SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 Number 0-16211
DENTSPLY International Inc.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
---------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At August 5, 2002 the
Company had 78,230,301 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 22
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 2002
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Interim Consolidated Condensed
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Net sales $ 377,978 $ 254,635 $ 729,196 $ 500,304
Cost of products sold 192,448 120,908 373,321 236,763
Gross profit 185,530 133,727 355,875 263,541
Selling, general and administrative expenses 120,099 89,391 234,815 178,784
Restructuring and other (income) costs (Note 6) (44) -- (2,001) 5,500
Operating income 65,475 44,336 123,061 79,257
Other income and expenses:
Interest expense 8,284 4,296 16,012 7,877
Interest income (167) (240) (420) (484)
Other expense (income), net 1,574 (888) 1,469 (23,720)
Income before income taxes 55,784 41,168 106,000 95,584
Provision for income taxes 18,964 13,764 36,084 33,854
Net income $ 36,820 $ 27,404 $ 69,916 $ 61,730
Earnings per common share (Note 3):
Basic $ 0.47 $ 0.35 $ 0.90 $ 0.80
Diluted 0.46 0.35 0.88 0.78
Cash dividends declared per common share $ 0.04600 $ 0.04583 $ 0.09200 $ 0.09167
Weighted average common shares outstanding:
Basic 78,163 77,622 78,056 77,543
Diluted 80,076 78,928 79,858 78,707
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 17,686 $ 33,710
Accounts and notes receivable-trade, net 221,316 191,534
Inventories, net (Notes 1 and 5) 222,911 197,454
Prepaid expenses and other current assets 60,250 61,545
Total Current Assets 522,163 484,243
Property, plant and equipment, net 286,730 240,890
Identifiable intangible assets, net 229,566 248,890
Goodwill, net 846,113 763,270
Other noncurrent assets 86,181 60,858
Total Assets $ 1,970,753 $ 1,798,151
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 65,292 $ 69,904
Accrued liabilities 179,442 194,357
Income taxes payable 106,089 86,622
Notes payable and current portion
of long-term debt 9,852 7,634
Total Current Liabilities 360,675 358,517
Long-term debt 786,179 723,524
Deferred income taxes 12,620 32,526
Other noncurrent liabilities 76,387 73,628
Total Liabilities 1,235,861 1,188,195
Minority interests in consolidated subsidiaries 573 437
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 100 million shares authorized;
81.4 million shares issued at June 30, 2002 and December 31, 2001 814 814
Capital in excess of par value 154,876 152,916
Retained earnings 660,142 597,414
Accumulated other comprehensive loss (Note 2) (22,999) (77,388)
Unearned ESOP compensation (3,039) (3,419)
Treasury stock, at cost, 3.2 million shares at June 30, 2002
and 3.5 million shares at December 31, 2001 (55,475) (60,818)
Total Stockholders' Equity 734,319 609,519
Total Liabilities and Stockholders' Equity $ 1,970,753 $ 1,798,151
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
---------------------------------
2002 2001
(in thousands)
Cash flows from operating activities:
Net income $ 69,916 $ 61,730
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,229 12,999
Amortization 5,220 13,428
Restructuring and other costs (2,001) 5,500
Gain on sale of business -- (23,121)
Other, net (35,969) 1,010
Net cash provided by operating activities 54,395 71,546
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (50,178) (286,318)
Proceeds from the redemption of preferred stock investment 15,000 --
Proceeds from bulk sale of precious metals inventory 6,754 --
Capital expenditures (21,777) (24,376)
Other, net 418 1,085
Net cash used in investing activities (49,783) (309,609)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 132,523 283,436
Payments on long-term borrowings (144,536) (52,229)
Increase (decrease) in short-term borrowings 1,133 (3,573)
Cash paid for treasury stock -- (875)
Cash dividends paid (7,160) (7,101)
Other, net 5,290 5,068
Net cash (used in) provided by financing activities (12,750) 224,726
Effect of exchange rate changes on cash and cash equivalents (7,886) 14,864
Net (decrease) increase in cash and cash equivalents (16,024) 1,527
Cash and cash equivalents at beginning of period 33,710 15,433
Cash and cash equivalents at end of period $ 17,686 $ 16,960
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary for a fair
statement of financial position, results of operations and cash flows for the
interim periods. These interim financial statements conform to the
requirements for interim financial statements and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. Disclosures included in the Company's most recent Form 10-K filed
March 29, 2002 are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Intercompany accounts and transactions
are eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. At June 30, 2002,
the cost of $16.6 million or 7% of inventories was determined by the last-in,
first-out (LIFO) method. At December 31, 2001, the cost of $23.6 million or
12% of inventories was determined by the last-in, first-out (LIFO) method.
The cost of other inventories was determined by the first-in, first-out
(FIFO) or average cost method.
If the FIFO method had been used to determine the cost of the LIFO
inventories, the amounts at which net inventories are stated would be higher
than reported at June 30, 2002 by $0.4 million and by $2.3 million at
December 31, 2001.
Derivative Financial Instruments
The Company employs derivative financial instruments to hedge certain
anticipated transactions, firm commitments, or assets and liabilities
denominated in foreign currencies, interest rate swaps to convert floating
rate debt to fixed rate or fixed rate debt to floating rate, cross currency
basis swaps to convert debt denominated in one currency to another currency
and commodity swaps to fix its variable raw materials.
