<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to .
Commission File Number 0-18347
Sullivan Dental Products, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 36-3070444
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10920 West Lincoln Avenue, West Allis, Wisconsin 53227
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(414)321-8881
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(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 twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
As of November 5, 1996, 9,675,251 shares of common stock,
$.01 par value, were outstanding.
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
Page
----
Part I Item 1 - Financial Information 1
Balance Sheets as of September 30, 1996
and December 31, 1995 1-2
Statements of Income for the three
months and nine months ended September 30, 1996 and 1995 3
Statements of Cash Flows for the three months
and nine months ended September 30, 1996 and 1995 4
Notes to Financial Statements 5-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
Part II Item 5 - Other Information 9
Item 6 - Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
PART I FINANCIAL INFORMATION
SULLIVAN DENTAL PRODUCTS, INC.
BALANCE SHEETS
September 30, December 31,
1996 1995
------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 3,196 $ 172,482
Accounts receivable:
Trade, less allowance for uncollectible
accounts 31,115,407 31,753,427
Other 2,684,977 1,039,093
Inventory 39,527,828 45,977,729
Prepaid expenses and income taxes 1,818,430 1,851,508
----------- -----------
Total current assets 75,149,838 80,794,239
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Warehouse and office equipment 8,006,901 7,528,286
Transportation equipment 2,852,722 2,672,728
Leasehold improvements 1,350,016 1,296,970
----------- -----------
12,209,639 11,497,984
Less accumulated depreciation and amortization 5,699,698 4,899,204
----------- -----------
Net equipment and leasehold improvements 6,509,941 6,598,780
OTHER ASSETS:
Goodwill 13,350,002 9,276,039
Other 344,326 245,568
----------- -----------
$95,354,107 $96,914,626
----------- -----------
----------- -----------
See notes to financial statements.
-1-
<PAGE>
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 2,700,000 $ 9,900,000
Accounts payable 15,277,458 18,474,537
Accrued expenses:
Salaries, commissions and benefits 1,720,033 2,098,566
Other 3,910,972 3,293,498
Income taxes payable 76,795 -
Dividends payable 471,763 -
----------- -----------
Total current liabilities 24,157,021 33,766,601
DEFERRED INCOME TAXES 695,000 695,000
STOCKHOLDERS' EQUITY:
Preferred stock--$.01 par value; 500,000 shares
authorized, none issued - -
Common stock--$.01 par value; 30,000,000 shares
authorized, 9,735,747 and 9,306,747 shares
issued in 1996 and 1995, respectively 97,357 93,067
Paid-in capital 35,476,786 31,030,201
Retained earnings 37,740,156 33,662,217
----------- -----------
Total 73,314,299 64,785,485
Less treasury stock at cost (300,496 and
257,496 shares in 1996 and 1995,
respectively) (2,812,213) (2,332,460)
----------- -----------
Total stockholders' equity 70,502,086 62,453,025
----------- -----------
$95,354,107 $96,914,626
----------- -----------
----------- -----------
See notes to financial statements.
-2-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 59,914,201 $ 52,702,699 $172,871,316 $156,223,681
Cost of sales 39,543,373 34,678,376 113,982,112 102,795,182
------------ ------------- ------------ ------------
Gross profit 20,370,828 18,024,323 58,889,204 53,428,499
Operating expenses 16,808,551 15,396,323 50,157,346 45,997,933
------------ ------------- ------------ ------------
Operating income 3,562,277 2,628,000 8,731,858 7,430,566
Interest expense (42,353) (28,158) (248,491) (33,952)
Other income 184,343 268,777 602,460 739,040
------------ ------------- ------------ ------------
Income before provision
for income taxes 3,704,267 2,868,619 9,085,827 8,135,654
Provision for income
taxes 1,481,000 1,147,000 3,634,000 3,254,000
------------ ------------- ------------ ------------
Net income $ 2,223,267 $ 1,721,619 $ 5,451,827 $ 4,881,654
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Net income per common and
common equivalent share:
Primary and fully diluted $ .24 $ .19 $ .58 $ .52
Weighted average common shares:
Primary 9,372,000 9,248,000 9,362,000 9,431,000
Fully diluted 9,418,000 9,263,000 9,386,000 9,431,000
</TABLE>
See notes to financial statements.
