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 October 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 22,051,446 shares of common stock as of December 3, 1997. Page 1 of 13
PATTERSON DENTAL COMPANY INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-7 Condensed Consolidated Balance Sheets as of October 25, 1997 and April 26, 1997 3 Condensed Consolidated Statements of Income for the three months and six months ended October 25, 1997 and October 26, 1996 4 Condensed Consolidated Statements of Cash Flows for the six months ended October 25, 1997 and October 26, 1996 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 12 Item 6 - Exhibits and Reports on Form 8-K 12 Signatures 13 Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995: This Form 10-Q for the period ended October 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 25, 1997, 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 October 25, April 26, 1997 1997 ----------- ---------- (unaudited) (restated) Current assets: Cash and cash equivalents................ $ 21,220 $ 9,095 Receivables, net......................... 94,175 95,132 Inventory................................ 69,435 65,486 Prepaid expenses......................... 2,743 2,927 Deferred taxes........................... 1,289 1,178 -------- -------- Total current assets................. 188,862 173,818 Property and equipment, net................. 36,128 35,563 Intangibles ................................ 42,688 43,813 Other ...................................... 2,454 2,117 -------- -------- Total assets......................... $270,132 $255,311 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................... $ 47,497 $ 48,472 Accrued payroll expense.................. 10,261 12,281 Other accrued expenses................... 9,682 9,268 Income taxes payable..................... 3,092 1,677 Bank indebtedness........................ 3,535 3,927 Current maturities of long-term debt..... 182 1,300 -------- -------- Total current liabilities............ 74,249 76,925 Long-term debt.............................. 3,810 5,565 Deferred taxes.............................. 1,362 1,362 -------- -------- Total liabilities.................... 79,421 83,852 Deferred credits............................ 7,355 7,797 Stockholders' equity: Preferred stock.......................... --- --- Common stock............................. 221 219 Additional paid in capital............... 58,512 56,168 Cumulative translation adjustment........ (869) (899) Retained earnings........................ 140,561 123,243 Note receivable from ESOP................ (15,069) (15,069) -------- -------- Total stockholders' equity........... 183,356 163,662 -------- -------- Total liabilities and stockholders' equity.............................. $270,132 $255,311 ======== ======== See accompanying notes. 3
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended --------------------- --------------------- Oct. 25, Oct. 26, Oct. 25, Oct. 26, 1997 1996 1997 1996 -------- -------- -------- -------- (restated) (restated) <S> <C> <C> <C> <C> Net sales........................................ $191,635 $169,013 $371,623 $318,312 Cost of sales.................................... 120,887 109,127 235,009 205,652 -------- -------- -------- -------- Gross profit..................................... 70,748 59,886 136,614 112,660 Operating expenses............................... 55,059 47,487 107,592 90,917 -------- -------- -------- -------- Operating income................................. 15,689 12,399 29,022 21,743 Other income and expense: Amortization of deferred credits............. 222 221 442 442 Finance income, net.......................... 263 442 452 986 Interest expense............................. (222) (280) (417) (507) Profit (loss) on currency exchange........... (12) 5 (21) (4) -------- -------- -------- -------- Income before income taxes....................... 15,940 12,787 29,478 22,660 Income taxes..................................... 5,877 4,695 11,075 8,250 -------- -------- -------- -------- Net income....................................... $ 10,063 $ 8,092 $ 18,403 $ 14,410 ======== ======== ======== ======== Earnings per common and common equivalent share.. $0.46 $ 0.37 $0.84 $0.66 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding........................... 22,115 21,782 22,033 21,738 ======== ======== ======== ======== </TABLE> See accompanying notes. 4
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended --------------------- Oct. 25, Oct. 26, 1997 1996 --------- ---------- (restated) <S> <C> <C> Operating activities: Net income............................................. $18,403 $ 14,410 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................... 2,727 2,151 Amortization of deferrals.......................... (442) (442) Amortization of goodwill........................... 1,173 342 Bad debt expense................................... 440 283 Change in assets and liabilities, net of acquired.. (4,279) (5,048) ------- -------- Net cash provided by operating activities................. 18,022 11,696 Investing activities: Additions to property and equipment, net............... (3,187) (2,218) Acquisitions........................................... --- (56,478) Cash received from acquisitions........................ 