SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
July 9, 2001
Date of report (Date of earliest event reported)
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0886515
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 686-1600
ITEM 5. OTHER EVENTS
On July 9, 2001, Patterson Dental Company ("the Company") announced that it had
purchased substantially all of the assets of J.A. Webster, Inc. and assumed
certain liabilities, for a purchase price of $92.5 million, consisting of $81.8
million in cash and $10.7 million in stock. The acquisition agreement also
includes an earnout provision tied to future product sales, which could result
in additional cash payments over five years if certain minimum revenue
milestones are achieved.
The press release issued by the Company announcing the acquisition is included
as Exhibit 99.1 and is incorporated into this Item 5 by reference.
On July 9, 2001, the Company intends to hold a presentation for analysts and
others regarding the acquisition, which will be accessible via the Internet and
by conference call. Certain financial and other information relating to the
acquisition will be presented (the "Acquisition Presentation Materials"). The
Acquisition Presentation Materials are included as Exhibit 99.2 and are
incorporated into this Item 5 by reference.
ABOUT J. A. WEBSTER, INC.
Certain information of a non-historical nature contained in this Form 8-K
includes forward-looking statements. Reference is made to Factors that May
Affect Future Operating Results, for a discussion of certain factors which could
in the future affect J.A. Webster, Inc.'s actual operating results which could
differ materially from those expressed in any forward-looking statements.
General
J. A. Webster Inc. ("Webster"), founded by John A. Webster in 1946, is a third-
generation family business, which grew from a small Massachusetts-based
veterinary supply business to include seven distribution locations throughout
the Eastern half of the United States. Over the recent five-year period,
Webster's net sales of core distributed products have grown 17.2% compounded
annually. In July 2001, Patterson Dental Company purchased J.A. Webster, Inc.
J.A. Webster, Inc. is a full-service, value-added distributor of veterinary
supplies to more than 10,000 animal health clinics in 26 states primarily in the
Eastern, Mid-Atlantic and Southeastern regions of the United States. Webster is
one of the three largest distributors of companion pet veterinary supplies in
the United States. Webster provides products used for the treatment and/or
prevention of diseases in companion pets and, to a lesser extent, equine
animals. Webster offers its customers a broad selection of veterinary products
including more than 8,000 stock keeping units ("SKU's") of pharmaceuticals,
diagnostics, biologicals, instruments, equipment and supplies.
In addition to its core business of distributing veterinary products, Webster
has a significant agency commission business with a few large pharmaceutical
manufacturers. Under the agency relationships, Webster typically earns a
commission for soliciting orders through its sales force and tele-sales
representatives. Webster's agency commission business accounted for 3% of total
sales in fiscal 2000.
Webster markets veterinary products and services through its 73 direct sales
representatives and 74 in-house tele-salespeople operating in conjunction with 7
strategically located distribution facilities. Webster estimates that its
average order size is approximately $225 and that for its best customers where
it serves as the primary supplier it generally receives two orders per week.
Webster processes approximately 3,000 orders per day and estimates that over 95%
of its orders are shipped complete within 24 hours. To assist its inside and
outside sales force, Webster publishes a variety of direct marketing materials
including catalogs, equipment fliers and monthly specials.
J.A. Webster, Inc.'s business strategy is to be the leading supplier of
companion pet veterinary products to the animal health clinics and licensed
veterinarians it serves.
Industry Background
Webster believes that the underlying structure of the veterinary supply market
is attractive for its role as a value-added full-service distributor. The
companion pet supply market is large and growing and consists of a sizeable
dispersed number of fragmented veterinary practices.
2
According to a market study prepared by KMPG LLP for three veterinary
professional organizations in 1999, the demand for veterinary services has grown
significantly faster than growth in the overall economy. Total expenditures for
veterinary services in the United States grew at an inflation adjusted real
annual rate of 7.2% from 1980 through 1997, and are projected to grow 5% on a
real basis annually, through the year 2015. Webster believes that the demand for
veterinary services, equipment and supplies will continue to be influenced by
the following favorable factors:
. Veterinary expenditures per household. A factor that effects the total
demand for veterinary services is how actively or regularly pet-owning
households seek veterinary care for their pets. The willingness of
companion pet owners to spend more money at the veterinarian is increasing
substantially. Between 1991 and 1996, the average expenditure per visit for
dog-owning and cat-owning households increased at a compound annual growth
rate of 8.1% and 8.2%, respectively.
. Number of households with companion pets. The number of households with
companion pets is expanding the demand for veterinary services.
