FORM 8-K/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
October 2, 2001
(Date of earliest event reported)
DENTSPLY INTERNATIONAL INC
(Exact name of Company as specified in charter)
Delaware 0-16211 39-1434669
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
570 West College Avenue, York, Pennsylvania 17405
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Company's telephone number including area code)
Page 1 of 41
Exhibit Index on Page 39
Item 7. Financial Statements and Exhibits
(a) The following audited financial statements of the Degussa Dental Group
are filed as part of this Current Report on Form 8-K, as amended by Form
8-K/A:
Page
Report of PricewaterhouseCoopers GmbH....................... 4
Report of KPMG Deutsche Treuhand-Gesellschaft AG................... 5
Combined Statements of Income for the nine months ended September 30,
2001 and for the year ended December 31, 2000....................... 6
Combined Balance Sheets as of September 30, 2001 and December 31,
2000...... 7
Combined Statements of Equity and Comprehensive Income for the period
from January 1, 2000 through September 30, 2001...................... 8
Combined Statements of Cash Flows for the nine month period ended
September 30, 2001and for the year ended December 30, 2000..............9
Notes to Combined Financial
Statements......................................................... 10
(b) The following unaudited pro forma combined financial statements are
filed as part of this Current Report on Form 8-K, as amended by Form
8-K/A:
Page
Introduction to Unaudited Pro Forma Combined Financial
Statements.................. 29
Unaudited Pro Forma Combined Statement of Income for the
nine months ended September 30, 2001............................... 31
Unaudited Pro Forma Combined Balance Sheet as of September 30,
2001........... 32
Unaudited Pro Forma Combined Statement of Income for the year ended
December 31, 2000................................................ 33
Notes to Unaudited Pro Forma Combined Financial Statements............ 34
2.1 Degussa Dental Group Sale and Purchase Agreement, dated May 28/29, 2001
between Degussa AG (Seller) and Dentsply Hanau GmbH & Co. KG, Dentsply
Research & Development Corporation and Dentsply EU S.a.r.l. (Purchasers
and subsidiaries of the Company) (previously filed).
2.2 Series A and Series B Note Purchase Agreement dated March 1, 2001
between the Company and Prudential Insurance Company of America
(previously filed).
23.1 Consent of Independent Accountants - PricewaterhouseCoopers GmbH.
23.2 Consent of Independent Auditors - KPMG Deutsche
Treuhand-Gesellschaft AG
2
Degussa Dental Group
Financial Statements
3
Report of Independent Accountants
To the Board of Directors and Shareholder of the
Degussa Dental Group:
In our opinion, the accompanying combined balance sheet as of September 30,
2001 and the related combined statement of income, of equity and
comprehensive income and of cash flows present fairly, in all material
respects, the financial position of Degussa Dental Group at September 30,
2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the
United States of America. 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 audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers GmbH
Stuttgart, Germany
December 10, 2001
4
Independent Auditors' Report
The Board of Directors
Degussa AG:
We have audited the accompanying combined balance sheet of Degussa Dental
Group as of December 31, 2000, and the related combined statements of income,
equity and comprehensive income, and cash flows for the year then ended.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Degussa Dental
Group as of December 31, 2000, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG Deutsche Treuhand-Gesellschaft AG
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Frankfurt am Main, Germany
September 28, 2001, except as to note 17, which is as of October 2, 2001
5
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF INCOME
(euro, in thousands)
Nine months Year
ended ended
September 30, December 31,
2001 2000
-------- --------
Net sales (Note 14) 346,734 489,517
Cost of products sold (Note 14) 224,745 343,256
-------- --------
Gross profit 121,989 146,261
Selling, general and administrative expenses (Note 14) 86,239 123,729
Other operating expense, net 11,984 6,059
-------- --------
Operating income 23,766 16,473
Other income and expenses:
Interest expense (Note 14) 3,263 4,635
Interest income (Note 14) (1,293) (2,717)
Minority interest 98 306
-------- --------
Earnings before income taxes 21,698 14,249
Income taxes (Note 10) 8,447 840
-------- --------
Net income 13,251 13,409
======== ========
<FN>
The accompanying notes are an integral part of the combined financial
statements.
</FN>
6
DEGUSSA DENTAL GROUP
COMBINED BALANCE SHEETS
(euro, in thousands)
September 30, 2001 December 31, 2000
------------------ -----------------
Assets
Current assets:
Cash and cash equivalents (Note 14) 6,556 14,677
Accounts and notes receivable-trade, net (Note 3) 55,915 63,593
Receivables from related parties (Note 14) 1,529 10,202
Inventories (Notes 1 and 4) 102,882 111,533
Deferred tax assets 4,145 3,030
Prepaid expenses and other current assets (Note 5) 3,455 13,317
------------------ -----------------
Total current assets 174,482 216,352
Property, plant and equipment, net (Notes 1 and 6) 55,669 56,628
Identifiable intangible assets, net (Notes 1 and 7) 34,416 34,138
Costs in excess of fair value of net assets acquired, net (Note 1) 98,608 104,840
Deferred tax assets 5,108 8,282
Other noncurrent assets 2,780 1,807
------------------ -----------------
Total assets 371,063 422,047
================== =================
Liabilities and combined equity
Current liabilities:
Current portion of long-term debt (Note 9) 2,662 2,917
Short-term notes payable (Note 9) 20,520 71,764
Accounts payable-trade 11,763 10,856
Payables to related parties (Note 14) 2,420 18,099
Accrued liabilities (Note 8) 22,528 22,509
Income taxes payable 19,914 11,061
Deferred tax liabilities 9,329 10,856
Other current liabilities 9,479 14,078
------------------ -----------------
Total current liabilities 98,615 162,140
Long-term debt, excluding current portion (Note 9) 5,886 8,696
Pension obligation (Note 11) 13,460 14,596
Obligations under capital lease, excluding current installments (Note 12) 9,185 9,092
Deferred tax liabilities 15,532 16,278
Other noncurrent liabilities 5,868 5,312
Minority interests in consolidated subsidiaries 837 661
------------------ -----------------
Total liabilities 149,383 216,775
------------------ -----------------
Commitments and contingencies (note 16)
Combined equity:
Investments by and advances from Degussa AG 219,049 200,718
Accumulated other comprehensive income 2,631 4,554
------------------ -----------------
Total combined equity 221,680 205,272
------------------ -----------------
Total liabilities and combined equity 371,063 422,047
================== =================
<FN>
The accompanying notes are an integral part of the combined financial
statements.
</FN>
7
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(euro, in thousands)
Investments Accumulated
by and other
advances from comprehensive Combined
Degussa AG income equity
------------------ ------------------- ---------------
Balance as of December 31, 1999 253,949 3,681 257,630
Net activity with Degussa AG (Note 14) (66,640) - (66,640)
Comprehensive income:
Net income 13,409 - 13,409
Foreign currency translation - 873 873
---------------
Comprehensive income 14,282
------------------ ------------------- ---------------
Balance as of December 31, 2000 200,718 4,554 205,272
Net activity with Degussa AG (Note 14) 5,080 - 5,080
Comprehensive income:
Net income 13,251 - 13,251
Foreign currency translation - (1,923) (1,923)
Comprehensive income 11,328
------------------ ------------------- ---------------
Balance as of September 30, 2001 219,049 2,631 221,680
================== =================== ===============
<FN>
The accompanying notes are an integral part of the combined financial
statements.
