result of its investment in short-term commercial paper and
government securities. As of the end of fiscal 2002 and 2001, the fair market
value of the investments approximated the carrying value. If market interest
rates for these investments averaged 10 percent more or less in 2002 and 2001,
the Company's interest income would have changed by approximately $0.3 million
in 2002 and $0.5 million in 2001.
The Company has operations in Canada which it considers to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company experienced negative
translation adjustments of $0.8 million in 2002 and $0.3 million in 2001 which
were reflected in the balance sheet as an adjustment to stockholders' equity.
The cumulative translation adjustment at the end of 2002 showed a negative
translation adjustment of $3.1 million.
The Company purchases a portion of the products it sells from suppliers
located in countries other than where the products are sold. The risk of
transaction gains and losses from changes in foreign exchange rates is not
material as a majority of these purchases are denominated in the U.S. dollar.
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, 2002 and April 28, 2001, 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, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Patterson Dental Company at April 27, 2002 and April 28, 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended April 27, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 23, 2002
21
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
April 27, April 28,
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents ............................................................... $ 125,986 $ 160,024
Short-term investments .................................................................. 25,251 24,484
Receivables, net of allowance for doubtful accounts of $4,574 and $4,166
at April 27, 2002 and April 28, 2001, respectively .................................. 222,435 144,625
Inventory ............................................................................... 142,457 103,700
Prepaid expenses and other current assets ............................................... 13,291 9,928
----------- ----------
Total current assets .................................................................. 529,420 442,761
Property and equipment, net ............................................................... 57,140 48,575
Goodwill and other intangibles, net ....................................................... 126,228 51,892
Other ..................................................................................... 5,588 5,952
----------- ----------
Total assets .......................................................................... $ 718,376 $ 549,180
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 133,637 $ 89,321
Accrued payroll expense ................................................................. 28,311 20,866
Income taxes payable .................................................................... 7,815 4,805
Other accrued liabilities ............................................................... 28,244 17,723
----------- ----------
Total current liabilities ............................................................. 198,007 132,715
Non-current liabilities ................................................................... 2,637 3,693
----------- ----------
Total liabilities ..................................................................... 200,644 136,408
Deferred credits .......................................................................... 3,372 4,257
Stockholders' equity:
Preferred Stock Series A, $.01 par value, $11.20 per share liquidation
value:
Authorized shares - 10,000,000 ..................................................... -- --
Preferred Stock, $.01 par value:
Authorized shares - 20,000,000 ..................................................... -- --
Common Stock, $.01 par value:
Authorized shares - 600,000,000
Issued and outstanding shares - 68,124,646 and 67,489,466 at
April 27, 2002, and April 28, 2001, respectively ................................. 681 675
Additional paid-in capital ................................................................ 90,777 68,049
Accumulated other comprehensive loss ...................................................... (3,084) (2,316)
Retained earnings ......................................................................... 449,661 354,371
Notes receivable from ESOP ................................................................ (23,675) (12,264)
----------- ----------
Total stockholders' equity ............................................................ 514,360 408,515
----------- ----------
Total liabilities and stockholders' equity ............................................ $ 718,376 $ 549,180
=========== ==========
See accompanying notes
22
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Fiscal Year Ended
-----------------------------------------------
April 27, April 28, April 29,
2002 2001 2000
----------- ----------- -----------
Net sales ................................................. $ 1,415,515 $ 1,156,455 $ 1,045,883
Cost of sales ............................................. 921,335 747,301 678,766
----------- ----------- -----------
Gross profit .............................................. 494,180 409,154 367,117
Operating expenses ........................................ 347,000 294,039 269,658
----------- ----------- -----------
Operating income .......................................... 147,180 115,115 97,459
Other income and expense:
Amortization of deferred credits ................. 885 885 885
Finance income, net .............................. 4,387 6,534 4,826
Interest expense ................................. (109) (123) (132)
Loss on currency exchange ........................ (120) (215) (39)
----------- ----------- -----------
Income before income taxes ................................ 152,223 122,196 102,999
Income taxes .............................................. 56,933 45,721 38,527
----------- ----------- -----------
Net income ................................................ $ 95,290 $ 76,475 $ 64,472
=========== =========== ===========
Earnings per share -- basic ............................... $ 1.41 $ 1.13 $ 0.96
=========== =========== ===========
Earnings per share -- diluted ............................. $ 1.40 $ 1.13 $ 0.95
=========== =========== ===========
Weighted average shares and potentially dilutive
shares outstanding:
Basic ............................................ 67,700 67,435 67,346
Diluted .......................................... 68,201 67,763 67,544
See accompanying notes
23
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Other
Additional Compre- Notes
Common Stock Paid-in hensive Retained Receivable
Number Amount Capital (Loss) Earnings from ESOP Total
---------------------------------------------------------------------------------------------
Balance at April 24, 1999 ......... 33,649,313 $ 336 $ 66,992 $ (2,222) $ 213,761 $ (13,668) $ 265,199
Change in translation adjustment .. -- -- -- 162 -- -- 162