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities"
on January 1, 2001. This standard, as amended by SFAS 138, requires that all
derivative instruments be recorded on the balance sheet at their fair value
and that changes in fair value be recorded each period in current earnings or
comprehensive income.
Stock Split
All share and per share data in the accompanying financial statements and
notes to the financial statements reflect the three-for-two stock split
effective January 31, 2002.
6
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(in thousands)
Net income $ 36,820 $ 27,404 $ 69,916 $ 61,730
Other comprehensive income:
Foreign currency translation adjustments 60,467 (1,907) 55,528 (16,787)
Unrealized gain on available-for-sale securities 1,741 -- 1,741 --
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) -- -- -- (503)
Net (loss) gain on derivative financial
instruments (3,852) 538 (2,880) (933)
Total comprehensive income $ 95,176 $ 26,035 $ 124,305 $ 43,507
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
June 30, December 31,
2002 2001
(in thousands)
Foreign currency translation adjustments $ (19,663) $ (75,191)
Net loss on derivative financial
instruments (4,193) (1,313)
Unrealized gain on available-for-sale securities 1,741 -
Minimum pension liability (884) (884)
$ (22,999) $ (77,388)
7
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $36,820 $27,404 $69,916 $61,730
Denominator:
Common shares outstanding 78,163 77,622 78,056 77,543
Basic EPS $ 0.47 $ 0.35 $ 0.90 $ 0.80
Diluted EPS Computation
Numerator (Income) $36,820 $27,404 $69,916 $61,730
Denominator:
Common shares outstanding 78,163 77,622 78,056 77,543
Incremental shares from assumed exercise
of dilutive options 1,913 1,306 1,802 1,164
Total shares 80,076 78,928 79,858 78,707
Diluted EPS $ 0.46 $ 0.35 $ 0.88 $ 0.78
Options to purchase 35,400 and 3,900 shares of common stock that were
outstanding during the quarter ended June 30, 2002 and 2001, respectively,
were not included in the computation of diluted earnings per share since the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive. Antidilutive
options outstanding during the six months ended June 30, 2002 and 2001 were
71,400 and 54,900, respectively.
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In January 2002, the Company acquired the partial denture business of
Austenal Inc. ("Austenal"), in a cash transaction valued at approximately
$23.8 million, including debt assumed. Headquartered in Chicago, Illinois,
Austenal manufactures dental laboratory products and is the world leader in
the manufacture and sale of systems used by dental laboratories to fabricate
partial dentures.
In October 2001, the Company completed the acquisition of Degussa Dental
Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001 Sale
and Purchase Agreement. The preliminary purchase price for Degussa Dental was
548 million Euros or $503 million, which was paid at closing. The preliminary
purchase price was subject to increase or decrease, based on certain working
capital levels of Degussa Dental as of October 1, 2001. The Company has made
a partial payment of 12.1 million Euros or $11.4 million as a closing balance
sheet adjustment but is still in negotiations with Degussa AG related to the
final payment. Based on current information, the Company expects to pay up to
$10 million for this final closing balance sheet payment. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", the goodwill associated with this acquisition was not
amortized. Degussa Dental manufactures and sells dental products, including
precious metal alloys, ceramics and dental laboratory equipment, and
chairside products. Headquartered in Hanau-Wolfgang, Germany since 1992,
Degussa Dental Group has production facilities throughout the world.
8
In January 2001, the Company agreed to acquire the dental injectible
anesthetic assets of AstraZeneca ("AZ Assets"), including permanent,
exclusive and royalty-free licensing rights to the dental products and
tradenames, for $136.5 million and royalties on future sales of a new
anesthetic product for scaling and root planing, Oraqix(TM) ("Oraqix"), that
was in Stage III clinical trials at the time of the agreement. The $136.5
million purchase price was composed of the following: an initial $96.5
million payment which was made at closing in March 2001; a $20 million
contingency payment associated with the first year sales of injectible dental
anesthetic which was paid during the first quarter of 2002; a $10 million
payment upon submission of an Oraqix New Drug Application ("NDA") in the
U.S., and Marketing Authorization Application ("MAA") in Europe for the
Oraqix product under development; and a $10 million payment upon approval of
the NDA and MAA. Because the Oraqix product has not received regulatory
approvals for its use, payments made with respect to this product prior to
approval are considered to be research and development costs and are expensed
as incurred. After an analysis of the available clinical data, the Company
concluded that the data was inadequate to support the original agreement. As
a result, the Company renegotiated the contract to require a $2.0 million
payment upon submission of the NDA and MAA, prepaid royalty payments of $6.0
million and $2.0 million upon the approval of the NDA and MAA, respectively,
and a $10.0 million prepaid royalty upon approval of both applications. Under
the terms of the renegotiated agreement, the $2.0 million payment was accrued
during the fourth quarter of 2001 and was paid during the first quarter of
2002.
In January 2001, the Company acquired the outstanding shares of Friadent
GmbH ("Friadent") for 220 million German marks or $106 million ($105 million,
net of cash acquired). During the first quarter of 2002, the Company
received cash of 16.5 million German marks or approximately $7.3 million,
representing a final balance sheet adjustment. As a result of this closing
balance sheet adjustment, goodwill was reduced by approximately $7.3 million.
Headquartered in Mannheim, Germany, Friadent is a major global dental implant
manufacturer and marketer with subsidiaries in Germany, France, Denmark,
Sweden, the United States, Switzerland, Brazil, and Belgium.
