<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 March 31, 1997
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
----------------------------------------------------
(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 April 28, 1997, 9,943,451 shares of common stock, .01 par value, were
outstanding.
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1997
INDEX
Page
----
Part I Item 1 - Financial Information 1
Balance Sheets as of March 31, 1997
and December 31, 1996 1-2
Statements of Income for the three
months ended March 31, 1997 and 1996 3
Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 4
Notes to Financial Statements 5-7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-9
Part II Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I FINANCIAL INFORMATION
SULLIVAN DENTAL PRODUCTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 167,360 $ 50,217
Commercial paper -- cash equivalent 3,500,000 500,000
Accounts receivable:
Trade, less allowance for uncollectible accounts 31,374,496 35,093,051
Other 200,237 180,617
Inventory 41,304,871 40,399,951
Prepaid expenses and income taxes 1,679,807 1,752,373
------------ ------------
Total current assets 78,226,771 77,976,209
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Warehouse and office equipment 7,919,177 7,794,591
Transportation equipment 3,104,413 3,106,327
Leasehold improvements 1,391,509 1,367,264
------------ ------------
12,415,099 12,268,182
Less accumulated depreciation and amortization 5,890,508 5,577,684
------------ ------------
Net equipment and leasehold improvements 6,524,591 6,690,498
OTHER ASSETS:
Goodwill 19,606,950 16,043,511
Other 324,760 340,068
------------ ------------
$104,683,072 $101,050,286
============ ============
</TABLE>
See notes to financial statements.
-1-
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 15,257,736 $ 15,241,950
Accrued expenses:
Salaries, commissions and benefits 1,503,159 3,105,005
Other 4,150,146 4,944,268
Income taxes payable 972,877 --
Dividends payable 497,685 484,113
------------- -------------
Total current liabilities 22,381,603 23,775,336
DEFERRED INCOME TAXES 816,000 816,000
STOCKHOLDERS' EQUITY:
Preferred stock--$.01 par value; 500,000 shares
authorized, none issued -- --
Common stock--$.01 par value; 30,000,000 shares
authorized, 10,004,697 and 9,982,747 shares issued
in 1997 and 1996, respectively 100,047 99,827
Paid-in capital 40,223,166 38,702,016
Retained earnings 41,817,594 40,469,320
------------- -------------
Total 82,140,807 79,271,163
Less treasury stock at cost (55,496 and
300,496 shares in 1997 and 1996, respectively) (655,338) (2,812,213)
------------- -------------
Total stockholders' equity 81,485,469 76,458,950
------------- -------------
$104,683,072 $101,050,286
============= =============
</TABLE>
See notes to financial statements.
-2-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
------------- -------------
<S> <C> <C>
Net sales $ 60,181,006 $ 54,460,313
Cost of sales 39,461,436 35,834,886
------------- -------------
Gross profit 20,719,570 18,625,427
Operating expenses 17,956,272 16,466,784
------------- -------------
Operating income 2,763,298 2,158,643
Interest expense (10,974) (145,720)
Other income, principally interest 324,641 281,638
------------- -------------
Income before provision for income taxes 3,076,965 2,294,561
Provision for income taxes 1,231,000 918,000
------------- -------------
Net income $ 1,845,965 $ 1,376,561
============= =============
Net income per common and common
equivalent share $0.18 $0.15
Weighted average common shares 10,374,000 9,348,000
</TABLE>
See notes to financial statements.