Net income ........................ -- -- -- -- 64,472 -- 64,472
---------
Comprehensive income .............. 64,634
Common stock issued, net .......... 122,410 1 3,784 -- -- -- 3,785
Payment on ESOP note .............. -- -- -- -- -- 606 606
Share repurchases ................. (90,000) -- (3,754) -- -- -- (3,754)
Stock split (2 for 1) ............. 33,681,723 337 -- -- (337) -- --
----------- -------- ----------- ----------- ----------- ----------- ---------
Balance at April 29, 2000 ......... 67,363,446 674 67,022 (2,060) 277,896 (13,062) 330,470
Change in translation adjustment .. -- -- -- (256) -- -- (256)
Net income ........................ -- -- -- -- 76,475 -- 76,475
---------
Comprehensive income .............. 76,219
Common stock issued, net .......... 251,020 1 4,610 -- -- -- 4,611
Payment on ESOP note .............. -- -- -- -- -- 798 798
Share repurchases ................. (125,000) -- (3,583) -- -- -- (3,583)
----------- -------- ----------- ----------- ----------- ----------- ---------
Balance at April 28, 2001 ......... 67,489,466 675 68,049 (2,316) 354,371 (12,264) 408,515
Change in translation adjustment .. -- -- -- (768) -- -- (768)
Net income ........................ -- -- -- -- 95,290 -- 95,290
---------
Comprehensive income .............. 94,522
Common stock issued, acquisitions 655,513 7 25,589 -- -- -- 25,596
Common stock issued, net .......... 226,667 2 5,444 -- -- -- 5,446
Payment on ESOP note .............. -- -- -- -- -- 1,201 1,201
Merger of acquired ESOP ........... -- -- -- -- -- (12,612) (12,612)
Share repurchases ................. (247,000) (3) (8,305) -- -- -- (8,308)
----------- -------- ----------- ----------- ----------- ----------- ---------
Balance at April 27, 2002 ......... 68,124,646 $ 681 $ 90,777 $ (3,084) $ 449,661 $ (23,675) $ 514,360
=========== ======== =========== =========== =========== =========== =========
See accompanying notes
24
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended
-------------------------------------------
April 27, April 28, April 29,
2002 2001 2000
-------------------------------------------
Operating activities:
Net income .......................................................... $ 95,290 $ 76,475 $ 64,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................... 8,932 7,771 7,161
Amortization of deferred credits ................................ (885) (885) (885)
Amortization of goodwill ........................................ 5,351 3,306 3,029
Bad debt expense ................................................ 1,592 821 1,267
Deferred taxes .................................................. (2,999) (1,038) (3,141)
Change in assets and liabilities net of acquired:
Increase in receivables ........................................ (43,488) (13,889) (17,367)
(Increase) decrease in inventory ............................... (9,310) (10,981) 3,211
Increase in accounts payable ................................... 19,235 9,307 10,154
Increase in accrued liabilities ................................ 14,001 7,295 163
Other changes from operating activities, net ................... 2,776 1,877 (183)
---------- --------- ---------
Net cash provided by operating activities ........................... 90,495 80,059 67,881
Investing activities:
Additions to property and equipment, net ............................ (11,138) (10,014) (15,373)
Purchase of investments ............................................. (767) (19,764) (4,720)
Acquisitions ........................................................ (109,253) (3,797) (12,569)
---------- --------- ---------
Net cash used in investing activities ............................... (121,158) (33,575) (32,662)
Financing activities:
Payments of long-term debt .......................................... (729) (683) (425)
Cash payments received on notes receivable from ESOP ................ 1,201 798 606
Repurchases of common stock ......................................... (8,308) (3,583) (3,754)
Common stock issued, net ............................................ 4,360 3,668 3,135
---------- --------- ---------
Net cash (used in) provided by financing activities ................ (3,476) 200 (438)
Effect of exchange rate changes on cash ............................. 101 (113) (74)
---------- --------- ---------
Net (decrease)increase in cash and cash equivalents ................. (34,038) 46,571 34,707
Cash and cash equivalents at beginning of period .................... 160,024 113,453 78,746
---------- --------- ---------
Cash and cash equivalents at end of period .......................... $ 125,986 $ 160,024 $ 113,453
========== ========= =========
Supplemental disclosures:
Income taxes paid ................................................... $ 55,325 $ 42,162 $ 37,148
Interest paid ....................................................... 112 127 134
Common stock issued for acquisitions ................................ 25,596 -- --
Less ESOP loan ................................................. (12,612) -- --
---------- --------- ---------
Net equity impact from acquisitions ............................ 12,984 -- --
See accompanying notes
25
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 27, 2002
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries Patterson Dental Supply, Inc., Webster
Veterinary Supply, Inc., Direct Dental Supply Co, and Patterson Dental Canada
Inc. Significant intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications of previously reported amounts have
been made to conform to the current year presentation.
Description of Business
Patterson Dental Company ("Patterson" or the "Company") is a
value-added distributor serving the North American dental supply and
companion-pet (dogs, cats and other common household pets) veterinary supply
markets. The Company has two reportable segments, dental supply and veterinary
supply. As the Company's largest segment, dental supply provides a virtually
complete range of consumable dental products, clinical and laboratory equipment,
and value-added services to dentists, dental laboratories, institutions and
other healthcare providers throughout North America. The Company's veterinary
supply segment distributes consumable supplies, equipment, diagnostic products,
biologicals (vaccines) and pharmaceuticals to companion pet veterinary clinics
principally in the Eastern, Mid-Atlantic and Southeastern regions of the United
States.
Fiscal Year End
The Company utilizes a fifty-two, fifty-three week fiscal year ending
on the Saturday nearest April 30. Fiscal years 2002 and 2001 each consisted of
fifty-two weeks. Fiscal year 2000 consisted of fifty-three weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in money market
funds, highly-rated commercial paper and government securities. The maturities
of these securities at the time of purchase is 90 days or less. Short-term
investments consist of highly-rated commercial paper, corporate notes and bonds
and government securities with maturities longer than 90 days at the date of
purchase. All cash equivalents and short-term investments are classified as
available for sale and carried at market value.
