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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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, York, Pennsylvania 17405-0872
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 845-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 20, 1999, the aggregate market value of voting common stock
held by non-affiliates of the registrant, based upon the last reported sale
price for the registrant's Common Stock on the Nasdaq National Market on such
date, as reported in The Wall Street Journal, was $1,353,902,020 (calculated by
excluding shares owned beneficially by directors and executive officers as a
group from total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's Common Stock outstanding as of the
close of business on February 20, 1999 was 52,566,138.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of DENTSPLY
International Inc. to be used in connection with the 1999 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Annual Report on Form 10-K to the extent provided herein. Except as
specifically incorporated by reference herein, the Proxy Statement is not to be
deemed filed as part of this Annual Report on Form 10-K.
PART I
Item 1. Business
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General
DENTSPLY International Inc. ("DENTSPLY" or the "Company"), a Delaware
corporation, designs, develops, manufactures and markets products in two
principal categories: dental consumable and laboratory products, and dental
equipment. Dental consumable and laboratory products include dental prosthetics,
endodontic instruments and materials, impression materials, restorative
materials, crown and bridge materials, prophylaxis paste, dental sealants,
cutting instruments, dental needles, dental anesthetics, and orthodontic
appliances. Dental equipment includes dental x-ray systems, intraoral cameras,
computer imaging systems and related software, handpieces, ultrasonic scalers
and polishers, and air abrasion systems. The Company also develops and markets
practice management software for managing the dental office and software for
maintaining a data base of information generated in the dental operatory's
clinical environment.
In January 1998, the Company purchased from Procter & Gamble its Blendax
Professional Dental Business ("Blendax"), a distributor doing business
principally in Germany, Austria and the United Kingdom. The Blendax product line
consists of rotary cutting instruments, impression materials, composite filling
material and fluoride rinses and gels.
In March 1998, DENTSPLY acquired the assets of InfoSoft, Inc. ("InfoSoft"),
a developer and marketer of full-featured, practice management software for
managing the dental office as well as maintaining a data base of information
generated in the operatory's clinical environment. InfoSoft is also one of the
largest processors of electronic dental insurance claims in the United States.
In April and December 1998, the Company purchased 100 percent of the
capital stock of GAC International, Inc. ("GAC"), an internationally recognized
orthodontic company selling a full line of high quality orthodontic appliances
to orthodontists throughout the world.
In May 1998, DENTSPLY purchased 100 percent of the capital stock of
Crescent Dental Manufacturing Co., one of the leading manufacturers in the
United States of prophy cups and brushes, amalgamators and other professional
equipment and supplies.
Also in May 1998, the Company purchased 100 percent of the capital stock of
Herpo Productos Dentarios Ltda., a leading Brazilian manufacturer of alginate
impression material, artificial teeth and dental anesthetics which are
distributed throughout South America.
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In December 1998, DENTSPLY purchased 100 percent of the capital stock of
Vereingte Dentalwerke GmbH ("VDW") and related companies. VDW manufactures
endodontic files and accessory products which are marketed worldwide.
In the second quarter of 1998, the Company recorded a $29 million pre-tax
charge for restructuring and other costs. The major portion of the charge
included costs of $26 million to rationalize and restructure our worldwide
laboratory business (primarily for closing the German tooth manufacturing
facility, which was completed by March 31, 1999). The remaining $3 million of
the charge was recorded to cover termination costs related to the arbitration
proceedings associated with the former implant product line.
The Company took a pre-tax restructuring charge of $42.5 million in the
fourth quarter of 1998 to integrate the New Image intraoral camera line into
Gendex, its major dental equipment franchise. The charge is primarily for the
write-off of intangibles including goodwill associated with the business and
also includes the closing costs associated with the discontinuance of the New
Image division in Carlsbad, California. The restructuring is expected to be
completed by the close of the second quarter of 1999.
Market Overview
Professional Dental Products
General. The worldwide professional dental industry encompasses the
diagnosis, treatment and prevention of disease and ailments of the teeth, gums
and supporting bone. DENTSPLY believes that demand in a given geographic market
for dental procedures and products varies according to the stage of social,
economic and technical development that the market has attained. Geographic
markets for DENTSPLY's dental products can be categorized into the three stages
of development described below.
The United States, Canada, Western Europe, the United Kingdom, Japan, and
Australia are highly developed markets that demand the most advanced dental
procedures and products and have the highest level of expenditure on dental
care. In these markets, the focus of dental care is increasingly upon preventive
care and specialized dentistry. In addition to basic procedures such as the
excavation and filling of cavities and tooth extraction and denture replacement,
dental professionals perform an increasing volume of preventive and cosmetic
procedures, including periodontia (the treatment of the structure supporting the
teeth), endodontia (the revitalization of teeth that would otherwise require
extraction), orthodontia (the movement and realignment of teeth for improved
function and aesthetics), gnathology (the treatment of temporomandibular joint
(TMJ) dysfunction and occlusive modification), implantology (the insertion of
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prosthetic devices to provide support for partial or full dentures) and cosmetic
dentistry. These markets require varied and complex dental products, such as
advanced cleaning and scaling equipment and related solutions, light-cured
bonding and restorative compounds, precision-molded and customized crowns,
bridges, orthodontic appliances, bone grafting materials, implants and other
prosthodontic devices, materials and instruments used in endodontic procedures,
and aesthetically accurate stains and tints. These markets also utilize
sophisticated diagnostic and imaging equipment, and demand high levels of
attention to protection against infection and patient cross-contamination.
In certain countries in Central America, South America and the Pacific Rim,
dental care is often limited to the excavation and filling of cavities and other
restorative techniques, reflecting more modest per capita expenditures for
dental care. These markets demand diverse products such as high and low speed
handpieces, restorative compounds, finishing devices and custom restorative
devices.
In the People's Republic of China, India, Eastern Europe, the countries of
the former Soviet Union, and other developing countries, dental ailments are
treated primarily through tooth extraction and denture replacement. These
procedures require basic surgical instruments, artificial teeth for dentures and
bridgework, and anchoring devices such as posts.
The Company offers products and equipment for use in markets at each of
these stages of development. The Company believes that as each of these markets
develops, demand for more technically advanced products will increase. The
Company also believes that its recognized brand names, high quality and
innovative products, technical support services and strong international
distribution capabilities position it well to take advantage of any
opportunities for growth in all of the markets that it serves.
United States
The market for professional dental products in the United States has
experienced steady growth in recent years. Statistics published by the U.S.
Department of Health and Human Services indicate that annual United States
spending on dental products and services increased from $39.5 billion to $50.6
billion from 1993 to 1997, or 6.4% per annum.
The Company believes that the United States market will continue to be
influenced by favorable demographic trends, increasing coverage of dental care
by private insurance and government programs, and an intensifying focus on
preventive dental care. The percentage of the United States population over age
65 is expected to more than double by the year 2035, to 20.5%, and this segment
of the population commands a relatively high level of discretionary income. The
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Company believes that as the number of older, more affluent Americans increases,
the demand for restorative and cosmetic dental procedures will increase as these
individuals seek to retain their natural teeth and improve their appearance.
The Company also believes that the United States market will continue to
demand products which reduce the risks of infection and patient
cross-contamination. This demand reflects increasing government regulation,
professional practice guidelines and public attention focused on preventing the
transmission in the dental office of infectious diseases such as hepatitis-B and
the virus that causes acquired immune deficiency syndrome. The Company offers
products to address the growing market for infection control products, such as
sterilizable dental handpieces and cutting instruments, single-use prophylaxis
pastes, disposable prophy angles and air-water syringe tips, and infection
control barriers, and intends to continue to develop and acquire products to
address this market.
DENTSPLY expects insurance coverage of dental care to play an important
role in the United States market. It is generally believed that approximately
40% of the United States population is covered by some form of dental insurance.
While insurance covers a significant portion of expenditures for dental products
and services, the Health Care Finance Review indicates that, in 1997,
approximately 50% of dental expenditures were paid for directly by the consumer.
Products
DENTSPLY's two principal dental product lines are consumable and laboratory
products, and equipment. These products are produced by the Company in the
United States and internationally and are distributed throughout the world under
some of the most well-established brand names and trademarks in the industry,
including ASH(R), CAULK(R), CAVITRON(R), CERAMCO(R), DENTSPLY(R), DETREY(R),
GENDEX(R), MIDWEST(R), R&R(R), RINN(R), TRUBYTE(R), MAILLEFER(R), PROFILE(R),
THERMAFIL(R), ACUCAM(R), SANI-TIP(R), OVATION(TM), ANTAEOUS(R), BEUTELROCK(R)
and ZIPPERER(R). Sales of the Company's professional dental products accounted
for approximately 95% of DENTSPLY's consolidated sales for 1998, 1997 and 1996,
respectively.
Consumable and Laboratory Products. Consumable and laboratory products
consist of dental sundries used in dental offices in the treatment of patients
and in dental laboratories in the preparation of dental appliances, such as
crowns and bridges. The Company manufactures approximately 1,200 different
consumable and laboratory products marketed under more than 70 brand names.
Consumable and laboratory products include:
Resin-Based and Porcelain Artificial Teeth: Artificial teeth replace
natural teeth lost through deterioration, disease or injury. The Company's
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artificial teeth are marketed under the TRUBYTE(R) and PORTRAIT(R) IPN(R)
brand names, among others, and are produced by the Company in York,
Pennsylvania, Brazil and China in some 15,000 combinations of shapes, sizes
and shades.
Impression Materials: Impression materials are used to make molds of
teeth for fitting crowns, bridges and dentures. DENTSPLY's JELTRATE(R),
BLUEPRINT(TM), REPROSIL(R) and AQUASIL LV Smart Wetting Impression Material
are designed to increase the rate of successful impressions without retakes
and to set quickly to minimize patient discomfort.