The acquisitions above were accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of estimated fair values at the dates of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities. The current purchase price allocations for Austenal, Degussa
Dental, Friadent and the AZ Assets are as follows:
Austenal Degussa Dental Friadent AZ Assets
(in thousands)
Current assets $ 10,667 $ 175,447 $ 16,244 $ --
Property, plant and equipment 906 72,842 4,184 878
Identifiable intangible assets and goodwill 16,244 378,761 106,809 129,591
Other long-term assets 1,236 8,655 1,119 --
Current liabilities (4,089) (86,987) (27,553) (11,122)
Other long-term liabilities (1,157) (34,336) (3,054) --
$ 23,807 $ 514,382 $ 97,749 $ 119,347
In March 2001, the Company sold InfoSoft, LLC to PracticeWorks Inc.
("PracticeWorks"). InfoSoft, LLC was the wholly owned subsidiary of the
Company, that developed and sold software and related products for dental
practice management. PracticeWorks is the dental software management and
dental claims processing company which was spun-off by Infocure Corporation.
In the transaction, the Company received 6.5% convertible preferred stock in
PracticeWorks, with a fair value of $32 million. This sale resulted in a
$23.1 million pretax gain which was included in "Other expense (income),
net". The Company recorded this preferred stock investment and subsequent
accrued dividends to "Other noncurrent assets" and has measured the
investment for recoverability on a periodic basis.
9
In June 2002, the Company completed a transaction with PracticeWorks to
exchange the accumulated balance of this preferred stock investment for a
combination of $15.0 million of cash, 1.0 million shares of PracticeWorks'
common stock valued at $15.0 million and 450,000 seven-year term stock
warrants issued by PracticeWorks, valued at $3.6 million. The transaction
resulted in a loss to the Company of $1.1 million, which is included in
"Other expense (income), net". The exchange will provide the Company with
immediate cash, as well as, improved liquidity on its investment in
PracticeWorks, while also providing additional market appreciation potential
if PracticeWorks' business and stock price continue to perform well. As a
result of the transaction, the Company will no longer recognize income for
preferred stock dividends. The common stock will be classified as
available-for-sale and any fair value adjustments to this investment will be
reflected in other comprehensive income until sold. The warrants are
classified as derivative financial instruments as defined under SFAS No. 133
and any fair value adjustments in these holdings will be reflected in current
income each quarter until sold. For the quarter ended June 30, 2002 the
unrealized gain on the stock warrants was $1.1 million which was included in
"Other expense (income), net".
NOTE 5 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2002 2001
(in thousands)
Finished goods $137,296 $119,030
Work-in-process 40,553 35,539
Raw materials and supplies 45,062 42,885
$222,911 $197,454
NOTE 6 - RESTRUCTURING AND OTHER COSTS
During the second quarter of 2002 the Company recorded a charge of $1.7
million for restructuring and other costs. The charge primarily related to
the elimination of duplicative functions created as a result of combining the
Company's Ceramed and U.S. Friadent divisions. Included in this charge were
severance costs of $0.5 million, lease/contract termination costs of $0.9
million and other restructuring costs of $38,000. In addition, the Company
recorded $0.2 million of impairment charges on fixed assets that will be
disposed of as a result of the restructuring plan. This restructuring plan
will result in the elimination of approximately 35 administrative and
manufacturing positions in the United States, substantially all of which
remain to be eliminated as of June 30, 2002. The plan is expected to be
completed by the first quarter of 2003. The major components of these
restructuring charges and the remaining outstanding balances at June 30, 2002
are as follows:
Amounts Balance
2002 Applied June 30,
Provisions 2002 2002
Severance $ 541 $ -- $ 541
Lease/contract terminations 895 -- 895
Other restructuring costs 38 -- 38
Fixed asset impairment charges 195 (195) --
$ 1,669 $ (195) $ 1,474
10
In the fourth quarter of 2001, the Company recorded a charge of $12.3
million for restructuring and other costs. The charge included costs of $6.0
million to restructure the Company's existing operations, primarily in
Germany, Japan and Brazil, as a result of the integration with Degussa
Dental. The primary effect of this plan is the elimination of duplicative
functions created as a result of combining the Company's operations in these
countries with those of Degussa Dental. Included in this charge were
severance costs of $2.1 million, lease/contract termination costs of $1.1 and
other restructuring costs of $0.2 million. In addition, the Company recorded
$2.6 million of impairment charges on fixed assets that will be disposed of
as a result of the restructuring plan. During the second quarter of 2002, the
Company determined that the costs to complete this plan were lower than
originally estimated and as a result $1.2 million of these costs were
reversed as a change in estimate. This restructuring plan will result in the
elimination of approximately 160 administrative and manufacturing positions
in Germany, Japan and Brazil, 100 of which remain to be eliminated as of June
30, 2002. The Company anticipates that most aspects of this plan will be
completed by the fourth quarter of 2002. The remaining charge of $6.3 million
involves impairment charges on intangible assets.
In the first quarter of 2001, the Company recorded a charge of $5.5 million
related to reorganizing certain functions within Europe, Brazil and North
America. The primary objectives of this reorganization were to consolidate
duplicative functions and to improve efficiencies within these regions.
Included in this charge were severance costs of $3.1 million, lease/contract
termination costs of $0.6 million and other restructuring costs of $0.8
million. In addition, the Company recorded $1.0 million of impairment charges
on fixed assets that will be disposed of as a result of the restructuring
plan. This restructuring plan resulted in the elimination of approximately
310 administrative and manufacturing positions in Brazil and Germany. During
the first quarter of 2002, this plan was substantially completed and the
remaining accrual balances of $1.9 million were reversed as a change in
estimate.