</FN>
8
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF CASH FLOWS
(euro, in thousands)
Nine months ended Year ended
September 30, 2001 December 31, 2000
---------------------- ------------------
Cash flows from operating activities:
Net income 13,251 13,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,203 7,304
Amortization 8,215 10,553
Deferred income taxes (214) (10,128)
(Decrease) increase in pension obligation and
other non-current liabilities (580) 6,024
Loss on disposal of property, plant and equipment 584 70
Other non-cash expense 859 3,438
Changes in current operating assets and liabilities, net:
Receivables fom related parties 8,673 (4,532)
Accounts and notes receivable-trade, third parties, net 7,678 (5,800)
Inventories 8,651 (3,414)
Prepaid expenses and other current assets 9,862 (10,095)
Payables to related parties (15,679) 9,929
Accounts payable-trade, third parties (3,692) 6,224
Accrued liabilities 19 (3,701)
Income taxes payable 8,853 7,605
Other, net (797) 1,308
---------------------- ------------------
Net cash provided by operating activities 50,886 28,194
---------------------- ------------------
Cash flows from investing activities:
Expenditures for identifiable intangible assets (2,219) (1,380)
Proceeds from sale of property, plant and equipment 635 663
Capital expenditures (6,665) (10,009)
---------------------- ------------------
Net cash used in investing activities (8,249) (10,726)
---------------------- ------------------
Cash flows from financing activities:
Equity distributions to Degussa AG (2,747) (7,223)
Equity contributions by Degussa AG 6,968 -
Increase (decrease) in capital lease obligations 93 (327)
Net repayments of long-term borrowings (2,810) (2,306)
Net repayments of short-term borrowings (2,508) (899)
Net repayments of short-term borrowings, related parties (48,991) (2,560)
---------------------- ------------------
Net cash used in financing activities (49,995) (13,315)
---------------------- ------------------
Effect of exchange rate changes on cash and cash equivalents (763) 90
---------------------- ------------------
Net (decrease) increase in cash and cash equivalents (8,121) 4,243
Cash and cash equivalents at beginning of period 14,677 10,434
---------------------- ------------------
Cash and cash equivalents at end of period 6,556 14,677
====================== ==================
<FN>
The accompanying notes are an integral part of the combined financial
statements.
</FN>
9
DEGUSSA DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(unless otherwise noted, all amounts are stated in thousands of euro)
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Degussa Dental Group ("Degussa Dental" or the "Company") designs, develops
and manufactures a broad range of dental products and complete system
solutions used in preventative, restorative and orthodontic treatment by
dental laboratories, dentists, orthodontists and oral surgeons. Products
marketed primarily to dental laboratories include alloys, veneering
porcelain, ceramics systems attachments, consumables and laboratory
equipment. Products marketed directly to dentists include filling materials,
cements, impression materials, local anesthetics and dedicated equipment for
the application of the respective materials. Orthodontic products include
all necessary appliances for the movement and realignment of teeth, and
products marketed to oral surgeons consist of complete systems to replace
teeth using artificial roots implanted into the jawbone of a patient. The
Company has operations and investments located in Europe, Asia, South America
and the United States. Degussa Dental's customers are primarily located in
Europe, Asia, and North and South America.
Basis of Presentation
In 2000, Degussa AG commenced a program to focus its operations on core
competencies related to the manufacture and distribution of specialty
engineered chemical products. In connection with this program, Degussa AG
formed Degussa Dental GmbH & Co. KG ("Degussa Dental KG") and DH Zweite
Vermogensverwaltungs GmbH ("DH GmbH"). Subsequently, Degussa AG transferred
substantially all dental-related investments, operations and activities to
Degussa Dental KG and DH GmbH, with the exception of certain retiree pension
obligations, which were retained by Degussa AG. Substantially all of the
German-based dental investments, operations and activities were contributed
to Degussa Dental KG while non-German-based dental investments, operations
and activities were contributed to DH GmbH. Collectively, Degussa Dental KG,
DH GmbH, and their majority owned subsidiaries, comprise Degussa Dental.
On May 29, 2001, Degussa AG entered into a sale and purchase agreement to
sell Degussa Dental to DENTSPLY International, Inc. ("DENTSPLY"). This
transaction closed on October 2, 2001. The combined financial statements are
presented on a historical cost basis and do not reflect any adjustments that
might be recorded by DENTSPLY in its application of purchase accounting.
The accompanying combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") and include the results of operations and assets and
liabilities directly related to Degussa Dental's operations. The
accompanying combined financial statements may not necessarily be indicative
of the results of operations, financial positions and cash flows of Dental KG
and DH GmbH had they operated as separate independent companies for the
duration of the periods presented, nor are they an indicator of future
performance.
As the businesses in the combined financial statements are included in
multiple consolidated tax returns and in multiple tax jurisdictions, the
effective tax rate does not reflect the structure and tax strategies that
could be in place if the businesses were conducted by a separate legal
entity.
The effects of capital transactions between Degussa Dental and Degussa AG
are included in "Investments by and advances from Degussa AG" in the
accompanying combined balance sheets and statements of equity and
comprehensive income.
10
Degussa Dental's operations have been financed partly through contributions
from Degussa AG and partially through third-party debt. Prior to the
formation of Degussa Dental in July 2000, Degussa AG did not allocate
interest charges to the contributed businesses. Accordingly, such interest
expense is not included in the accompanying combined statements of income.
In connection with the formation of Degussa Dental certain loans with Degussa
AG were created. Interest expense associated with those related party loans
that accrue interest is included in the accompanying combined statements of
income.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements of the Company include all significant
entities in which Dental KG or DH GmbH have legal or effective control after
completion of the reorganization program described above. All transactions
between combined businesses have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less, including cash pool positions with
related parties, to be cash equivalents (see note 14).
Inventories
Inventories are stated at the lower-of-cost-or-market. The cost of
precious metals inventories are determined using the last-in, first-out
("LIFO") method while the cost of other inventory components is determined
primarily using the average cost method. Cost consists of purchased
component costs and manufacturing costs, which are comprised of direct
material and labor costs and applicable indirect costs.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstance indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount
which the carrying amount exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or the fair
value less costs to sell.
11
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Plant and equipment under capital leases are stated at the
present value of minimum lease payments. Expenditures for maintenance and
repairs are charged to expense as incurred while replacements and major
improvements are capitalized.
Depreciation on plant and equipment is recognized using accelerated or
straight-line methods over the useful lives of related assets. Useful lives
range from 10 to 40 years for buildings and from 3 to 15 years for machinery
and equipment.
Identifiable Intangible Assets
Identifiable intangible assets primarily consist of patents, trademarks and
capitalized software costs and are amortized on a straight-line basis over
their estimated useful lives.
The estimated useful lives are as follows:
Estimated
useful lives
(years)
----------
Acquired patents 5-20
Acquired trademarks 5-20
Capitalized software 4
Other 3-10
Costs in Excess of Fair Value of Net Assets Acquired
The excess of costs of acquired businesses over the fair value of net
assets acquired ("goodwill") is amortized on a straight-line basis over the
expected periods to be benefited, generally 15 years, and is stated net of
accumulated amortization of 23.7 million and 17.8 million as of September 30,
2001 and December 31, 2000, respectively. The Company assesses the
recoverability of goodwill based on projected undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows.
Costs of Computer Software Developed or Obtained for Internal Use
Certain external direct costs of materials and services consumed in
developing or obtaining internal use computer software and payroll related
costs for employees associated with internal-use software projects are
capitalized and amortized on a straight-line basis over four years. Software
costs of 440 and 1.2 million were capitalized during the nine months and year
ended September 30, 2001 and December 31, 2000, respectively. Amortization
expense was 308 and 200 for the nine months and year ended September 30, 2001
and December 31, 2000, respectively.
12
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which amended SFAS No. 133 to delay its effective date by
one year. SFAS No. 133 requires that all derivative instruments be recorded
in the balance sheet at fair value. Changes in the fair value of derivatives
will be recorded each period in earnings or other comprehensive income,
depending on whether a derivative is designated as a part of a hedge
transaction and, if it is, the type of hedge transaction. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedge Activities" which amended SFAS No. 133. This statement, as
amended by SFAS 137 and SFAS 138, was adopted effective January 1, 2001. The
adoption of SFAS 133 did not have a material impact on net income for the
nine months ended September 30, 2001.
The Company utilizes derivative financial instruments to manage its exposure
related to foreign exchange, interest rate and commodity price fluctuations.
The aggregate notional amount and fair value of all derivative instruments
was 4.2 million and 53, respectively, as of September 30, 2001 and 1.9
million and 10, respectively, as of December 31, 2000. The Company
does not enter into derivatives for trading purposes.
Foreign Currency
Assets and liabilities of foreign subsidiaries where the functional
currency is other than the euro are translated at exchange rates as of the
respective balance sheet dates. Revenues and expenses of those subsidiaries
are translated at the weighted average year-to-date exchange rates of the
respective period. The effects of these translation adjustments are included
in other comprehensive income and reported as a separate component of
combined equity.