-3-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,223,267 $ 1,721,619 $ 5,451,827 $ 4,881,654
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 545,351 473,823 1,562,929 1,371,433
(Gain) loss on sale of equipment 9,856 1,225 (9,742) 23,478
Provision for losses on accounts receivable 60,000 82,500 270,000 315,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable--trade (992,088) (4,408,590) 323,499 (1,908,747)
(Increase) decrease in accounts receivable--other (2,660,234) 8,259 (1,645,884) 705,639
Decrease (increase) in inventory 1,299,269 2,159,057 6,449,901 (486,359)
Decrease (increase) in prepaid expenses and income
taxes 492,435 333,856 33,078 (283,196)
(Increase) in other assets (76,776) (5,095) (148,924) (4,639)
(Decrease) increase in accounts payable (40,792) 329,319 (3,197,079) (6,713,009)
(Decrease) in accrued expenses--
salaries, commissions and benefits (405,857) (364,837) (378,533) (177,236)
Increase (decrease) in accrued expenses--other (843,230) (343,127) 617,474 (982,905)
Increase (decrease) in income taxes payable 76,795 - 76,795 (414,073)
------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities (312,004) (11,991) 9,405,341 (3,672,960)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of assets, net of cash received - - - 42,155
Purchase of equipment and leasehold improvements (253,852) (449,249) (1,256,739) (2,083,424)
Proceeds from sale of equipment 14,974 15,466 91,740 206,332
------------ ------------- ------------ ------------
Net cash (used in) investing activities (238,878) (433,783) (1,164,999) (1,834,937)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in notes payable to banks 975,000 2,250,000 (7,200,000) 2,250,000
Purchase of treasury stock - - (307,503) (2,231,250)
Dividends paid (450,313) (1,811,349) (902,125) (1,811,349)
Proceeds from stock options exercised - - - 154,289
------------ ------------- ------------ ------------
Net cash (used in) provided by financing activities 524,687 438,651 (8,409,628) (1,638,310)
------------ ------------- ------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (26,195) (7,123) (169,286) (7,146,207)
CASH AND CASH EQUIVALENTS, beginning of period 29,391 60,932 172,482 7,200,016
------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,196 $ 53,809 $ 3,196 $ 53,809
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 33,532 $ 13,818 $ 270,302 $ 19,612
Income taxes 1,213,582 1,002,942 3,108,884 3,923,655
</TABLE>
See notes to financial statements.
-4-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The financial statements have been prepared by the Company, without audit by
independent certified public accountants, in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations since the Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's 1995 Annual Report on Form 10-K.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of September 30, 1996, as well as the results of operations and the
cash flows for the three and nine months ended September 30, 1996 and 1995, have
been included.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
INVENTORY:
The Company measures inventory and cost of sales for interim financial
statements by use of a historically developed gross profit percentage.
Annually, the Company adjusts the inventory to reflect the results of a physical
count.
NET INCOME PER SHARE:
Net income per share and the dilutive effect on net income per share of
potentially dilutive stock options are computed by the treasury stock method.
Common stock equivalents result from the assumed issuance of shares under stock
option plans.
CASH FLOWS:
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The change in assets and liabilities in the operating section
of the statement of cash flows for the nine months ended September 30, 1995, is
reflected net of the effects of the acquisition consummated.
-5-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
NOTE B - ACQUISITION
On September 12, 1996 the Company purchased substantially all of the assets and
assumed certain liabilities of Mountain West Dental Company (MOUNTAIN), an Idaho
based dental supply, equipment and service company, in exchange for 429,000
shares of common stock of the Company valued at $4,450,875. The excess of cost
over the fair value of assets acquired (goodwill) was approximately $4,400,000
and is being amortized over twenty years on a straight-line basis. The
acquisition was accounted for under the purchase method of accounting. The
accompanying statements of income for 1996 include the operations of MOUNTAIN
since the date of acquisition. The effect of this acquisition on the Company's
results of operations on the pro forma basis was not material.
The effect on common stock and paid-in capital as of September 30, 1996, of this
acquisition is as follows:
Common Paid-In
Stock Capital
------- -----------
Balance, January 1, 1996 $93,067 $31,030,201
Shares issued in connection with the
MOUNTAIN acquisition 4,290 4,446,585
------- -----------
Balance, September 30, 1996 $97,357 $35,476,786
------- -----------
------- -----------
NOTE C - TREASURY STOCK
During June 1996, the Company repurchased 30,000 shares of its own common stock
in the open market for $307,503. Also during June 1996, an acquisition from a
prior year was revalued and 13,000 shares valued at $172,250 were returned to
the Company and recorded as treasury stock.