As part of combining Friadent and Degussa Dental with the Company, $14.1
million of liabilities were established through purchase price accounting for
the restructuring of the acquired companies' operations in Germany, Brazil,
the United States and Japan. These liabilities relate primarily to the
elimination of duplicative functions created as a result of combining the
companies. Included in this liability were severance costs of $11.9 million,
lease/contract termination costs of $1.1 million and other restructuring
costs of $1.1 million. This restructuring plan will result in the elimination
of approximately 200 administrative and manufacturing positions in Germany,
Brazil and the United States, 70 of which remain to be eliminated as of June
30, 2002. The Company anticipates that most aspects of this plan will be
completed by the fourth quarter of 2002.
The major components of these restructuring charges and the amounts
recorded through purchase price accounting and the remaining outstanding
balances at June 30, 2002 are as follows:
Amounts
Recorded
Through Amounts Amounts Change Balance
2001 Purchase Price Applied Applied in Estimate June 30,
Provisions Accounting 2001 2002 2002 2002
Severance $ 5,270 $ 11,929 $ (1,850) $ (4,711) $ (990) $ 9,648
Lease/contract terminations 1,682 1,071 (563) (697) (653) 840
Other restructuring costs 897 1,062 -- (23) (823) 1,113
Fixed asset impairment charges 3,634 -- (3,634) 656 (656) --
Intangible asset impairment charges 6,291 -- (6,291) -- -- --
$ 17,774 $ 14,062 $(12,338) $ (4,775) $ (3,122) $ 11,601
In the fourth quarter of 2000, the Company recorded a pre-tax charge of
$2.7 million related to the reorganization of its French and Latin American
businesses. The primary focus of the reorganization was consolidation of
operations in these regions in order to eliminate duplicative functions. The
restructuring plan resulted in the elimination of approximately 40
administrative positions, mainly in France. During the first quarter of 2002,
this plan was substantially completed and the Company reversed an accrual of
$0.1 million as a change in estimate.
In the second quarter of 1998, the Company rationalized and restructured
its worldwide laboratory business, primarily for the closure of the Company's
German tooth manufacturing facility. All major aspects of the plan were
completed in 1999, except for the disposition of the property and plant
located in Dreieich, Germany, which has been written-down to its estimated
fair value, but which has not yet been sold. In the second quarter of 2002,
the Company entered into a tentative agreement to sell this property. This
recent activity has provided the Company with more updated fair value
information and as a result the Company has written-up the carrying value of
the property by $0.5 million to its revised estimated fair value.
11
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This statement requires that the amortization of goodwill and
indefinite life intangible assets be discontinued and instead an annual
impairment test approach be applied. These impairment tests are required to
be performed transitionally upon adoption and annually thereafter (or more
often if adverse events occur). These impairment tests are based upon a fair
value approach rather than an evaluation of the undiscounted cash flows. If
goodwill impairment is identified, the resulting charge is determined by
recalculating goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it
exceeds the recalculated goodwill. If impairment is identified on indefinite
life intangibles, the resulting charge reflects the excess of the asset's
carrying cost over its fair value. Other intangible assets with finite lives
will continue to be amortized over their useful lives. The Company performed
the transitional impairment tests during the first quarter of 2002 and no
impairment was identified.
In accordance with SFAS 142, prior period amounts have not been restated.
The following table presents prior year reported amounts adjusted to
eliminate the amortization of goodwill and indefinite life intangible assets.
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
(in thousands, except per share amounts)
Reported net income $ 36,820 $ 27,404 $ 69,916 (1) $ 61,730 (2)
Add: amortization adjustment, net of related tax - 3,902 - 6,784
Adjusted net income $ 36,820 $ 31,306 $ 69,916 $ 68,514
Reported basic earnings per share $ 0.47 $ 0.35 $ 0.90 (1) $ 0.80 (2)
Add: amortization adjustment - 0.05 - 0.09
Adjusted basic earnings per share $ 0.47 $ 0.40 $ 0.90 $ 0.89
Reported diluted earnings per share $ 0.46 $ 0.35 $ 0.88 (1) $ 0.78 (2)
Add: amortization adjustment - 0.05 - 0.09
Adjusted diluted earnings per share $ 0.46 $ 0.40 $ 0.88 $ 0.87
<FN>
(1) Includes restructuring and other income of $1.3 million, after tax, or $0.02 per share.
(2) Includes gain from the sale of a business and restructuring and other costs of $9.8 million, after tax, or $0.13
per share.
</FN>
The net carrying values of goodwill and identifiable intangible assets are
as follows:
June 30, December 31,
2002 2001
(in thousands)
Goodwill $ 846,113 $ 763,270
Indefinite life identifiable intangible assets:
Trademarks $ 4,080 $ 4,080
Licensing agreements 140,087 118,979
Finite life identifiable intangible assets 85,399 125,831
Total identifiable intangible assets $ 229,566 $ 248,890
12
The change in the net carrying value of goodwill was primarily related to
the goodwill associated with the acquisition of Austenal purchased in January
2002, the closing balance sheet adjustment received in the Friadent
acquisition (see note 4) and foreign currency translation adjustments. The
increase in indefinite life licensing agreements was due to final purchase
price adjustments related to the AZ asset acquisition and foreign currency
translation adjustments. These intangible assets relate to the royalty-free
licensing rights to AstraZeneca's dental products and tradenames. The change
in finite life identifiable intangible assets was due primarily to the
finalization of the valuations of the intangible assets acquired in the
Degussa Dental acquisition which were previously based on estimates and
foreign currency translation adjustments.