Approximately 58.2 million of the 98.9 million households in the United
States had at least one companion animal in 1996, representing a
penetration of 58.9%. The number of households that had companion animals
grew by 3.4 million from 1991 to 1996, with the penetration rate increasing
to 58.9% from 57.9%.
. Veterinary products and techniques. Many new therapeutic and preventive
products are being developed for the companion pet market. Technological
developments have resulted in new innovative veterinary products and
advances in veterinary services.
There are approximately 65,000 veterinarians practicing at 22,400 animal health
clinics, representing a fragmented, geographically diverse market. The vast
majority, approximately 65%, of veterinarians work in private animal health
clinics specializing in small animals, predominately companion pets. The average
private veterinary practice generates between $500,000 and $750,000 of annual
revenue and employs two veterinarians, two veterinarian technicians and four to
five other employees. These practices purchase between $80,000 and $120,000 of
supplies each year but can not afford to maintain a large supply of inventory on
hand. The typical veterinary practice purchases approximately 80% of its
supplies from its top two suppliers.
Webster estimates the market for pharmaceuticals and supplies sold to small
animal, companion pet veterinarians is approximately $2.2 billion on an annual
basis. This market breaks down further due to certain manufacturers wanting more
influence over the marketing of specific products. Webster estimates that
approximately $1.5 billion of the market is served through distributors while
the remainder is served through agency relationships between the manufacturers
and the distributors (approximately $500 million), or directly by the
manufacturer. In the agency relationship, the distributor earns a commission on
product sales orders taken by the distributor. The distributor processes the
order to the manufacturer but handles none of the product nor do they bill and
collect from the customer. The agency commissions that Webster earns range from
4% to 8%, a portion of which is shared with the direct sales personnel.
Webster's Strategy
Webster's objective is to be the leading national distributor of veterinary
supplies and equipment while continuing to improve its profitability and enhance
its value to customers. Webster plans to achieve this objective by offering a
full line of supplies at competitive prices while emphasizing its value-added,
full-service capabilities, building brand awareness, maximizing its agency
business and expanding its market share in existing markets and geographically.
Emphasizing Value-Added, Full-Service Capabilities. Webster believes its
customer's value full service and responsive delivery of quality supplies and
equipment, in addition to competitive prices. The single largest component of
Webster's value-added approach is its experienced sales force. Due to the
fragmented and diverse nature of the veterinary market, Webster believes that a
large sales force is necessary to provide full service. Each representative
works within an assigned sales territory and assists customers in selecting and
purchasing products and managing their inventory levels. The education benefits
that Webster's knowledgeable sales force provides is essential for the
veterinary practitioners, as it is often one of their primary links to industry
knowledge, especially with respect to new products. Webster seeks to meet all of
the veterinary product needs of its customers by providing access to a single
source for pharmaceutical, supplies and other veterinary products from hundreds
of different manufacturers. As part of its commitment to superior customer
service, Webster delivers 95% of all items ordered within 24 hours.
3
Building Brand Awareness. Webster has been a respected and trusted brand name in
veterinary supply for over 50 years. Over the past 5 decades, management has
built and reinforced its unique brand character with its customers to
distinguish Webster from its competitors. Webster's customers have come to
differentiate Webster by its quality sales force, by the breadth and mix of
high-quality products offered at competitive prices, and by Webster's reputation
for customer service. The long history of Webster, combined with its value-added
full service reputation has created excellent brand awareness and customer
loyalty. Webster has successfully leveraged its brand name to increase its
market share which currently is estimated to be approximately 10%.
Maximizing its Agency Business. Webster is sought after by licensed
veterinarians to access new product introductions by the leading manufacturers.
As a result, Webster has become a preferred channel manager for certain select
agency relationships who are drawn to Webster's leadership position and
value-added sales force practices. Webster actively manages its agency
relationships to secure the most attractive terms and overall profitability.
Although its agency business is highly profitable, Webster seeks to limit its
reliance on the agency business since pharmaceutical manufacturers have a
history of vacillating over time between agency relationships, direct sales, or
employing distributors exclusively.
Expanding Market Share in Existing Markets and Geographically. Webster intends
to continue to increase penetration in existing markets by continuing to invest
in sales personnel to expand its existing customer base and increase its average
sales per customer, and expand into other geographic markets. In 1999, Webster
expanded geographically opening a new distribution center in Houston, Texas.
Sales to this geographic market were $6.4 million in fiscal 2000. Webster
believes that consolidation within the veterinary supply industry will continue
and that it is suitably positioned to take advantage of acquisition
opportunities.