Inventory
Inventory consists of merchandise held for sale and is stated at the
lower of cost or market. Cost is determined using the last-in, first-out (LIFO)
method for domestic dental and veterinary inventories and the first-in,
first-out (FIFO) method for all other inventories. Inventories valued at LIFO
represent 86% and 84% of total inventories at April 27, 2002, and April 28,
2001, respectively.
The accumulated LIFO provision was $19,114 at April 27, 2002, and
$15,981 April 28, 2001. The Company believes that inventory replacement cost
exceeds the inventory balance by an amount approximating the LIFO reserve.
26
Property and Equipment
Property and equipment are stated at cost. The Company provides
depreciation on the straight-line method over estimated useful lives of up to 40
years for buildings or the expected remaining life of purchased buildings, 3 to
20 years for leasehold improvements or the term of the lease, if less, 5 years
for data processing equipment, and 5 to 10 years for office furniture and
equipment.
Goodwill and Other Intangibles
Goodwill represents primarily the excess of the purchase price over the
fair value of the net tangible assets of acquired businesses. Other intangible
assets consist primarily of non-compete agreements. Goodwill and Other
Intangibles are being amortized on a straight-line basis using lives ranging
from 3 to 20 years. Accumulated amortization at April 27, 2002 and April 28,
2001 was $18,515 and $13,164, respectively. The Company periodically reviews its
long-lived assets, including fixed assets, for indicators of impairment using an
estimate of the undiscounted cash flows generated by those assets. The Company's
financial statements for fiscal years 2000 through 2002 reflect no such
impairments. Effective April 28, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(Statement 142). Under Statement 142, goodwill is no longer amortized, but is
subject to annual impairment tests. See "New Accounting Pronouncements" for
further discussion of Statement 142 and its anticipated impact on the Company's
consolidated financial statements.
Revenue Recognition
Revenues recognized include product sales, billings for freight and
handling charges, and fees earned for services provided. Consumable and printed
product sales and billings for freight and handling charges are recorded as
products are shipped. Equipment and software product revenues are also
recognized upon shipment. Revenue for these products are recorded at shipment
since at that time there is persuasive evidence that an arrangement exists, the
price is fixed and final, and there is reasonable assurance of collection of the
sales proceeds. Revenue derived from post contract customer support for software
is deferred and recognized ratably over the period in which the support is
provided. Other service revenues are recorded on the date services are
completed.
Advertising
The Company expenses all advertising and promotional costs as incurred
except for certain catalog costs which are capitalized and amortized over future
periods based upon estimates of revenue to be generated. Total advertising and
promotional expenses were $13,748, $11,987 and $7,799 for fiscal years 2002,
2001 and 2000, respectively.
Deferred Credits
Negative goodwill (deferred credits) arose from the purchase of the
Patterson business in fiscal 1986 and D.L. Saslow Co., Inc. in fiscal 1988. The
Company is amortizing the deferred credits on a straight-line basis over 20
years. In conjunction with Statement 142, the deferred credits will be written
off through the income statement in fiscal 2003. See "New Accounting
Pronouncements" for further discussion of Statement 142 and its anticipated
impact on the Company's consolidated financial statements.
Income Taxes
The liability method is used to account for income tax expense. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
27
Employee Stock Ownership Plan (ESOP)
Compensation expense related to the Company's defined contribution ESOP
is computed based on the shares allocated method.
Stock-Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations to
account for its stock option plans. Under APB No. 25, no compensation expense is
recognized if the exercise price of the Company's stock options equals the
market price on the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires that the fair value of options granted and the pro forma
impact on earnings be disclosed when material. The pro forma impact was not
material for fiscal years 2002, 2001 and 2000.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares during the period. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of outstanding common shares and common share equivalents, when dilutive.
Certain director and employee stock options are not included in the April 27,
2002, April 28, 2001, and April 29, 2000 calculations because they are
anti-dilutive.
The following table sets forth the denominator for the computation of basic and
diluted earnings per share. There were no adjustments to the numerator.
Fiscal Year
---------------------------------
2002 2001 2000
-------- -------- --------
Denominator: (in thousands)
Denominator for basic earnings per
share - weighted average shares 67,700 67,435 67,346
Effect of dilutive securities:
Stock Option Plans 426 245 111
Employee Stock Purchase Plan 9 10 10
Capital Accumulation Plan 66 73 77
-------- -------- --------
Dilutive potential common shares 501 328 198
-------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average
shares 68,201 67,763 67,544
======== ======== ========
New Accounting Pronouncements
In July 2001, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, " Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 addresses
financial accounting and reporting for business combinations. Specifically,
effective for business combinations occurring after June 30, 2001, it eliminated
the use of the pooling method of accounting and required all business
combinations to be accounted for under the purchase method. SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. The primary change related to this new standard is that the amortization
of goodwill and intangible assets with indefinite useful lives will be
discontinued and instead an annual impairment approach will be applied.
As provided in the new standards, the Company is not amortizing the
goodwill related to the acquisition of the assets of J. A. Webster, Inc. or
Thompson Dental Company which occurred after June 30, 2001. The Company will
discontinue amortization on the remainder of its indefinite lived intangible
assets, including goodwill, effective April 28, 2002. With the adoption of the
remaining provisions of these standards, Patterson's reported net earnings per
share are projected to increase by approximately $0.02 on a going forward basis.
In fiscal 2003, there also will be an additional one-time benefit of $0.05 per
share as Patterson is
28
required to write-off the remaining balance of its deferred credits. The
deferred credits are negative goodwill that arose from acquisitions in the
1980's and currently total approximately $3.4 million.