Restorative Materials: Restorative materials are used in sealing,
lining and filling excavated tooth cavities and repairing broken or damaged
teeth, and include amalgams, bonding agents, light-cured composites and
glass ionomer filling materials for more aesthetic restorations. DENTSPLY'S
SUREFIL(TM) High Density Composite Restorative is condensable, just like
amalgam and offers true amalgam-like packability with the aesthetics of a
composite or tooth-colored filling material. SUREFIL(TM) exhibits a natural
appearance but, unlike currently available composites, does not need to be
placed in multiple increments, therefore saving valuable time for the
dentist. These features, combined with fluoride release, assure both the
dentist and patient of strong, long lasting and esthetically pleasing
posterior restorations. In addition, its wear rates are equal to or less
than an amalgam restoration. The Company's DYRACT(R) AP is a patented,
single component restorative material featuring simplicity in delivery
combined with excellence in restorative results. Formulated with a resin
mix, it delivers the compressive strength of a hybrid composite. Due
to its wear resistance and strength, DYRACT(R) AP is indicated for
all classes of cavities. DYRACT(R) Flow is an easy handling flowable
compomer restorative with excellent adaption to tooth structures;
sustained, rechargeable fluoride release; ideal flow consistency for air
abrasion procedures; and availability in seven popular shades. The
Company's PRISMA(R) AP.H(R), PRISMA(R) TPH(R) and TPH SPECTRUM(TM)
universal composite materials permit restorations to be performed on either
the anterior or posterior teeth using the same material. PRINCIPLE(TM)
cement delivers high strength, low solubility and the best dimensional
stability of the recent generation of cements. These properties are
combined with self adhesion, ease of use and high sustained, rechargeable
fluoride release of traditional glass ionomers. Added photo initiators
allow PRINCIPLE(TM) cement to be dual cured, providing "on command", easy
cleanup. PRIME & BOND(R) NT (Nano Technology) is a revolutionary dental
adhesive material that incorporates the use of nanofillers which are 100
times smaller than traditional fillers and have the perfect size to
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penetrate the typical micro-sized keyhole etch pattern of enamel as well as
the smallest dentin channels. These tiny particles support the natural
components of dentin while building the foundation for a perfect link
between tooth structure and restorative materials. PRIME & BOND(R) NT is a
true one coat liquid adhesive system offering the dentist reduced procedure
time coupled with excellent physical properties. It can be used in
composite or compomer tooth restorations, cementation procedures, adhesive
repairs and as an adhesive cavity varnish. DENTSPLY also markets the
DISPERSALLOY(R), UNISON(R) and MEGALLOY(R) lines of restorative amalgams;
and DELTON(R) and DELTON(R) PLUS (with fluoride release) brand dental
sealants.
Crown and Bridge Porcelains and Ceramics: These porcelain and ceramic
products are used by dental laboratories in making crowns, bridges, inlays
and onlays for restorative dental procedures, where aesthetics are
particularly important, and to provide functional biting and
chewing surfaces that appear and feel natural. The Company produces
specialty crown and bridge porcelain materials and fully automatic
programmable porcelain furnaces, as well as castable ceramic materials,
used by dental laboratories. Product offerings include the CERAMCO(R) line,
and in Europe, the DETREY(R) CARAT(R) line of specialty crown and bridge
porcelain products for use as fixed prosthetics. FINESSE(TM) Porcelain from
Ceramco, features superb shade matching and permits the dental laboratory
to fire restorations with extraordinary aesthetics. FINESSE(R) Porcelain
restorations also allow dentists to adjust and repolish at chairside
without reglazing. FINESSE(TM) All Ceramic provides superior wear
characteristics, kindness to opposing detition and chair side
polishability on a ceramic core. The translucent fluorescent ceramic
substructure helps optimize esthetics of DENTSPLY's low fusing porcelains.
Endodontic Instruments and Materials: These products are used in root
canal treatment of severely damaged or decayed teeth. Through its
Maillefer, DENTSPLY Endodontics and VDW subsidiaries, the Company has an
extensive endodontic product offering including broaches, files, and other
endodontic materials and instruments. The SUREFLEX(R) Nickel Titanium File
features superior flexibility and shape memory which allows the instrument
to follow the path of the root canal. The Company's PROFILE(R) SERIES 29(R)
line of endodontic files offer a standard 29 percent increase between the
tip diameters of each size instrument for a smooth, progressive enlargement
from one file to the next. PROFILE(R) .04 TAPERS(R) feature non-standard
tapers constructed from super-flexible nickel titanium for use in a
controlled, slow-speed, high-torque rotary dental handpiece. PROFILE(R) GT
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Rotary Engine Driven Nickel Titanium Endodontic Files are specifically
designed with unparalleled strength and flexibility to simplify root canal
operations, by giving dentists an automated method to achieve the
clinically necessary root canal funnel shape. They are used in conjunction
with PROFILE(R) .04 TAPERS(R) to efficiently create a predefined taper.
THERMASYSTEM(R) PLUS includes THERMASEAL(R) PLUS, a patented root canal
filling material which is fast, effective and tissue- friendly and the
THERMAPREP(R) PLUS Oven which cuts required heating time for plastic
THERMAFIL(R) PLUS Obturators from up to seven minutes to as little as
seventeen seconds. THERMASYSTEM(R) PLUS provides a three dimensional root
canal fill in a fraction of the time it takes for traditional lateral
condensation procedures. Pro Root MTA(TM) is a root repair material that
uses water based chemistry which allows for normal setting in the presence
of moisture. It out performs other material in providing a stable barrier
to bacterial and fluid leakage. Pro Root MTA(TM) is unlike any other root
canal repair material, in that in many cases where a tooth was previously
considered a lost cause, it may now be saved. GLYDE FILE PREP(TM) is a new
root canal therapy gel used to facilitate the cleaning and shaping of the
root canal. Used as a lubricant and irrigating agent, it lifts debris
coronally while it cleans and lubricates. It offers two distinct
advantages. First, the packaging respects asepsis concerns. The disposable
syringe tips eliminate the possibility of cross contamination and allow for
clean, single-dose dispensing. Second, GLYDE FILE PREP(TM) has a gel-like
consistency that clings better to files. This improved consistency makes
its placement in the canal easier and more convenient. It works by
effervescing when it reacts with sodium hypochlorite. The resulting
bubbling effect lifts dentinal mud and necrotic tissue for easy removal. It
also encourages lightening of the tooth if discloration exists from
non-vitality. The use of sodium hypochlorite promotes internal bleaching of
the tooth. This process is enhanced by the release of oxygen from the
carabamide peroxide.
Protective Supplies: These products are designed to ameliorate
possible sources of patient cross-contamination of infectious disease, and
include RITE-ANGLE(R) and NUPRO(R) Disposable Prophy Angles (disposable
mechanical devices used by dentists and hygienists to clean and polish
teeth), hand cleansers, disposable barriers, enzymatic cleansers, needle
stick prevention devices and disposable air-water syringe tips. The
SANI-TIP(R) Disposable Air-Water Syringe Tip features a central water
channel encircled by six separate air channels. This innovative design,
when coupled with a SANI-TIP(R) adaptor, produces precise separation or
atomization of air and water while its clear cellulose- based plastic does
not obstruct the practioner's vision and allows office staff to determine
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if a tip was previously used.
Dental Cutting Instruments: The Company distributes
MIDWEST(R) carbide and specialty burs. Regular carbide burs are the most
commonly used dental cutting instruments in the North American market.
Carbide burs mounted in handpieces are used as milling tools. While these
burs are primarily used for cavity excavation, the variety of available
shapes allows for alternative uses such as limited trimming and finishing
techniques. Specialty burs are designed to cut and remove metal alloy
dental restorations, to produce smooth surfaces on composite materials,
amalgams, gold, enamel and dentin, and for gross reduction of tooth anatomy
in preparation for fitting crowns and normal cavity excavations.
Tooth Whitener: DENTSPLY also offers a tooth whitening system. The
NUPRO(R) Gold Tooth Whitening System is a complete, professionally
administered program. Patients receive a tooth whitening system in a
convenient, easy-to-use take home kit. Clinical studies for this innovative
product showed that teeth averaged eight shades whiter which far exceeds
the American Dental Association recommendation which states that whiteners
must change teeth by a least two shades.
Other Consumable and Laboratory Products: Other products produced by
the Company for use in dental offices and laboratories include the
VERTEX(R) disposable articulator used in dental laboratories to simulate
the dynamic movement of teeth against one another; pre-sterilized dental
needles in a variety of gauges and lengths; and NUPRO(R) prophylaxis paste
that is used in cleaning and polishing teeth. NUPRO(R) Prophy Paste BUBBLE
EXTREME(TM) is a new "big bubble" bubble gum flavor. This completes the
seven flavors NUPRO(R) Prophy Paste line which has been a favorite in the
dental office for years for its excellent stain removal, superior polishing
and great flavors.
Dental Equipment. DENTSPLY's dental equipment product lines include high
and low speed handpieces, intraoral lighting systems, ultrasonic scalers and
polishers, x-ray systems and related support equipment and accessories, and air
abrasion systems.
Handpieces: Under the MIDWEST(R) brand name, DENTSPLY manufactures and
distributes a line of high-speed and low-speed air-driven handpieces and
intraoral lighting systems. High-speed handpieces are the primary
instruments utilized by dentists for restorative, prosthodontic and
aesthetic procedures. Low-speed handpieces may also be used in these
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procedures and in procedures which require more control and higher torque,
such as removal of soft decay, tooth cleaning and polishing, and chairside
adjustment of dentures. Handpiece intraoral lighting systems supply light
to the fiber optic bundles in the handpieces through tubes that also
provide air and water to the handpiece. Midwest's RDH(R) Hygienist
Handpiece is a more comfortable, ergonomically sound and lightweight
handpiece for the dental hygienist. Its one piece "twist and click"
connection avoids cumbersome sterilization protocols and provides faster
handpiece changes.
Air Abrasion Unit: The AIRTOUCH(TM) Cavity Preparation System is an
air-abrasion unit that delivers aluminum oxide particles with pressurized
air to cut tooth structure. This unit features directed spray control, an
evacuation system to safely remove the powder from the oral cavity and an
ergonomically designed handpiece. The system is monitored by a highly
sophisticated software program which provides dentists with simple
instructions for basic use and maintenance. The need for anesthetic is
absent from many procedures when using the AIRTOUCH(TM) Cavity Preparation
System and there is a lower level of vibration, pressure and noise when
compared with traditional cavity preparation methods.