Foreign currency transactions are recorded at the exchange rate prevailing at
the date of the transaction. Receivables and payables denominated in foreign
currencies are remeasured at the exchange rate in effect as of the respective
balance sheet dates. Net foreign currency transaction losses of 39 for the
nine months ended September 30, 2001 and gains of 47 for the December 31,
2000, are included in other operating expense, net in the accompanying
combined statements of income.
Revenue Recognition
Revenue, net of allowances for related discounts, is recognized when
finished product is shipped and risks associated with ownership has
transferred to the customer.
A significant portion of Degussa Dental's products include precious
metals. Market prices of precious metals are highly volatile and can lead to
significant fluctuations in the Company's sales prices and gross profit
margins (see note 4).
Research and Development Costs
Research and development costs are expensed as incurred. For the nine
months ended September 30, 2001 and the year ended December 31, 2000,
research and development costs of 11.1 million and 18.1 million,
respectively, were included in selling general and administrative expense in
the accompanying combined statements of income.
13
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The businesses in the combined financial statements are included in
multiple consolidated tax returns and in multiple tax jurisdictions. There
is no formal tax allocation agreement between the various Dental businesses
and Degussa AG. The tax amounts reflected in the accompanying combined
financial statements have been computed as if each of the contributed
businesses had filed separate tax returns.
While the legal forms of Degussa Dental KG, and Ducera Dental GmbH & Co. KG
("Ducera") in 2000, were limited partnerships which are not generally subject
to German corporation income tax, the income tax expense for these German
entities has been presented in the accompanying combined financial statements
as if Degussa Dental KG, and Ducera in 2000, were stand-alone corporate
entities. Accordingly, the German corporation tax effects normally passed
through to Degussa AG are included in the accompanying combined financial
statements as if all earnings were distributed currently.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
can be reasonably estimated.
Minority Interests
Minority interests in the equity and results of the entities controlled by
Degussa Dental are shown as a separate item in the combined financial
statements. The entities included in the combined financial statements that
have minority interests as of September 30, 2001 and December 31, 2000 are as
follows:
Minority
Ownership Percentage
Sankin Kogyo K.K., Tokyo 5.6%
Probem S.A., Catanduva 40.0%
New Accounting Standards Not Yet Adopted
In June 2001, the FASB issued SFAS No.141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies the types of
acquired intangible assets that are required to be recognized and reported
separately from goodwill and those acquired intangible assets that are
required to be included in goodwill. SFAS No. 142 will require that goodwill
no longer be amortized, but instead tested for impairment at least annually.
SFAS No. 142 will also require recognized other intangible assets to be
amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Any
recognized intangible asset determined to have an indefinite useful life will
not be amortized, but instead tested for impairment until its life is
determined to no longer be indefinite.
14
The Company is required to adopt the provisions of SFAS No. 141 and SFAS No.
142 on January 1, 2002, with the exception of the immediate requirement to
use the purchase method of accounting for all future business combinations
completed after June 30, 2001. Early adoption and retroactive application of
these standards is not permitted. However, goodwill, and any intangible
asset determined to have an indefinite useful life, that is acquired in a
business combination completed after June 30, 2001 will not be amortized.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until December 31, 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset and subsequently allocated to
expense over the asset's useful life. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 retains the
current requirement to recognize an impairment loss only if the carrying
amounts of long-lived assets to be held and used are not recoverable from
their expected undiscounted future cash flows. However, goodwill is no
longer required to be allocated to these long-lived assets when determining
their carrying amounts. SFAS No. 144 requires that a long-lived asset to be
abandoned, exchanged for a similar productive asset, or distributed to owners
in a spin-off be considered held and used until it is disposed. However,
SFAS No. 144 requires the depreciable life of an asset to be abandoned be
revised. SFAS No. 144 requires that long-lived assets to be disposed of by
sale be recorded at the lower of their carrying amount or fair value less
cost to sell and to cease depreciation (amortization). Therefore,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they
occur. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001.
The Company is not currently able to determine the potential effects of
adopting these new standards.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The Company sells dental equipment and supplies primarily to the end user.
For customers on credit terms, the Company performs ongoing credit evaluation
and generally does not require collateral. Accounts and notes
receivable-trade are stated net of an allowance for doubtful accounts of 5.4
million and 2.9 million as of September 30, 2001 and December 31, 2000,
respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
September 30 December 31,
2001 2000
---------- ----------
Finished goods 78,606 92,956
Work-in-process 11,374 8,937
Raw materials and supplies 12,902 9,640
---------- ----------
102,882 111,533
========== ==========
15
Inventories stated under the LIFO method are 34.2 million and 55.0 million,
respectively. The current cost of LIFO inventories as of September 30, 2001
and December 31, 2000 was greater than the amount at which these inventories
were carried in the combined balance sheet by 52.3 million and 89.1 million,
respectively.
As a result of LIFO inventory liquidation, earnings before taxes was
increased by approximately 15.0 million for the nine months ended September
30, 2001. For the year ended December 31, 2000, earnings before taxes was
not effected because there was no LIFO inventory liquidation.
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses relate primarily to advance payments for leases and rental
and maintenance contracts.
Other current assets consist primarily of Value Added Tax refunds
receivable of 770 and 10.8 million as of September 30, 2001 and December 31,
2000, respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, December 31,
2001 2000
----------------- -----------------
Assets, at cost:
Land 19,391 19,248
Buildings and improvements (note 12) 49,682 49,707
Machinery and equipment 62,342 59,708
Construction in progress 977 898
----------------- -----------------
132,392 129,561
Less: Accumulated depreciation (note 12) 76,723 72,933
----------------- -----------------
55,669 56,628
================= =================
16
NOTE 7 - IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consist of the following:
September 30, December 31,
2001 2000
--------------- --------------
Acquired patents 17,792 16,028
Acquired trademarks 21,003 21,003
Capitalized software 2,735 2,570
Other 71 82
--------------- --------------
41,601 39,683
Less: Accumulated amortization 7,185 5,545
--------------- --------------
34,416 34,138
=============== ==============
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30, December 31,
2001 2000
-------------- --------------
Allowance for customer discounts
and rebates 6,317 8,366
Personnel expenses 9,373 7,668
Other 6,838 6,475
-------------- --------------
22,528 22,509
============== ==============
17
NOTE 9 - FINANCING ARRANGEMENTS
Short-term notes payable
September 30, December 31,
2001 2000
------------- ------------
Notes payable to banks, weighted
average interest rate 11.05% 5,151 7,404
Loans payable to Degussa AG 15,369 64,360
------------- ------------
20,520 71,764
============= ============
Degussa Dental has unused lines of credit for short-term financing of 15.9
million as of September 30, 2001. Interest applicable to these lines of
credit varies according to market conditions in the country of origin.
Inventory is pledged to secure additional amounts of 50, and the remaining
amount is unsecured.
In 2001 the Company repaid loans of 50.0 million net amount to Degussa AG,
bearing interest at the European overnight interest rate average, which was
outstanding as of December 31, 2000.
Approximately 13 million of the loans payable to Degussa AG as of September
30, 2001 and December 31, 2000 represents a non-interest bearing loan to DH
Zweite Vermogensverwaltungsgesellschaft GmbH. No imputed interest expense
has been recorded in the accompanying combined financial statements related
to this loan.
The remaining balance of loans payable to Degussa AG as of September 30,
2001 is comprised of a 2.3 million loan to the Japanese operating subsidiary
which bears interest at 0.2%. This loan expires on October 1, 2001.
18
Long-Term Debt
September 30, December 31,
2001 2000
--------------- ------------
Notes secured by mortgage payable,
weighted average rate 3.51%, due 2002 - 2005 4,741 8,813
Other long term debt secured by letters of comfort
from Degussa AG
Installment loans, weighted average rate 2.61%,
due 2002 - 2004 3,807 2,800
--------------- ------------
8,548 11,613
Less: Current portion of long-term debt 2,662 2,917
--------------- ------------
5,886 8,696
=============== ============
Aggregate maturities of long-term debt are as follows:
Year ending September 30
2002 2,662
2003 1,699
2004 3,728
2005 367
2006 92
---------------
8,548
===============
19
NOTE 10 - INCOME TAXES
The components of earnings before income taxes are as follows:
Nine months ended Year ended
September 30, 2001 December 31, 2000
----------------------------- ------------------------
Germany 16,004 6,083
Foreign 5,694 8,166
----------------------------- ------------------------
21,698 14,249
============================= ========================
The components of income tax expense (benefit) are as follows:
Nine months ended Year ended
September 30, 2001 December 31, 2000
----------------------------- ------------------------
Current:
German 8,176 7,395
Foreign 1,316 3,574
----------------------------- ------------------------
Total 9,492 10,969
----------------------------- ------------------------
Deferred:
German (1,509) (9,199)
Foreign 464 (930)
----------------------------- ------------------------
Total (1,045) (10,129)
----------------------------- ------------------------
Total income tax expense 8,447 840
============================= ========================
In 2000, the German government enacted new tax legislation which, among
other changes, reduced the statutory corporate tax rate for German companies
from 40% on retained earnings and 30% on distributed earnings to a uniform
25% effective for the year beginning January 1, 2001. The effects of the
reductions in the tax rate and other tax law changes on the deferred tax
assets and liabilities of the Group's German companies were recognized in the
year of enactment and resulted in deferred tax benefit of 8.6 million for the
year ended December 31, 2000.