2. Cash Equivalents and Short-term Investments
All cash equivalents and short-term investments are available for sale
and carried at market value, which approximates cost. At April 27, 2002 and
April 28, 2001 cash equivalents and investments consisted of the following:
Fiscal Year
------------------------
2002 2001
--------- --------
Cash on hand $ 48,849 $ 37,218
Cash Equivalents:
Certificates of deposit -- 5,350
Commercial paper 5,864 10,761
Corporate notes and bonds 11,930 7,081
Government securities 19,493 9,422
Money market funds 39,850 90,192
--------- --------
77,137 122,806
Short-term investments:
Commercial paper 8,690 4,170
Corporate notes and bonds 9,374 17,294
Government securities and other 7,187 3,020
--------- --------
25,251 24,484
--------- --------
$ 151,237 $184,508
========= ========
3. Acquisitions
On July 9, 2001, the Company purchased substantially all of the assets
of J. A. Webster, Inc.("Webster") and assumed certain liabilities, for a
purchase price of $95,662, consisting of $84,955 in cash and $10,707 in stock.
The value of the 322,524 common shares issued was determined based on the
average market price of Patterson's common shares on July 9, 2001. The
acquisition agreement also includes an earnout provision tied to future product
sales, which could result in additional cash payments over five years if certain
minimum revenue milestones are achieved. The earn-out payments are not expected
to have a material impact on future cash flows.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of J. A. Webster, Inc.'s operations are
included in the accompanying financial statements since the date of acquisition.
The purchase price plus direct acquisition costs have been allocated on the
basis of estimated fair values at the date of acquisition, pending final
determination of the fair value of certain acquired assets. The preliminary
purchase price allocation is as follows:
Purchase price $ 95,662
Less:
Accounts receivable 25,367
Inventory 19,758
Fixed assets 2,383
Other assets 278
Identifiable intangible assets 12,000
Accounts payable (18,839)
Accrued expenses (2,621)
---------
Preliminary Goodwill $ 57,336
=========
29
The following pro forma summary presents the results of operations, as
if the acquisition had occurred at the beginning of the fiscal period. The pro
forma results of operations are not necessarily indicative of the results that
would have been achieved had the two companies been combined.
Fiscal Year
--------------------------
2002 2001
---- ----
Net Sales $1,449,143 $1,308,746
Net Income /(1)/ 95,677 79,893
Earnings per share - basic /(1)/ $ 1.41 $ 1.18
Earnings per share - diluted /(1)/ $ 1.40 $ 1.17
(1) Reflects the amortization of certain intangible assets. Because the
transaction was consumated following the effective date specified in the
recently issued Statement of the Financial Accounting Standards Board No. 142
"Goodwill and Other Intangible Assets," the Company will not amortize goodwill
for this transaction, but the goodwill becomes subject to periodic evaluations
of possible impairment in its value.
The Company also made the following acquisitions that affect the
periods covered by these financial statements:
Entity Closing date Consideration
------------------------------------- ------------------ ----------------------
Thompson Dental Company April 2, 2002 Cash, Stock & Earn-out
Modern Practice Technologies December 4, 2001 Cash
ECheck-Up.com September 15, 2000 Cash & Earn-out
Micheli Dental Supply, Inc. August 1, 2000 Cash & Earn-out
Guggenheim Brothers Dental Supply Co. March 27, 2000 Cash & Earn-out
Kentucky Dental Supply Company, Inc. October 25, 1999 Cash
Barr Dental Supply, Inc. June 28, 1999 Cash
The above acquisitions have been recorded using the purchase method of
accounting. The aggregate purchase price for the acquisitions was allocated as
follows:
Fiscal Year
------------------------------------
2002 2001 2000
---------- -------- --------
Purchase price $ 26,574 $ 3,797 $ 12,569
Allocated to the following:
Accounts receivable 9,031 318 4,082
Inventory 9,808 420 4,351
Other assets 1,752
Fixed assets 4,024 491 802
Accounts payable (6,269) (83) (2,765)
Accrued expenses (1,154) -- (336)
---------- -------- --------
Goodwill $ 9,382 $ 2,651 $ 6,435
========== ======== ========
The operating results of each of these acquisitions are included in the
Company's consolidated statements of income from the date of each acquisition.
Pro forma results of operations have not been presented for these acquisitions
since the effects of these business acquisitions were not material to the
Company either individually or in the aggregate.
30
4. Property and Equipment
April 27, 2002 April 28, 2001
-------------- --------------
Land $ 3,790 $ 3,790
Buildings 25,738 22,432
Leasehold improvements 4,477 2,381
Furniture and equipment 36,173 31,684
Data processing equipment 36,101 27,047
----------- -----------
106,279 87,334
Accumulated depreciation (49,139) (38,759)
----------- -----------
$ 57,140 $ 48,575
=========== ===========
5. Financing
The Company maintained a combined Contract Purchase and Revolving Credit
Agreement with U. S. Bank National Association, as agent, which allowed the
Company to sell, with limited recourse on an ongoing basis, its installment sale
contract receivables secured by dental equipment to U. S. Bank National
Association and three additional banks. This financing arrangement is accounted
for as a sale of assets under the provisions of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
During fiscal 2002, the Company sold approximately $102.5 million of its
contracts under this program. The Company retains servicing responsibilities,
for which it is paid a servicing fee. The servicing fees received by the Company
are considered adequate compensation for services rendered. Accordingly, no
servicing asset or liability has been recorded. 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, 2002. A
total of $125.0 million of installment contracts receivable sold under the
agreement were outstanding at April 27, 2002.