Ultrasonic Scalers and Polishers: DENTSPLY manufactures and
distributes the CAVITRON(R) SPS(TM) Ultrasonic Scaler (which uses
ultrasonic waves to remove hardened tooth calculus which results from the
interaction of plaque, saliva and food particles). SPS(TM) stands for
Sustained Performance System, a patent-pending technology which acts much
like an automobile's cruise control that measures tip motion and
compensates for reduction in tip motion once the insert tip contacts the
tooth surface. By doing this, SPS(TM) provides more power for improved
scaling efficiency and permits the dentist to set the power control at a
lower level, providing a more comfortable scaling procedure for the
patient. Additional product offerings include the CAVITRON(R) JET with
SPS(TM) Technology (which combines both ultrasonic scaling and air
polishing prophylaxis in one multi-function unit) and the PROPHY-JET(R) 30
Air Polishing Prophylaxis Unit (which cleans, polishes and buffs the tooth
surface after scaling is completed). DENTSPLY manufactures a variety of
inserts for use with its ultrasonic prophylaxis units. The FOCUSED
SPRAY(TM) Insert brings water directly to the instrument tip and focuses
water where it is most needed. The SLIMLINE(R) Ultrasonic Insert is 40
percent thinner than standard ultrasonic inserts and allows subgingival
ultrasonic instrumentation at depths up to 7 mm. The FSI(R) SLIMLINE(R)
combines the best features of the
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FOCUSED SPRAY(TM) Insert and the SLIMLINE(R) Ultrasonic Insert.
Dental X-Ray Systems: The Company offers a full line of
dental x-ray equipment for intraoral, panoramic and cephalometric
procedures. Intraoral films provide a view of a particular area of tooth
and jaw structure. Panoramic x- rays utilize a moving x-ray tube and
provide an image of the entire oral cavity, an image that is particularly
valuable to oral surgeons and orthodontists. The ORTHORALIX(R) 9000
panoramic x-ray system comes with a mechanical drive and advanced
microprocessor control which minimizes spinal shadow for sharp detail
throughout the x-ray film. A scientifically derived, software controlled
motion path ensures proper density, contrast and sharpness on any size
patient. Cephalometric systems permit precise, repeatable positioning of
the patient's skull so that images taken at different times can be
compared. The Company markets a real time, digital video x-ray system,
VISUALIX(TM). This system uses a solid state, intraoral x-ray sensor and
associated computer which allows the dentist to produce radiographic images
without using film. X-rays generated by a standard system strike the
sensor. The image is then displayed on a computer screen, where it can be
enlarged, enhanced and manipulated. The image may also be stored for future
retrieval. The extremely sensitive sensor provides excellent image quality
with a significantly lower x-ray dosage compared to film. The DENOPTIX(R)
Digital Imaging System is a patented, digital x-ray imaging product
compatible with the installed base of both intraoral and panoramic units.
This system uses storage phosphor imaging technology to create digital
x-ray images on imaging plates. These imaging plates are thin and flexible
and are available in every intraoral and panoramic size. They are reusable,
do not require chemical processing like conventional film, and allow the
dentist to reduce the amount of radiation to the patient by as much as 90%.
When placed in a laser scanner, the information on the imaging plate is
converted to a digital image via a computer. Imaging software is then used
to enhance the image through magnification, sharpening, inverting,
reversing, adding color or embossing for simulated three-dimensional depth.
The DENOPTIX(R) Ceph System is designed to produce superior digital images
for cephalometric, panoramic and intraoral x-ray systems. It will
especially benefit orthodontists and oral surgeons in planning their
treatment. The DENOPTIX(R) Ceph System is compatible with most software
used for treatment planning and practice management. Both VISUALIX(TM) and
DENOPTIX(R) digital imaging systems use VIXWIN 32 Software, a 32 bit
imaging software which enhances the features of both systems.
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X-Ray Support Equipment: Under the RINN(R) brand name, DENTSPLY
manufactures and distributes x-ray film mounts, film holders and related
equipment and accessories. X-ray film mounts are used as organizing,
storage and retrieval holders for dental x-ray films. Film holders are film
positioning devices used in taking dental x-ray films which ensure the
alignment of the x-ray beam to the intraoral film. Equipment and
accessories include film viewers, film duplicators, chair-side darkrooms,
patient aprons, developing chemicals and x-ray collimating devices.
The GXP(R) Processor, which develops intraoral, panoramic, and
cephalometric x-ray film, features a closed chemical recirculation system
so that potentially environmentally hazardous solutions may be disposed of
properly. Film enters and exits in the front of the processor, thereby
allowing placement of the unit flush against a wall to conserve space.
The Company offers SOFTDENT(R) practice management software through its
InfoSoft division. This fully integrated software is used in managing both the
dental "front" office as well as in maintaining a data base of information
generated in the operatory's clinical environment. SOFTDENT(R) is used in more
than 11,000 dental offices throughout the United States. The InfoSoft division
is also one of the leading processors of electronic dental insurance claims in
the United States. InfoSoft also provides statement preparation and mailing at a
substantial savings over what dentists can do on their own.
DENTSPLY also supplies specialty chemical binders, refractory particles,
investment mold materials and related products to the precision investment
casting industry, which produces metal parts of complex geometry and "near net"
shapes requiring little or no subsequent machining or finishing. Marketing,
Sales and Distribution
The market for DENTSPLY's dental products is primarily comprised of
dentists, dental hygienists, dental assistants, dental laboratories and dental
schools. DENTSPLY focuses its primary marketing efforts on the dental
professionals who are the end users of its products. DENTSPLY employs highly
trained, product-specific sales and technical staffs to provide comprehensive
marketing and service tailored to the particular sales and technical support
requirements of its customers. DENTSPLY's marketing efforts seek to capitalize
on the strength of the Company's brand names and international infrastructure to
expand sales of new and existing products throughout the world, including
emerging dental markets in the Pacific Rim, Central and South America and
Eastern Europe.
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DENTSPLY's product-specific sales force is divided into domestic and
foreign field selling organizations, each of which is responsible for
maintaining contact with both dealers and dental professionals. The dental sales
force includes approximately 350 domestic representatives, approximately 450
international representatives and approximately 50 telemarketers who support the
domestic representatives. This sales force is further divided into product-based
teams. Each specialized sales force tailors its sales strategy to the particular
sales and technical support requirements of its customers. Sales personnel
attend over 100 dental trade shows each year where the Company's products are
exhibited to dental professionals and dealers. Sales personnel also routinely
participate with dealers to disseminate product information and conduct product
demonstrations, seminars, study groups and lectures for dental professionals. In
addition, DENTSPLY invests significant amounts in advertising in national and
international dental publications.
DENTSPLY distributes its dental products primarily through approximately
350 domestic and over three thousand foreign dealers and importers. While the
overwhelming majority of DENTSPLY's products are distributed through dental
dealers, certain highly technical products such as the Company's CERAMCO(R) line
of crown and bridge porcelain products, DENTSPLY Endodontics' instruments and
materials and GAC's orthodontic appliances are sold directly to the dental
laboratory or dentist.
The Company operates in one operating segment within the meaning
of SFAS 131. See Note 4 - "Segment and Geographic Information".
DENTSPLY also maintains ten educational facilities. The Company's
facilities in York, Pennsylvania; Burlington, New Jersey; Dreieich, Germany; and
Weybridge, England are used for training, product demonstrations and seminars
and to promote interest in and understanding of the use of DENTSPLY's dental
laboratory products. The DENTSPLY Educational Center in York provides
personalized training in both fixed and removable prosthodontic specialties.
Additional teaching facilities are maintained in Milford, Delaware; Konstanz,
Germany; Ballaigues, Switzerland; Hong Kong, China; Mexico City, Mexico and
Munich, Germany for training dental professionals in the use of consumable
dental products. The Company also offers many seminars throughout the world in
such areas as endodontics, crown and bridge porcelain and ceramics and
restoratives.
Product Development
During 1998, 1997 and 1996, approximately $18.2 million, $16.8 million and
$14.7 million, respectively, was invested by the Company in connection with the
development of new products and in the improvement of existing products.
DENTSPLY employs over 200 scientists, engineers and technicians dedicated to
12
product development. The Company believes that its product development programs
are critical in meeting market demands and achieving future growth. The Company
also sponsors independent clinical research projects aimed at developing,
adapting and testing new technologies for use in DENTSPLY products. From time to
time, the Company contracts with independent consultants and engineers to
augment efforts to develop new products.
Manufacturing and Technical Expertise
DENTSPLY believes that its manufacturing capabilities are important to its
success. The Company continues to automate its global manufacturing operations
in order to remain a low cost producer.
The manufacture of the Company's products requires substantial and varied
technical expertise. Complex materials technology and processes are necessary to
manufacture the Company's products.
The manufacture of artificial teeth and dental composites involves
expertise in polymer chemistry. A polymer is a compound of high molecular weight
derived through the combination of many smaller molecules or by the condensation
of many smaller molecules through the elimination of water or alcohol. DENTSPLY
manufactures certain lines of artificial teeth by a process that disperses the
polymeric molecules found within cross-linked polymers, thereby improving the
tooth's resistance to blanching, whitening, crazing and disintegration. Another
line of artificial teeth utilizes an ultra-high viscosity polypropylene that
significantly increases wear resistance.
Visible light-cured composites utilize a single paste that immediately
polymerizes when exposed to a light source. DENTSPLY's PRISMA(R) TPH(R)
light-cured composites contain non-radiopaque fillers of approximately .02-.08
microns in size. The small size of this filler increases the bonding power of
the composite. It also permits the material to be polished in order to more
accurately replicate the color of a natural tooth. Basic, self-cured
(self-hardened) composites are formed by combining two pastes that trigger
polymerization when reacted.
Nanofiller technology adds tiny nanofillers to PRIME & BOND(R) NT,
DENTSPLY's new one-bottle bonding agent. Nanofillers, which are 100 times
smaller than the fillers in hybrid composite, allow PRIME & BOND(R) adhesive to
thoroughly penetrate dentin tubules with only one application. Nanofillers also
fill and reinforce both the hydride layer as well as the collagen fibril which
conventional adhesives may not be able to achieve. PRIME & BOND(R) NT features
application in a one-coat technique, reducing treatment steps and chair time. It
13
has superior stress resistance, enhanced marginal integrity and is suitable for
both dentin and enamel with a strong and durable bond.
