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 July 25, 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) (651) 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 33,317,041 shares of common stock as of September 4, 1998. Page 1 of 12
PATTERSON DENTAL COMPANY INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-8 Condensed Consolidated Balance Sheets as of July 25, 1998 and April 25, 1998 3 Condensed Consolidated Statements of Income for the three months ended July 25, 1998 and July 26, 1997 4 Condensed Consolidated Statements of Cash Flows for the three months ended July 25, 1998 and July 26, 1997 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 11 Signatures 12 Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995: This Form 10-Q for the period ended July 25, 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 16, 1998, and other documents filed with the Securities and Exchange Commission. See also page 10 of this Form 10-Q. 2
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS July 25, April 25, 1998 1998 --------- --------- (unaudited) Current assets: Cash and cash equivalents ..................... $ 38,143 $ 35,619 Receivables, net .............................. 97,336 106,252 Inventory ..................................... 97,146 81,810 Prepaid expenses .............................. 2,741 2,802 Deferred taxes ................................ 1,178 1,178 --------- --------- Total current assets ....................... 236,544 227,661 Property and equipment, net .......................... 35,609 37,998 Intangibles, net ..................................... 47,410 48,013 Other ................................................ 2,437 2,701 --------- --------- Total assets ............................... $ 322,000 $ 316,373 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................. $ 57,373 $ 60,652 Accrued payroll expense ....................... 8,640 13,852 Other accrued expenses ........................ 13,522 13,426 Income taxes payable .......................... 7,472 2,009 Bank indebtedness ............................. 3,378 2,033 Current maturities of long-term debt .......... 221 2,433 --------- --------- Total current liabilities .................. 90,606 94,405 Long-term debt ....................................... 2,665 2,736 Deferred taxes ....................................... 2,017 2,017 --------- --------- Total liabilities .......................... 95,288 99,158 Deferred credits ..................................... 6,691 6,912 Stockholders' equity: Preferred stock ............................... -- -- Common stock .................................. 333 333 Additional paid-in capital .................... 63,568 63,134 Accumulated other comprehensive income ........ (2,569) (1,624) Retained earnings ............................. 173,026 162,797 Note receivable from ESOP ..................... (14,337) (14,337) --------- --------- Total stockholders' equity ................. 220,021 210,303 --------- --------- Total liabilities and stockholders' equity.. $ 322,000 $ 316,373 ========= ========= See accompanying notes. 3
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) Three Months Ended ------------------ July 25, July 26, 1998 1997 --------- --------- (restated) Net sales .................................... $ 200,073 $ 179,988 Cost of sales ................................ 126,482 114,122 --------- --------- Gross profit ................................. 73,591 65,866 Operating expenses ........................... 57,348 52,533 --------- --------- Operating income ............................. 16,243 13,333 Other income and expense: Amortization of deferred credits ......... 222 220 Finance income, net ...................... 404 189 Interest expense ......................... (140) (195) Profit (loss) on currency exchange ....... (66) (9) --------- --------- Income before income taxes ................... 16,663 13,538 Income taxes ................................. 6,434 5,198 --------- --------- Net income ................................... $ 10,229 $ 8,340 ========= ========= Earnings per share - basic and diluted ....... $ 0.31 $ 0.25 ========= ========= Weighted average common and dilutive potential common shares ............................ 33,387 32,928 ========= ========= See accompanying notes. 4
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ July 25, July 26, 1998 1997 -------- -------- (restated) <S> <C> <C> Operating activities: Net income ............................................. $ 10,229 $ 8,340 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................... 1,483 1,361 Amortization of deferrals ....................... (221) (220) Amortization of goodwill ........................ 669 587 Bad debt expense ................................ 246 229 Change in assets and liabilities, net of acquired (10,312) (9,283) -------- -------- Net cash provided by operating activities ..................... 2,094 1,014 Investing activities: Proceeds from sale of facilities ....................... 2,250 -- Additions to property and equipment, net ............... (1,566) (1,911) Other .................................................. -- (12) -------- -------- Net cash provided (used) in investing activities ............. 684 (1,923) Financing activities: Increase (decrease) in bank indebtedness ............... 1,471 (443) Payments and retirement of long-term debt and obligations under capital leases ..................... (2,161) (133) Common stock issued, net ............................... 434 404 -------- -------- Net cash used in financing activities ......................... (256) (172) Effect of exchange rate changes on cash ....................... 2 4 -------- -------- Net increase (decrease) in cash and cash equivalents .......... 2,524 (1,077) Cash and cash equivalents at beginning of period .............. 35,619 9,095 -------- -------- Cash and cash equivalents at end of period .................... $ 38,143 $ 8,018 ======== ======== </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) JULY 25, 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 July 25, 1998, and the results of operations and the cash flows for the periods ended July 25, 1998, and July 26, 1997. Such adjustments are of a normal recurring nature. The results of operations for the first quarter ended July 25, 1998, and July 26, 1997, are not necessarily indicative of the results to be expected for the full year. The balance sheet at April 25, 1998, 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 1998 Annual Report on Form 10-K filed on July 16, 1998. 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 3 below. 2. The fiscal year end of the Company is the last Saturday in April. The first quarter of fiscal year 1999 and 1998 represent the 13 weeks ended July 25, 1998 and July 26, 1997, respectively. 3. 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: Three Months Ended July 26, 1997 ---- Net Sales --------- Patterson Dental Company $173,311 CDS 6,677 -------- Total Combined $179,988 ======== Net Income ---------- Patterson Dental Company $ 8,263 CDS 77 -------- Total Combined $ 8,340 ======== Other Changes in Stockholders' Equity ------------------------------------- Patterson Dental Company $ 1,260 CDS (22) -------- Total Combined $ 1,238 ======== 6