Sources of Supply
Effectively managing supplier relationships is a critical success factor to
Webster's objective of offering a broad product mix at competitive prices. The
veterinary supply market is made up of a fragmented and diverse supplier base
who need value-added distribution to be successful and accordingly, are
attracted to Webster's high-quality sales force. Webster obtains its core
distributed veterinary products from approximately 400 manufacturers. Webster's
arrangements with suppliers can be generally characterized as having limited
rather than exclusive geographic territories.
Competition
Webster competes directly in the estimated $2.2 billion "companion pet" market
segment. It believes it is one of the three largest companion pet veterinary
supply distributors in the United States. The veterinary supply market that
serves the companion pet veterinary practitioner is highly fragmented. Principal
competition consists of several national, regional, and local full-service
distributors, and to a lesser extent mail order distributors or buying groups.
Also, some manufacturers sell directly to end-users, and thereby eliminate the
role of Webster. Webster estimates that of the total market for companion
veterinary supplies, approximately 11% is purchased directly from pharmaceutical
manufacturers, 23% are purchased through agency relationships and two-thirds are
purchased through distributors. Webster believes that it differentiates itself
from its competition based primarily on its value-added strategy of premium
customer service, experienced and motivated sales force, broad range of products
and services, accurate and timely delivery, strong relationships with product
manufacturers and competitive pricing.
4
Factors that May Affect Future Operating Results
Certain information of a non-historical nature contained in this Form 8-K
includes forward-looking statements. Words such as "believes," "expects,"
"plans," "estimates" and variations of such words are intended to identify such
forward-looking statements. The statements are not guaranties of future
performance and are subject to certain risks, uncertainties or assumptions that
are difficult to predict; therefore, the following important factors, among
others, could in the future affect Webster's actual operating results which
could differ materially from those expressed in any forward-looking statements.
The statements under this caption are intended to serve as cautionary statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
. Accuracy of Webster's assumptions concerning future per capita expenditures
for veterinary services, including assumptions as to the growth in the
number of households owning companion pets and the demand for veterinary
services.
. Capability of Webster to retain its base of customers and to increase its
market share through internal growth and acquisitions.
. Webster's ability to acquire and effectively integrate additional
veterinary supply companies.
. The ability of Webster to maintain satisfactory relationships with
qualified and motivated sales personnel.
. Impact of competitive pressures from national, regional and local
full-service distributors and manufacturers of veterinary products.
. Ability of Webster to preserve its relationships with key vendors and to
create relationships with additional manufacturers of quality, innovative
products.
. Effect of changes in economic or market conditions on veterinary practice
growth and the demand for veterinary products.
. Impact of current or pending legislation, regulation and changes in
accounting standards and taxation requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF J. A. WEBSTER, INC.'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The commentary that follows should be read in conjunction with J. A. Webster,
Inc.'s Financial Statements and the Notes to the Financial Statements.
Fiscal 2000 Compared to Fiscal 1999
The following table summarizes the results of operations over the past two
fiscal years as a percent of sales:
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of sales 74.2% 73.5%
----- -----
Gross margin 25.8% 26.5%
Operating expenses 18.8% 20.1%
----- -----
Operating income 7.0% 6.4%
Other income 0.1% 0.2%
----- -----
Income before income taxes 7.1% 6.6%
----- -----
Net Sales. Sales for the year increased 12.5% to $149.6 million from
$133.1 in fiscal 1999. Sales of distributed products were the principal sales
growth driver during the fiscal year increasing 14.1%. Distributed sales
increased in all regions. The newest distribution center, which opened in fiscal
1999, expanded Webster into new geographic areas adding approximately 3
percentage points or $3.5 million to the overall sales increase in distributed
products in fiscal 2000. Agency commissions decreased 23.1% or $1.3 million for
the year due to a change in distribution strategies of
5
one of Webster's suppliers. In fiscal 2000, a large pharmaceutical supplier
elected to sell its products directly to the customer resulting in a $1.1
million reduction in agency commissions year-over-year. Additionally, agency
commissions in 1999 were inflated by volume incentives from new product
introductions.
Gross Margin. Gross margins increased $3.3 million or 9.5% over fiscal
1999 due to higher sales volumes. Expressed as a percent of sales, gross margins
declined from 26.5% to 25.8% reflecting the reduction in agency commission
revenues, which impacts gross profit margin on almost a dollar-for-dollar basis.