DENTSPLY's new SUREFIL(TM) light cured High Density Composite Restorative
utilizes "interlocking particle technology", developed by DENTSPLY, to
synergistically couple the proven performance of the urethane modified Bis-GMA
resin system with filler particle composition, proportion, size distribution and
morphology. This unique technology provides an equivalent alternative to
mercury-silver amalgam. SUREFIL(TM) matches the handling, strength and
durability of classic amalgam, combined with the appearance of natural
dentition. SUREFIL(TM) places, packs, sculpts and finishes remarkably similar to
amalgam.
The Company manufactures high quality endodontic instruments using
production equipment designed and manufactured in-house. In general, the
equipment used is not available on the external market.
Dental handpiece manufacturing technology requires precision machining of
component parts to extremely tight tolerances in order to accommodate the
operating speed of the air-driven turbine, which exceeds 350,000 r.p.m. in high
speed handpieces, and the wide range of applications for which the unit is used.
These tolerances require dimensional machining to as little as 15 millionths of
an inch to produce the delicate balance necessary for a quiet, smooth-running
turbine with minimal vibration. The Company utilizes "computer numerically
controlled" (CNC) machines and computer-assisted design software in its
handpiece manufacturing processes.
Production of the Company's x-ray products involves a variety of
manufacturing disciplines. For example, the manufacture of x-ray tubes requires
expertise in high-temperature metallurgy, sophisticated glass blowing
techniques, and the ability to evacuate molecular impurities from the x-ray tube
through degasification. The Company also designs and fabricates printed circuit
boards, assembles electrical harnesses, fabricates sheet metal, and engages in
precision machining, painting and high-tension coil winding in connection with
the manufacturing of its x-ray products.
Foreign Operations
The Company conducts its business in over 100 foreign countries,
principally through its foreign subsidiaries which operate 43 foreign facilities
(including 15 manufacturing operations). DENTSPLY has a long-established
presence in Canada and in the European market, particularly in Germany,
Switzerland and England. The Company also has a significant market presence in
Central and South America, Australia, China (including Hong Kong), Thailand,
India, Philippines, Taiwan, Korea and Japan. DENTSPLY has established marketing
activities in Moscow, Russia to serve the countries of the former Soviet Union.
14
In 1996, a wholly-owned subsidiary, including a manufacturing facility, was
established in the People's Republic of China. Manufacturing operations in India
also commenced in 1996. During 1998, wholly owned subsidiaries were established
in Taiwan, Korea, Colombia and Chile.
For 1998, 1997 and 1996, the Company's sales outside the United States,
including export sales, accounted for approximately 46%, 48% and 49%,
respectively, of consolidated net sales. For information about the Company's
United States and foreign sales and assets for 1998, 1997 and 1996, see Note 4
of the Notes to the Company's Consolidated Financial Statements.
As a result of the Company's significant international operations, DENTSPLY
is subject to fluctuations in exchange rates of various foreign currencies and
other risks associated with foreign trade. The impact of currency fluctuations
in any given period can be favorable or unfavorable. The impact of foreign
currency fluctuations of European currencies on operating income is partially
offset by sales in the United States of products sourced from plants and third
party suppliers located overseas, principally in Germany and Switzerland.
Competition
The Company conducts its operations, both domestic and foreign, under
highly competitive market conditions. Competition in the dental materials and
equipment industries is based primarily upon product performance, quality,
safety and ease of use, as well as price, customer service, innovation and
acceptance by professionals and technicians. DENTSPLY believes that its
principal strengths include its well-established brand names, its reputation for
high-quality and innovative products, its leadership in product development and
manufacturing, and its commitment to customer service and technical support.
The size and number of the Company's competitors vary by product line and
from region to region. There are many companies which produce some, but not all,
of the same types of products as those produced by the Company. Certain of
DENTSPLY's competitors may have greater resources than does the Company in
certain of its product offerings.
Regulation
The Company's products are subject to regulation by, among other
governmental entities, the United States Food and Drug Administration (the
"FDA"). In general, if a dental "device" is subject to FDA regulation,
compliance with the FDA's requirements constitutes compliance with corresponding
15
state regulations. In order to ensure that dental products distributed for human
use in the United States are safe and effective, the FDA regulates the
introduction, manufacture, advertising, labeling, packaging, marketing and
distribution of, and record-keeping for, such products.
Dental devices of the types sold by the Company are generally classified by
the FDA into a category that renders them subject only to general controls that
apply to all medical devices, including regulations regarding alteration,
misbranding, notification, record-keeping and good manufacturing practices. The
Company believes that it is in compliance with FDA regulations applicable to its
products and manufacturing operations.
All dental amalgam filling materials, including those manufactured and sold
by the Company, contain mercury. Various groups have alleged that dental amalgam
containing mercury is harmful to human health and have actively lobbied state
and federal lawmakers and regulators to pass laws or adopt regulatory changes
restricting the use, or requiring a warning against alleged potential risks, of
dental amalgams. The FDA's Dental Devices Classification Panel, the National
Institutes of Health and the United States Public Health Service have each
indicated that no direct hazard to humans from exposure to dental amalgams has
been demonstrated to them. If the FDA were to reclassify dental mercury and
amalgam filling materials as classes of products requiring FDA premarket
approval, there can be no assurance that the required approval would be obtained
or that the FDA would permit the continued sale of amalgam filling materials
pending its determination.
The introduction and sale of dental products of the types produced by the
Company are also subject to government regulation in the various foreign
countries in which they are produced or sold. Some of these regulatory
requirements are more stringent than those applicable in the United States.
DENTSPLY believes that it is in substantial compliance with the foreign
regulatory requirements that are applicable to its products and manufacturing
operations.
Sources and Supply of Raw Materials
All of the raw materials used by the Company in the manufacture of its
products are purchased from various suppliers and are available from numerous
sources. No single supplier accounts for a significant percentage of DENTSPLY's
raw material requirements.
Trademarks and Patents
The Company's trademark properties are important and contribute to the
Company's marketing position. To safeguard these properties, the Company
maintains trademark registrations in the United States and in significant
international markets for its products, and carefully monitors trademark use
16
worldwide. DENTSPLY owns and maintains several hundred domestic and foreign
patents. The Company believes its patents are important to its business,
although no aspect of its business is materially dependent on any particular
patent.
Employees
As of March 15, 1999, the Company and its subsidiaries had approximately
6,000 employees, of whom approximately 3,225 were engaged in manufacturing
operations, approximately 1,930 were engaged in sales and distribution,
approximately 625 were engaged in finance and administration, and approximately
220 were engaged in research and product development activities. Hourly workers
at the Company's Ransom & Randolph facility in Maumee, Ohio are represented by
Local No. 12 of the International Union, United Automobile, Aerospace and
Agriculture Implement Workers of America under a collective bargaining agreement
that expires on January 31, 2000; and hourly workers at the Company's Midwest
Dental Products facility in Des Plaines, Illinois are represented by Tool & Die
Makers Local 113 of the International Association of Machinists and Aerospace
Workers under a collective bargaining agreement that expires on May 31, 2000.
The Company believes that its relationship with its employees is good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The factors described below are important risk factors. The occurrence of
any of these risks could have a material adverse effect on the Company's
business or operating results, causing actual results to differ materially from
those expressed in forward-looking statements made by the Company or its
representatives in this report or in any other written or oral reports or
presentations. These factors are intended to serve as meaningful cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995.
Rate of Growth
- --------------
The Company's ability to continue to increase revenues depends on a number
of factors, including the rate of growth in the market for dental supplies and
equipment, the ability of the Company to continue to develop innovative and
cost-effective new products, and the acceptance by dental professionals of new
products and technologies. The demand for dental services can be adversely
affected by economic conditions, healthcare reform, government regulation or
more stringent limits in expenditures by dental insurance providers. There is
also a risk that dental professionals may resist new products or technologies or
may not be able to obtain reimbursement from dental insurance providers for the
use of new procedures or equipment.
17
Acquisitions
- ------------
The Company's growth in recent years has depended to a significant extent
on acquisitions. The Company completed fourteen acquisitions in 1996, 1997 and
1998, the largest of which were Tulsa Dental Products LLC in 1996 and GAC, Inc.
and Vereingte Dentalwerke GmbH in 1998. There can be no assurance that the
Company will be able to continue to identify and complete acquisitions which
will add materially to the Company's revenues. Among the risks that could affect
the Company's ability to complete such acquisitions are competition for
appropriate acquisition candidates and the relatively small size of many such
candidates. Moreover, there can be no assurance that the Company will
successfully integrate into its operations the businesses that it acquires or
that any such integration will not take longer and cost more than anticipated.
Fluctuating Operating Results
- -----------------------------
The Company's business is subject to quarterly variations in operating
results caused by seasonality and by business and industry conditions, making
operating results more difficult to predict. The timing of acquisitions, the
impact of purchase accounting adjustments and consolidations among distributors
of the Company's products may also affect the Company's operating results in any
particular period.
Currency Translation and International Business Risks
- -----------------------------------------------------
Because approximately 40% of the Company's revenues have been generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the Company's operating results. The strength of the
U.S. dollar relative to foreign currencies can have a negative effect on the
Company's revenues and operating results. If the U.S. dollar strengthens in
relation to other currencies, the Company's revenues and operating results will
be adversely affected. In addition, approximately 50% of the Company's revenues
result from sales in markets outside of the United States. Europe has been an
important market for the Company, and although Asia and South America have not
historically been the source of significant revenues, the Company has made
investments in Asian and South American markets because it believes that
long-term future growth prospects in these geographic areas are good. Weakness
in economic conditions in Europe could have a material adverse effect on the
Company's sales and operating results, and continued economic turmoil in Asia
and South America could have a material adverse effect on the Company's future
rate of growth.
18
Margin Improvements
- -------------------
The Company strives to increase its margins by controlling its costs and
improving manufacturing efficiencies. However, there can be no assurance that
the Company's efforts will continue to be successful. Margins can be adversely
affected by many factors, including competition, product mix and the effect of
acquisitions.
Ability to Attract and Retain Personnel
- ---------------------------------------
The Company's success is dependent upon its management and employees. The
loss of senior management employees or any failure to recruit and train needed
managerial, sales and technical personnel could have a material adverse effect
on the Company.
