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 24, 1998. / / 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 33,261,537 shares of common stock as of March 6, 1998. Page 1 of 14
PATTERSON DENTAL COMPANY INDEX PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-8 Condensed Consolidated Balance Sheets as of January 24, 1998 and April 26, 1997 3 Condensed Consolidated Statements of Income for the three months and nine months ended January 24, 1998 and January 25, 1997 4 Condensed Consolidated Statements of Cash Flows for the nine months ended January 24, 1998 and January 25, 1997 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 14 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This Form 10-Q for the period ended January 24, 1998 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. See also page 11 of this Form 10-Q. 2
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS <TABLE> <CAPTION> January 24, April 26, 1998 1997 ----------- --------- (unaudited) (restated) <S> <C> <C> Current assets: Cash and cash equivalents .............................................. $ 34,706 $ 9,095 Receivables, net ....................................................... 90,518 95,132 Inventory .............................................................. 71,968 65,486 Prepaid expenses ....................................................... 1,401 2,927 Deferred taxes ......................................................... 1,178 1,178 --------- --------- Total current assets ............................................ 199,771 173,818 Property and equipment, net ................................................... 36,072 35,563 Intangibles ................................................................... 42,182 43,813 Other ......................................................................... 2,298 2,117 --------- --------- Total assets .................................................... $ 280,323 $ 255,311 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................................... $ 47,422 $ 48,472 Accrued payroll expense ................................................ 11,202 12,281 Other accrued expenses ................................................. 11,034 9,268 Income taxes payable ................................................... 3,321 1,677 Bank indebtedness ...................................................... 933 3,927 Current maturities of long-term debt ................................... 169 1,300 --------- --------- Total current liabilities ....................................... 74,081 76,925 Long-term debt ................................................................ 2,843 5,565 Deferred taxes ................................................................ 1,362 1,362 --------- --------- Total liabilities ............................................... 78,286 83,852 Deferred credits .............................................................. 7,133 7,797 Stockholders' equity: Preferred stock ........................................................ -- -- Common stock ........................................................... 332 327 Additional paid in capital ............................................. 60,231 56,168 Cumulative translation adjustment ...................................... (1,838) (899) Retained earnings ...................................................... 151,248 123,135 Note receivable from ESOP .............................................. (15,069) (15,069) ---------- ---------- Total stockholders' equity ...................................... 194,904 163,662 ---------- ---------- Total liabilities and stockholders' equity ...................... $ 280,323 $ 255,311 ========= ========== </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. 24, Jan. 25, Jan. 24, Jan. 25, 1998 1997 1998 1997 --------- --------- --------- --------- (restated) (restated) <S> <C> <C> <C> <C> Net sales .................................... $ 195,540 $ 181,996 $ 567,163 $ 500,308 Cost of sales ................................ 122,204 115,859 357,213 321,511 --------- --------- --------- --------- Gross profit ................................. 73,336 66,137 209,950 178,797 Operating expenses ........................... 56,242 51,650 163,834 142,567 --------- --------- --------- --------- Operating income ............................. 17,094 14,487 46,116 36,230 Other income and expense: Amortization of deferred credits ......... 222 222 664 664 Finance income, net ...................... 334 141 786 1,127 Interest expense ......................... (126) (276) (543) (783) Profit (loss) on currency exchange ....... (60) (7) (81) (11) ---------- ----------- ----------- ---------- Income before income taxes ................... 17,464 14,567 46,942 37,227 Income taxes ................................. 6,666 5,550 17,741 13,800 ---------- ---------- ---------- ---------- Net income ................................... $ 10,798 $ 9,017 $ 29,201 $ 23,427 ========== ========== ========== ========== Earnings per share - basic and diluted ....... $ 0.33 $ 0.28 $ 0.88 $ 0.72 ========== ========== ========== ========== Weighted average common and dilutive potential common shares ............................ 33,210 32,739 33,104 32,651 ========== ========== ========== ========== </TABLE> See accompanying notes. 4