Excluding agency commissions, gross margins as a percent-of-sales improved 30
basis points from fiscal 1999 to 2000 due to higher point-of-sale margins and
vendor rebates.
Operating Expenses. Operating expenses for the year increased 4.9%
over the prior year but declined as a percent of sales from 20.1% to 18.8%.
Higher sales volumes and investments in infrastructure were the primary factors
driving the 4.9% increase in operating expenses. There were significant
investments in computer systems and personnel during both fiscal 1999 and 2000.
The consulting expense resulting from the systems projects have subsided and
while the personnel costs have added to the fixed cost structure these personnel
costs can be leveraged effectively as the business grows. The decline in
operating expenses as a percent of sales reflects the benefit of improved
operating leverage.
Operating Income. Operating income increased 24.1% to $10.5 million
for fiscal 2000 compared to $8.5 million in fiscal 1999. Operating income, which
increased as a percent of sales from 6.4% to 7.0%, benefited from improved
operating leverage but was negatively impacted by the reduction in the gross
margin rate.
Other Income. Other income, net of expenses, came to $0.1 million for
fiscal 2000 compared to $0.3 million for fiscal 1999. The decrease in other
income reflects lower average investments of cash.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
(b) Pro forma financial information
(c) Exhibits
23 Consent of Love, Bollus, Lynch & Rogers LLP
99.1 Press Release dated July 9, 2001
99.2 Acquisition Presentation Materials
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PATTERSON DENTAL COMPANY
Date July 9, 2001 By /s/ R. STEPHEN ARMSTRONG
--------------------
R. Stephen Armstrong
Executive Vice President, Treasurer
and Chief Financial Officer
6
J. A. WEBSTER, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 8
Financial Statements:
Balance Sheets 9
Statements of Earnings and Retained Earnings 10
Statements of Cash Flows 11
Notes to Financial Statements 12 - 16
7
INDEPENDENT AUDITORS' REPORT
----------------------------
Stockholders and Directors
J.A. Webster, Inc.
We have audited the accompanying balance sheets of J.A. Webster, Inc. as of
December 31, 2000 and 1999 and the related statements of earnings and retained
earnings and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of J.A. Webster, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years then ended in conformity with generally accepted
accounting principles.
/s/ Love, Bollus, Lynch & Rogers LLP
Worcester, Massachusetts
February 28, 2001
8
J. A. WEBSTER, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Assets
Current assets
Cash and cash equivalents $ 2,340,691 $ 2,642,895
Accounts receivable
Trade, less allowance for doubtful accounts
of $100,000 20,445,646 17,936,609
Affiliate 169,033 109,780
Inventories 17,685,948 17,052,193
Prepaid and other current assets 216,511 117,254
------------- -------------
Total current assets 40,857,829 37,858,731
------------- -------------
Property and equipment 7,194,316 6,712,584
Less: Accumulated depreciation and amortization 4,545,776 3,779,337
------------- -------------
2,648,540 2,933,247
------------- -------------
Other assets
Cash value of life insurance, net of loans of $49,076
and $45,328 in 2000 and 1999, respectively 168,803 158,250
Investments 887,100 770,912
Other 35,268 78,664
------------- -------------
1,091,171 1,007,826
------------- -------------
$ 44,597,540 $ 41,799,804
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable, trade $ 12,435,440 $ 14,029,474
Accrued and other liabilities 1,704,468 1,791,375
------------- -------------
Total current liabilities 14,139,908 15,820,849
------------- -------------
Other long-term obligations 860,000 841,000
------------- -------------
Stockholders' equity
Common stock, no par value, 21,000 shares authorized,
1,260 shares issued and outstanding 398,523 398,523
Additional paid-in capital 1,689,849 1,689,849
Retained earnings 27,509,260 23,049,583
------------- -------------
29,597,632 25,137,955
------------- -------------
$ 44,597,540 $ 41,799,804
============= =============
See accompanying notes to financial statements.
