FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------- EXCHANGE ACT OF 1934. For the Quarterly Period ended January 25, 1997. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------- EXCHANGE ACT OF 1934. Commission File No. 0-20572 PATTERSON DENTAL COMPANY ------------------------ (Exact Name of Registrant as Specified in its Charter) Minnesota 41-0886515 --------- ---------- (State of Incorporation) (IRS Employer Identification No.) 1031 Mendota Heights Road, St. Paul, Minnesota 55120 ---------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (612) 686-1600 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. X Yes No -------- -------- Patterson Dental Company has outstanding 21,692,131 shares of common stock as of February 21, 1997. Page 1 of 12
PATTERSON DENTAL COMPANY INDEX <TABLE> <CAPTION> Page ---- PART I - FINANCIAL INFORMATION <S> <C> Item 1 - Financial Statements 3-7 Condensed Consolidated Balance Sheets as of January 25, 1997 and April 27, 1996 3 Condensed Consolidated Statements of Income for the three months and nine months ended January 25, 1997 and January 27, 1996 4 Condensed Consolidated Statements of Cash Flows for the nine months ended January 25, 1997 and January 27, 1996 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 11 Signatures 12 </TABLE> Safe Harbor Statement Under The Private Securities Litigation Reform Act Of - --------------------------------------------------------------------------- 1995: - ---- This Form 10-Q for the period ended January 25, 1997 contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which may be identified by the use of forward-looking terminology such as "may", "will", "expect", "anticipate", "estimate", "believe", "goal", or "continue", or comparable terminology that involves risks and uncertainties and that are qualified in their entirety by cautionary language set forth in the Company's Form 10-K report filed July 26, 1996, and other documents filed with the Securities and Exchange Commission. 2
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS <TABLE> <CAPTION> January 25, April 27, 1997 1996 ----------- --------- (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents.. $ 11,521 $ 46,056 Receivables, net........... 77,602 77,215 Inventory.................. 68,337 48,787 Prepaid expenses........... 3,137 1,729 Deferred taxes............. 901 898 -------- -------- Total current assets... 161,498 174,685 Property and equipment, net... 35,845 25,740 Intangibles and other......... 44,634 2,375 -------- -------- Total assets........... $241,977 $202,800 ======== ======== </TABLE> LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Current liabilities: <S> <C> <C> Accounts payable..................................$ 54,269 $ 42,520 Accrued payroll expense........................... 11,110 9,504 Other accrued expenses............................ 10,272 8,421 Income taxes payable.............................. 1,001 2,220 Current maturities of long-term debt............. 188 151 -------- -------- Total current liabilities................... 76,840 62,816 Long-term debt......................................... 2,938 3,024 Deferred taxes......................................... 1,167 1,157 -------- -------- Total liabilities........................... 80,945 66,997 Deferred credits....................................... 8,018 8,682 Stockholders' equity: Preferred stock................................... -- 21,885 Common stock...................................... 218 177 Additional paid in capital........................ 54,821 31,435 Cumulative translation adjustment................. (40) (189) Retained earnings................................. 113,915 89,713 Note receivable from ESOP......................... (15,900) (15,900) -------- -------- Total stockholders' equity.................. 153,014 127,121 -------- -------- Total liabilities and stockholders' equity.. $241,977 $202,800 ======== ======== </TABLE> See accompanying notes. 3
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Jan. 25, Jan. 27, Jan. 25, Jan. 27, 1997 1996 1997 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales.................................................................. $176,055 $148,672 $480,126 $426,721 Cost of sales.............................................................. 112,197 96,524 308,979 276,630 -------- -------- -------- -------- Gross profit............................................................... 63,858 52,148 171,147 150,091 Operating expenses......................................................... 49,348 41,368 135,605 118,725 -------- -------- -------- -------- Operating income........................................................... 14,510 10,780 35,542 31,366 Other income and expense: Amortization of deferred credits....................................... 222 221 664 663 Finance income, net.................................................... 76 446 921 1,007 Interest expense....................................................... (179) (96) (438) (307) Profit (loss) on currency exchange..................................... (7) (12) (11) 3 -------- -------- -------- -------- Income before income taxes................................................. 14,622 11,339 36,678 32,732 Income taxes............................................................... 5,576 4,323 13,569 12,398 -------- -------- -------- -------- Net income................................................................. $ 9,046 $ 7,016 $ 23,109 $ 20,334 ======== ======== ======== ======== Net income available for common shareholders............................... $ 9,046 $ 6,861 $ 23,109 $ 19,869 ======== ======== ======== ======== Earnings per common and common equivalent share............................ $ 0.42 $ 0.32 $ 1.07 $ 0.92 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding........... 21,714 21,546 21,655 21,532 ======== ======== ======== ======== </TABLE> See accompanying notes. 4