-3-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,845,965 $ 1,376,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 644,571 503,878
Loss (gain) on sale of equipment 18,960 (9,554)
Provision for losses on accounts receivable 75,000 105,000
Changes in assets and liabilities, net of acquired businesses:
Decrease in accounts receivable--trade 3,657,262 3,637,188
(Increase) decrease in accounts receivable--other (19,620) 652,506
(Increase) decrease in inventory (904,920) 4,214,248
Decrease in prepaid expenses and income taxes 72,566 925,991
Decrease (increase) in other assets 2,558 (1,000)
(Decrease) in accounts payable (61,431) (5,079,456)
(Decrease) in accrued expenses-- salaries,
commissions and benefits (1,601,846) (852,512)
(Decrease) in accrued expenses--other (794,237) (349,824)
Increase in income taxes payable 972,877 367,697
------------- -------------
Net cash provided by operating activities 3,907,705 5,490,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (287,168) (450,500)
Proceeds from sale of equipment 12,475 22,350
------------- -------------
Net cash (used in) investing activities (274,693) (428,150)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in notes payable to banks -- (5,175,000)
Purchase of treasury stock (275,000) --
Dividends paid (484,113) --
Proceeds from stock options exercised 211,300 --
Tax benefit of stock options exercised 31,944 --
------------- -------------
Net cash (used in) financing activities (515,869) (5,175,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS S 3,117,143 (112,427)
CASH AND CASH EQUIVALENTS, beginning of period 550,217 172,482
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 3,667,360 $ 60,055
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,974 $ 181,852
Income taxes 209,327 101,982
</TABLE>
See notes to financial statement.
-4-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
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 1996 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 March 31, 1997, as well as the results of operations and the cash
flows for the three months ended March 31, 1997 and 1996, 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 three months ended March 31, 1997, is
reflected net of the effects of the acquisitions consummated.
-5-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
Note B - Acquisitions
On February 14, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of Omega Professional Services, Inc. (OMEGA), a Utah
based equipment leasing company, in exchange for 200,000 shares of common stock
of the Company valued at $2,800,000. The excess of cost over the fair value of
assets acquired (goodwill) was approximately $2,831,000 and is being amortized
over twenty years on a straight-line basis.
On February 21, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of S. B. Service, a Connecticut based sterilization
equipment repair company, in exchange for 65,000 shares of common stock of the
Company valued at $910,000. The excess of cost over the fair value of assets
acquired (goodwill) was approximately $934,000 and is being amortized over
twenty years on a straight-line basis.
These acquisitions were accounted for under the purchase method of accounting.
The accompanying statements of income for 1997 include the operations of OMEGA
and S. B. Service since the date of acquisition. The effect of these
acquisitions on the Company's results of operations on a pro forma basis was not
material. Both of these acquisitions were purchased with treasury stock.
The effect on common stock, paid-in capital and treasury stock as of March 31,
1997, of these acquisitions, certain stock options exercised and the repurchase
of treasury stock (Note C) is as follows:
<TABLE>
<CAPTION>
Common Paid-In Treasury
Stock Capital Stock
------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 99,827 $38,702,016 $ (2,812,213)
Shares issued in connection
with the OMEGA acquisition - 1,025,000 1,775,000
Shares issued in connection
with the S. B. Service acquisition - 253,126 656,875
Shares issued in connection
with stock options exercised 220 211,080 -
Tax benefit of stock options exercised - 31,944 -
Shares repurchased (Note C) - - (275,000)
------------- ------------- -------------
Balance, March 31, 1997 $100,047 $40,223,166 $ (655,338)
============= ============= =============
</TABLE>
-6-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
Note C - Treasury Stock
During February 1997, the Company repurchased 20,000 shares of its own common
stock in the open market for $275,000.
Note D - Dividends
On March 20, 1997, the Company declared a cash dividend of $.05 per share
payable April 21, 1997, to stockholders of record on April 10, 1997. Total
dividends are $497,685.
Note E - Subsequent Event
During April 1997, the Company repurchased 20,000 shares of its own common stock
in the open market for approximately $277,500.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net sales for the three months ended March 31, 1997 ("Current Quarter") were
$60,181,000, an increase of $5,721,000, or 10.5%, over the three months ended
March 31, 1996 ("Prior Quarter"). The $5,721,000 increase in net sales was
primarily due to increased unit sales and, to a lesser extent, price increases.
The growth in unit sales was generated primarily by increased penetration in
existing markets and the acquisitions of Mountain West Dental Company, Inc. and
Capital Dental Supply, Inc., which occurred in September and November of 1996,
respectively.
Sales of dental supplies comprised 70.0% of net sales in the Current Quarter
versus 70.6% during the Prior Quarter. Sales of dental equipment constituted
23.3% of net sales in the first quarter of 1997 versus 22.3% in such period in
1996. The balance of sales in each period consisted primarily of repair service
and parts.