9
J. A. WEBSTER, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Sales
Distributed products $ 145,177,244 $ 127,249,392
Agency commissions 4,471,517 5,817,502
--------------- ---------------
149,648,761 133,066,894
Cost of sales 110,993,744 97,756,100
--------------- ---------------
Gross profit 38,655,017 35,310,794
Operating expenses 28,145,931 26,843,844
--------------- ---------------
Operating profit 10,509,086 8,466,950
Other income (expense) 130,840 311,069
--------------- ---------------
Earnings before income taxes and equity in
earnings of unconsolidated affiliate 10,639,926 8,778,019
Equity in earnings of unconsolidated affiliate 116,188 90,875
--------------- ---------------
Earnings before income taxes 10,756,114 8,868,894
Income taxes 515,000 489,413
--------------- ---------------
Net earnings 10,241,114 8,379,481
Retained earnings, beginning of year 23,049,583 23,976,498
Distributions to and on behalf of stockholders (5,781,437) (9,306,396)
--------------- ---------------
Retained earnings, end of year $ 27,509,260 $ 23,049,583
=============== ===============
Proforma Earnings Per Share
Earnings As Reported $ 10,241,114 $ 8,379,481
Income Taxes 3,507,787 2,827,553
Proforma Earnings 6,733,327 5,551,928
Basic and Dilutive
Weighted Average Shares Outstanding 1,260 1,260
Basic and Dilutive Earnings Per Share $ 5,344 $ 4,406
See accompanying notes to financial statements.
10
J. A. WEBSTER, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
Cash flows from operating activities:
Net earnings $ 10,241,114 $ 8,379,481
Adjustments to reconcile net earnings to net cash -------------- --------------
provided by (used in) operating activities:
Depreciation and amortization 799,470 673,154
Deferred compensation expense 19,000 658,000
Deferred income taxes 14,500 (94,500)
Uncollectible accounts expense 153,927 26,805
Loss on sale of property and equipment 2,740 9,255
Equity in earnings of unconsolidated affiliate (116,188) (90,875)
(Increase) decrease in operating assets:
Accounts receivable (2,722,217) (3,489,325)
Inventories (633,755) (3,695,544)
Prepaid expenses (102,257) 7,179
Increase (decrease) in operating liabilities:
Accounts payable, trade (1,594,034) 2,423,925
Accrued and other liabilities (86,907) (919,382)
-------------- --------------
Total adjustments (4,265,721) (4,491,308)
-------------- --------------
Net cash provided by (used in) operating activities 5,975,393 3,888,173
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment - 9,000
Expenditures for property and equipment (488,411) (1,658,423)
Net increase in cash value of life insurance (10,553) (13,573)
Net (increase) decrease in deposits 2,804 (17,925)
-------------- --------------
Net cash provided by (used in) investing activities (496,160) (1,680,921)
-------------- --------------
Cash flows from financing activities:
Distributions to and on behalf of stockholders (5,781,437) (9,306,396)
-------------- --------------
Net cash provided by (used in) financing activities (5,781,437) (9,306,396)
-------------- --------------
Net decrease in cash and cash equivalents (302,204) (7,099,144)
Cash and cash equivalents, beginning of year 2,642,895 9,742,039
-------------- --------------
Cash and cash equivalents, end of year $ 2,340,691 $ 2,642,895
============== ==============
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes $ 428,104 $ 895,952
See accompanying notes to financial statements.
11
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------
Nature of business
- ------------------
J. A. Webster, Inc. (the "Company") was incorporated under the
laws of the State of Massachusetts on April 11, 1961. The Company's
principal business is the distribution of veterinary products and supplies
for the animal health care industry located throughout the United States.
These products are purchased from manufacturers and sold primarily to
licensed veterinarians. The Company has seven distribution facilities
located within the United States.
During 2000, the Company established a Massachusetts business
trust (JAW Holdings) to act as the parent holding company for J. A. Webster,
Inc., its only asset. The prior shareholders of J. A. Webster, Inc. are the
beneficiaries of the trust.
Accounting estimates
- --------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses. Actual results could differ from those estimates.
Cash and cash equivalents
- -------------------------
For financial statement purposes, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories
- -----------
Inventories, which consist principally of veterinary products and
supplies, are valued at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method. The Company provides reserves for
inventory obsolescence.
Property and equipment
- ----------------------
Property and equipment are carried at cost. Depreciation and
amortization are computed using straight-line and accelerated methods.
12
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------
Investments
- -----------
The Company considers its investments in equity securities to be
available for sale. The Company considers the cost of its investments to
approximate their fair value.
Additionally, the Company is accounting for its 25% investment in
an unconsolidated affiliate by the equity method of accounting, under which
the Company's share of the net earnings of the affiliate is recognized as
earnings in the Company's statement of earnings and retained earnings and
added to the investment account. Dividends received from the affiliate are
treated as a reduction of the investment account.
Income taxes
- ------------
The Company is taxed for federal and state purposes as an S
Corporation, whereby income is passed through to the stockholders and is
taxed at the individual level. Accordingly, no federal and only certain
state income taxes are provided in the financial statements.