4. 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 stockholders' 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. 5. On February 2, 1998, 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. The Company issued 100,770 shares of its common stock in connection with the Hill acquisition. The results of the operations of Hill in the prior year first quarter are not material to the financial statements on a pro forma basis. 6. As of April 26, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes new rules for the display of comprehensive income and its components; however, the adoption of the Statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Total comprehensive income for the three months ended July 25, 1998 and July 26, 1997 is as follows: Three Months Ended ------------------ July 25, July 26, 1998 1997 ---- ---- Net income $10,229 $8,340 Other comprehensive income (loss): Foreign currency translation adjustments (945) 131 ------- ------ Total comprehensive income $ 9,284 $8,471 ======= ====== 7. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 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 ------------------ July 25, July 26, 1998 1997 -------- ------- Denominator: Denominator for basic earnings per share - weighted-average shares 33,291 32,844 7
Effect of dilutive securities: Director Stock Option Plan 57 39 Employee Stock Purchase Plan 5 7 Capital Accumulation Plan 34 38 -------- ------- Dilutive potential common shares 96 84 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 33,387 32,928 ======== ======= 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 ------------------ July 25, July 26, 1998 1997 ------ ------ Net sales....................................... 100.0% 100.0% Cost of sales................................... 63.2% 63.4% ------- ------- Gross profit.................................... 36.8% 36.6% Operating expenses.............................. 28.7% 29.2% ------- ------- Operating income................................ 8.1% 7.4% Other income and expense, net................... 0.2% 0.1% ------- ------- Income before income taxes...................... 8.3% 7.5% Income taxes.................................... 3.2% 2.9% ------- ------- Net income...................................... 5.1% 4.6% ======= ======= QUARTER ENDED JULY 25, 1998 COMPARED TO QUARTER ENDED JULY 26, 1997. NET SALES. Net sales increased 11.2% to $200.1 million for the three months ended July 25, 1998 ("Current Quarter") from $180.0 million for the three months ended July 26, 1997 ("Prior Quarter"). U.S. dental sales increased 13.7% due to strong equipment sales and the acquisition of Hill Dental in February, 1998. Canadian sales were down 3.5% in Canadian 8
dollars but were down 8.8% in U.S. dollars due to an unfavorable exchange rate during the Current Quarter. Colwell sales were down 3.8%, while EagleSoft sales were $2.0 million greater than the Prior Quarter. GROSS PROFIT. Gross profit margin increased to 36.8% for the Current Quarter from 36.6% for the Prior Quarter. The 20 basis point gross margin increase is due to a combination of greater production efficiencies at Colwell and growth in high margin software sales. Gross profit increased 11.7% to $73.6 million for the Current Quarter from $65.9 million for the Prior Quarter. The majority of the increase in gross profit was due to increased sales volume. OPERATING EXPENSES. Operating expenses increased 9.2% to $57.3 million for the Current Quarter from $52.5 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 decreased from 29.2% to 28.7% due primarily to improved operating leverage in the U.S. and Canadian dental operations. OPERATING INCOME. Operating income increased 21.8% to $16.2 million for the Current Quarter from $13.3 million for the Prior Quarter. Operating income as a percent of net sales increased to 8.1% from 7.4%, due to higher sales volume, improved margins and lower operating expenses as a percent of sales. FINANCE INCOME. Finance income, net of expenses, was $0.4 million for the Current Quarter compared to $0.2 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 $0.2 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 38.6% for the Current Quarter from 38.4% for the Prior Quarter. This increase was caused by an increase in the Canadian operating loss for which no tax benefit was recorded. LIQUIDITY AND CAPITAL RESOURCES Available liquid resources at July 25, 1998 consisted of $38.1 million cash and cash equivalents and $28.8 million available under bank lines. Inventory increased $15.3 million in the quarter due to increased forward buying. 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 and technology reliant operating systems and expects that all necessary modifications or replacements of existing 9
systems will be completed by the end of fiscal 1999. Progress in this effort is being monitored by senior management. Based on current expenditures and estimates, the costs of addressing the Year 2000 issue are not expected to be material to the financial results or operations of the Company. 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 intends to develop plans to mitigate the impact on the Company's operations of vendors or suppliers who are not in compliance with the Year 2000 issue. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Certain information of a non-historical nature contained in this Form 10-Q include forward looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties or assumptions that are difficult to predict and may be beyond the Company's ability to control. Accordingly, 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. * The ability of the Company and its suppliers to upgrade their computer systems to adequately address the Year 2000 issue. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 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 16, 1998. 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: September 4, 1998. By: /s/ Ronald E. Ezerski ---------------------- Ronald E. Ezerski Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 12