Subsequent to its fiscal 2002 year-end, the Company renegotiated its
agreement with U. S. Bank National Association. Under the new contract, the
Company has a $50 million contract purchase facility. In addition, the Company
created a special purpose entity ("SPE"), PDC Funding Company, LLC, a wholly
owned subsidiary and entered into a new Receivables Purchase Agreement with a
commercial paper conduit managed by Bank One. N. A. The Company will transfer on
an on-going basis a majority of its installment sale contracts to the SPE. In
turn, the SPE will sell the contracts to the commercial paper conduit
administered by Bank One. This is a one-year agreement, renewable annually, with
a current limit of $200 million of contract purchases.
6. Leases
The Company leases facilities for its branch office locations, two
distribution facilities, and also certain equipment. These leases are accounted
for as operating leases. Future minimum rental payments under noncancelable
operating leases are as follows for the years ending in April:
2003 $ 7,915
2004 7,036
2005 5,143
2006 3,322
2007 1,652
Thereafter 964
---------
Total minimum payments required $ 26,032
=========
Rent expense was $8,429, $6,839, and $7,075 for the years ended April 27,
2002, April 28, 2001 and April 29, 2000, respectively.
31
7. Income Taxes
Significant components of the provision (benefit) for income taxes are as
follows:
Fiscal Year
--------------------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal $ 51,466 $ 40,878 $ 37,594
Foreign 2,239 1,056 --
State 6,037 4,825 4,074
--------- --------- --------
Total current 59,742 46,759 41,668
Deferred:
Federal (2,579) (1,402) (2,437)
Foreign -- 481 (481)
State (230) (117) (223)
--------- ---------- --------
Total deferred (2,809) (1,038) (3,141)
--------- --------- --------
Provision for income taxes $ 56,933 $ 45,721 $ 38,527
========= ========= ========
Deferred taxes assets and liabilities are included in prepaid expenses and
other current assets and in non-current liabilities on the balance sheet.
Significant components of the Company's deferred tax assets (liabilities) as of
April 27, 2002 and April 28, 2001 are as follows:
Fiscal Year
---------------------------
2002 2001
--------- ---------
Bad debt allowance $ 1,180 $ 1,065
LIFO reserve (2,088) (2,360)
Financing income (157) (1,467)
Health insurance 1,133 1,053
Capital Accumulation Plan 3,496 2,973
Inventory obsolescence 2,850 1,928
Other 102 515
--------- ---------
Total $ 6,516 $ 3,707
========= =========
Income tax expense varies from the amount computed using the U.S. statutory
rate. The reasons for this difference and the related tax effects are shown
below:
Fiscal Year
--------------------------------------------
2002 2001 2000
--------- --------- ----------
Tax at U.S. statutory rate $ 53,278 $ 42,769 $ 36,048
State tax provision, net of federal benefit 3,775 3,060 2,503
Effect of foreign taxes 417 392 (2,130)
Tax settlements and exposures -- -- 2,350
Amortization of deferred credit (310) (310) (310)
Other (227) (190) 66
--------- --------- ----------
$ 56,933 $ 45,721 $ 38,527
========= ========= ==========
32
8. Segment and Geographic Data
Historically, the Company operated in one reportable segment, dental
supply. In July 2001, the company purchased the assets of J. A. Webster, Inc.
The acquisition became a reportable segment of the Company, and now Patterson
Dental Company is comprised of two reportable segments, dental supply and
veterinary supply. The Company's reportable segments are strategic business
units that offer similar products and services to different customer bases. The
dental supply segment provides a virtually complete range of consumable dental
products, clinical and laboratory equipment and value-added services to
dentists, dental laboratories, institutions and other healthcare providers
throughout North America. The veterinary supply segment provides consumable
supplies, equipment, diagnostic products, biologicals (vaccines) and
pharmaceuticals to companion-pet veterinary clinics primarily in the Eastern,
Mid-Atlantic and Southeastern regions of the United States.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment
performance based on operating income.
The following table presents information about the Company's reportable
segments:
Fiscal Year
----------------------------------------------------
2002 2001 2000
---- ---- ----
Net Sales
Dental Supply $1,280,693 $1,156,455 $1,045,883
Veterinary Supply 134,822 -- --
---------- ---------- ----------
Consolidated Net Sales $1,415,515 $1,156,455 $1,045,883
========== ========== ==========
Operating Income
Dental Supply $ 138,647 $ 115,115 $ 97,459
Veterinary Supply 8,533 -- --
---------- ---------- ----------
Consolidated Operating Income $ 147,180 $ 115,115 $ 97,459
========== ========== ==========
Total Assets
Dental Supply $ 589,819 $ 549,180 $ 451,976
Veterinary Supply 128,557 -- --
---------- ---------- ----------
Consolidated Total Assets $ 718,376 $ 549,180 $ 451,976
========== ========== ==========
Depreciation and Amortization
Dental Supply $ 11,833 $ 11,077 $ 10,190
Veterinary Supply 2,450 -- --
---------- ---------- ----------
Consolidated Depreciation and Amortization $ 14,283 $ 11,077 $ 10,190
========== ========== ==========
The following table presents sales information by product for the Company:
Fiscal Year
----------------------------------------------------
2002 2001 2000
---- ---- ----
Net Sales
Consumable and printed products $ 911,991 $ 719,510 $ 665,411
Equipment and software 392,683 336,856 292,018
Other 110,841 100,089 88,454
---------- ---------- ----------
Total $1,415,515 $1,156,455 $1,045,883
========== ========== ==========
33
The following table presents information about the Company by
geographic area. There were no material sales between geographic areas.