The difference between the financial statements and tax bases of
assets and liabilities is determined annually. Deferred income tax assets
and liabilities are computed for those differences that have future state
tax consequences using the currently enacted state tax laws and rates that
apply to the periods in which they are expected to affect taxable income.
State income tax expense is the current tax payable or refundable for the
period, plus or minus the net charge in the deferred tax assets and
liabilities.
Advertising and promotion
- -------------------------
All costs associated with advertising and promoting the Company
are expensed in the year incurred. Advertising and promotion expense was
approximately $139,305 and $171,998 in 2000 and 1999, respectively.
Agency commissions
- ------------------
The Company maintains sales agency agreements with primarily two
vendors in which the Company utilizes its existing sales force to sell
specific vendor products. The Company earns commissions, payable on a
monthly basis, on the related products' net sales. Agency commissions are
recorded when earned. According to both agreements, the vendor is required
to ship and bill the customer.
Earnings per share
- ------------------
Earnings per share are calculated on the weighted average of
outstanding shares each year. The proforma earnings calculation reflects an
estimate for taxes as if the Company was a C-Corporation.
13
2.INVENTORIES
- -------------
Inventories consist of the following:
2000 1999
---- ----
Inventories at FIFO $ 18,029,370 $ 17,848,021
Less: LIFO reserve 343,422 795,828
--------------- ---------------
Inventories at LIFO $ 17,685,948 $ 17,052,193
=============== ===============
If the first-in, first-out (FIFO) method of inventory
valuation had been used, net earnings would have been approximately
$9,812,459 and $8,658,530 for the years ended December 31, 2000 and 1999,
respectively.
3.PROPERTY AND EQUIPMENT
- ------------------------
Property and equipment, together with estimated useful lives,
consists of the following:
Estimated
Useful Lives 2000 1999
------------ ---- ----
Equipment 3 - 10 years $ 4,169,172 $ 3,894,936
Motor vehicles 5 - 10 years 512,478 468,117
Furniture and fixtures 3 - 5 years 1,317,763 1,232,487
Leasehold improvements 12 - 39 years 1,194,903 1,117,044
--------------- ---------------
$ 7,194,316 $ 6,712,584
=============== ===============
Depreciation and amortization expense was $799,470 and $673,154
for the years ended December 31, 2000, and 1999, respectively.
4.LINE OF CREDIT
- ----------------
In July 2000, the Company established a $5,000,000 unsecured
working capital line of credit with a bank. Interest shall be either the
prime rate or LIBOR pricing with the spread over LIBOR subject to leverage.
There were no amounts outstanding on this line of credit as of December 31,
2000. This line of credit is available through July 2003, at which time its
terms and conditions will be reviewed.
The line of credit agreement requires, among other
considerations, the maintenance of certain financial covenants. The Company
was in compliance with these financial covenants as of December 31, 2000.
The Company had a $2,500,000 unsecured working capital line of
credit with a bank. Interest was either the prime rate or the LIBOR rate
(index period equal to one, two, or three months) plus 1.50% as selected by
the Company. During 2000, the Company changed banking relationships
resulting in the termination of the line of credit agreement. There were no
amounts outstanding on this line of credit as of December 31, 1999.
14
5.INCOME TAXES
- --------------
Income taxes consist of the following:
2000 1999
---- ----
Current
State $ 500,500 $ 583,913
Deferred 14,500 (94,500)
--------------- ---------------
$ 515,000 $ 489,413
=============== ===============
The temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities that give rise to
significant portions of deferred income tax asset (liability) relate to the
following:
2000 1999
---- ----
Allowance for doubtful accounts $ 5,000 $ 6,000
Reserve for obsolescence 20,000 21,000
Uniform capitalization adjustment 40,000 41,000
Depreciation and amortization (30,000) (24,000)
Other long-term obligations 45,000 50,500
--------------- ---------------
$ 80,000 $ 94,500
=============== ===============
6.LEASES
- --------
The Company leases certain warehouse and office facilities from
affiliated and non-affiliated parties under long-term lease agreements.
These leases are non-cancelable and expire at various dates through October
2005. The leases require payment of increases in real estate taxes and
certain operating expenses. Certain of these leases contain renewal options.
2001 $ 888,856
2002 812,657
2003 792,918
2004 630,896
2005 496,747
Thereafter 89,409
---------------
$ 3,711,483
===============
Rent expense was $945,120 and $799,292 for the years ended
December 31, 2000 and 1999, respectively.