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended --------------------- Jan. 25, Jan. 27, 1997 1996 -------- -------- <S> <C> <C> Operating activities: Net income ............................................. $ 23,109 $ 20,334 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ....................................... 3,369 2,605 Amortization of goodwill ........................... 915 -- Amortization of deferrals .......................... (664) (656) Bad debt expense ................................... 376 576 Change in assets and liabilities, net of acquired .. 1,604 4,733 -------- -------- Net cash provided by operating activities .................. 28,709 27,592 Investing activities: Acquisitions ........................................... (61,171) (1,585) Additions to property and equipment, net ............... (3,462) (5,304) -------- -------- Net cash used in investing activities ...................... (64,633) (6,889) Financing activities: Common stock issued, net ............................... 1,502 769 Payments and retirement of long-term debt and obligations under capital leases ..................... (100) (86) -------- -------- Net cash provided by financing activities .................. 1,402 683 Effect of exchange rate changes on cash .................... (13) (81) -------- -------- Net increase (decrease) in cash and cash equivalents ....... (34,535) 21,305 Cash and cash equivalents at beginning of period ........... 46,056 13,570 -------- -------- Cash and cash equivalents at end of period ................. $ 11,521 $ 34,875 ======== ======== </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) January 25, 1997 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position as of January 25, 1997, and the results of operations and the cash flows for the periods ended January 25, 1997, and January 27, 1996. Such adjustments are of a normal recurring nature. The results of operations for the quarter and nine months ended January 25, 1997, and January 27, 1996, are not necessarily indicative of the results to be expected for the full year. The balance sheet at April 27, 1996, is derived from the audited balance sheet as of that date. These financial statements should be read in conjunction with the financial statements included in the 1996 Annual Report on Form 10-K. 2. The fiscal year end of the Company is the last Saturday in April. The third quarter and nine months of fiscal year 1997 and 1996 represents the 13 weeks and the thirty-nine weeks ended January 25, 1997 and January 27, 1996, respectively. 3. On July 3, 1996 all 3,552,856 shares of the Company's Preferred Stock Series A held by the Patterson Dental Company Employee Stock Ownership Plan ("ESOP") were converted to 3,837,083 shares of the Company's Common Stock in accordance with the terms of the Preferred Stock Series A. The terms of the constituent instrument defining the rights of holders of the Preferred Stock Series A were not modified; however, upon the conversion of the shares of Preferred Stock Series A to Common Stock, there were no remaining shares of Preferred Stock Series A issued and outstanding. Previously, the ESOP was funded through preferred stock dividends. With the conversion to common stock, the funding of the ESOP will now be reflected as a charge to operating expense. This annual charge is estimated to be approximately $800,000. 4. On September 30, 1996 the Company increased the existing revolving credit agreement from $30 million to $40 million. This agreement provides for unsecured borrowings and sales of installment contract receivables. Also, an additional $20 million revolving line of credit was established. Both lines mature on September 29, 1997 and include similar terms and conditions. 5. On October 1, 1996 the Company purchased the Colwell division of Deluxe Corporation ("Colwell") for an aggregate purchase price of $61.0 million. The acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations are included in the accompanying financial statements since the date of acquisition. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of the periods presented. The pro forma information does not purport to be indicative of 6
the results of operations that would have occurred had the acquisition been made as of those dates or future results. <TABLE> <CAPTION> Nine Months Ended ----------------- January 25, 1997 January 27, 1996 ----------------- ----------------- (In thousands except per share data) <S> <C> <C> Net sales.................... $503,891 $467,724 Net income................... 24,379 18,809 Earnings per share........... $ 1.13 $ 0.85 </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by certain operational data. <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Jan. 25, Jan. 27, Jan. 25, Jan. 27, 1997 1996 1997 1996 -------- ------- -------- ------- <S> <C> <C> <C> <C> Net sales.................................. 100.0% 100.0% 100.0% 100.0% Cost of sales.............................. 63.8% 64.9% 64.4% 64.8% ------ ------ ------ ------ Gross profit............................... 36.2% 35.1% 35.6% 35.2% Operating expenses......................... 28.0% 27.8% 28.2% 27.8% ------ ------ ------ ------ Operating income........................... 