Prior to the 2000 tax law changes becoming effective, German corporation
tax law applied a split rate imputation system to the income taxation of a
corporation and its shareholders. Upon distribution of retained earnings in
the form of a dividend, shareholders subject to German tax received a credit
for corporation taxes paid by the corporation on such distributed earnings.
In addition, the corporation received a tax refund to the extent such
earnings had been initially subjected to a corporation income tax in excess
of 30%. The tax refund was also distributed to the shareholder.
20
In general, prior to 2001, retained (undistributed) German corporate income
was initially subject to a federal corporation income tax at a rate of 40%
for 2000 plus a surcharge of 5.5% on federal corporate taxes payable. Giving
effect to the surcharge, the federal corporate tax rate was 42.2% for the
year ended December 31, 2000. Upon distribution of certain retained earnings
generated in Germany to shareholders, the corporate income tax rate on the
earnings was adjusted to 30%, plus a solidarity surcharge of 5.5% for a total
of 31.65%, by means of a refund for taxes previously paid. Under the new
German corporate tax system, during a 15 year transition period beginning on
January 1, 2001, Degussa Dental will continue to receive a refund or pay
additional taxes on the distribution of retained earnings which existed as of
December 31, 2000.
As discussed in Note 2, actual income tax expense reflects the amount of
distribution of that year's earnings of the German operations. As such, the
refund of tax described above is reflected in the income tax expense
reconciliation presented below.
For the nine months ended September 30, 2001 and the year ended December
31, 2000, actual income tax expense differed from the amounts computed by
applying the German federal corporation income tax rate of 25% for 2001 and
40% for 2000, to earnings before income taxes as a result of the following:
Nine months ended Year ended
September 30, 2001 December 31, 2000
----------------------- ------------------------
Expected income tax at statutory federal rate 5,459 5,700
Effect of:
Trade tax & solidarity tax, net of federal benefit 1,840 2,022
Benefit of distributed rate - (1,503)
Tax holiday - (782)
Difference book/taxable income 1,107 1,377
Goodwill - 2,522
Loss for which no tax benefit recognized 663 -
Tax rate change - (8,577)
Other (622) 81
----------------------- ------------------------
Actual income tax expense 8,447 840
======================= ========================
21
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
September 30, 2001 December 31, 2000
---------------------------- -------------------------------
Deferred tax assets:
Intangible assets 218 984
Property, plant and equipment 437 404
Financial assets 85 942
Inventories 1,793 1,840
Receivables and other current assets 270 427
Pension accruals 3,400 3,232
Other accruals 1,845 1,865
Payables 156 374
Tax loss carryforwards 1,049 1,244
---------------------------- -------------------------------
Total deferred tax assets 9,253 11,312
============================ ===============================
Deferred tax liabilities:
Intangible assets (11,975) (13,028)
Financial assets (2) -
Property, plant and equipment (2,396) (2,438)
Inventories (10,389) (11,414)
Receivables and other current assets (66) (220)
Other accruals (33) (34)
---------------------------- -------------------------------
Total deferred tax liabilities (24,861) (27,134)
============================ ===============================
Net deferred tax liabilities (15,608) (15,822)
============================ ===============================
The combined financial statements include certain assets, goodwill and
other intangibles, the tax bases of which will remain with Degussa AG upon
completion of the sale of Degussa Dental to DENTSPLY. Deferred tax benefits
related to this goodwill and other intangibles of 292 and 503 as of September
30, 2001 and December 31, 2000, respectively, have been included in the
combined financial statements.
Subsidiaries of the Company in Brazil and Japan have tax loss
carry-forwards of 2.9 million as of September 30, 2001, of which 900 expire
through 2006 and 2.0 million may be carried forward indefinitely. The
Company believes that sufficient future taxable income will be generated by
these subsidiaries to realize the benefits of these tax loss carry-forwards.
As no distributions in the foreseeable future from foreign subsidiaries are
planned, deferred taxes have not been recorded for these undistributed
earnings. If such distributions were to occur, it is expected that the
related tax effects would be partially offset by tax benefits generated from
the distribution. Undistributed earnings as of September 30, 2001 amounted
to 6.9 million.
22
NOTE 11 - BENEFIT PLANS
The Company maintains a number of separate contributory and
non-contributory defined benefit pension plans for a significant portion of
its hourly and salaried employees. Pension benefits are generally based upon
age, salary and years of service.
Unrecognized actuarial gains and losses are amortized over the average
remaining service lives of employees.
SFAS No. 87 requires the recognition of a minimum pension liability if a
plan's accumulated benefit obligation is greater than the fair value of plan
assets. As this is the case for certain foreign plans, 134 and 148 are
included in the pension liability as of September 30, 2001 and December 31,
2000, respectively, with corresponding amounts recorded as intangible assets
and included in other non-current assets in the accompanying combined balance
sheets.
September 30, 2001 December 31, 2000
-------------------------------------- --------------------------------------
German Foreign Total German Foreign Total
Reconciliation of Projected Benefit Obligation
Benefit obligation at beginning of period 8,592 11,593 20,185 7,840 10,860 18,700
Service cost 272 733 1,005 342 876 1,218
Interest cost 399 335 734 490 394 884
Participant contributions - 27 27 - 58 58
Actuarial (gains) losses (3) 1,371 1,368 (80) 121 41
Effects of exchange rate changes - (107) (107) - - -
Net transfers to Degussa AG (2,329) - (2,329) - - -
Benefits assumed and paid (12) (614) (626) - (716) (716)
Benefit obligation at end of period 6,919 13,338 20,257 8,592 11,593 20,185
Reconciliation of Plan Assets
Fair value of plan assets at beginning of period - 4,639 4,639 - 4,196 4,196
Actual return on assets - 160 160 - 171 171
Effects of exchange rate changes - (16) (16) - - -
Employer contributions - 647 647 - 853 853
Participant contributions - 27 27 - 58 58
Benefits paid - (580) (580) - (616) (616)
Fair value of plan assets at end of period - 4,877 4,877 - 4,662 4,662
Reconciliation of Funded Status
Actuarial present value of projected
benefit obligations 6,919 13,338 20,257 8,592 11,593 20,185
Plan assets at fair value - 4,877 4,877 - 4,662 4,662
Funded status (6,919) (8,461) (15,380) (8,592) (6,931) (15,523)
Adjustment to recognize minimum liability - (134) (134) - (148) (148)
Unrecognized net actuarial (gains) losses
and transition obligation (83) 2,137 2,054 13 1,062 1,075
Accrued benefit cost (7,002) (6,458) (13,460) (8,579) (6,017) (14,596)
23
The amounts recognized in the accompanying combined balance sheet
are as follows:
September 30, 2001 December 31, 2000
------------------------------------------------------------------------------
German Foreign Total German Foreign Total
Pension obligation 7,002 6,458 13,460 8,579 6,017 14,596
Identifiable intangible assets - 134 134 - 148 148
Net amount recognized 7,002 6,324 13,326 8,579 5,869 14,448
All of the Company's plans had accumulated benefit obligations that
exceeded the fair value of plan assets. The aggregate accumulated benefit
obligation for these plans was 14.2 million as of September 30, 2001 and 14.6
million as of December 31, 2000.