Fiscal Year
-------------------------------------
2002 2001 2000
---- ---- ----
Net Sales
United States $1,322,991 $1,068,871 $ 957,107
Canada 92,524 87,584 88,776
---------- ---------- ----------
Total $1,415,515 $1,156,455 $1,045,883
========== ========== ==========
Long-lived Assets
United States $ 185,040 $ 102,209 $ 95,843
Canada 3,916 4,210 4,725
---------- ---------- ----------
Total $ 188,956 $ 106,419 $ 100,568
========== ========== ==========
9. Shareholders' Equity
Share Repurchases
In September 1999, the Board of Directors authorized the repurchase of
up to two million shares of the Company's common stock. The Company repurchased
247,000, 125,000 and 180,000 shares of its common stock for $8,308, $3,583 and
$3,754 during fiscal 2002, 2001 and 2000, respectively.
Employee Stock Ownership Plan
During 1990, the Company's Board of Directors adopted a leveraged ESOP.
During fiscal 1991, under the provisions of the plan and related financing
arrangements, the Company loaned the ESOP $22,000 for the purpose of acquiring
its then outstanding preferred stock which was subsequently converted to common
stock. At April 27, 2002, and April 28, 2001, indebtedness of the ESOP to the
Company is shown as a deduction from stockholders' equity in the consolidated
balance sheets. The cost of the ESOP is borne by the Company through annual
contributions to the plan in amounts determined by the Board of Directors.
Shares of stock acquired by the plan are allocated to each employee who has
completed 1,000 hours of service during the plan year. During fiscal 2002, 2001
and 2000, shares with a cost of $1,201, $798 and $606, respectively, were earned
and allocated to ESOP participants. These amounts represented the Company's
contribution for each fiscal year.
At April 27, 2002, 4,382,944 shares of the common stock were allocated
to participants and had a fair market value of $195,786.
In conjunction with the purchase of Thompson Dental Company
("Thompson"), the Company's ESOP and an ESOP sponsored by Thompson were used to
facilitate the acquisition and merger of Thompson into the Company. The net
result of this transaction was an additional loan of $12,612 being made to the
ESOP and the ESOP to acquiring 332,989 shares of common stock of Patterson
Dental Company. Under current accounting standards, these shares are not
considered outstanding for the computation of earnings per share until the
shares are allocated to the participants. When the shares are allocated to the
employees, the expense to the Company will be determined based on the fair
market value of the shares in the year of the allocation. The loan bears
interest at current rates but principal does not begin to amortize until 2011.
The shares issued in this transaction, which were not previously allocated to
the employees of Thompson (284,084), will begin to be allocated in fiscal 2003
but only to the extent of interest on the loan. The non-cash expense is not
expected to materially impact the consolidated results of operations of the
Company.
34
Stock Option Plan
In June 1992, the Company adopted the Patterson Dental Company 1992
Stock Option Plan (the "Employee Plan"). The Employee Plan provides for the
granting of options to designated employees and non-employees, including
consultants to the Company, to purchase up to a maximum of 4,050,000 shares of
common stock. The Employee Plan is administered by the Stock Option Committee,
which determines the employees, officers and others who are to receive options,
the type of option to be granted, the number of shares subject to each option
and the exercise price of each option.
Stock options must be granted at an exercise price not less than the
fair market value of the common stock on the dates the options are granted (or,
for persons who own more than 10 percent of the Company's outstanding voting
stock, not less than 110 percent of such fair market value). Stock options
granted under the Employee Plan have exercise prices equal to the market price
on the date of the grant, vest over a three-to nine-year period, and expire ten
years following the date of the grant.
Director Stock Option Plan
In June 1992, the Company adopted a Director Stock Option Plan (the
"Director Plan"), pursuant to which 675,000 shares of Common Stock have been
reserved for the grant of non-statutory stock options to the Company's outside
directors. Options are granted at the fair market value on the date of grant and
are exercisable for a period of four years commencing one year after the date of
grant. This plan terminated during fiscal 2002.
In June 2001, the Company adopted a new Director Stock Option Plan. A
total of 400,000 shares of common stock have been reserved for issuance under
the plan. Options are granted at fair market value on the option grant date and
are exercisable for a period of nine years one year after the grant date. In
addition, each eligible director will have the right to elect to receive
additional options in lieu of the amount of the director's annual fee for
service on the board of directors.
Following is a summary of stock option activity:
Employee Plan Director Plan
--------------------------------------------------- ------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Available Options Price Available Options Price
for Grant Outstanding Per Share for Grant Outstanding Per Share
----------- ----------- ---------- ----------- ----------- ----------
Balance April 24, 1999 3,624,036 425,964 $ 20.28 216,000 270,000 $ 11.33
Granted (74,298) 74,298 18.12 (72,000) 72,000 23.81
Exercised -- -- -- -- (54,000) 6.00
Canceled 45,178 (45,178) 20.28 -- -- --
----------- --------- --------- --------- --------- ---------
Balance April 29, 2000 3,594,916 455,084 19.93 144,000 288,000 13.87
Granted (226,103) 226,103 24.74 (72,000) 72,000 22.50
Exercised -- -- -- -- (54,000) 8.83
Canceled 36,974 (36,974) 20.82 -- -- --
----------- --------- --------- --------- --------- ---------
Balance April 28, 2001 3,405,787 644,213 21.58 72,000 306,000 18.27
Reserved 400,000
Granted (317,143) 317,143 32.42 (84,000) 84,000 37.30
Exercised -- (2,686) 20.28 -- (72,000) 10.36
Canceled 29,598 (29,598) 22.19 -- -- --
----------- --------- --------- --------- --------- ---------
Balance April 27, 2002 3,118,242 929,072 $ 25.26 388,000 318,000 $ 25.09
=========== ========= ========= ========= ========= =========
35
At April 27, 2002 the range of exercise prices on outstanding options
under the Employee and Director Plans were as follows:
Employee Plan Director Plan
- --------------------------------------------------------- ---------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Options Remaining Life Exercise Options Remaining Life Exercise
Range of Prices Outstanding in Years Price Range of Prices Outstanding in Years Price
$13.46 - $22.00 399,786 6.9 $19.90 $13.46 - $19.00 90,000 1.0 $16.78
$22.01 - $26.00 194,195 8.1 24.22 $19.01 - $24.00 144,000 2.9 23.16
$26.01 - $31.00 181,106 9.1 30.45 $24.01 - $39.42 84,000 4.4 37.30
--------- --- ------
$31.01 - $38.00 153,738 9.2 34.41 318,000 2.8 $25.09
========= === ======
$38.01 - $40.57 247 9.8 40.55
--------- --- ------
929,072 7.9 $25.26
========= === ======
Employee Stock Purchase Plan
In June 1992, the Company adopted an Employee Stock Purchase Plan (the
"Stock Purchase Plan"). A total of 1,375,000 shares of common stock are reserved
for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is
intended to qualify under Section 423 of the Internal Revenue Code, is
administered by the Board of Directors of the Company or by a committee
appointed by the Board of Directors. Employees are eligible to participate after
a year of employment with the Company if they are employed for at least 20 hours
per week and more than five months per year. The Stock Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed 10 percent of an employee's compensation, at 85 percent of the
lower of the fair market value of the common stock on the offering date or at
the end of each three-month period following the offering date during the
applicable offering period. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. Employees purchased
80,678, 99,276 and 100,716 shares in fiscal 2002, 2001 and 2000, respectively.