Year 2000
- ---------
The following information contains Year 2000 Readiness Disclosures under
the Year 2000 Information and Readiness Disclosure Act.
An issue affecting DENTSPLY and all other companies is whether computer
systems and applications will recognize and process data for the Year 2000 and
beyond. In 1995, the Company commenced an upgrade of its information technology
("IT") systems for all of its locations. A primary software was chosen to
upgrade the Company's computerized business applications to world class
standards and enable the Company to become Year 2000 compliant. Most of the
identification, planning and development phases of the Year 2000 project have
been completed. The Company is in the process of implementing the information
system upgrade with an anticipated completion date of mid-1999.
Possible Year 2000 issues not covered by the IT upgrades are being
addressed separately and may require software replacement, reprogramming or
other remedial action. The Company is engaged in a program to identify affected
systems and applications and to develop a plan to correct any issues in the most
effective manner. The Company is in the process of formulating contingency plans
to the extent necessary in fiscal 1999.
The Year 2000 initiative also presents a number of uncertainties including
the status and planning of third parties. The Company is currently surveying its
significant customers and vendors as to their Year 2000 compliance. Based on the
nature of their responses, the Company will develop contingency plans as
appropriate.
19
There is no assurance that the Year 2000 project will be completed by
mid-1999 or that Year 2000 issues not covered by the IT upgrade will not
interrupt the Company's operations and cause unanticipated costs or reduce
sales. In addition, the Company cannot be certain that its suppliers or
customers will complete Year 2000 conversions which could have a material
adverse impact on the Company's financial results.
Competition
- ------------
The worldwide market for dental supplies and equipment is highly
competitive. There can be no assurance that the Company will successfully
identify new product opportunities and develop and market new products
successfully, or that new products and technologies introduced by competitors
will not render the Company's products obsolete or noncompetitive.
Antitakeover Provisions
- -----------------------
Certain provisions of the Company's Certificate of Incorporation and
By-Laws and of Delaware law could have the effect of making it difficult for a
third party to acquire control of the Company. Such provisions include the
division of the Board of Directors of the Company into three classes, with the
three-year term of each class expiring each year, a provision allowing the Board
of Directors to issue preferred stock having rights senior to those of the
Common Stock and certain procedural requirements which make it difficult for
stockholders to amend the Company's by-laws and which preclude stockholders from
calling special meetings of stockholders. In addition, members of the Company's
management and participants in the Company's Employee Stock Ownership Plan
collectively own approximately 15% of the outstanding Common Stock of the
Company, which may discourage a third party from attempting to acquire control
of the Company in a transaction that is opposed by the Company's management and
employees.
Item 2. Properties
- -------------------
As of March 15, 1999, DENTSPLY maintains manufacturing facilities at the
following locations:
Leased
Location Function or Owned
- -------- -------- --------
York, Pennsylvania Manufacture and distribution of Owned
artificial teeth and other dental
laboratory products; export of
dental products; corporate
headquarters
20
York, Pennsylvania Manufacture and distribution of Owned
dental equipment and preventive
dental products
Des Plaines, Illinois Manufacture and assembly of dental Leased
handpieces and components and
dental x-ray equipment
Franklin Park, Manufacture and distribution of Owned
Illinois needles and needle-related
products, primarily for the dental
profession
Milford, Delaware Manufacture and distribution of Owned
consumable dental products
Las Piedras, Manufacture of crown and bridge Owned
Puerto Rico materials
Elgin, Illinois Manufacture of dental x-ray film Owned
holders, film mounts and
accessories
Maumee, Ohio Manufacture and distribution of Owned
investment casting products
Lakewood, Colorado Manufacture and distribution of Leased
bone grafting materials and
Hydroxylapatite plasma-feed
coating materials
Commerce, California Manufacture and distribution of Leased
investment casting products
Carlsbad, California Manufacture and distribution of Leased(1)
intraoral cameras and computer
imaging systems
Johnson City, Manufacture and distribution of Leased
Tennessee endodontic instruments and
materials
West Palm Beach, Manufacture and distribution of Leased
Florida endodontic instruments and
materials
Petropolis, Brazil Manufacture and distribution of Owned
artificial teeth and consumable
dental products
21
Petropolis, Brazil Manufacture and distribution of Owned
dental anesthetics
Dreieich, Germany Manufacture and distribution of Owned(2)
artificial teeth and other dental
laboratory products
Konstanz, Germany Manufacture and distribution of Owned
consumable dental products;
distribution of dental equipment
Munich, Germany Manufacture and distribution of Owned
endodontic instruments and
materials
Milan, Italy Manufacture and distribution of Leased
dental x-ray equipment
Mexico City, Mexico Manufacture and distribution of Owned
dental products
Plymouth, England Manufacture and distribution of Leased
dental hand instruments
Blackpool, England Manufacture and distribution of Leased
dental materials
Ballaigues, Manufacture and distribution of Owned
Switzerland endodontic instruments
Ballaigues, Manufacture and distribution of Owned
Switzerland plastic components and packaging
material
Le Creux, Manufacture and distribution of Owned
Switzerland endodontic instruments
Moscow, Russia Manufacture and distribution of Leased
consumable dental products
New Delhi, India Manufacture and distribution of Leased
dental products
Tianjin, China Manufacture and distribution of Leased
dental products
(1) Facility closed March 31, 1999
(2) Manufacturing discontinued March 31, 1999.
22
In addition, the Company maintains sales and distribution offices at
certain of its foreign and domestic manufacturing facilities, as well as at four
other United States locations and at 22 international locations in 17 foreign
countries. Of the 26 United States and international sites used exclusively for
sales and distribution, one is owned by the Company and the remaining 25 are
leased. The Company also maintains sales offices in various countries throughout
the world.
DENTSPLY believes that its properties and facilities are well maintained
and are generally suitable and adequate for the purposes for which they are
used.
Item 3. 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 investigating 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 are seeking an order for the Company to
discontinue its practices. A follow on private class action suit on behalf of
dentists was filed January 12, 1999 in the Supreme Court of the State of New
York for New York County. It is the Company's position that the conduct and
activities of the Trubyte Division do not violate the antitrust laws and any
outcome will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of March 15, 1999.
23
Name Age Position
---- --- --------
John C. Miles II 57 Chairman of the Board and Chief
Executive Officer
Gerald K. Kunkle Jr. 52 President and Chief Operating Officer
W. William Weston 51 Senior Vice President
Michael R. Crane 58 Senior Vice President
Thomas L. Whiting 56 Senior Vice President
William R. Jellison 41 Senior Vice President and Chief
Financial Officer
Brian M. Addison 45 Vice President, Secretary and
General Counsel
John C. Miles II was named Chairman of the Board effective May 20, 1998.
Prior thereto, he was Vice Chairman of the Board since January 1, 1997. He was
named Chief Executive Officer of the Company upon the resignation of Burton C.
Borgelt from that position on January 1, 1996. Prior to that he was President
and Chief Operating Officer and a director of the Company since the Merger and
of Old Dentsply commencing in January 1990.
Gerald K. Kunkle Jr. was named President and Chief Operating Officer
effective January 1, 1997. Prior thereto, Mr. Kunkle served as President of
Johnson and Johnson's Vistakon Division, a manufacturer and marketer of contact
lenses, from January 1994 and, from early 1992 until January 1994, was President
of Johnson and Johnson Orthopaedics, Inc., a manufacturer of orthopaedic
implants, fracture management products and trauma devices.
Michael R. Crane was named Senior Vice President of the following profit
centers effective February 1, 1998: Ceramco, CeraMed, Dentsply Argentina,
Dentsply Brazil, Dentsply Canada, Dentsply Mexico, DeTech, Latin American
Export, Rinn, MPL, North American Group Marketing, Preventive Care, Ransom &
Randolph and Trubyte. Effective January 1, 1999, MPL, Rinn and the 1998
acquisition, Crescent, were reassigned from Mr. Crane to Thomas L. Whiting.(1)
Mr. Crane retained responsibilities for Herpo, acquired in May 1998 along with
the remaining profit centers assigned to him effective February 1, 1998. From
January 1, 1996 until February 1, 1998, Mr. Crane was Senior Vice President,
North American Group. Prior to that he was Senior Vice President, Europe,
Mideast, Africa and Commonwealth of Independent States of the Company effective
in early 1995. Prior thereto he served as Senior Vice President, International
Operations of the Company since the Merger, and in a similar capacity with Old
Dentsply commencing in November 1989. Prior to that time, he served as Vice
President Sales/Marketing for Whaledent International, a division of IPCO
Corporation.
W. William Weston was named Senior Vice President of the following profit
centers effective February 1, 1998: DeDent, Dentsply France, Dentsply Italy,
24
Dentsply United Kingdom, L.D. Caulk, SIMFRA, SPAD and StomaDent. Effective
January 1, 1999, Mr. Weston also assumed responsibility for Dentsply Asia,
Dentsply Australia and Dentsply Japan in addition to the profit centers assigned
to Mr. Weston effective February 1, 1998. From January 1, 1996 until February 1,
1998 Mr. Weston was Senior Vice President, European Group. Prior to that Mr.
Weston served as the Vice President and General Manager of DENTSPLY's DeDent
Operations in Europe from October 1, 1990 to January 1, 1996. Prior to that time
he was Pharmaceutical Director for Pfizer in Germany.
Thomas L. Whiting was named Senior Vice President of the following profit
centers effective February 1, 1998: Dentsply Asia, Dentsply Australia, Dentsply
Japan, Gendex, Maillefer, Midwest, New Image, Tulsa Dental, Gendex Germany, and
Gendex Italy. Effective January 1, 1999, Dentsply Asia, Dentsply Australia, and
Dentsply Japan were reassigned from Mr. Whiting to Mr. Weston. Mr. Whiting
retains responsibility for GAC, InfoSoft and VDW, acquired in 1998, along with
the remaining profit centers assigned to him February 1, 1998 and Rinn, MPL and
Crescent reassigned from Mr. Crane. From early 1995 until February 1, 1998 Mr.