September 30, 2001 December 31, 2000
------------------------------------------------------------------------------
German Foreign Total German Foreign Total
Service cost 272 733 1,005 342 876 1,218
Interest cost 1,286 335 1,621 1,928 394 2,322
Expected return on plan assets - (160) (160) - (186) (186)
Net amortization and deferral - 279 279 (80) 293 213
Net periodic benefit cost 1,558 1,187 2,745 2,190 1,377 3,567
The weighted average assumptions used in accounting for the Company's
plans are as follows:
September 30, 2001 December 31, 2000
------------------------- --------------------------
German Foreign German Foreign
Discount rate 6.3% 3.9% 6.3% 3.8%
Expected return on plan assets - 4.6% - 4.4%
Rate of compensation increase 2.5% 4.7% 2.6% 4.1%
As described in Note 1, certain pension obligations related to retirees
were not transferred from Degussa AG upon formation of Degussa Dental.
Accordingly, those obligations are not included in the benefit obligation
noted above. However, as they are clearly identifiable to Degussa Dental,
interest costs on the retiree pension obligation of 0.9 million and 1.4
million are included in net periodic pension cost for the nine months ended
September 30, 2001 and the year ended December 31, 2000, respectively.
24
NOTE 12 - LEASES
The Company is obligated under a capital lease with a related party
covering its headquarters in Hanau, Germany that expires in 2018. As of
September 30, 2001 the gross amount of capital lease obligations of Sankin
Kogyo K.K. was 174. Sankin had no lease obligations as of December 31,
2000. As of September 30, 2001 and December 31, 2000, the gross amount of
the building and related accumulated amortization recorded under the capital
lease were as follows:
September 30, 2001 December 31, 2000
------------------- -------------------
Buildings 11,758 11,758
Less: Accumulated amortization 2,540 2,294
------------------- ------------------
9,218 9,464
=================== ==================
Amortization of assets held under capital leases was 0.2 million and 0.3
million for the nine months ended September 30, 2001 and the year ended
December 31, 2000.
The Company also has several noncancelable operating leases for automobiles
and certain office, warehouse, machinery and equipment and manufacturing
facilities. These leases generally require the Company to pay all executory
costs such as maintenance and insurance.
Rental expense for the nine months ended September 30, 2001 and the year
ended December 31, 2000 was 3.8 million and 4.7 million, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of September 30, 2001 are:
Capital Operating
Year ending September 30 leases leases
- ----------------------------------------------- ----------------- -----------------
2002 1,006 2,591
2003 1,006 1,946
2004 1,006 1,831
2005 1,006 1,657
2006 1,006 1,524
Later years, through 2018 10,615 -
----------------- -----------------
Total minimum lease payments 15,645 9,549
=================
Less: Interest discount 6,039
-----------------
Present value of net minimum
capital lease payments 9,606
Less: Current installments 421
-----------------
Obligations under capital lease,
excluding current installments 9,185
=================
25
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying amounts of cash and cash equivalents,
accounts receivable, prepaid expenses and other current assets, accounts
payable, accrued liabilities, income taxes payable and short-term debt
approximate fair value due to the short-term nature of these instruments.
The Company also believes the carrying amount of long-term debt approximates
fair value as the interest rates are either variable or close to current
market rates.
NOTE 14 - Related party transactions
In the normal course of business, Degussa Dental conducts transactions with
Degussa AG and entities under the direct control of Degussa AG (together,
"Related Parties").
The Company maintains its cash in a bank controlled by Degussa AG and
participates in a cash pool administered by Degussa AG. Degussa Dental
companies that are part of the different euro-cash-pools in Germany and the
Netherlands deposit their excess cash in overnight cash-pool accounts at a
rate of EONIA minus 0.125%.
In addition, Degussa Dental sells a portion of its products to entities
under the direct control of Degussa AG for resale to third parties.
Associated amounts receivable from Related Parties as of the respective
balance sheet dates consist of the following:
September 30, December 31,
2001 2000
----------- -----------
Trade receivables 1,399 6,692
Other receivables 130 3,510
----------- -----------
Total 1,529 10,202
=========== ===========
Related party interest income of 400 and 1.1 million is recorded in the
accompanying combined statements of income for the nine months ended September
30, 2001 and the year ended December 31, 2000, respectively.
Degussa Dental buys certain raw materials, primarily precious metals, from
entities under the direct control of Degussa AG. Associated liabilities due
to related parties as of the respective balance sheet dates consist of the
following:
September 30, December 31,
2001 2000
----------- -----------
Trade payables 2,420 3,468
Other payables - 14,631
----------- -----------
Total 2,420 18,099
=========== ===========
For the nine months ended September 30, 2001 and the year ended
December 31, 2000 related party interest expense of 1.4 million and 3.1
million, respectively, is recorded in the accompanying combined
statements of income.
26
Sale and purchase activity with Related Parties during the nine months
ended September 30, 2001 and the year ended December 31, 2000 was as follows:
2001 2000
--------- ---------
Sales 12,115 15,303
Purchases 136,705 200,512
Historically, Degussa AG has provided services to and incurred costs on
behalf of Degussa Dental. The types of services provided include:
administrative services, employee benefit administration, insurance, tax
services, treasury services, and accounting and reporting. The cost of such
services has been allocated based upon service contracts between the relevant
parties as well other methods including the use of time estimates, headcount
and transaction statistics, working capital ratios and other similar
activity-based or financial relationships. Allocated related party expenses
of 11.5 million and 17.1 million for the nine months ended September 30, 2001
and the year ended December 31, 2000, respectively, are included in the
accompanying combined statements of income.
While management believes the allocations supporting these expenses is
reasonable, such expenses may not be indicative of the costs that would have
been incurred if Degussa Dental had performed the related functions or
received services as a stand-alone entity. It is not practicable to estimate
what these expenses would have been had Degussa Dental operated as an
unaffiliated entity.
The components of net activity with Degussa AG during the nine months ended
September 30, 2001 and the year ended December 31, 2000 are as follows:
2001 2000
--------- ---------
Creation of short-term debt upon
legal formation - (64,360)
Interest expense related to
pension obligations not
transferred upon legal
formation 859 1,438
Common costs incurred and paid
by Degussa AG - 2,200
Distributions to Degussa AG (2,747) (7,223)
Contributions from Degussa AG 10,225 -
Other (3,257) 1,305
--------- ---------
5,080 (66,640)
--------- ---------
27
NOTE 15 - Supplemental Cash flow information
Nine months
ended Year ended
September 30, December 31,
2001 2000
--------------- --------------
Interest paid 2,014 2,577
Income taxes paid 3,193 1,947
NOTE 16 - COMMITMENTS, CONTINGENCIES AND SIGNIFICANT RISKS
Degussa Dental is subject to various lawsuits, claims and proceedings
arising in the normal course of business. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position or results of operations or liquidity.
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from historical results
include, but are not limited to, significant seasonal fluctuations relating
especially to summer vacation effects on dental practices and laboratories in
Germany, as well as overall economic developments, both domestic and foreign,
and in particular relating to Germany, the United States, Japan and Brazil.
NOTE 17 - SUBSEQUENT EVENT
On October 2, 2001 Degussa AG completed the sale of Degussa Dental to
DENTSPLY International, Inc.
28
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma financial information for the year ended December 31,
2000 and as of, and for the nine months ended September 30, 2001, relating
to DENTSPLY has been prepared on the basis that the acquisition of Friadent
GmbH ("Friadent"), the Acquisition of AstraZeneca PLC's dental injectible
anesthesia business ("AZ") and the Degussa Dental Acquisition had been
completed on January 1, 2000 and taking into account a sale/leaseback of
precious metals owned by Degussa Dental. There are certain limitations
relating to the DENTSPLY Pro Forma Financial Information which are described
in more detail in the DENTSPLY Pro Forma Financial Information and which
include, in particular, the fact that complete stand-alone historical
financial information was not available for the business acquired in the AZ
Acquisition since that business had not previously been separately
identified as an operating unit by AstraZeneca PLC.
These pro forma historical unaudited combined balance sheets and
statements of income of DENTSPLY are provided for illustrative purposes only
and, because of their nature, may not give a true picture of DENTSPLY's
financial position or results.
The pro forma unaudited combined balance sheets and statements of
income and other selected financial and statistical information of DENTSPLY
do not necessarily reflect the results of operations or financial results of
DENTSPLY that would have actually resulted had the acquisitions referred to
below been consummated as of the dates indicated and are not intended to
project DENTSPLY'S financial condition or results for any future period.