15
7.EMPLOYEE BENEFIT PLAN
- -----------------------
The Company has a defined contribution plan which covers
substantially all of its full-time employees. Under the plan, employees may
contribute up to 15% of their compensation. The Company will make a matching
contribution equal to 50% on the first $1,000 and 25% on the second $1,000
contributed by an employee. Contributions made to the plan for 2000 and 1999
were as follows:
2000 1999
---- ----
Employer discretionary contribution $ 275,000 $ 252,598
Employer matching contribution 150,776 147,402
--------------- ---------------
$ 425,776 $ 400,000
=============== ===============
8.PHANTOM STOCK PLAN
- --------------------
During 1998, the Company established a Phantom stock plan, for
certain key executives. Under the plan these officers were awarded phantom
performance units. Each unit provides the officer the opportunity to earn a
cash award equal to the increase in the fair market value of the company's
stock, in accordance with the plan agreement. The officers vest in this
benefit over a five year period. Compensation expense and the related
liability are adjusted annually based on the fair market value of the
Company's stock and the benefit vested to date. The Company issued 50 units,
and as of December 31, 2000 has accrued $860,000 associated with this plan
as other long-term obligations in these financial statements.
9.RELATED PARTY TRANSACTIONS
- ----------------------------
The Company is an affiliate through common ownership of JAW
Associates Limited Partnership (a Massachusetts partnership), Taft Park
Realty Trust (a New York trust), 4128 Barringer Drive Associates (a
Massachusetts partnership), J.A. Webster Pennsylvania, Inc. (a Pennsylvania
Corporation), and JAW Florida, Inc. (a Florida Corporation).
The Company had the following transactions with those affiliates:
2000 1999
---- ----
Accounts receivable, affiliate $ 169,033 $ 109,780
Accounts payable 304,337 410,249
Accrued and other liabilities 56,885 103,650
Purchases 6,014,848 5,326,899
Rent expense 706,089 605,976
Additionally, the Company has guaranteed mortgage notes of JAW
Associates Limited Partnership, J.A. Webster Pennsylvania, Inc., and JAW
Florida, Inc. with a local bank. The outstanding balance on these notes were
approximately $3,557,564 and $3,866,000 as of December 31, 2000 and 1999,
respectively.
10.RECLASSIFICATIONS
- --------------------
Certain amounts in the 1999 financial statements have been
relcassified to conform with the 2000 presentation. Such reclassifications
had no effect on net earnings as previously reported.
16
PATTERSON DENTAL COMPANY
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 28, 2001
The following unaudited pro forma condensed consolidated financial statements
give effect to the acquisition by Patterson Dental Company (the "Company") of
J.A. Webster, Inc. using the purchase method of accounting, and are based on
estimates and assumptions set forth below and in the notes to such statements,
which include pro forma adjustments. These pro forma financial statements are
based upon the historical financial statements of Patterson Dental Company,
adjusted to give effect to the acquisition of J.A. Webster, Inc. which was
consummated on July 9, 2001.
The pro forma condensed consolidated statement of income for the year ended
April 28, 2001 gives effect to the acquisition as if it had occurred at the
beginning of fiscal 2001. Such statements are based on historical statements of
income of J.A. Webster, Inc. for the fiscal year ended December 31, 2000.
The pro forma condensed consolidated balance sheet at April 28, 2001 combines
the Patterson Dental Company and J.A. Webster, Inc. balance sheets at April 28,
2001 and December 31, 2000, respectively.
The pro forma adjustments are based upon estimates, available information and
certain assumptions that management deemed appropriate. Final purchase
accounting adjustments may differ from the pro forma adjustments presented
herein. The unaudited pro forma condensed consolidated financial information
does not profess to represent the Company's results of operations had the above
transaction, in fact, occurred on these dates or to project the Company's
combined results of operations for any date or period. The pro forma condensed
consolidated financial information should be read in conjunction with the
Company's and J.A. Webster, Inc.'s historical financial statements and notes
thereto.
17
PATTERSON DENTAL COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 28, 2001
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS
Patterson J. A.