Whiting was Senior Vice President, Pacific Rim, Latin America and Gendex; his
responsibilities and title were expanded to encompass Tulsa Dental and New Image
upon the Company's acquisitions of those businesses. Prior to this appointment,
Mr. Whiting was Vice President and General Manager of the Company's L.D. Caulk
Division since the Merger, and prior thereto served in the same capacity with
Old Dentsply since joining Old Dentsply in 1987. Prior to that time, Mr. Whiting
held management positions with Deseret Medical and the Parker-Davis Company.
William R. Jellison was named Senior Vice President and Chief Financial
Officer of the Company effective April 20, 1998. Prior to that time, Mr.
Jellison held the position of Vice President of Finance, Treasurer and Corporate
Controller for Donnelly Corporation of Holland, Michigan since 1994. From 1991
to 1994, Mr. Jellison was Donnelly's Vice President of Financial Operations,
Treasurer and Corporate Controller. Prior to that, he served one year as
Treasurer and Corporate Controller, and in other financial management positions
for Donnelly. Mr. Jellison is a Certified Management Accountant.
Brian M. Addison has been Vice President, Secretary and General Counsel of
the Company since January 1, 1998. Prior to that he was Assistant Secretary and
Corporate Counsel since December 1994. From August 1994 to December 1994 he was
a Partner at the Harrisburg, Pennsylvania law firm of McNees, Wallace & Nurick.
Prior to that he was Senior Counsel at Hershey Foods Corporation.
(1) The reassignment of profit centers among Messrs. Crane, Weston and Whiting
was part of the implementation of a new organizational structure for the
Company's profit center locations.
25
PART II
Item 5. Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters
- -------------------
The information set forth under the caption "Supplemental Stock
Information" in Part IV of this Annual Report on Form 10-K is incorporated
herein by reference in response to this Item 5.
Item 6. Selected Financial Data
- --------------------------------
The information set forth under the caption "Selected Financial Data" in
Part IV of this Annual Report on Form 10-K is incorporated herein by reference
in response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
- -----------------------------------
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part IV of this
Annual Report on Form 10-K is incorporated herein by reference in response to
this Item 7.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
The table below provides information about the Company's market sensitive
financial instruments and includes "forward-looking statements" that involve
risks and uncertainties. Actual results cold differ materially from those
expressed in the forward-looking statements. The Company's major market risk
exposures are changing interest rates, primarily in the United States and
movements in foreign currency exchange rates. The Company's policy is to manage
interest rates through the use of floating rate debt and interest rate swaps to
adjust interest rate exposures when appropriate, based upon market conditions. A
portion of the Company's borrowings are denominated in foreign currencies which
exposes the Company to market risk associated with exchange rate movements. The
Company's policy generally is to hedge major foreign currency exposures through
foreign exchange forward contracts. These contracts are entered into with major
financial institutions thereby minimizing the risk of credit loss. The Company
does not hold or issue derivative financial instruments for speculative or
trading purposes. The Company is subject to other foreign exchange market risk
exposure as a result of non-financial instrument anticipated foreign currency
cash flows which
26
are difficult to reasonably predict, and have therefore not been included in the
table below. All items described are non-trading and are stated in U.S.
dollars.
27
Fair
There- Value
Expected Maturity Dates 1999 2001 2002 2003 after Total 12/31/98
(in thousands) -------- -------- -------- -------- ------ -------- --------
ASSETS
Forward purchase
agreements
Swiss denominated $ 7,600 $ 7,600 $ 7,600
Dollar denominated 1,200 1,200 1,254
DEBT
Current:
Dollar denominated 2,400 2,400
Average interest rates 7.0%
Hong Kong denominated 3,718 3,718
Average interest rates 6.1%
Duetschmark denominated 2,167 2,167
Average interest rates 4.1%
Non-current:
Sterling denominated 13,608 13,608
Average interest rates 7.2%
Swiss Franc denominated 16,051 16,051
Average interest rates 1.8%
Australian $ denominated 3,061 3,061
Average interest rates 5.4%
US$ denominated 100,000 100,000
Average interest rates 5.6%
Interest rate swaps 40,000 20,000 20,000 80,000 (2,579)
28
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information set forth under the captions "Consolidated Statements of
Income," "Consolidated Balance Sheets," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements," "Management's Financial Responsibility" and
"Independent Auditors' Report" of KPMG LLP in Part IV of this Annual Report on
Form 10-K is incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on
- ---------------------------------------------------------
Accounting and Financial Disclosure
- -----------------------------------
Not applicable.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the captions "Election of Directors", "Section 16(a) Beneficial
Ownership Reporting compliance" and "Other Matters" in the Proxy Statement is
incorporated herein by reference in response to this Item 10.
Item 11. Executive Compensation
- --------------------------------
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management
- ----------
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the subcaptions "Compensation of
Directors", "Human Resources Committee Interlocks and Insider Participation"
and "Reports on Executive Compensation" in the Proxy Statement is incorporated
herein by reference to this Item 13.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
- ----------------------------------------------------------------
Form 8-K
- --------
Sequential
(a) Documents filed as part of this Report Page No.
-------------------------------------- ----------
1. Supplemental Stock Information 36
2. Selected Financial Data 37
3. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 38
4. Financial Statements and Supplementary
Data
--------------------------------------
The following consolidated financial
statements of the Company are filed as
part of this Annual Report on Form 10-K:
Management's Financial Responsibility 45
Independent Auditors' Report of
KPMG LLP 46
Consolidated Statements of Income
for the years ended December 31,
1998, 1997 and 1996 47
Consolidated Balance Sheets as of
December 31, 1998 and 1997 48
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 1998, 1997 and
1996 49
Consolidated Statements of Cash
Flows for the years ended
December 31, 1998, 1997 and 1996 52
Notes to Consolidated Financial
Statements 56
31
Sequential
5. Financial Statement Schedules Page No.
----------------------------- ----------
The following financial statement
schedule is filed as part of
this Annual Report on Form 10-K:
Schedule II - Valuation and qualifying 77
accounts
Financial statement schedules not
listed above have been omitted because
they are inapplicable, are not required
under applicable provisions of
Regulation S-X, or the information that
would otherwise be included in such
schedules is contained in the
registrant's consolidated financial
statements or accompanying notes.
6. Exhibits. The Exhibits listed below are filed or
incorporated by reference as part of this Annual
Report on Form 10-K.
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws, as amended (2)
4.1 364-Day and 5-Year Competitive Advance,
Revolving Credit and Guaranty Agreements
dated as of October 23, 1997 among the
Company, the guarantors named therein,
the banks named therein, the Chase
Manhattan Bank as Administrative Agent,
and ABN Amro Bank, N.V. as Documentation
Agent. (11)
10.1 1992 Stock Option Plan adopted May 26,
1992 (4)
10.2 1993 Stock Option Plan (2)
10.3 1998 Stock Option Plan (1)
10.4 Nonstatutory Stock Option Agreement
between the Company and Burton C.
Borgelt (3)
10.5 (a) Employee Stock Ownership Plan as amended
effective as of December 1, 1982,
restated as of January 1, 1991 (7)
(b) Second amendment to the DENTSPLY
Employee Stock Ownership Plan (10)
32
(c) Third Amendment to the DENTSPLY
Employee Stock Ownership Plan
10.6 (a) Retainer Agreement dated December 29,
1992 between the Company and State Street
Bank and Trust Company ("State Street")
(5)
(b) Trust Agreement between the Company and
State Street Bank and Trust Company dated
as of August 11, 1993 (6)
(c) Amendment to Trust Agreement between the
Company and State Street Bank and Trust
Company effective August 11, 1993 (6)
10.7 Employment Agreement dated January 1,
1996 between the Company and Burton C.
Borgelt (9)*
10.8 (a) Employment Agreement dated as of
December 31, 1987 between the Company
and John C. Miles II (5)*
(b) Amendment to Employment Agreement between
the Company and John C. Miles II dated
February 16, 1996, effective January 1,
1996 (9)*
10.9 Employment Agreement dated as of December
31, 1987, as amended as of February 8,
1990, between the Company and Leslie A.
Jones (5)*
10.10 Employment Agreement dated as of December
10, 1992 between the Company and Michael
R. Crane (5)*
10.11 Employment Agreement dated as of December
10, 1992 between the Company and Edward
D. Yates (5)*
10.12 Employment Agreement dated January 1,
1996 between the Company and W. William
Weston (9)*
10.13 Employment Agreement dated January 1,
1996 between the Company and Thomas L.
Whiting (9)*
10.14 Employment Agreement dated October 11,
1996 between the Company and Gerald K.
Kunkle Jr. (10)*
10.15 Employment Agreement dated April 20,
1998 between the Company and William R.
Jellison
10.16 Employment Agreement dated September 10,
1998 between the Company and Brian M.
Addison
10.17 Midwest Dental Products Corporation
Pension Plan as amended and restated
effective January 1, 1989 (7)*
33
10.18 Revised Ransom & Randolph Pension Plan,
as amended effective as of September 1,
1985, restated as of January 1, 1989 (7)*
10.19 DENTSPLY International Inc. Directors'
Deferred Compensation Plan effective
January 1, 1997 (10)*
10.20 Asset Purchase and Sale Agreement, dated
January 10, 1996, between Tulsa Dental
Products, L.L.C. and DENTSPLY
International Inc. (8)
10.21 Supplemental Executive Retirement Plan
effective January 1, 1999
21.1 Subsidiaries of the Company
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- -------------------
* Management contract or compensatory plan.
(1) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 333-56093).
(2) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-71792).
(3) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-79094).
(4) Incorporated by reference to exhibit included in the
Company's Registration Statement on Form S-8 (No. 33-52616).
(5) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993, File No. 0-16211.
(6) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 0-16211.
(7) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
December 31, 1994, File No. 0-16211.
(8) Incorporated by reference to exhibit included in the
Company's Current Report on Form 8-K dated January 10,
1996, File No. 0-16211.
(9) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 0-16211.
34
(10) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 0-16211.
(11) Incorporated by reference to exhibit included in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 0-16211.
Loan Documents
The Company and certain of its subsidiaries have entered into various loan
and credit agreements and issued various promissory notes and guaranties of such
notes, listed below, the aggregate principal amount of which is less than 10% of
its assets on a consolidated basis. The Company has not filed copies of such
documents but undertakes to provide copies thereof to the Securities and
Exchange Commission supplementally upon request.