8.2% 7.3% 7.4% 7.4% Other income and expense, net.............. 0.1% 0.3% 0.2% 0.3% ------ ------ ------ ------ Income before income taxes................. 8.3% 7.6% 7.6% 7.7% Income taxes............................... 3.2% 2.9% 2.8% 2.9% ------ ------ ------ ------ Net income................................. 5.1% 4.7% 4.8% 4.8% ====== ====== ====== ====== </TABLE> As discussed in Note 5 to the Condensed Consolidated Financial Statements, Patterson purchased the Colwell division of Deluxe Corporation on October 1, 1996. Colwell's sales of $19.7 million for the seventeen weeks ended January 25, 1997 were better than expected. Colwell's higher gross margins had a favorable impact on consolidated gross margins and operating margin for the quarter and nine months ended January 25, 1997. The acquisition of Colwell utilized all of the Company's 7
excess cash and increased borrowings against the company's revolving line of credit, increasing interest expense and reducing interest income for the quarter and nine months. As of January 25, 1997, all borrowings under the revolving line of credit associated with the acquisition of Colwell were paid down through internally generated cash. Colwell's impact on consolidated operating earnings was $3.3 million for the quarter and $4.4 million for the nine month period. It is expected to have a continuing positive effect on operating earnings for the balance of the fiscal year. QUARTER ENDED JANUARY 25, 1997 COMPARED TO QUARTER ENDED JANUARY 27, 1996. Net Sales. Net sales increased 18.4% to $176.1 million for the three months ended January 25, 1997 ("Current Quarter") from $148.7 million for the three months ended January 27, 1996 ("Prior Quarter"). Sales increased $27.4 million, with Colwell contributing $14.9 million of the increase. Excluding Colwell, sales were up $12.5 million or 8.4% due primarily to increased unit sales and price increases. Gross Profit. Gross profit margin increased to 36.2% for the Current Quarter from 35.1% for the Prior Quarter. The 110 basis point gross margin increase is due to the higher margins from the Colwell acquisition. Gross profit increased 22.5% to $63.9 million for the Current Quarter from $52.1 million for the Prior Quarter. The increase in gross profit was due primarily to increased sales. Operating Expenses. Operating expenses increased 19.3% to $49.3 million for the Current Quarter from $41.4 million for the Prior Quarter. The increase in operating expenses is primarily related to the increase in sales. Operating expenses as a percent of sales increased from 27.8% to 28.0% due to a change in accounting for the ESOP and increased employee health care costs. As a result of the conversion of the ESOP preferred stock, the funding of the ESOP is now reflected as an operating expense of approximately $200,000 per quarter. Previously, the funding of the ESOP was reflected as preferred stock dividends. Operating Income. Operating income increased 34.6% to $14.5 million for the Current Quarter from $10.8 million for the Prior Quarter. Operating income as a percent of net sales increased from 7.3% to 8.2% due primarily to the increase in gross margins discussed earlier. Finance Income. Finance income, net of expenses, was $76,000 for the Current Quarter compared to $446,000 for the Prior Quarter. Finance income decreased $370,000 due primarily to utilization of our cash for the Colwell acquisition. Interest Expense. Interest expense increased to $179,000 for the Current Quarter from $96,000 for the Prior Quarter. This increase is due mainly to the acquisition of Colwell and the utilization of the revolving bank loan during the quarter. 8
Income Taxes. The effective income tax rate was 38.1% for the Current Quarter or equal to the Prior Quarter. NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 27, 1996. Net Sales. Net sales increased 12.5% to $480.1 million for the nine months ended January 25, 1997 ("Current Period") from $426.7 million for the nine months ended January 27, 1996 ("Prior Period"). There were seventeen weeks of Colwell sales in the Current Period. Sales increased $53.4 million with Colwell contributing $19.7 million of the increase. Excluding Colwell, sales were up $33.7 million or 7.9% due primarily to increased unit sales and price increases. Gross Profit. Gross profit margin increased to 35.6% for the Current Period from 35.2% for the Prior Period due to the higher margins from the Colwell acquisition. Gross profit increased 14% to $171.1 million for the Current Period from $150.1 million for the Prior Period. The increase in gross profit was due primarily to increased sales. Operating Expenses. Operating expenses increased 14.2% to $135.6 million for the Current Period from $118.7 million for the Prior Period. The increase in operating expenses is primarily related to increased sales. Operating expenses as a percent of sales have increased from 27.8% to 28.2% due to increased employee health care costs and the change in the ESOP funding as discussed earlier. Operating Income. Operating income increased 13.3% to $35.5 million for the Current Period from $31.4 million for the Prior Period. Operating income as a percent of net sales was 7.4%, the same as the Prior Period. Finance Income. Finance income, net of expenses, was $921,000 for the Current Period compared to $1,007,000 for the Prior Period. Finance income decreased $86,000 due primarily to utilization of cash for the Colwell acquisition. Interest Expense. Interest expense increased to $438,000 for the Current Period from $307,000 for the Prior Period. This increase is due mainly to the acquisition of Colwell and the utilization of the revolving bank loan. Income Taxes. The effective income tax rate decreased to 37.0% for the Current Period from 37.9% for the Prior Period and results from lower state income taxes. LIQUIDITY AND CAPITAL RESOURCES Available liquid resources at January 25, 1997 consisted of $11.5 million cash and cash equivalents and $33.5 million available under bank lines. The acquisition of Colwell on 9