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED --------------------- Jan. 24, Jan. 25, 1998 1997 -------- --------- (restated) <S> <C> <C> Operating activities: Net income ............................................. $ 29,201 $ 23,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................... 4,212 3,484 Amortization of deferrals ....................... (664) (659) Amortization of goodwill ........................ 1,762 915 Bad debt expense ................................ 731 376 Change in assets and liabilities, net of acquired (244) 1,243 -------- --------- Net cash provided by operating activities ..................... 34,998 28,786 Investing activities: Additions to property and equipment, net ............... (4,832) (3,579) Acquisitions ........................................... -- (61,375) Cash received from acquisitions ........................ 69 204 Other .................................................. (25) (10) -------- --------- Net cash used in investing activities ........................ (4,788) (64,760) Financing activities: (Decrease) increase in bank indebtedness ............... (2,853) 230 Payments and retirement of long-term debt and obligations under capital leases ..................... (3,826) (282) Common stock issued, net ............................... 2,353 1,502 -------- --------- Net cash (used) provided by financing activities .............. (4,326) 1,450 Effect of exchange rate changes on cash ....................... (273) (11) -------- --------- Net increase (decrease) in cash and cash equivalents .......... 25,611 (34,535) Cash and cash equivalents at beginning of period .............. 9,095 46,056 -------- --------- Cash and cash equivalents at end of period .................... $ 34,706 $ 11,521 ======== ======== </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) JANUARY 24, 1998 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 24, 1998, and the results of operations and the cash flows for the periods ended January 24, 1998, and January 25, 1997. Such adjustments are of a normal recurring nature. The results of operations for the quarter and nine months ended January 24, 1998, and January 25, 1997, 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 third quarter and nine months of fiscal year 1998 and 1997 represent the 13 weeks and the thirty-nine weeks ended January 24, 1998 and January 25, 1997, 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. NINE MONTHS ENDED JANUARY 25, 1997 ---------------- (restated) Net sales .................. $524,073 Net income ................. 24,697 Earnings per share - diluted $ 0.76 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 6.324 shares of Company common stock. The Company issued 168,648 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 period prior to the merger with CDS are as follows: PERIOD FROM NINE MONTHS ENDED APRIL 27, 1997 JANUARY 25, TO AUGUST 26, 1997 1997 ------------------ -------- NET SALES Patterson Dental Company ............... $231,350 $480,126 CDS .................................... 8,190 20,182 -------- -------- Total Combined ................... $239,540 $500,308 ======== ======== NET INCOME Patterson Dental Company ............... $ 11,292 $ 23,109 CDS .................................... 31 318 -------- -------- Total Combined ................... $ 11,323 $ 23,427 ======== ======== 5. On January 12, 1998 the Company declared a 3 for 2 stock split in the form of a 50% stock dividend payable February 17, 1998, to shareholders of record January 30, 1998. The accompanying financial statements and Management's Discussion and Analysis give retroactive effect to the 3 for 2 stock split. 6. On February 2, 1998 after the end of the quarter, the Company acquired Hill Dental Company, Inc. ("Hill") a Birmingham, Alabama based distributor of dental supplies and equipment. Each share of Hill's outstanding common stock was converted into the right to receive 9.39 shares of Company common stock subject to certain conditions. To date, the Company has issued 86,872 shares of its common stock in connection with the Hill acquisition. Subject to the satisfaction of certain conditions, up to an additional 27,973 shares may be issued. The transaction will be accounted for as a purchase in the fourth quarter financial statements. 7. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 131 (SFAS) "Disclosure 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. 8. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 130, "Reporting Comprehensive Income." This Statement establishes standards for 7
the reporting and presentation of comprehensive income and its components. The Company does not believe that this Statement will have a material impact on the financial statements since this standard is for informational purposes only. 9. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 128, "Earnings per Share." All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the denominator for the computation of basic and diluted earnings per share: THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- Jan. 24, Jan. 25, Jan. 24, Jan. 25, 1998 1997 1998 1997 -------- ------- -------- -------- Denominator: Denominator for basic earnings per share - weighted-average shares ........ 33,104 32,657 33,005 32,583 Effect of dilutive securities: Director Stock Option Plan ............. 50 43 43 51 Employee Stock Purchase Plan ........... 6 6 7 3 Capital Accumulation Plan .............. 50 33 49 14 ------ ------ ------ ------ Dilutive potential common shares ......... 106 82 99 68 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions ......... 33,210 32,739 33,104 32,651 ====== ====== ====== ====== 8
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. THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ------------------ Jan. 24, Jan. 25, Jan. 24, Jan. 25, 1998 1997 1998 1997 -------- -------- -------- ------- Net sales ................... 100.0% 100.0% 100.0% 100.0% Cost of sales ............... 62.5% 63.6% 63.0% 64.3% ----- ----- ----- ----- Gross profit ................ 37.5% 36.4% 37.0% 35.7% Operating expenses .......... 28.8% 28.4% 28.9% 28.5% ----- ----- ----- ----- Operating income ............ 8.7% 8.0% 8.1% 7.2% Other income and expense, net 0.2% 0.0% 0.2% 0.2% ----- ----- ----- ----- Income before income taxes .. 8.9% 8.0% 8.3% 7.4% Income taxes ................ 3.4% 3.0% 3.2% 2.7% ----- ----- ----- ----- Net income .................. 5.5% 5.0% 5.1% 4.7% ===== ===== ===== ===== QUARTER ENDED JANUARY 24, 1998 COMPARED TO QUARTER ENDED JANUARY 25, 1997. NET SALES. Net sales increased 7.4% to $195.5 million for the three months ended January 24, 1998 ("Current Quarter") from $182.0 million for the three months ended January 25, 1997 ("Prior Quarter"). U.S. dental sales increased 11% due to increased volume and price increases principally in the U.S. dental market. Sales of business forms and stationery through Colwell Systems were down 12% due to discontinued sales to Deluxe Corporation and reduced volume in the medical market. Canadian sales were down 4% in Canadian dollars but were down 9% in U.S. dollars due to an unfavorable exchange rate during the Current Quarter. Sales volume was affected by the ice storm in Montreal, which reduced demand in this important market, and operating issues related to implementing new branch and distribution systems in western Canada. GROSS PROFIT. Gross profit margin increased to 37.5% for the Current Quarter from 36.4% for the Prior Quarter. The 110 basis point gross margin increase is due to a combination of higher margins from U.S. dental operations, Colwell and Eaglesoft. Gross profit increased 9