(1) Master Grid Note dated November 4, 1996 executed in favor of The Chase
Manhattan Bank in connection with a line of credit up to $20,000,000
between the Company and The Chase Manhattan Bank.
(2) Agreement dated December 19, 1997 between Midland Bank PLC and Dentsply
Limited for 2,500,000 pounds.
(3) Promissory Note dated August 14, 1998 in the principal amount of $6,000,000
of the Company in favor of First Union National Bank.
(4) Credit Agreement dated September 14, 1998 between Dentsply Canada Limited
("DCL") and Bank of Montreal for C$3,500,000.
(5) Promissory Note dated December 1, 1995 in connection with a line of credit
up to $20,000,000 between the Company and Mellon Bank.
(6) Form of "comfort letters" to various foreign commercial lending
institutions having a lending relationship with one or more of the
Company's international subsidiaries.
(7) Unsecured Note dated June 26, 1998 between the Company and Harris Trust and
Savings Bank in the principal amount of $500,000.
(b) Reports on Form 8-K
-------------------
The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1998.
* * * * * *
35
Supplemental Stock Information
- ------------------------------
The common stock of the Company is traded on the NASDAQ National Market
under the symbol "XRAY". The following table sets forth high and low sale prices
of the Company's common stock for the periods indicated as reported on the
NASDAQ National Market (after giving effect to the two-for-one stock split
effective on October 29, 1997):
Market Range of Common Stock Cash
---------------------------- Dividend
1998 High Low Declared
- ---- -------- -------- --------
First Quarter $35-1/4 $26-1/4 $.05125
Second Quarter 34-3/4 23-1/4 .05125
Third Quarter 26-3/4 21-1/4 .05125
Fourth Quarter 28 20 .05625
1997
- ----
First Quarter $27-1/2 $23-3/8 $.04625
Second Quarter 26-3/16 22-5/16 .04625
Third Quarter 28-15/16 24-5/16 .05125
Fourth Quarter 31-3/4 26-1/8 .05125
1996
- ----
First Quarter $20-3/8 $18-3/4 $.04125
Second Quarter 22-3/8 20 .04125
Third Quarter 22-1/4 18-5/8 .04125
Fourth Quarter 24-1/2 20-7/8 .04625
The Company estimates, based on information supplied by its transfer agent,
that there are approximately 15,014 holders of common stock, including 553
holders of record.
36
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Statement of Income Data: (in thousands, except per share amounts)
Net sales $795,122 $720,760 $656,557 $572,028 $524,758
Gross profit 416,423 368,726 324,670 280,852 257,724
Restructuring and other costs 71,500 --- --- --- ---
Operating income from continuing operations 69,852 132,456 119,464 100,735 97,400
Income from continuing operations
before income taxes 55,101 122,006 110,960 90,017 91,662
Net income from continuing operations 34,825 74,554 67,222 53,963 54,144
Discontinued operations and extraordinary items --- --- --- --- 7,854
-------- -------- -------- -------- --------
Net income $ 34,825(1) $ 74,554 $ 67,222 $ 53,963(1) $ 61,998
======== ======== ======== ======== ========
Earnings per Common Share:
Income from continuing operations-basic $ .65 $ 1.38 $ 1.25 $ 1.00 $ .98
Net income-basic .65 1.38 1.25 1.00 1.12
Income from continuing operations-diluted .65 1.37 1.25 .99 .97
Net income-diluted .65 1.37 1.25 .99 1.11
Cash dividends declared per common share .21 .195 .17 .1538 .075
Weighted Average Common Shares Outstanding:
Basic 53,330 53,937 53,840 54,024 55,552
Diluted 53,597 54,229 53,994 54,255 56,094
Balance Sheet Data:
Working capital $128,076 $107,678 $113,547 $122,706(2) $ 92,206(2)
Total assets 895,322 774,376 667,662 582,383(2) 466,930(2)
Total debt 233,761 129,510 101,820 76,291 21,939
Stockholders' equity 413,801 423,933 365,590 315,922 299,337
Average return on stockholders' equity 19.2%(3) 18.9% 19.9% 17.9% 21.8%(4)
Other Data:
Depreciation and amortization $ 37,474 $ 32,405 $ 28,108 $ 21,488 $ 18,133(5)
Capital expenditures 31,430 27,660 20,804(5) 17,421(5) 12,504(5)
Interest expense, net 14,168 11,006 10,071 7,879 6,472
Property, plant and equipment, net 158,998 147,130 141,458 140,101 91,140
Goodwill and other intangibles, net 346,073 336,905 256,199 188,409 176,508
(1) Includes restructuring and other costs of $45.4 million in 1998 and unusual or non-recurring charges of $1.8
million in 1995.
(2) Excludes net assets of discontinued operations.
(3) Excludes income statement effect of restructuring and other costs.
(4) Excludes income statement effect of discontinued operations.
(5) Excludes discontinued operations.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements made by the Company that are forward-looking, including
without limitation, statements containing the words "plans", "anticipates",
"believes", "expects', or words of similar import may be deemed to be
forward-looking statements and 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 set forth in the section "Factors That May
Affect Future Results" in item 1, part 1 of this Annual Report on Form 10-K.
Results of Operations, 1998 Compared to 1997
- --------------------------------------------
Net sales increased $74.4 million, or 10.3% from $720.8 million in 1997 to
$795.1 million in 1998. Acquisitions, net of divestitures, accounted for 7.0% of
the sales growth for the year. Base business sales were up 4.3% due to sales
increases of 7.7% in the U.S. and 2.1% in Europe, offset by a decline of 6.5% in
the Pacific Rim and Latin America. The European base business sales increase
included a decline in sales to the Commonwealth of Independent States (C.I.S.)
and a decline in the German laboratory business sales. Sales in the Pacific Rim
and Latin America were adversely impacted by the downturn in the Asian and Latin
American economies and the termination of distributors in Taiwan, Korea,
Colombia and Chile which were replaced by newly established local DENTSPLY
subsidiaries in 1998. The translation impact of exchange rate fluctuations in
Europe, Asia and Latin America had a negligible impact on sales in 1998. Base
business sales growth in other territories (including Canada, Australia and
Japan) was strong but was offset by the adverse impact of the translation effect
of the strong U.S. dollar.
Gross profit increased $47.7 million, or 12.9% due primarily to higher net
sales and an increase in the gross profit percentage in 1998. As a percentage of
net sales, gross profit increased from 51.2% in 1997 to 52.4% in 1998. Favorable
product and geographical mix, operational improvements and discontinuing the
implant product line all contributed to the improved percentage.
Selling, general and administrative ("SG&A") expenses increased $38.8
million, or 16.4%. As a percentage of sales, expenses increased from 32.8% in
1997 to 34.6% in 1998. The main reasons for the percentage increase were: a
higher expense to sales ratio for businesses acquired during 1998; higher
expenses for upgrading information systems in the United States, Europe and
Asia; bad debt provisions, principally for customers in the C.I.S.; costs
associated with establishing new local DENTSPLY subsidiaries in countries where
third party distributors have been terminated; and increased research and
development expenses.
Restructuring and other costs of $29.0 million were recorded in the second
quarter of 1998. The major component of the charge includes costs of $26.0
million to rationalize and restructure the Company's worldwide laboratory
38
business (primarily for the closure of the Company's German tooth manufacturing
facility). The restructuring is expected to be complete by the end of 1999. The
after-tax cash flow of the charge is expected to be approximately $10-12
million, most of which should occur in 1999.
In the fourth quarter of 1998, the Company took a restructuring charge of
$42.5 million primarily for the write-off of intangibles, including goodwill,
and closing costs associated with the discontinuance of the New Image division
in Carlsbad, California. Following the restructuring, certain intraoral camera
products will be sold and supported by the Gendex Dental X-ray division in Des
Plaines, Illinois.
The increase in net interest expense of $3.2 million was mainly due to debt
resulting from $106.8 million spent for acquisitions and $42.0 million to
repurchase approximately 1.8 million shares of common stock during 1998. Other
expense was $.6 million in 1998 compared to other income of $.6 million in 1997.
The change is primarily due to exchange losses in 1998 compared to a small gain
in 1997.
Income before income taxes decreased $66.9 million from $122.0 million in
1997 to $55.1 million in 1998 mainly due to the $71.5 million of restructuring
and other costs. Without these costs, income before income taxes increased $4.6
million, or 3.8%.
The effective tax rate (before restructuring and other costs) of 36.8% in
1998 compares to 38.9% in 1997. The 1998 rate reflects savings resulting from
federal, state and foreign tax planning.
Net income decreased $39.7 million due to the after-tax cost of $45.4
million for restructuring and other costs. Without these costs, net income
increased $5.7 million, or 7.6% in 1998 due to higher sales, an improvement in
the gross profit percentage and a lower effective tax rate for the Company in
1998.
Basic and diluted earnings per common share were $.65 in 1998 compared to
$1.38 basic and $1.37 diluted earnings per common share in 1997. Both basic and
diluted earnings per common share in 1998 included $.85 per common share for
restructuring and other costs. Without these costs, basic earnings per common
share increased from $1.38 in 1997 to $1.50 in 1998, or 8.7% and diluted
earnings per common share increased from $1.37 to $1.50 in 1998, or 9.5%.
Results of Operations, 1997 Compared to 1996
- --------------------------------------------
Net sales increased $64.2 million, or 9.8% from $656.6 million in 1996 to
$720.8 million in 1997. About one half of this increase was due to strong growth
in the United States from a moderate increase in base business and incremental
sales from acquisitions. The growth in the United States was partially offset by
the adverse impact of the termination of the Implant Distribution Agreement
between Core-Vent Corporation and DENTSPLY in the first quarter of 1997. In
Europe, strong growth in base business plus incremental sales from the
39
acquisitions was adversely impacted by the translation effect of the strong U.S.
dollar. Sales growth in the Pacific Rim and Latin America remained strong.