For the purposes of preparing the pro forma unaudited combined
financial statements euro amounts appearing in the combined historical
financial statements of Degussa Dental have been translated into U.S.
dollars using an exchange rate of U.S.$1.00 = (euro)0.90 for the statement of
income for the nine months ended September 30, 2001, U.S.$1.00 = (euro)0.91 for
the balance sheet as of September 30, 2001, and U.S.$1.00 = (euro)0.93 for the
statement of income for the year ended December 31, 2000.
The following unaudited pro forma combined financial statements have
been derived from the application of pro forma adjustments to the combined
historical financial statements of DENTSPLY and Degussa Dental which are
included in this Form 8-K/A The unaudited pro forma combined statement of
income for the year ended December 31, 2000 also reflects the application
of pro forma adjustments to a sale/leaseback of precious metals owned by
Degussa Dental and to the historical financial information of two additional
DENTSPLY acquisitions completed in 2001: Friadent GmbH ("Friadent"), a major
global dental implant manufacturer, and AstraZeneca's dental injectible
anesthesia business ("AZ"). The Friadent historical financial information
was derived from Friadent's various operating units' audited statutory
financial statements prepared in conformity with their respective country's
generally accepted accounting principles ("GAAP") and was consolidated by
DENTSPLY Management. Complete stand-alone historical financial information
was not available for AZ since the business purchased was a carve-out of the
AstraZeneca business and was not separately identified as an operating unit.
As a result, the AZ historical financial information was derived from data
presented in AZ's sale information memorandum and estimates made by
Management.
The unaudited pro forma combined financial statements as at and for the
nine months ended September 30, 2001 and for the year ended December 31,
2000 reflect the purchase in October 2001 of Degussa Dental for an expected
final purchase price of (euro)576 million or US$530 million using the exchange
rate at closing of 0.92 US$/euro, as if it had occurred on January 1, 2000
and September 30, 2001 for pro forma income statement and balance sheet
purposes, respectively. In addition, the unaudited pro forma combined income
statement for the year ended December 31, 2000 reflects the January 12, 2001
purchase of Friadent for DM 220 million or US$106 million and the March 1,
2001 purchase of AZ for US$96.5 million, as if they occurred on January 1,
2000.
29
Based on the unaudited pro forma combined financial information
presented, the combined companies would have had assets of U.S.$1.8 billion,
long-term debt of U.S.$828.2 million and stockholders' equity of U.S.$593.5
at September 30, 2001. The combined companies would have also had sales of
U.S.$1.1 billion, net income of U.S.$88.3 million and diluted earnings per
share of U.S.$1.68 during the nine months ended September 30, 2001 and
sales, net income and diluted earnings per share of U.S.$1.5 billion,
U.S.$91.1 million and U.S.$1.74, respectively, for the year ended December
31, 2000.. The pro forma adjustments are described in the accompanying notes
to the unaudited pro forma combined financial statements. The unaudited pro
forma combined financial information does not purport to represent the
financial position or results of operations for the combined companies at
any future date or for any future periods.
The unaudited pro forma combined financial information, including the
notes to the unaudited pro forma combined financial statements, should be
read in conjunction with the Company's Form 10-K for the year ended December
31, 2000 and its Form 10-Q for the nine months ended September 30, 2001,
filed with the Commission separately, and the combined financial statements
of Degussa Dental, including the notes to these statements, included in this
Form 8-K/A.
The Friadent, AZ and Degussa Dental acquisitions have been accounted
for using the purchase method of accounting. The purchase price of Friadent
and AZ, including actual fees and expenses related to the acquisitions, has
been allocated to the tangible and identifiable intangible assets and
liabilities of Friadent and AZ based upon DENTSPLY's estimate of the fair
value of the assets acquired and the liabilities assumed. The remaining
purchase price has been allocated to goodwill, which is the excess of cost
over the fair value of the net assets acquired, and included in "Costs in
excess of fair value of net assets acquired, net" in the unaudited pro forma
combined balance sheet. The purchase price for Degussa Dental, including
estimated fees and expenses, has been preliminarily allocated to inventory
(to record acquired precious metals and other inventories at fair market
value), fixed assets, identifiable intangible assets and goodwill, pending
the completion of valuations of acquired tangible and intangible assets and
liabilities. Goodwill is included in "Cost in excess of businesses acquired,
less amortization" in the unaudited pro forma combined balance sheet. The
pro forma adjustments directly attributable to the acquisition relate
primarily to the allocation of purchase price to the fair value of the net
assets acquired and the depreciation and amortization of the fair value
adjustments over their estimated useful lives.
The allocation of purchase price for Degussa Dental may be revised when
additional information concerning valuations of various tangible and
intangible assets and liabilities becomes available. Accordingly, the final
purchase price allocation for Degussa Dental could be different from the
amounts reflected in the unaudited pro forma combined financial information.
In addition, the unaudited pro forma combined financial information gives
effect only to the adjustments set forth in the accompanying notes and does
not reflect all restructuring costs, nor any potential cost savings or other
synergies that DENTSPLY management expects to realize as a result of the
acquisitions. Plans are being currently developed to integrate the
operations of the companies, which may involve various costs including
employee severance expenses and asset write-offs. Some of these costs may be
accounted for as accrued liabilities and included in the allocation of the
purchase price consideration at the date of the combination. However, the
plans are not yet sufficiently advanced to determine the total amount of
those costs which would be accounted for as accrued liabilities on the
effective date of the combination. To the extent that these costs are not
accounted for as accrued liabilities at the date of the combination, a
charge may be recorded, which may be material. The total amount of the
charge cannot be quantified at this time, but it is expected to be
recognized in the period in which the restructuring occurs.
30
DENTSPLY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Combined
Degussa DENTSPLY
Dental and
Degussa Pro Forma Degussa
DENTSPLY Dental Adjustments Note (1) Dental
(in thousands, except per share amounts)
Net sales $ 753,805 $ 310,327 $ - j) $ 1,064,132
Cost of products sold 357,879 201,147 300 d), j) 559,326
Gross profit 395,926 109,180 (300) 504,806
Selling, general and administrative expenses 266,759 77,184 2,500 e) 346,443
Other operating expense, net - 10,726 (5,621) g) 7,205
2,100 c)
Restructuring and other costs (income) 5,500 - - 5,500
Operating income 123,667 21,270 721 145,658
Other income and expenses:
Interest expense 12,749 2,920 17,460 f) 30,209
(2,920) b)
Interest income (696) (1,157) 1,157 b) (696)
Other expense (income), net (22,025) 88 - (21,937)
Income before income taxes 133,639 19,419 (14,976) 138,082
Provision for income taxes 45,990 7,560 (3,775) i) 49,775
Net income $ 87,649 $ 11,859 $ (11,201) $ 88,307
Earnings per common share:
Basic $ 1.69 $ 1.71
Diluted 1.67 1.68
Weighted average common shares outstanding:
Basic 51,742 51,742
Diluted 52,570 52,570
31
DENTSPLY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
Combined
Degussa DENTSPLY
Dental and
Degussa Pro Forma Note Degussa
DENTSPLY Dental Adjustments (1) Dental
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 11,879 $ 5,963 $ (5,963) b) $ 11,879
Accounts and notes receivable-trade, net 146,568 50,860 - 197,428
Accounts receivable from affiliated companies - 1,391 - 1,391
Inventories, net 163,853 93,581 30,000 c) 217,434
(70,000) c)
Prepaid expenses and other current assets 41,439 6,913 (3,770) h) 44,582
Total Current Assets 363,739 158,708 (49,733) 472,714
Property, plant and equipment, net 195,217 50,637 6,000 d) 251,854
Identifiable intangible assets, net 172,081 31,305 50,000 e) 253,386
Costs in excess of fair value of net
assets acquired, net 434,256 89,694 341,350 g) 775,606
- - (89,694) g)
Other noncurrent assets 53,878 7,174 (4,646) h) 56,406
Total Assets $ 1,219,171 $ 337,518 $ 253,277 $ 1,809,966
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 47,515 $ 10,700 $ - $ 58,215
Accounts payable due to affiliated companies - 2,201 - 2,201
Accrued liabilities 113,719 20,491 - 134,210
Income taxes payable 46,782 26,599 (15,863) b) 57,518