NOTE D - DIVIDENDS
On September 23, 1996, the Company declared a cash dividend of $.05 per share
payable October 21, 1996, to stockholders of record on October 10, 1996. The
Company also paid a $.05 cash dividend on April 20, 1996, and on June 19, 1996.
Total dividends are $1,373,888.
NOTE E - SUBSEQUENT EVENT
On November 5, 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Capitol Dental Supply, Inc., a Maryland based
dental supply, equipment and service company, in exchange for 240,000 shares of
common stock of the Company valued at $ 2,820,000. The excess of cost over the
fair value of assets acquired (goodwill) is approximately $ 2,600,000 and will
be amortized over twenty years on a straight-line basis. The acquisition will be
accounted for under the purchase method of accounting. During August 1996, the
Company made a deposit on this acquisition of approximately $1,260,000. At
September 30, 1996, this deposit is recorded in Accounts Receivable - Other.
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the three months ended September 30, 1996 ("Current Quarter") were
$59,914,000, an increase of $7,212,000, or 13.7%, over the three months ended
September 30, 1995 ("Prior Quarter"). The $7,212,000 increase in net sales was
substantially due to increased unit sales and, to a lesser extent, price
increases. The growth in unit sales was generated largely by increased
penetration in existing markets and the acquisition of Mountain West Dental
Company, Inc. as more fully described in the footnotes to the financial
statements.
Sales of dental supplies comprised 66.5% of net sales in the third quarter of
1996 versus 67.0% during the same period in 1995. Sales of dental equipment
constituted 27.0% of net sales in the Current Quarter versus 26.8% in the Prior
Quarter.
Gross profit rose $2,347,000, or 13.0%, in the Current Quarter compared to the
Prior Quarter, primarily as the result of increased sales. Gross profit as a
percentage of net sales decreased to 34.0% from 34.2% primarily due to declining
gross margins of equipment sales and a very competitive market.
Operating expenses rose $1,412,000, or 9.2%, in the third quarter of 1996
compared to the third quarter of 1995 but, more significantly, decreased as a
percentage of net sales to 28.1% from 29.2% over the same period last year. Of
this increase in operating expenses, $1,025,000 resulted from increased salaries
and commissions primarily due to higher sales creating higher commissions.
Operating income in the Current Quarter increased from the Prior Quarter by
$934,000 to $3,562,000, due to increased sales and more focused management of
operating expenses. Other income decreased by $84,000 to $184,000 in the third
quarter of 1996 compared to the third quarter of 1995.
Net income per share for primary and fully diluted shares increased to $.24 per
share during the third quarter of 1996 compared to $.19 per share for the
corresponding period in 1995. Net income increased $502,000 in the third
quarter of 1996 as compared to such period in 1995, due to the factors
identified above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the nine months ended September 30, 1996 ("Current Period") were
$172,871,000, an increase of $16,648,000, or 10.7%, over the nine months ended
September 30, 1995 ("Prior Period"). The $16,648,000 increase in net sales was
substantially due to increased unit sales and, to a lesser extent, price
increases. The growth in unit sales was generated largely by increased
penetration in existing markets and the acquisition of Mountain West Dental
Company, Inc., as more fully described in the footnotes to the financial
statements.
7
<PAGE>
Sales of dental supplies decreased to 68.2% of net sales in the first three
quarters of 1996 as compared to 69.4% for the corresponding period in 1995.
Sales of dental equipment constituted 25.1% of net sales in the Current Period
versus 23.9% in the Prior Period. The balance of sales in each period consisted
of repair service and parts. The change in product mix is largely due to the
opening of 9 new equipment sales and service centers in the last 12 months
which, when adjusting for the closing of one center, brings the total number of
equipment sales and service centers to 53 nationwide.
Gross profit rose $5,461,000, or 10.2%, in the first three quarters of 1996,
compared to the same period last year, primarily as a result of increased sales.
Gross profit as a percentage of net sales decreased to 34.1% from 34.2%.
Operating expenses for the Current Period rose $4,159,000, or 9.0%, compared to
the Prior Period but, more significantly, decreased as a percentage of net sales
to 29.0% from 29.4% over the same period last year. Of this increase in
operating expenses, $2,454,000 resulted from increased salaries and commissions
due to higher sales creating higher commissions.