At April 27, 2002, there were 574,172 shares available for purchase under the
Stock Purchase Plan.
Capital Accumulation Plan
In 1996, the Company adopted an employee Capital Accumulation Plan (the
"CAP Plan"). A total of 3,000,000 shares of common stock are reserved for
issuance under the CAP Plan. Officers and other key employees of the Company or
its subsidiaries are eligible to participate by purchasing common stock through
payroll deductions, which must be between 5% and 25% of an employee's
compensation, at 75% of the average closing price of the common stock for the
calendar year. The shares issued are restricted stock and are held in the
custody of the Company until the restrictions lapse. The restriction period is
three years from the beginning of the plan year. Employees purchased 135,046,
161,251 and 160,734 shares of restricted stock in fiscal 2002, 2001 and 2000,
respectively. At April 27, 2002, 2,308,825 shares were available for purchase
under the Plan.
10. 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.
36
11. 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 2002 and 2001.
Quarter Ended
-----------------------------------------------------------
Apr. 27, Jan. 26, Oct. 27, Jul. 28,
2002 2002 2001 2001
-------- -------- -------- --------
Net sales $399,849 $357,394 $355,018 $303,254
Gross profit 140,302 125,608 121,203 107,067
Operating income 43,204 38,581 35,955 29,440
Net income 27,563 24,832 23,282 19,613
Basic earnings per share $ 0.41 $ 0.37 $ 0.34 $ 0.29
Dilutive earnings per share $ 0.40 $ 0.36 $ 0.34 $ 0.29
Quarter Ended
-----------------------------------------------------------
Apr. 28, Jan. 27, Oct. 28, Jul. 29,
2001 2001 2000 2000
-------- -------- -------- --------
Net sales $305,119 $290,579 $290,717 $270,040
Gross profit 109,307 104,753 101,999 93,095
Operating income 31,532 30,603 28,782 24,198
Net income 21,026 20,386 18,969 16,094
Basic earnings per share $ 0.31 $ 0.30 $ 0.28 $ 0.24
Dilutive earnings per share $ 0.31 $ 0.30 $ 0.28 $ 0.24
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated
herein by reference to the descriptions set forth under the caption "Election of
Directors" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held September 9, 2002 (the "2002 Proxy Statement").
Information regarding executive officers of the Company is incorporated herein
by reference to Item 1 of Part I of this Form 10-K under the caption "Executive
Officers of the Registrant." Information regarding compliance with Section 16(c)
of the Securities Exchange Act of 1934 is incorporated herein by reference to
the information set forth under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2002 Proxy Statement.
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 2002 Proxy Statement.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 2002 Proxy Statement. Information
regarding equity compensation plans is incorporated by reference to the
information set forth under the caption "Equity Compensation Plan Information"
in the 2002 Proxy Statement.
37
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following consolidated financial statements and supplementary data
of the Company and its subsidiaries, are included in Part II, Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of April 27, 2002 and April 28, 2001
Consolidated Statements of Income for the Years Ended April 27, 2002,
April 28, 2001 and April 29, 2000
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended April 27, 2002, April 28, 2001 and April 29, 2000
Consolidated Statements of Cash Flows for the Years Ended April 27,
2002, April 28, 2001 and April 29, 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith: Schedule
II - Valuation and Qualifying Accounts for the Years Ended April 27, 2002, April
28, 2001 and April 29, 2000.
Schedules other than that listed above have been omitted because they
are not applicable or the required information is included in the financial
statements or notes thereto.