Other current liabilities - 8,622 - 8,622
Notes payable and current portion
of long-term debt 1,049 21,086 (21,086) b) 1,049
Total Current Liabilities 209,065 89,699 (36,949) 261,815
Long-term debt 343,153 5,354 485,000 f) 828,153
(5,354) b)
Deferred income taxes 22,817 14,128 12,220 h) 49,165
Other noncurrent liabilities 48,355 25,936 - 74,291
Total Liabilities 623,390 135,117 454,917 1,213,424
Minority interests in consolidated subsidiaries 2,260 761 - 3,021
Commitments and contingencies
Stockholders' Equity 593,521 201,640 (201,640) 593,521
Total Liabilities and Stockholders' Equity $ 1,219,171 $ 337,518 $ 253,277 $ 1,809,966
32
DENTSPLY INTERNATIONAL INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
Combined
Combined DENTSPLY,
Degussa DENTSPLY Combined AZ Degussa
Dental and Combined and Friadent Dental,
Degussa Pro Forma Note Degussa AZ and Pro Forma Note AZ and
DENTSPLY Dental Adjustments (1) Dental Friadent Adjustments (2) Friadent
(in thousands, except per share amounts)
Net sales $ 889,796 $ 453,880 $-- j) $1,343,676 $ 111,613 $-- $1,455,289
Cost of products sold 426,202 318,267 400 d) 744,869 54,931 -- 799,800
Gross profit 463,594 135,613 (400) 598,807 56,682 -- 655,489
Selling, general and
administrative expenses 299,734 114,722 3,333 e) 417,789 42,153 1,700 c) 464,768
3,126 b)
Other operating expense, net -- 5,618 (7,639) g) 779 -- -- 779
-- -- 2,800 c)
Restructuring and other costs
(income) (56) -- -- (56) -- -- (56)
Operating income 163,916 15,273 1,106 180,295 14,529 (4,826) 189,998
Other income and expenses:
Interest expense 10,153 4,298 23,280 f) 33,433 629 8,602 d) 42,664
(4,298) b)
Interest income (862) (2,519) 2,519 b) (862) (384) -- (1,246)
Other expense (income), net 2,829 284 -- 3,113 (607) -- 2,506
Income before income taxes 151,796 13,210 (20,395) 144,611 14,891 (13,428) 146,074
Provision for income taxes 50,780 779 1,209 i) 52,768 6,342 (4,104) e) 55,006
Net income $ 101,016 $ 12,431 $ (21,604) $ 91,843 $ 8,549 $ (9,324) $ 91,068
Earnings per common share:
Basic $ 1.95 $ 1.77 $ 1.76
Diluted 1.93 1.75 1.74
Weighted average common shares
outstanding:
Basic 51,856 51,856 51,856
Diluted 52,373 52,373 52,373
33
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Acquisition of Degussa Dental
(1) The process of determining the adjustments necessary to record the
assets and liabilities of Degussa Dental at fair value and allocating
the excess purchase consideration over fair value of net assets
acquired is being carried out. The allocation of the total expected
consideration of (euro)576 million, or US$530 million based on the
exchange rate at the closing date of 0.92 US$/euro, to the assets and
liabilities of Degussa Dental will be made on management's best
estimates of fair value pending the completion of valuations of
acquired tangible and intangible assets and liabilities. In the
unaudited pro forma combined financial statements, preliminary fair
value adjustments have been recorded related to inventory and
identifiable intangible assets for assets acquired from Degussa Dental,
pending the completion of valuations. The estimates made in the
unaudited pro forma combined balance sheet at September 30, 2001 to
record the acquisition of Degussa Dental are described below:
(in thousands)
Purchase consideration $530,000
Costs and fees of the
transaction 25,000
Total purchase
consideration 555,000 (a)
Less:
Net book value of Degussa
Dental's
net assets, adjusted for 148,286
assets and
liabilities not assumed
and net debt
Fair value of Degussa
Dental's 30,000
inventory (c)
Fair value of Degussa
Dental's fixed 6,000
assets (d)
Fair value of Degussa
Dental's
identifiable intangible 50,000 (e)
assets
Deferred tax changes
related to
purchase adjustments and (20,636) (h)
acquisition
Goodwill $
341,350 (g)
(a) The unaudited pro forma combined financial information does not give
effect to all restructuring costs, nor any potential cost savings,
revenue enhancements, or other synergies that could result from the
acquisition of Degussa Dental. Plans are being currently developed to
integrate the operations of the combining companies, which may involve
some costs including employee severance expenses and asset write-offs.
Some of these costs may be accounted for as accrued liabilities and
included in the allocation of the purchase price consideration at the
date of the combination. To the extent that these costs are not
accounted for as accrued liabilities at the date of the combination, an
income statement charge may result, which may be material. The total
amount of the charge cannot be quantified at this time, but if made it
is expected to be recognized in the period in which the restructuring
occurs. Management's plans are not yet sufficiently advanced to
determine the total amount of those costs which would be accounted for
as accrued liabilities on the effective date of the acquisition. To the
extent that these costs are accounted for as accrued liabilities and
included in the allocation of the purchase price consideration, the
amount allocated to goodwill in the unaudited pro forma combined
balance sheet would increase.
34
(b) In certain instances, the historical financial statements for DENTSPLY
present captions in a more summarized form than Degussa Dental's
presentation. In order to have a consistent presentation, Degussa
Dental's captions were categorized in conformity with DENTSPLY's
presentation. The historical financial statements for Degussa Dental
include an income tax liability of $15.9 million, which was not assumed
by DENTSPLY. In addition, the historical financial statements include
net third party debt of $20.5 million (net of cash). The purchase price
was based on a debt-free transaction. Any debt existing at closing was
assumed by DENTSPLY and reduced the purchase consideration. As the
income tax liability was not acquired in connection with the
acquisition of Degussa Dental and since the net debt effectively was
not acquired, they have been eliminated as pro forma adjustments to
the unaudited pro forma combined balance sheet at September 30, 2001.
The net interest expense related to these balances has also been
eliminated as a pro forma adjustment to the unaudited pro forma
combined income statement for the nine months ended September 30, 2001
and for the year ended December 31, 2000.
(c) Management believes a portion of the excess of fair value over book
value of Degussa Dental's net assets is related to inventory and has
estimated the excess of fair value over book value of Degussa Dental's
reported inventory as of the closing date, including the fair value
inventory "step-up" in the unaudited pro forma combined balance sheet.
A significant portion of the acquired inventory are precious metals
composed primarily of gold, silver, platinum and palladium sold to
dental laboratories for the construction of crown and bridge work. The
precious metals inventory has been adjusted from its historical cost of
approximately $45 million as of September 30, 2001 to its fair value of
approximately $70 million using the London fixing of prices established
by the London Bullion Market Association (LBMA) of October 1, 2001. An
adjustment of approximately $5 million was made to non-precious metals
inventory to estimate the step-up to fair value. No adjustment to cost
of sales is reflected in the unaudited pro forma combined statements of
income for the nine months ended September 30, 2001 and for the year
ended December 31, 2000 with respect to any fair value adjustments to
Degussa Dental's inventory as any adjustment is considered to be a
non-recurring charge directly related to the transaction. However,
DENTSPLY will incur approximately $2.8 million and $2.1 million in
operating lease expenses for the periods ended December 31, 2000 and
September 30, 2001, respectively, for the leasing of precious metals.
These amounts have been included in the pro forma adjustments.
The Company anticipates selling the precious metals inventory acquired
in the Degussa Dental transaction to a third party. As part of the
contemplated transaction, DENTSPLY will receive an up-front cash
payment of approximately $70 million in exchange for the precious
metals inventory. This up-front cash payment is based on the fair value
as of October 1, 2001. DENTSPLY will use the proceeds from the sale of
the precious metals to repay a portion of its outstanding debt.
Fluctuations in the market price of the precious metals may materially
increase or decrease the fair value of the inventory on the date of
closing and may impact the proceeds received from the third party.
(d) DENTSPLY has estimated the fair value of Degussa Dental's fixed assets
and has reflected an estimated fair value "step-up" of the fixed assets
in the unaudited pro forma combined balance sheet at September 30,
2001, pending the completion of valuations. Depreciation of $0.3
million and $0.4 million related to these fair value adjustments has
been included in the unaudited pro forma combined statements of income
for the nine months ended September 30, 2001 and for the year ended
December 31, 2000, respectively, based on a weighted average expected
useful life of 15 years.