69 204 Other.................................................. (56) (7) ------- -------- Net cash used in investing activities.................... (3,174) (58,499) Financing activities: (Decrease) increase in bank indebtedness............... (359) 3,217 Payments and retirement of long-term debt and obligations under capital leases..................... (2,998) (176) Common stock issued, net............................... 634 513 ------- -------- Net cash provided by financing activities.............. (2,723) 3,554 Effect of exchange rate changes on cash................... --- 6 ------- -------- Net increase (decrease) in cash and cash equivalents...... 12,125 (43,243) Cash and cash equivalents at beginning of period.......... 9,095 46,056 ------- -------- Cash and cash equivalents at end of period................ $21,220 $ 2,813 ======= ======== </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) October 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 October 25, 1997, and the results of operations and the cash flows for the periods ended October 25, 1997, and October 26, 1996. Such adjustments are of a normal recurring nature. The results of operations for the quarter and six months ended October 25, 1997, and October 26, 1996, are not necessarily indicative of the results to be expected for the full year. The balance sheet at April 26, 1997, 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 1997 Annual Report on Form 10-K filed on July 25, 1997, and the supplemental consolidated financial statements included in the Current Report on Form 8-K filed November 26, 1997. The accompanying financial statements and Management's Discussion and Analysis give retroactive effect to the acquisition of Canadian Dental Supply Ltd. ("CDS") and include CDS for all periods presented. See Note 4. below. 2. The fiscal year end of the Company is the last Saturday in April. The second quarter and six months of fiscal year 1998 and 1997 represent the 13 weeks and the twenty-six weeks ended October 25, 1997 and October 26, 1996, respectively. 3. 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 the results of operations that would have occurred had the acquisition been made as of those dates or future results. Six Months Ended ---------------- October 26, 1996 ---------------- (restated) Net sales............... $342,077 Net income.............. 15,680 Earnings per share...... $ 0.72 6
On July 18, 1997 the Company acquired EagleSoft Incorporated in a transaction accounted for as a pooling of interests. The acquisition was not material to the financial statements. 4. Effective August 26, 1997, the Company acquired Canadian Dental Supply Ltd. ("CDS") a Vancouver, British Columbia based distributor of dental supplies and equipment. Each share of CDS's outstanding common stock was converted into the right to receive 4.216 shares of Company common stock. The Company issued 112,432 shares of its common stock to acquire CDS. The transaction was accounted for as a pooling of interests. The accompanying financial statements and Management's Discussion and Analysis give retroactive effect to the acquisition and include CDS for all periods presented. Separate results of operations for the periods prior to the merger with CDS are as follows: Three Months Ended Six Months Ended ------------------ ---------------- July 26, July 27, Oct. 26, 1997 1996 1996 -------- -------- --------- Net Sales --------- Patterson Dental Company $173,311 $142,193 $304,071 CDS 6,677 7,106 14,241 -------- -------- -------- Total Combined $179,988 $149,299 $318,312 ======== ======== ======== Net Income ---------- Patterson Dental Company $ 8,263 $ 6,232 $ 14,063 CDS 77 86 347 -------- -------- -------- Total Combined $ 8,340 $ 6,318 $ 14,410 ======== ======== ======== 5. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information." This statement, which is required to be adopted for financial statements issued for periods beginning after December 15, 1997, establishes standards for the way that public business enterprises report information about operating segments in financial reports issued to shareholders. The Company has not yet determined the financial statement disclosure impact of SFAS 131. 7
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 Six Months Ended --------------------- ---------------------- Oct. 25, Oct. 26, Oct. 25, Oct. 26, 1997 1996 1997 1996 --------- --------- --------- --------- (restated) (restated) <S> <C> <C> <C> <C> Net sales...................... 100.0% 100.0% 100.0% 100.0% Cost of sales.................. 63.1% 64.6% 63.2% 64.6% ----- ----- ----- ----- Gross profit................... 36.9% 35.4% 36.8% 35.4% Operating expenses............. 28.7% 28.1% 29.0% 28.6% ----- ----- ----- ----- Operating income............... 8.2% 7.3% 7.8% 6.8% Other income and expense, net.. 0.1% 0.3% 0.1% 0.3% ----- ----- ----- ----- Income before income taxes..... 8.3% 7.6% 7.9% 7.1% Income taxes................... 3.0% 2.8% 2.9% 2.6% ----- ----- ----- ----- Net income..................... 5.3% 4.8% 5.0% 4.5% ===== ===== ===== ===== </TABLE> QUARTER ENDED OCTOBER 25, 1997 COMPARED TO QUARTER ENDED OCTOBER 26, 1996. NET SALES. Net sales increased 13.4% to $191.6 million for the three months ended October 25, 1997 ("Current Quarter") from $169.0 million for the three months ended October 26, 1996 ("Prior Quarter"). There were thirteen weeks of Colwell sales in the Current Quarter versus four weeks of Colwell sales in the Prior Quarter. Sales grew $22.6 million, with Colwell contributing $9.1 million of the increase. Excluding Colwell, sales were up $13.5 million or 8.2% due primarily to strong demand for consumable products and price increases. GROSS PROFIT. Gross profit margin increased to 36.9% for the Current Quarter from 35.4% for the Prior Quarter. The 150 basis point gross margin increase is due to a combination of higher margins from U.S. Dental operations, Colwell and Eaglesoft. Gross profit increased 18.1% to $70.7 million for the Current Quarter from $59.9 million for the Prior Quarter. The majority of the increase in gross profit was due to increased sales. 8