Finite life identifiable intangible assets consist of the following:
June 30, 2002 December 31, 2001
------------------------------- ---------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
(in thousands)
Patents $ 56,027 $ (30,076) $ 25,951 $ 64,514 $ (27,866) $ 36,648
Trademarks 35,362 (5,869) 29,493 59,610 (5,630) 53,980
Licensing agreements 33,185 (15,919) 17,266 29,405 (14,877) 14,528
Other 37,754 (25,065) 12,689 44,961 (24,286) 20,675
$ 162,328 $ (76,929) $ 85,399 $ 198,490 $ (72,659) $ 125,831
Amortization expense for finite life identifiable intangible assets was
$5.2 million for the six months ended June 30, 2002. The annual estimated
amortization expense related to these intangible assets for each of the five
succeeding fiscal years is $10.2 million, $9.5 million, $8.4 million, $7.0
million and $6.1 million for 2002, 2003, 2004, 2005 and 2006, respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that
pending litigation to which DENTSPLY is a party will not have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Company filed motions for summary
judgment in all of the above cases. The Court denied the Company's motion for
summary judgment regarding the Department of Justice action, granted the
motion on the lack of standing of the patient class action and granted the
motion on the lack of standing of the laboratory class action to pursue
damage claims. In an attempt to avoid the effect of the Court's ruling, the
attorneys for the laboratory class action filed a new complaint naming
DENTSPLY and its dealers as co-conspirators with respect to DENTSPLY's
distribution policy. The Company filed a motion to dismiss this re-filed
complaint. The Court again granted DENTSPLY's motion on the lack of standing
of the laboratory class action to pursue damage claims. The attorneys for
the patient class have also filed a new action to avoid the effect of the
Court's ruling. This action is filed in the U.S. District Court in
Delaware. Four private party class actions on behalf of indirect purchasers
were filed in California state court. These cases are based on allegations
similar to those in the Department of Justice case. In response to the
Company's motion, these cases have been consolidated in one Judicial District
in Los Angeles. A similar private party action was filed in Florida. The
trial in the government's case was held in April and May 2002 and the
post-trial briefing will occur during the summer of 2002. It is unlikely a
decision will be made by the Court until late in 2002. It is the Company's
position that the conduct and activities of the Trubyte division do not
violate the antitrust laws.
13
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation,
statements containing the words "plans", "anticipates", "believes",
"expects", or words of similar import constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may
materially affect the Company's business and prospects, and should be read in
conjunction with the risk factors discussed within the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Net Sales
Net sales for the quarter ended June 30, 2002 increased $123.4 million, or
48.4%, to $378.0 million, up from $254.6 million in the same period of 2001.
Base business sales growth (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) for the
second quarter was 8.3%, excluding a 38.4% increase due to net acquisitions
and a positive 1.7% foreign currency translation impact due to the weakening
of the U.S. dollar against the major currencies in Europe during the quarter.
This growth was achieved over both large equipment and consumables (which
includes small equipment) product categories.
Sales in the United States for the second quarter grew 19.9%: 8.6% from
base business sales growth in both large equipment and consumables; and 11.3%
from net acquisitions/divestitures and currency translation. Notable base
business growth was achieved in endodontics, orthodontics, dental implants,
PepGen P-15(TM) bone grafting, and a broad range of consumable products.
European sales, including the Commonwealth of Independent States (C.I.S.),
increased 116.5% during the second quarter of 2002. European base business
sales growth increased 7.0%. Shipping backlogs a year ago at the European
central warehouse improved the second quarter 2002 base business sales
growth. European base business sales growth would have been approximately
5.2% in the second quarter of 2002 without the shipping backlogs in the prior
year quarter. Currency translation had a positive 7.0% impact on the quarter
in Europe. Acquisitions/divestitures added 102.5% to European sales during
the quarter. Notable base business growth was achieved in endodontics,
orthodontics, and a broad range of consumable products in Germany, U.K., and
France.
Asia (excluding Japan) base business sales increased 7.1% despite
struggling economies in this region. Notable growth was achieved by
Dentsply's subsidiaries in South Korea, India, and the Philippines. Net
acquisitions added an additional 23.6% in Asia and currency translation added
1.6%. Latin American base business sales declined 4.1% during the second
quarter, 2002, primarily due to numerous economic and political issues which
hampered sales growth throughout this region. Acquisitions added 14.9% to
Latin American net sales offset by 7.6% for the negative impact of currency
translation. Sales in the rest of the world grew 75.9%; 18.0% from base
business primarily in Canada, Japan and Australia which was partially offset
by negative volume growth in Middle East/Africa. Currency translation had a
positive 2.8% impact on the quarter, while acquisitions added 55.1% to sales
in the rest of the world.
Sales for the three months ended June 30, 2002 of $378.0 million included
sales of precious metals generated through the precious metal alloy product
offerings of newly acquired Degussa Dental. Due to the fluctuations of
precious metal prices, the sales value of this component may vary from period
to period. The Company's net sales for the three months ended June 30, 2002,
excluding the sales value of precious metals, were $332.5 million, an
increase of 30.6% over the same period of 2001.
14
Gross Profit
Gross profit for the second quarter represented 49.1% of net sales, or
55.8% without precious metals content, compared to 52.5% of net sales in
2001. There were no sales of precious metals in the second quarter of 2001.
The gross profit margin, without precious metals content, benefited by a
favorable product mix and operational improvements, including the positive
results of earlier restructuring activities.