3. Exhibits.
Exhibit
3.1 The Company's Articles of Incorporation, as amended*
3.2 The Company's Bylaws, as amended*
4.1 Specimen form of the Company's Common Stock Certificate*
4.2 The Company's Articles of Incorporation, as amended (see Exhibit
3.1)
4.3 The Company's Bylaws, as amended (see Exhibit 3.2)
10.1 Patterson Dental Company Employee Stock Ownership Plan, as
amended*
10.2 Patterson Dental Company 1992 Stock Option Plan*
10.3 Patterson Dental Company 1992 Director Stock Option Plan*
10.4 Patterson Dental Company Employee Stock Purchase Plan*
10.5 Patterson Dental Company Capital Accumulation Plan**
10.6 Incentive Compensation Program (Fiscal 1992)*
10.8 ESOP Loan Agreement dated June 15, 1990 as amended July 13, 1992*
38
10.9 Amended and Restated Term Promissory Note dated July 13, 1992*
10.10 Second Amended and Restated Contract Purchase Agreement dated
April 28, 2000 between Patterson Dental Company and U.S. Bank
National Association***
10.11 Amended and Restated Credit Agreement dated April 28, 2000
between Patterson Dental Company and U.S. Bank National
Association***
10.12 Asset Purchase Agreement by and among Patterson Dental Company
and J. A. Webster, Inc.****
10.13 Third Amended and Restated Contract Purchase Agreement dated
June 19, 2002 between Patterson Dental Company and U. S. Bank
National Association*****
10.14 Receivables Purchase Agreement dated May 10, 2002 Between
Patterson Dental Company and Bank One.*****
10.15 Receivables Sale Agreement dated May 10, 2002 among PDC
Funding Company, LLC, Patterson Dental Supply, Inc., and
Webster Veterinary Supply, Inc.*****
10.16 2001 Non-Employee Director Stock Option Plan*****
10.17 Amendments to Restated Employee Stock Purchase Plan*****
10.18 Amended and Restated Employee Stock Ownership Plan*****
10.19 Articles of Amendment to the Company's Restated Articles of
Incorporation*****
21 Subsidiaries
23 Consent of Independent Auditors
99 Item 5 captioned "About J. A. Webster, Inc." of Form 8-K dated
July 9, 2001****
________________________
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-51304) filed with the Securities and Exchange
Commission August 26, 1992.
** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended April 27, 1996.
*** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended April 29, 2000.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended April 28, 2001.
***** Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended April 27, 2002.
(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, 2002.
39
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 25, 2002
By /s/ Peter L. Frechette
-------------------------------------
Peter L. Frechette,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date
----
/s/ Peter L. Frechette President and Chief Executive Officer and July 25, 2002
- ------------------------------
Peter L. Frechette Director (Principal Executive Officer)
/s/ R. Stephen Armstrong Executive Vice President, Treasurer, and July 25, 2002
- ------------------------------
R. Stephen Armstrong Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Ronald E. Ezerski Director July 25, 2002
- ------------------------------
Ronald E. Ezerski
/s/ David K. Beecken Director July 25, 2002
- ------------------------------
David K. Beecken
/s/ Burt E. Swanson Director July 25, 2002
- ------------------------------
Burt E. Swanson
/s/ Andre B. Lacy Director July 25, 2002
- ------------------------------
Andre B. Lacy
/s/ James W. Wiltz Director July 25, 2002
- ------------------------------
James W. Wiltz
/s/ Harold C. Slavkin Director July 25, 2002
- ------------------------------
Harold C. Slavkin
40
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PATTERSON DENTAL COMPANY
(Dollars in thousands)
Charged
Balance at Charged to to Other Balance at
Beginning Costs and Accounts - Deductions - End of
of Period Expenses Describe Describe Period
----------- ------------ ------------ -------------- ------------
Year ended April 27, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $ 4,166 $ 1,592 $ $ 1,184 /(1)/ $ 4,574
======== ======== ======== ======== ========
LIFO inventory adjustment $ 15,981 $ 3,133 $ -- $ -- $ 19,114
Inventory obsolescence reserve 6,223 7,171 3,922 9,472
-------- -------- -------- -------- --------
Total inventory reserve $ 22,204 $ 10,304 $ -- $ 3,922 $ 28,586
======== ======== ======== ======== ========
Year ended April 28, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 4,208 $ 821 $ -- $ 863 /(1)/ $ 4,166
======== ======== ======== ======== ========
LIFO inventory adjustment $ 15,355 $ 626 $ -- $ -- $ 15,981
Inventory obsolescence reserve 3,149 9,982 -- 6,908 /(2)/ 6,223
-------- -------- -------- -------- --------
Total inventory reserve $ 18,504 $ 10,608 $ -- $ 6,908 $ 22,204
======== ======== ======== ======== ========
Year ended April 29, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 4,096 $ 1,267 $ 8 /(3)/ $ 1,163 /(1)/ $ 4,208
======== ======== ======== ======== ========
LIFO inventory adjustment $ 13,991 $ 1,364 $ -- $ -- $ 15,355
Inventory obsolescence reserve 1,955 4,058 -- 2,864 /(2)/ 3,149
-------- -------- -------- -------- --------
Total inventory reserve $ 15,946 $ 5,422 $ -- $ 2,864 $ 18,504
======== ======== ======== ======== ========
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory disposed of and written off.
(3) Acquisition of Dentaplex, Inc. in fiscal 2000.
41
INDEX TO EXHIBITS
Exhibit 10.13 Third Amended and Restated Contract Purchase
Agreement dated June 19, 2002 between Patterson
Dental Company and U.S. Bank National Association
Exhibit 10.14 Receivables Purchase Agreement dated May 10, 2002
Between Patterson Dental Company and Bank One
Exhibit 10.15 Receivables Sale Agreement dated May 10, 2002 among
PDC Funding Company, LLC, Patterson Dental Supply, Inc.,
and Webster Veterinary Supply, Inc.
Exhibit 10.16 2001 Non-Employee Director Stock Option Plan
Exhibit 10.17 Amendments to Restated Employee Stock Purchase Plan
Exhibit 10.18 Amended and Restated Employee Stock Ownership Plan
Exhibit 10.19 Articles of Amendment to Restated Articles of Incorporation
Exhibit 21 Subsidiaries
Exhibit 23 Consent of Independent Auditors
42