OPERATING EXPENSES. Operating expenses increased 15.9% to $55.1 million for the Current Quarter from $47.5 million for the Prior Quarter. The increase in operating expenses was principally related to the higher sales volume. Operating expenses as a percent of sales increased from 28.1% to 28.7% due primarily to the impact of Eaglesoft, which carries a much higher operating expense ratio as a percent of sales than the rest of the business, and increased health care costs. OPERATING INCOME. Operating income increased 26.5% to $15.7 million for the Current Quarter from $12.4 million for the Prior Quarter. Operating income as a percent of net sales increased from 7.3% to 8.2%, due to higher gross margins. FINANCE INCOME. Finance income, net of expenses, was $263,000 for the Current Quarter compared to $442,000 for the Prior Quarter. Finance income decreased $179,000 due to lower average short term investments of cash. INTEREST EXPENSE. Interest expense decreased to $222,000 for the Current Quarter from $280,000 for the Prior Quarter. This decrease is due mainly to lower borrowings under the revolving bank loan. INCOME TAXES. The effective income tax rate increased slightly to 36.9% for the Current Quarter from 36.7% for the Prior Quarter. SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26, 1996. NET SALES. Net sales increased 16.7% to $371.6 million for the six months ended October 25, 1997 ("Current Period") from $318.3 million for the six months ended October 26, 1996 ("Prior Period"). There were twenty six weeks of Colwell sales in the Current Period versus four weeks in the Prior Period. Sales increased $53.3 million with Colwell contributing $22.6 million of the increase. Excluding Colwell, sales were up $30.8 million or 9.8% due primarily to increased unit sales and price increases. GROSS PROFIT. Gross profit margin increased to 36.8% for the Current Period from 35.4% for the Prior Period due to the higher margins from Colwell and U.S. operations. Gross profit increased 21.3% to $136.6 million for the Current Period from $112.7 million for the Prior Period. the increase in gross profit was due primarily to the increase in sales. OPERATING EXPENSES. Operating expenses increased 18.3% to $107.6 million for the Current Period from $90.9 million for the Prior Period. The majority of the increase in operating expenses was related to increased sales. Operating expenses as a percent of sales have increased from 28.6% to 29.0% due to increased health care and advertising costs. 9
OPERATING INCOME. Operating income increased 33.5% to $29.0 million for the Current Period from $21.7 million for the Prior Period. As a percent of net sales, operating income increased from 6.8% to 7.8%, due to higher gross margins. FINANCE INCOME. Finance income, net of expenses, was $452,000 for the Current Period compared to $986,000 for the Prior Period. Finance income decreased $534,000 due primarily to lower short term investment of cash. INTEREST EXPENSE. Interest expense decreased to $417,000 for the Current Period from $507,000 for the Prior Period. This decrease is due mainly to a reduction in the use of the revolving bank loan. INCOME TAXES. The effective income tax rate increased to 37.6% for the Current Period from 36.4% for the Prior Period due primarily to higher levels of tax free investment income in the Prior Period related to short term investments of excess cash balances. LIQUIDITY AND CAPITAL RESOURCES Available liquid resources at October 25, 1997 consisted of $21.2 million in cash and cash equivalents and $28.3 million available under bank lines. The company believes that cash and cash equivalents 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 replace its existing revolver and provide the necessary funds for potential acquisitions. 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. 10
- 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. - 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. 11
PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a) The Company's Annual Meeting of Shareholders was held on September 8, 1997. c)(1) The shareholders voted for one director nominee, Burt E. Swanson, for a three year term. 19,634,818 shares were voted for Mr. Swanson and 212,833 shares withheld authority. There were no abstentions and no broker non-votes. (2) The shareholders voted to ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending April 25, 1998. The vote was 19,830,501 shares for, 3,786 against and 13,364 abstentions. There were no broker non-votes. Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (b) Reports on Form 8-K. On September 5, 1997 the Company filed a report on Form 8-K relating to the acquisition on Canadian Dental Supply Ltd. and the issuance of stock in connection therewith. On November 26, 1997 the Company filed a report on Form 8-K to present restated financial statements and other financial information as a result of the August 26, 1997 acquisition of Canadian Dental Supply Ltd. accounted for as a pooling of interests, and to report the issuance of additional shares in connection with the acquisition. 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 25, 1997. 12
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: December 5, 1997. By: /s/ Ronald E. Ezerski -------------------------- Ronald E. Ezerski Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 13