October 1, 1996 utilized a substantial portion of the Company's cash balances and increased debt under the revolving credit agreement during the third quarter. All borrowings under the revolving credit agreement associated with the Colwell acquisition were paid down by the end of the third quarter. Inventory at January 25, 1997 was $68.3 million which represented an $11 million increase from October 26, 1996 due primarily to calendar year-end forward buying to maximize volume rebates and in advance of vendor price increases. This additional inventory should be sold off by the end of the fiscal year. A similar purchase was made in previous years. The Company believes that funds from operations and the remainder of its credit lines are sufficient to meet any other existing and presently anticipated needs. In addition, because of its low debt to equity ratio, the Company believes it has sufficient debt capacity to obtain the necessary funds for use in accomplishing its corporate objectives. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The Company wishes to caution shareholders and prospective investors that the following important factors, among others, could in the future affect the Company's actual operating results which could differ materially from those expressed in any forward-looking statements made by the Company. The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose. The order in which such factors appear below should not be construed to indicate their relative importance or priority. . Reduced growth in expenditures for dental services by private dental insurance plans. . Accuracy of the Company's assumptions concerning future per capita expenditures for dental services, including assumptions as to population growth and the demand for preventive dental services such as periodontic, endodontic and orthodontic procedures. . The rate of growth in demand for infection control products currently used for prevention of the spread of communicable diseases such as AIDS, hepatitis and herpes. . The effects of health care reform, increasing emphasis on controlling health care costs and legislation or regulation of health care pricing, all of which may affect the ability of dentists to obtain reimbursement for use of new and state-of-the-art procedures and technologies. . The amount and growth of the Company's selling, general and administrative expenses. . The effects of, and changes in, U.S. and world social and economic conditions, monetary and fiscal conditions, laws and regulations, other activities of governments, agencies and similar organizations, trade policies and taxes, import and other charges, inflation and monetary fluctuations; the ability or inability of the Company to obtain or hedge against foreign currencies, foreign exchange rates and fluctuations in those rates. . Ability of the Company to retain its base of customers and to increase its market share. 10
. The ability of the Company to maintain satisfactory relationships with qualified and motivated sales personnel. . Changes in economics of dentistry affecting dental practice growth and the demand for dental products, including the ability and willingness of dentists to invest in high-technology diagnostic and therapeutic products. . The Company's ability to meet increased competition from national, regional and full-service distributors and mail-order distributors of dental products, while maintaining current or improved profit margins. . Continued ability to maintain satisfactory relationships with key vendors and the ability of the Company to create relationships with additional manufacturers of quality, innovative products. . Future operating results of the Company's Colwell subsidiary depend upon its ability to attract and retain customers by offering quick response time and innovative products that meet industry reporting standards. Because the cost of paper stock represents over half the cost of its paper and printed products, future operating results may be subject to fluctuations in paper prices. In addition, the introduction of computer- based technologies into the management of health care practices may affect future demand for printed products. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (a) Reports on Form 8-K On December 13, 1996 the Company filed a report on Form 8-K/A, as Amendment No. 1 to the report on Form 8-K filed October 15, 1996 relating to the acquisition of the Colwell division of Deluxe Corporation. The form 8-K/A filed on December 13, 1996, contained the financial statements and pro forma financial information required to be filed pursuant to Item 7 of Form 8-K. All other items under Part II have been omitted because they are inapplicable or the answers are negative, or, in the case of legal proceedings, were previously reported in the annual report on Form 10-K filed July 26, 1996. 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PATTERSON DENTAL COMPANY (Registrant) Dated: March 6, 1997 By: /s/ Ronald E. Ezerski --------------------- Ronald E. Ezerski Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) 12