10.9% to $73.3 million for the Current Quarter from $66.1 million for the Prior Quarter. The majority of the increase in gross profit was due to increased sales. OPERATING EXPENSES. Operating expenses increased 8.9% to $56.2 million for the Current Quarter from $51.7 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 28.4% to 28.8% 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 higher fixed costs in relation to sales at Colwell. OPERATING INCOME. Operating income increased 18.0% to $17.1 million for the Current Quarter from $14.5 million for the Prior Quarter. Operating income as a percent of net sales increased to 8.7% from 8.0%, due to higher gross margins. FINANCE INCOME. Finance income, net of expenses, was $0.3 million for the Current Quarter compared to $0.1 million for the Prior Quarter. The increase in finance income was caused by higher average short term investments of cash. INTEREST EXPENSE. Interest expense decreased to $0.1 million for the Current Quarter from $0.3 million for the Prior Quarter. This decrease is due mainly to lower borrowings under the revolving bank loan agreements. INCOME TAXES. The effective income tax rate increased slightly to 38.2% for the Current Quarter from 38.1% for the Prior Quarter caused by factors discussed below. NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25, 1997. NET SALES. Net sales increased 13.4% to $567.2 million for the nine months ended January 24, 1998 ("Current Period") from $500.3 million for the nine months ended January 25, 1997 ("Prior Period"). There were thirty nine weeks of Colwell sales in the Current Period versus seventeen weeks in the Prior Period. Sales increased $66.9 million with Colwell contributing $20.8 million of the increase. Excluding Colwell, sales were up $46.1 million or 9.2% due primarily to increased unit sales and price increases. GROSS PROFIT. Gross profit margin increased to 37.0% for the Current Period from 35.7% for the Prior Period due to the higher margins from Eaglesoft, Colwell and U.S. dental operations. Gross profit increased 17.4% to $210.0 million for the Current Period from $178.8 million for the Prior Period. The increase in gross profit was due primarily to the increase in sales. OPERATING EXPENSES. Operating expenses increased 14.9% to $163.8 million for the Current Period from $142.6 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 28.5% in the Prior Period to 28.9% in the Current Period. This was caused by higher operating expenses in relation to sales at Eaglesoft and start up costs related to the marketing of Colwell products through Patterson's sales force. 10
OPERATING INCOME. Operating income increased 27.3% to $46.1 million for the Current Period from $36.2 million for the Prior Period. As a percent of net sales, operating income increased from 7.2% to 8.1%, due to higher gross margins. FINANCE INCOME. Finance income, net of expenses, was $0.8 million for the Current Period compared to $1.1 million for the Prior Period. Finance income decreased $0.3 million due primarily to lower short term investment of cash. INTEREST EXPENSE. Interest expense decreased to $0.5 million for the Current Period from $0.8 million for the Prior Period. This decrease is due mainly to a reduction in the use of the revolving bank loans. INCOME TAXES. The effective income tax rate increased to 37.8% for the Current Period from 37.1% for the Prior Period. This was caused by lower tax free investment income in the current year and a Canadian loss for which no tax benefit was recorded. LIQUIDITY AND CAPITAL RESOURCES Available liquid resources at January 24, 1998 consisted of $34.7 million cash and cash equivalents and $23.4 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 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. IMPACT OF YEAR 2000 The Company has performed an assessment of its major information technology systems and expects that all necessary modifications and/or replacements will be completed prior to December 1998. Based on current expenditures and estimates, the costs of addressing this issue are not expected to be material. The Company intends to contact its significant vendors and suppliers regarding the Year 2000 issue and the status of their compliance. At this time, the impact on the Company if significant vendors or suppliers are not in compliance cannot be reasonably estimated. However, the Company will be developing plans to mitigate the impact of vendors or suppliers who are not in compliance with the Year 2000 issue. 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 11
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. - 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. 12
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (b) Reports on Form 8-K. On November 26, 1997 the Company filed a Current 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. On January 13, 1998 the Company filed a Current Report on Form 8-K relating to the 3 for 2 stock split in the form of a 50% stock dividend declared January 12, 1998 payable February 17, 1998 to shareholders of record January 30, 1998. 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. 13
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, 1998. By: /S/ RONALD E. EZERSKI -------------------------------- Ronald E. Ezerski Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 14