Operating income in the Current Period increased by $1,301,000 to $8,732,000
from the Prior Period due to increased sales and more focused management of
operating expenses. Other income decreased by $137,000 to $602,000 for the
first nine months of 1996 as compared to the same period in 1995. Interest
expense rose $215,000 due to greater use of the bank lines. The weighted
average interest rate for the nine months ended September 30, 1996 was 6.5%.
Net income per share for primary and fully diluted shares rose from $.52 per
share to $.58 per share during the Current Period compared to the Prior Period.
Net income increased by $570,000 in the first nine months of 1996 as compared to
the same period last year, due to the factors identified above.
LIQUIDITY AND CAPITAL RESOURCES
The Company, pursuant to a stock repurchase plan which authorized the purchase
of up to 500,000 shares, has to date repurchased 280,000 shares of its common
stock from the public at various prices with an average price of approximately
$9.00 per share, which repurchases total $2,538,750.
Inventories decreased by $6,450,000 or 14.0%, over year-end 1995 due to reduced
purchasing in the first three quarters of 1996 due to accelerated purchases at
year-end to take advantage of vendor rebates.
Working capital at September 30, 1996 was $50,993,000, an increase of $3,965,000
over December 31, 1995.
Cash and cash equivalents as of September 30, 1996 decreased by $170,000 from
December 31, 1995. Net cash provided by operating activities for the nine
months ended September 30, 1996 was $9,405,000, primarily as a result of net
income adjusted for depreciation and provision for bad debts and a decrease in
inventory offset by a decrease in accounts payable. Cash was used for equipment
purchases ($1,257,000) and to reduce notes payable to banks ($7,200,000), as
well as to pay dividends ($902,000)and to buy treasury stock ($308,000).
8
<PAGE>
Other assets, net of amortization, as of September 30, 1996 increased by
$4,172,000 to $13,694,000 compared to $9,522,000 at December 31, 1995. The
increase is due to the goodwill from the acquisition of Mountain West
($4,451,000) and the purchase of customer lists ($140,000) offset by
amortization of goodwill ($299,000) and the reduction of goodwill for the
revaluing of the Inglis Dental Supply, Inc. acquisition ($218,000).
The Company expects that the $23,000,000 available lines of credit, of which
$2,700,000 was borrowed as of September 30, 1996, together with internally
generated funds from its operations, is sufficient to meet its currently
foreseeable short-term and long-term liquidity and capital needs.
On September 12, 1996, the Company completed its purchase of substantially all
of the assets and assumption of certain liabilities of Mountain West Dental
Company in exchange for 429,000 shares of common stock of the Company as more
fully described in the footnotes to the financial statements.
On September 23, 1996, the Company declared a cash dividend of 5 cents per share
which was paid on October 21, 1996 to shareholders of record on October 10,
1996.
ARTICLE II
ITEM 5. OTHER INFORMATION
On November 5, 1996, the Company purchased substantially all of the assets
and assumed certain of the liabilities of Capitol Dental Supply, Inc. a
Maryland based dental equipment and supply company, in exchange for 240,000
registered shares of common stock of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K - The Company was not required to, and did not, file a Form
8-K during the period covered by this report.
9
<PAGE>
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.
SULLIVAN DENTAL PRODUCTS, INC.
(Registrant)
By /s/ Timothy J. Sullivan
------------------------------------
Dated: November 11, 1996 TIMOTHY J. SULLIVAN, Vice President
and Principal Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 32,086
<ALLOWANCES> 971
<INVENTORY> 39,528
<CURRENT-ASSETS> 75,150
<PP&E> 12,210
<DEPRECIATION> 5,700
<TOTAL-ASSETS> 95,354
<CURRENT-LIABILITIES> 24,157
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 70,405
<TOTAL-LIABILITY-AND-EQUITY> 95,354
<SALES> 172,871
<TOTAL-REVENUES> 173,474
<CGS> 113,982
<TOTAL-COSTS> 113,982
<OTHER-EXPENSES> 50,157
<LOSS-PROVISION> 270
<INTEREST-EXPENSE> 248
<INCOME-PRETAX> 9,086
<INCOME-TAX> 3,634
<INCOME-CONTINUING> 5,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,452
<EPS-PRIMARY> .582
<EPS-DILUTED> .581
</TABLE>