Dental Webster, Pro Forma
Company Inc. Adjustments Consolidated
------- -------- ------------- ------------
Current assets:
Cash and cash equivalents........................ $ 160,024 $ 2,341 $ (81,800) a) $ 80,565
Short-term investments........................... 24,484 -- -- 24,484
Receivables, net................................. 144,625 20,615 -- 165,240
Inventory........................................ 103,700 17,686 343 b) 121,729
Prepaid expenses and other current assets........ 9,928 217 -- 10,145
--------- ---------- --------- ---------
Total current assets................................ 442,761 40,859 (81,457) 402,163
Property and equipment, net......................... 48,575 2,648 -- 51,223
Intangibles, net.................................... 51,892 -- 62,214 c) 114,106
Other............................................... 5,952 1,091 (515) d) 6,528
--------- ---------- --------- ---------
Total assets............................... $ 549,180 $ 44,598 $ (19,758) $ 574,020
========= ========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 89,321 $ 12,436 $ -- $ 101,757
Other accrued liabilities........................ 43,394 1,704 -- 45,098
--------- ---------- --------- ---------
Total current liabilities........................... 132,715 14,140 -- 146,855
Non-current liabilities............................. 3,693 860 (860) e) 3,693
--------- ---------- --------- ---------
Total liabilities.......................... 136,408 15,000 (860) 150,548
Deferred credits .................................. 4,257 -- -- 4,257
Stockholders' equity:
Preferred Stock.................................. -- -- -- --
Common Stock..................................... 675 399 (399) 1,025
350 a)
Additional paid-in capital....................... 68,049 1,690 (1,690) 78,399
10,350 a)
Accumulated other comprehensive loss............. (2,316) -- -- (2,316)
Retained earnings................................ 354,371 27,509 (27,509) 354,371
Note receivable from ESOP........................ (12,264) -- -- (12,264)
--------- ---------- --------- ---------
Total stockholders' equity................. 408,515 29,598 (18,898) 419,215
--------- ---------- --------- ---------
Total liabilities and stockholders' equity.......... $ 549,180 $ 44,598 $ (19,758) $ 574,020
========= ========== ========= =========
See accompanying notes.
18
PATTERSON DENTAL COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
APRIL 28, 2001
(In thousands, except per share amounts)
(Unaudited)
--------------------------------------------------------------
Patterson J. A.
Dental Webster, Pro Forma Pro Forma
Company Inc. Adjustments Consolidated
------- -------- ----------- -------------
Net sales.................................................. $ 1,156,455 $149,649 $ -- 1,306,104
Cost of sales.............................................. 747,301 110,994 -- 858,295
----------- -------- --------- ----------
Gross profit............................................... 409,154 38,655 -- 447,809
Operating expenses......................................... 294,039 28,146 3,092 f) 325,277
----------- -------- --------- ----------
Operating income........................................... 115,115 10,509 (3,092) 122,532
Other income and expense................................... 7,081 131 (2,521) g) 4,691
Equity in earnings of unconsolidated affiliate............. -- 116 (116) d) --
----------- -------- --------- ----------
Income before income taxes................................. 122,196 10,756 (5,729) 127,223
Income tax expense......................................... 45,721 515 1,360 h) 47,596
----------- -------- --------- ----------
Net income................................................. $ 76,475 $ 10,241 $ (7,089) $ 79,627
=========== ======== ========= ==========
Earnings per common and common
equivalent share.......................................... $ 1.13 $ 1.17
==== ====
Weighted average shares outstanding:
Basic............................................... 67,435 350 67,785
Diluted............................................. 67,763 350 68,113
See accompanying notes.
19
PATTERSON DENTAL COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Pro Forma Adjustments
(a) Reflects the $92.5 million purchase price for J.A. Webster, Inc. ($81.8
million cash, $10.7 million common stock).
(b) Reflects the net-realizable value of J. A. Webster, Inc.'s inventories,
which were carried on a LIFO basis.
(c) Reflects the excess of allocated purchase price over the fair value of
net assets acquired. Final purchase accounting adjustments may differ
from the pro forma adjustments presented herein.
(d) Reflects J. A. Webster's equity investment in an unconsolidated
affiliate, which was not acquired by Patterson Dental Company.
(e) Reflects J. A. Webster's liability for its phantom stock plan, which
was not assumed by Patterson Dental Company.
(f) Reflects the amortization of goodwill in connection with the J. A.
Webster, Inc. acquisition over a twenty year amortization period net of
reduction in deferred compensation expense associated with J. A.
Webster, Inc.'s phantom stock plan. Because the transaction is
consummated following the effective date specified in the proposed
Statement of the Financial Accounting Standards Board on "Business
Combinations and Intangible Assets--Accounting for Goodwill," the
Company will not amortize goodwill for this transaction in future
financial statements.
(g) Reflects reduction in interest income resulting from the $81.8 million
purchase price for J.A. Webster.
(h) Reflects income tax expense at the statutory rate based on J. A.
Webster, Inc.'s income before taxes.
20