Operating Expenses
Selling, general and administrative (SG&A) expense increased $30.7 million,
or 34.4%. As a percentage of sales, SG&A expenses decreased from 35.1% in
the second quarter of 2001 to 31.8% for the same period of 2002. SG&A
spending, excluding acquisitions, represented 33.8% of sales during the
second quarter of 2002 compared to 35.1% for the same period in 2001. This
decrease is mainly due to the discontinuation of goodwill amortization.
During the second quarter of 2002, the Company recorded a restructuring
charge for the combination of the CeraMed and U.S. Friadent divisions. This
restructuring charge was offset by income resulting from changes in estimates
related to prior period restructuring initiatives.
Other Income and Expenses
Net interest expense increased $4.1 million in the second quarter of 2002
due to higher debt levels to finance the acquisition activity in 2001 and
2002. Other income decreased $2.5 million including $2.8 million of
unfavorable currency transactions resulting from the significant weakening of
the U.S. dollar in the second quarter of 2002. Other income and expense for
the second quarter of 2002 included the loss realized on the share exchange
with PracticeWorks of $1.1 million, which was offset by a $1.1 million
mark-to-market gain on the stock warrants received in the transaction (see
Note 4 to the condensed consolidated financial statements). Other income and
expense will be impacted by the change in fair value of these stock warrants
each period until sold.
Earnings
Income before income taxes in the second quarter of 2002 increased $14.6
million due to higher pre-tax profits from operations in 2002. The effective
tax rate for operations was 34.0% in the second quarter of 2002 compared to
33.5% in the second quarter of 2001. The Company expects its tax rate to
improve by year-end.
Net income for the second quarter of 2002 was $36.8 million, or $.46
diluted earnings per common share compared to $27.4 million, or $.35 diluted
earnings per common share in the second quarter of 2001, an increase of
31.4%.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales
Net sales for the six months ended June 30, 2002 increased $228.9 million,
or 45.8%, to $729.2 million, up from $500.3 million in the same period of
2001. Base business sales growth (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) for the
first six months was 7.4%, excluding a 38.4% increase due to net
acquisitions. This growth was achieved over both large equipment and
consumables (which includes small equipment) product categories. The U.S.
dollar weakened significantly during the second quarter of 2002 against
DENTSPLY's major functional reporting currencies and, on average, is on par
with the prior year as of June 30, 2002.
Sales in the United States for the first half of 2002 grew 20.4%: 8.1% from
base business sales growth in both large equipment and consumables; and 12.3%
from net acquisitions/divestitures and translation. Notable growth was
achieved in endodontics and orthodontics.
15
European sales, including the Commonwealth of Independent States, increased
106.9% during the first half of 2002. European base business sales growth
increased 6.1% compared to the prior year which included shipping backlogs at
the European central warehouse. European base business sales growth would
have been approximately 4.7% in the first six months of 2002 without the
shipping backlogs in the prior year period. Currency translation had a
positive 1.6% impact on the first six months in Europe.
Acquisitions/divestitures added 99.2% to European sales during the first six
months. Notable base business growth was achieved in endodontics,
orthodontics and a broad range of consumable products in Germany, U.K., and
France.
Asia (excluding Japan) base business sales increased 6.2% despite slowing
economies in this region. Notable growth was achieved by Dentsply's
subsidiaries in South Korea and India. Net acquisitions added an additional
24.3% in Asia, offset by a negative 0.3% impact from currency translation.
Latin American base business sales declined 2.3% during the first half of
2002 primarily due to economic and political issues which hampered sales
growth throughout this region. Acquisitions added 17.1% to Latin American net
sales offset by 7.3% for the negative impact of currency translation. Sales
in the rest of the world grew 58.3%; 13.0% from base business primarily in
Canada, Japan, and Australia which was partially offset slightly by a
softening of sales growth in the Middle East/Africa. Currency translation
had a negative 0.7% impact on the first half of 2002, while acquisitions
added 46.0% to sales in the rest of the world.
Sales for the six months ended June 30, 2002 of $729.2 million included
sales of precious metals generated through the precious metal alloy product
offerings of newly acquired Degussa Dental. The Company's net sales for the
six months ended June 30, 2002, excluding the sales value of precious metals,
were $634.8 million, an increase of 26.9% over the same period of 2001.
Gross Profit
Gross profit for the first half represented 48.8% of net sales, or 56.1%
without precious metals content, compared to 52.7% of net sales in 2001.
There were no sales of precious metals in the first half of 2001. The gross
profit margin, without precious metals content, benefited by a favorable
product mix and operational improvements, including the positive results of
earlier restructuring activities and the elimination of the negative impact
of inventory step-up from prior year acquisitions.
Operating Expenses
Selling, general and administrative (SG&A) expense increased $56.0 million,
or 31.3%. As a percentage of sales, SG&A expenses decreased from 35.7% in
the first half of 2001 to 32.2% for the same period of 2002. SG&A spending,
excluding acquisitions, represented 34.2% of sales during the first half of
2002 compared to 35.7% for the same period in 2001. This decrease is mainly
due to the discontinuation of goodwill amortization. The company has
completed its impairment review of goodwill as required under the Statement
of Financial Accounting Standards (SFAS) 142, and did not have any impairment
of its goodwill.