(e) DENTSPLY has estimated the fair value of Degussa Dental's identifiable
intangible assets which include patents, trademarks and licensing
agreements and have reflected an estimated fair value "step-up" of the
identifiable intangible assets in the unaudited pro forma combined
balance sheet at September 30, 2001, pending the completion of
valuations. DENTSPLY amortizes its identifiable intangible assets on a
straight-line basis over their estimated useful lives, ranging from 5
to 40 years. The cost of acquired intangible assets will be reduced
proportionally when a portion of the asset is disposed of or the asset
becomes impaired. Amortization of $2.5 million and $3.3 million related
to these fair value adjustments has been included in the unaudited pro
forma combined statements of income for the nine months ended September
30, 2001 and for the year ended December 31, 2000, respectively, based
on a weighted average expected useful life of 15 years.
35
(f) Long-term debt has been increased by $485.0 million to reflect the
total purchase consideration of the acquisition of Degussa Dental and
the costs associated with the acquisition less the anticipated proceeds
from the sale of the precious metals inventory. Interest expense of
approximately $17.5 million for the nine months ended September 30,
2001 and $23.3 million for the year ended December 31, 2000 has been
recorded in the unaudited pro forma combined statements of income as a
result of the Degussa Dental acquisition. DENTSPLY funded the
acquisition of Degussa Dental primarily through a long-term eurobond
debt offering, supplemented by drawings under its revolving credit
facility and private placements of notes. Interest on the long-term
debt has been calculated at an assumed interest rate of 4.80 per cent.,
which reflects the weighted average interest rate that DENTSPLY expects
to pay on the eurobond debt and its existing credit facilities. An
increase of 0.125 per cent. in the interest rate assumption would
increase annual expense by approximately $0.6 million.
(g) Since preliminary valuations of the fixed and intangible assets
acquired from Degussa Dental are still in process as of the date of the
filing of this Form 8-K/A, the entire excess of purchase price over the
net assets of Degussa Dental, except for that related to inventory,
fixed assets and identifiable intangible assets, has been allocated to
goodwill for purposes of the unaudited combined pro forma financial
information. The preliminary allocation will change upon completion of
the necessary valuations and will change the amortization included in
the unaudited pro forma combined statement of income.
In June 2001, the Financial Accounting Standards Board (FASB) changed
the model used to account for purchased business combinations. As a
result of this change, goodwill related to acquisitions prior to June
30, 2001 will continue to be amortized until January 1, 2002 when
amortization will cease and goodwill will be tested for impairment on a
periodic basis. Goodwill related to acquisitions occurring subsequent
to June 30, 2001, will not be amortized at all. Therefore, amortization
on the goodwill created by the Degussa Dental acquisition has not been
recognized in the unaudited pro forma combined statements of income for
the nine months ended September 30, 2001 and the year ended December
31, 2000 and the goodwill amortization recognized in Degussa Dental's
historical financial statements for these periods have been eliminated
as pro forma adjustments.
(h) The Company has provided deferred income taxes of $12.2 million for
temporary differences caused by the allocation of the purchase price,
and will assume a portion of Degussa Dental's tax basis in its assets
and liabilities. In addition, the Company has reflected changes to
Degussa Dental's historical deferred tax assets due to changes in facts
and circumstances as a result of the acquisition.
(i) Income tax expense reflects the tax effects of pro forma adjustments at
the federal weighted average statutory rates for each respective
period, excluding amortization of non-tax deductible goodwill. As the
transaction, in part, was structured as an asset acquisition the basis
in certain deferred tax assets and liabilities were not assumed by
DENTSPLY. The unaudited pro forma combined statements of income have
been adjusted to exclude changes in deferred tax expense recorded by
Degussa Dental for the year ended December 31, 2000 and the nine months
ended September 30, 2001.
(j) A significant proportion of Degussa Dental's net sales comprises sales
of precious metals. As the value of these sales is dependent on the
price of the precious metals which can fluctuate significantly,
DENTSPLY intends in future presentations of its financial results to
identify separately the precious metals component of its net sales. Net
sales excluding precious metals on a pro forma basis would have been
approximately U.S.$167 million and U.S.$255 million lower than shown
for the nine months ended September 30, 2001 and for the year ended
December 31, 2000, respectively. Degussa Dental used the LIFO method of
accounting for its inventories of precious metals. During the nine
months ended September 30, 2001, cost of products sold was decreased by
approximately U.S.$13.4 million as a result of LIFO inventory
liquidation.
36
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Acquisition of the AstraZeneca Injectible Anaesthesia Business ("AZ") and
Friadent GmbH (" Friadent")
(2) DENTSPLY has made preliminary adjustments to record the assets and
liabilities of AZ and Friadent at fair value and has allocated the
excess purchase consideration over fair value of net assets acquired.
The total consideration has been allocated to the assets and
liabilities of AZ and Friadent based on management's best estimates of
fair value.
(a) The related unaudited pro forma combined statement of income does not
give effect to any potential cost savings, revenue enhancements, or
other synergies that could result from the acquisition of AZ and
Friadent. Plans are currently in place to integrate the operations of
the combining companies.
(b) A total of $109.8 million of the excess fair value over the book value
of Friadent's and AZ's net assets is related to identifiable intangible
net assets. The excess fair value attributable to identifiable
intangible assets relates to Management's determination of the value of
Friadent and AZ's patents, trademarks and licensing agreements.
The determination of the fair value of Friadent's identifiable
intangible assets is based on a risk-adjusted discounted net future
cash flow analysis of its current product portfolio which was performed
by an independent valuation firm. For AZ, the vast majority of purchase
price is related to a permanent, exclusive and royalty-free license
agreement for the AZ dental injectible anaesthetic products and
tradenames. Accordingly, substantially all of the AZ purchase price was
allocated to identifiable intangible assets. The license has an
indefinite life; however, it will be amortized over 40 years for pro
forma presentation.
Amortization of $3.1 million related to the fair value adjustments in
the unaudited pro forma combined statement of income for the year ended
December 31, 2000 has been included.
DENTSPLY amortizes its identifiable intangible assets on a
straight-line basis over their estimated useful lives, ranging from 5
to 40 years. The cost of acquired intangible assets will be reduced
proportionally when a portion of the asset is disposed of or the asset
becomes impaired.
(c) A total of $68.0 million of the excess fair value over book value of
Friadent's and AZ's net assets has been allocated to goodwill. This
goodwill is amortized over 40 years. Amortization of $1.7 million for
the year ended December 31, 2000 is included in the unaudited pro forma
combined statements of income.
In June 2001, the Financial Accounting Standards Board (FASB) changed
the model used to account for purchased business combinations. As a
result of this change, goodwill related to acquisitions prior to 30th
June, 2001 will continue to be amortized until 1st January, 2002 when
amortization will cease and goodwill will be tested for impairment on a
periodic basis.
(d) Long-term debt has been increased by $205.2 million to reflect the
consideration paid in the acquisitions of AZ and Friadent, and the
costs associated with these acquisitions. Interest expense of
approximately $8.6 million for the year ended December 31, 2000 has
been reflected in the unaudited pro forma combined statement of income
as a result of the AZ and Friadent acquisitions. DENTSPLY funded the
acquisitions of AZ and Friadent through the issuance of private
placement debt and the use of its existing credit facilities. Interest
on the debt is calculated at an assumed weighted average interest rate
of 4.20 per cent., which reflects the interest rate that DENTSPLY
expects to pay on the private placement debt and use of its existing
credit facilities. This rate does not differ materially from the
historic weighted average interest rates during the period presented.
The interest rates on these debt facilities are contractually fixed or
are effectively fixed through the use of interest rate swaps.
(e) Income tax expense reflects the tax effects of pro forma adjustments at
the federal weighted average statutory rates, excluding amortization of
non-tax deductible goodwill.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DENTSPLY INTERNATIONAL INC
(Company)
/s/ William R. Jellison
William R. Jellison
Senior Vice President,
Chief Financial Officer
Date: December 14, 2001
38
EXHIBIT INDEX
Sequential
Number
Description Page No.
23.1 Consent of Independent Accountants - PricewaterhouseCoopers
GmbH. 40
23.2 Consent of Independent Auditors - KPMG Deutsche
Treuhand-Gesellschaft AG 41
39