Gross profit increased $44.1 million, or 13.6% due primarily to higher net
sales. As a percentage of net sales, gross profit increased from 49.5% in 1996
to 51.2% in 1997. The percentage improved in 1997 due to better operating
performance in manufacturing facilities in both the United States and Europe and
a favorable mix of higher margin products in each major geographic region. In
1996, purchase price accounting for the acquisitions of Maillefer Instruments
S.A., Tulsa Dental Products LLC and CeraMed Dental, LLC had an adverse impact on
the gross profit percentage.
SG&A expenses increased $31.1 million, or 15.1%. As a percentage of net
sales, expenses increased from 31.3% in 1996 to 32.8% in 1997. This increase was
mainly due to the high ratio of expenses to sales for certain direct selling
businesses acquired in 1997 which typically have a high ratio of SG&A expenses
to sales; increased amortization from 1997 acquisitions; expansion of the
endodontic sales force and start-up of the group practices business unit in the
United States; continued emphasis on upgrading the information systems in the
United States and Europe; increased spending for the new China subsidiary in the
Pacific Rim; increased research and development expenses; and costs associated
with certain legal proceedings.
The increase in interest expense of $1.6 million was due to acquisition
debt, largely offset by cash generated from operations. Other income was $.6
million in 1997 compared to $1.6 million in 1996. The reduction was primarily
due to a legal settlement of $1.2 million the Company's favor in 1996.
Income before income taxes increased $11.0 million, or 10.0% from $111.0
million in 1996 to $122.0 million in 1997. Net income in 1997 was $74.6 million,
compared with $67.2 million reported in 1996, an increase of 10.9%.
Basic earnings per common share (after giving effect to the two-for-one
stock split effective on October 29,1997) of $1.38 for 1997 increased $.13 or
10.4% from $1.25 in 1996. Diluted earnings per common share of $1.37 for 1997
increased $.12, or 9.6% from $1.25 in 1996.
Foreign Currency
- ----------------
Since approximately 40% of the Company's revenues have been generated in
currencies other than the U.S. dollar, the value of the U.S. dollar in relation
to those currencies affects the results of operations of the Company. The impact
of currency fluctuations in any given period can be favorable or unfavorable.
The impact of foreign currency fluctuations of European currencies on operating
income is partially offset by sales in the U.S. of products sourced from plants
and third party suppliers located overseas, principally in Germany and
Switzerland.
Liquidity and Capital Resources
- -------------------------------
In January 1998, the Company purchased the assets of Procter & Gamble's
40
Blendax Professional Dental Business for approximately DM13 million or $6.9
million. In March 1998, the Company purchased the assets of InfoSoft Inc. for
approximately $8.6 million. In April and December 1998, the Company purchased
100% of the capital stock of GAC International, Inc. for approximately $26.5
million. In May 1998, the Company purchased 100% of the capital stock of Herpo
Productos Dentarios Ltda. for $7.4 million and all of the capital stock of
Crescent Dental Manufacturing Co. for $5.2 million. In December 1998, the
Company purchased all of the capital stock of Vereingte Dentalwerke GmbH and
related companies for approximately $50.9 million in cash and a deferred payment
of $.9 million. These cash transactions were funded from the Company's $175
million and $125 million revolving credit agreements and short-term bank
borrowings.
Investment activities for 1998 included capital expenditures of $31.4
million.
During 1998, the Company repurchased 1.8 million shares of its common stock
for $42.0 million. In December 1998, the Board of Directors authorized for 1999
the repurchase of up to .5 million additional shares of common stock on the open
market or in negotiated transactions. The timing and amounts of any additional
purchases will depend upon many factors, including market conditions and the
Company's business and financial condition.
At December 31, 1998, the Company's current ratio was 1.7 with working
capital of $128.1 million. This compares with a current ratio of 1.6 and working
capital of $107.7 million at December 31, 1997.
Under its revolving credit agreements, the Company is able to borrow up to
$175 million on an unsecured basis through October 2002 and $125 million through
October 1999. The $175 million facility may be extended, subject to certain
conditions, until October 2004. The $125 million 364-day facility terminates in
October 1999, but contains a one-year term-out provision and may be extended,
subject to certain conditions, for additional periods of 364 days. The revolving
credit agreements are unsecured and contain various financial and other
covenants.
Under its bank multi-currency revolving credit agreement, the Company is
able to borrow up to $25 million for foreign working capital purposes on an
unsecured basis through October 1999. The multi-currency facility contains a
one-year term-out provision and may be extended, subject to certain conditions,
for additional periods of 364 days.
The Company has unused lines of credit of $178.5 million at December 31,
1998.
The Company expects to be able to finance its cash requirements, including
capital expenditures, stock repurchases, debt service and acquisitions from
funds generated from operations and amounts available under the Revolving Credit
Agreements.
Cash flows from operating activities were $93.7 million in 1998 compared to
$94.3 million in 1997.
41
Derivative Instruments and Hedging Activities
- ---------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
This Statement is effective for fiscal years beginning after June 15, 1999,
and it may be implemented as of the beginning of any fiscal quarter after June
15, 1998. The Statement must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in contracts that were issued, acquired,
or substantially modified after December 31, 1997 (and, at the company's
election, before January 1, 1998). The transition adjustments resulting from
adopting this statement shall be reported in net income or other comprehensive
income, as appropriate, as the effect of a change in accounting principle and
presented in a manner similar to the cumulative effect of a change in accounting
principle.
The Company has not yet quantified the impacts of adopting this statement
on the financial statements or the risk management processes. Additionally, the
Company expects to adopt this standard in the first quarter of fiscal year 2000.
Start-Up Costs
- --------------
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities". SOP 98-5, which becomes effective for the fiscal year ended
December 31, 1999, sets accounting standards in connection with accounting and
financial reporting related to costs of start-up activities. This SOP requires
that, at the effective date of adoption, costs of start-up activities previously
capitalized be reported as a cumulative effect of a change in accounting
principle, and further requires that such costs incurred subsequent to adoption
be expensed. Management anticipates that adoption of SOP 98-5 will not have a
material effect on the Company's financial position or results of operations.
Year 2000
- ---------
The following discussion contains Year 2000 Readiness Disclosures under the
Year 2000 Information and Readiness Disclosure Acts.
An issue affecting DENTSPLY and all other companies is whether computer
systems and applications will recognize and process data for the Year 2000 and
beyond. The Year 2000 issue arose because many existing computer programs use
42
only the last two digits to refer to a year. These computer programs do not
recognize a year that begins with "20" instead of "19". The inability of many
computer applications to interpret the Year 2000 correctly may cause potential
business disruptions affecting all aspects of normal operations. The Year 2000
issue has global ramifications affecting not only the Company's operations but
also the operations of the Company's suppliers, vendors and customers.
In 1995, the Company commenced an upgrade of its information technology
("IT") systems for all of its locations. A primary software was chosen to
upgrade the Company's computerized business application systems to world class
standards and enable the Company to become Year 2000 compliant. The upgrade
included necessary hardware and software improvements, training, data
conversion, systems testing and implementation, and Year 2000 compliance.
Most of the identification, planning and development phases of the Year
2000 project have been completed. The Company is in the process of implementing
the information system upgrade with an anticipated completion date of mid-1999.
Work has been completed on 95% of North American, 90% of Latin American and
Asian systems, as well as 70% of European systems. To date, the Company has
spent approximately $14.5 million for the IT project. An additional $2.3 million
of spending is anticipated for 1999. These costs encompass the total upgrade of
the Company's manufacturing, distribution and financial reporting systems. The
Company has not deferred other IT projects due to its Year 2000 initiative, but
rather, the Year 2000 initiative has been part of the upgrade of its current IT
system. Possible Year 2000 issues that are not covered by the IT upgrade are
being addressed separately and may require software replacement, reprogramming
or other remedial action. The Company is engaged in a program to identify
affected systems and applications and to develop a plan to correct any issues in
the most effective manner. The Company is in the process of formulating
contingency plans to the extent necessary in fiscal 1999.
The Year 2000 initiative presents a number of uncertainties including the
status and planning of third parties. The Company is currently surveying its
significant customers and vendors as to their Year 2000 compliance. Based on the
nature of their responses, the Company will develop contingency plans as
appropriate. However, the Company has no means of assuring that external
customers and vendors will be Year 2000 compliant. The inability of third
parties to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company.
The Company's Year 2000 remediation efforts along with the information
system upgrade are funded from the Company's operating cash flows and its
borrowing facilities. The following table contains historical and estimated
future costs of the total IT system upgrade, which includes the Year 2000
initiative. Infrastructure and daily IT-related operating expenses have been
excluded from the reported costs.
43
Project Costs Anticipated
To Date Future Costs
------------- ------------
Capital Expenditures $ 7,697 $ 837
Expenses 6,807 1,467
-------- --------
Total $ 14,504 $ 2,304
======== ========
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 will remain 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 will issue 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 intend to keep their books in their respective legacy currency
through a portion of the three year transition period. At this time, the Company
does not expect the reasonable 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.
44
Management's Financial Responsibility
The management of DENTSPLY International Inc. is responsible for the
preparation and integrity of the consolidated financial statements and all other
information contained in this Annual Report. The financial statements were
prepared in accordance with generally accepted accounting principles and include
amounts that are based on management's informed estimates and judgements.
In fulfilling its responsibility for the integrity of financial
information, management has established a system of internal accounting controls
supported by written policies and procedures. This provides reasonable assurance
that assets are properly safeguarded and accounted for and that transactions are
executed in accordance with management's authorization and recorded and reported
properly.
The financial statements have been audited by our independent public
accountants, KPMG LLP, whose unqualified report is presented below. The
independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the internal control structure and perform such tests and
other procedures as they deem necessary to reach and express an opinion on the
fairness of the financial statements.
The Audit Committee of the Board of Directors, consisting solely of outside
Directors, meets with the independent public accountants with and without
management to review and discuss the major audit findings, the adequacy of the
internal control structure and quality of financial reporting. The independent
accountants also have access to the Audit Committee to discuss auditing and
financial reporting matters with or without management present.
John C. Miles II Gerald K. Kunkle William R. Jellison
Chairman and President and Chief Senior Vice President and
Chief Executive Officer Operating Officer Chief Financial Officer
45
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
DENTSPLY International Inc.
We have audited the accompanying consolidated balance sheets of DENTSPLY
International Inc. and subsidiaries as of December 31, 1998 and 19