During the first half of 2002, the Company recorded restructuring and other
income of $2.0 million resulting from changes in estimates related to prior
period restructuring initiatives, offset somewhat by a restructuring charge
for the combination of the CeraMed and U.S. Friadent divisions in the second
quarter of 2002. The first quarter of 2001 included a restructuring charge of
$5.5 million to improve efficiencies in Europe, Brazil and North America.
Other Income and Expenses
Net interest expense increased $8.2 million in the first half of 2002 due
to higher debt levels to finance the acquisition activity in 2001 and 2002.
Other income decreased $25.2 million due to the $23.1 million gain from the
sale of Infosoft, LLC in the first quarter of 2001 and $2.5 million of
unfavorable currency transactions resulting from the significant weakening of
the U.S. dollar in the first half of 2002. Other income and expense for the
first half of 2002 included the loss realized on the share exchange with
PracticeWorks of $1.1 million, which was offset by a $1.1 million
mark-to-market gain on the stock warrants received in the transaction (see
Note 4 to the condensed consolidated financial statements).
16
Earnings
Income before income taxes in the first half of 2002 increased $10.4
million including the $23.1 million gain from the sale of Infosoft, LLC
recorded in the first quarter of 2001 which was offset mostly by higher
pre-tax profits from operations in 2002. The effective tax rate for
operations was 34.0% in the first half of 2002 compared to 33.5% in the first
half of 2001.
Net income for the first half of 2002 was $69.9 million, or $.88 diluted
earnings per common share compared to $61.7 million, or $.78 diluted earnings
per common share in the first half of 2001. Excluding restructuring benefits
in 2002 and the gain for the sale of Infosoft, LLC and the restructuring
charge in the first quarter of 2001, first half 2002 net income was $68.6
million, an increase of 32.2% over 2001. Excluding these items, diluted
earnings per common share were $.86 in 2002 compared to $.66 in 2001, an
increase of 30.3%.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company's disclosure in its 2001
Annual Report on Form 10-K filed March 29, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2002
For the six months ended June 30, 2002, cash flows from operating
activities were $54.4 million compared to $71.5 million for the six months
ended June 30, 2001. The decrease of $17.1 million results primarily from
higher inventory and receivables levels, payments of annual volume rebates
for precious metal purchases and restructuring outflows, offset by higher
operating earnings.
Investing activities for the six months ended June 30, 2002 include capital
expenditures of $21.8 million. Net acquisition activity for the six months
ended June 30, 2002 was $50.2 million (see Note 4 to the condensed
consolidated financial statements). During the third quarter of 2002, the
Company expects to make a payment of approximately $10 million for the
purchase of the Degussa Dental headquarters building in Hanau, Germany.
The Company's current ratio was 1.4 with working capital of $161.5 million
at June 30, 2002. This compares with a current ratio of 1.4 and working
capital of $125.7 million at December 31, 2001.
The Company's long-term debt increased by $62.7 million from December 31,
2001 to $786.2 million. This net change included an increase of approximately
$90 million due to exchange rate fluctuations on non-U.S. dollar denominated
debt. A portion of this debt is hedging the Company's net investments in certain
foreign locations and the offset of this increase is reflected in other
comprehensive income. In addition, a portion of this debt is hedged by cross
currency swaps, the value of which is reflected in other noncurrent assets,
and therefore the income statement impact of the related debt change is
offset by the income statement impact of changes in the fair values of the
swaps. The resulting long-term debt to total capitalization at June 30, 2002
was 51.7% compared to 54.3% at December 31, 2001.
Under its multi-currency revolving credit agreement, the Company is able to
borrow up to $250 million through May 2006 ("the five-year facility") and
$250 million through May 2003 ("the 364 day facility"). The 364-day facility
terminates in May 2003, but may be extended, subject to certain conditions,
for additional periods of 364 days. This revolving credit agreement is
unsecured and contains various financial and other covenants. The Company
also has available an aggregate $250 million under two commercial paper
facilities; a $250 million U.S. facility and a $250 million U.S. dollar
equivalent European facility ("Euro CP facility"). Under the Euro CP
facility, borrowings can be denominated in Swiss francs, Japanese yen, Euros,
British pounds and U.S. dollars. The 364-day facility serves as a back-up to
these commercial paper facilities. The total available credit under the
commercial paper facilities and the 364-day facility is $250 million.
The Company also has access to $83.4 million in uncommitted short-term
financing under lines of credit from various financial institutions.
Substantially all of these lines of credit have no major restrictions and are
provided under demand notes between the Company and the lending institutions.
17
In total, the Company had unused lines of credit of $362.8 million at June
30, 2002. Access to most of these available lines of credit is contingent
upon the Company being in compliance with certain affirmative and negative
covenants relating to its operations and financial condition. The most
restrictive of these covenants pertain to asset dispositions, maintenance of
certain levels of net worth, and prescribed ratios of indebtedness to total
capital and operating income plus depreciation and amortization to interest
expense. At June 30, 2002, the Company was in compliance with these covenants.
There have been no material changes to the Company's scheduled contractual
cash obligations disclosed in its 2001 Annual Report on Form 10-K filed March
29, 2002.
The Company expects on an ongoing basis, to be able to finance-- cash
requirements, including capital expenditures, stock repurchases, debt
service, operating leases and potential future acquisitions, from the funds
generated from operations and amounts available under its existing credit
facilities.
NEW ACCOUNTING STANDARDS
In June 2001 Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 141 addresses financial
accounting and reporting for business combinations. Specifically, effective
for business combinations occurring after July 1, 2001, it eliminates the use
of the pooling method of accounting and requires 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 (or more often if
adverse events occur) will be applied. Except for goodwill and intangible
assets with indefinite lives related to acquisitions after July 1, 2001 (for
which amortization was not recognized at all), the Company discontinued
amortization of goodwill and intangible assets with indefinite lives
effective January 1, 2002 (see Note 7 to the condensed consolidated financial
statements).
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 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 143 is effective for the Company in 2003 and the effect of
adopting it is not expected to be material.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and APB 30, " Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 requires an impairment loss to
be recognized only if the carrying amounts of long-lived assets to be held
and used are not recoverable from their expected and undiscounted future cash
flows. The Company adopted SFAS 144 effective January 1, 2002. This standard
has not had, nor is expected to have, a material impact on the Company.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." The principal change resulting
from this statement as compared to EITF 94-3 relates to more stringent
requirements for the recognition of a liability for a cost associated with an
exit or disposal activity. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. Based on a preliminary assessment of this new standard, the
Company believes that SFAS 146 may impact the timing of the recognition of
future restructuring activities, whereby liabilities associated with the
elements of the restructuring plan may need to be recognized at various dates
subsequent to the commitment date rather than at the commitment date, which
is the Company's current practice.
18
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their legacy currencies and the newly established Euro currency.
The legacy currencies remained legal tender in the participating countries
between January 1, 1999 and January 1, 2002 (the "transition period"). On
January 1, 2002, the European Central Bank issued Euro-denominated bills and
coins for use in cash transactions. On or before July 1, 2002, the legacy
currencies of participating countries will no longer be legal tender for any
transactions.
The Company's various operating units which are affected by the Euro
conversion adopted the Euro as the functional currency effective January 1,
2001. At this time, the Company does not expect the reasonably foreseeable
consequences of the Euro conversion to have material adverse effects on the
Company's business, operations or financial condition.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the
cost of purchased materials by reducing operating costs and increasing
selling prices to the extent permitted by market conditions.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as
disclosed in the Company's Annual Report on Form 10-K filed for the year
ending December 31, 2001.
19
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that
pending litigation to which DENTSPLY is a party will not have a material
adverse effect upon its consolidated financial position or results of
operations.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and
conduct undertaken by the Company's Trubyte Division with respect to the
distribution of artificial teeth and related products. On January 5, 1999
the Department of Justice filed a complaint against the Company in the U.S.
District Court in Wilmington, Delaware alleging that the Company's tooth
distribution practices violate the antitrust laws and seeking an order for
the Company to discontinue its practices. Three follow on private class
action suits on behalf of dentists, laboratories and denture patients in
seventeen states, respectively, who purchased Trubyte teeth or products
containing Trubyte teeth, were filed and transferred to the U.S. District
Court in Wilmington, Delaware. The class action filed on behalf of the
dentists has been dismissed by the plaintiffs. The private party suits seek
damages in an unspecified amount. The Company filed motions for summary
judgment in all of the above cases. The Court denied the Company's motion for
summary judgment regarding the Department of Justice action, granted the
motion on the lack of standing of the patient class action and granted the
motion on the lack of standing of the laboratory class action to pursue
damage claims. In an attempt to avoid the effect of the Court's ruling, the
attorneys for the laboratory class action filed a new complaint naming
DENTSPLY and its dealers as co-conspirators with respect to DENTSPLY's
distribution policy. The Company filed a motion to dismiss this re-filed
complaint. The Court again granted DENTSPLY's motion on the lack of standing
of the laboratory class action to pursue damage claims. The attorneys for
the patient class have also filed a new action to avoid the effect of the
Court's ruling. This action is filed in the U.S. District Court in
Delaware. Four private party class actions on behalf of indirect purchasers
were filed in California state court. These cases are based on allegations
similar to those in the Department of Justice case. In response to the
Company's motion, these cases have been consolidated in one Judicial District
in Los Angeles. A similar private party action was filed in Florida. The
trial in the government's case was held in April and May 2002 and the
post-trial briefing will occur during the summer of 2002. It is unlikely a
decision will be made by the Court until late in 2002. It is the Company's
position that the conduct and activities of the Trubyte division do not
violate the antitrust laws.
20
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 22, 2002, the Company held its 2002 Annual Meeting of
stockholders.
(b) Not applicable.
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class I Directors:
Nominee Votes For Votes Withheld Broker Non-votes
Dr. Michael C. Alfano 71,073,018 897,429 N/A
Burton C. Borgelt 70,434,253 1,536,194 N/A
William F. Hect 71,083,545 886,902 N/A
2. Proposal to ratify the appointment of PricewaterhouseCoopers
LLP, independent accountants, to audit the books and accounts
of the Company for the year ending December 31, 2002:
Votes For: 67,265,092
Votes Against: 4,549,360
Abstentions: 155,995
Broker Non-Votes: N/A
3. Proposal to amend the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock:
Votes For: 64,069,415
Votes Against: 7,753,602
Abstentions: 147,430
Broker Non-Votes: N/A
4. Proposal to approve the Dentsply International Inc. 2002 Stock
Option Plan:
Votes For: 48,457,893
Votes Against: 17,292,693
Abstentions: 269,463
Broker Non-Votes: 5,950,398
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99 Chief Executive Officer and Chief Financial Officer Certification
Statements.
(b) Reports on Form 8-K - None.
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DENTSPLY INTERNATIONAL INC.
August 14, 2002 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
August 14, 2002 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
22