Gross profit rose $2,094,000, or 11.2%, in the Current Quarter compared to the
Prior Quarter, primarily as the result of increased sales. Gross profit as a
percentage of net sales increased to 34.4% in the first quarter of 1997 compared
to 34.2% for the same period in 1996 primarily as a result of more efficient
buying programs and, to a lesser degree, from revenue from SDP Financial, which
is the equipment leasing operation that was developed in conjunction with the
acquisition of Omega Professional Services, Inc., a Utah based equipment leasing
company ("Omega").
Operating expenses rose $1,489,000, or 9.0%, to $17,956,000, in the Current
Quarter compared to $16,467,000 in the Prior Quarter but, more significantly,
decreased as a percentage of net sales to 29.8% from 30.2% over the same period
last year. Of this increase in operating expenses, $924,000 resulted from
increased salaries and commissions due to higher sales creating higher
commissions.
Operating income in the Current Quarter increased $605,000 from the Prior
Quarter due to the increase in sales and better control of operating expenses.
Interest expense decreased by $135,000 to $11,000 primarily due to reduced use
of the Company's credit line.
Net income increased by $469,000 or 34.1%, in the first three months of 1997 as
compared to such period in 1996. Net income per share rose to $.18 for the first
quarter of 1997 from $.15 per share in such quarter of 1996. Such increases to
net income and income per share are due to the factors identified above.
8
<PAGE>
Liquidity and Capital Resources
The Company, pursuant to a stock repurchase plan which authorized the purchase
of up to 500,000 shares, has purchased through March 31, 1997, 300,000 shares of
its common stock from the public at various prices with an average price of
approximately $9.38 per share, which repurchases total $2,813,750.
Working capital at March 31, 1997 was $55,845,000, an increase of $1,644,000
from December 31, 1996, reflecting net income of $1,846,000, reduced by
dividends of $498,000.
Inventory rose $905,000 or 2.2%, from December 31, 1996.
Cash and cash equivalents as of March 31, 1997 increased by $3,117,000 from
December 31, 1996. Cash was used for equipment purchases ($287,000), purchase of
treasury stock ($275,000) and to pay dividends ($484,000) and was primarily
provided by operations ($3,908,000) and stock options exercised ($211,000).
Net cash provided by operating activities for the three months ended March 31,
1997, of $3,908,000 was primarily as a result of net income adjusted for
depreciation and bad debts and a decrease in accounts receivable offset by a
decrease in accrued expenses.
Other assets, net of amortization, as of March 31, 1997 increased $3,548,000 to
$19,932,000 compared to $16,384,000 at December 31, 1996. This increase is due
to the goodwill attributable to the acquisition of Omega in the amount of
$2,831,000 and S.B. Service in the amount of $934,000 offset by the amortization
of goodwill and customer lists in the amount of $214,000.
The Company expects that the $23,000,000 of available lines of credit, against
which there were no borrowings as of March 31, 1997, together with internally
generated funds, is sufficient to meet currently foreseeable short-term and
long-term liquidity and capital needs of the Company.
On February 14, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of Omega in exchange for 200,000 shares of common
stock of the Company as more fully described in the footnotes to the financial
statements.
On February 21, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of S.B. Service, a Connecticut based sterilization
equipment repair company, in exchange for 65,000 shares of common stock of the
Company as more fully described in the footnotes to the financial statements.
On March 20, 1997, the Company declared a cash dividend of $.05 per share for
stockholders of record on April 10, 1997 which dividend was payable on April 21,
1997.
The Company had short term investments of $3,500,000 at March 31, 1997, compared
to $500,000 at December 31, 1996. This increase was due to collection of
accounts receivable from the fourth quarter of 1996.
Accounts receivable of $31,374,000 at March 31, 1997, decreased $3,719,000, or
10.6%, compared to December 31, 1996.
9
<PAGE>
Part II - Other Information
Item 5. Other Information
In April, the Company, pursuant to the stock repurchase plan described above,
purchased an additional 20,000 shares of its common stock from the public at a
price of approximately $13.88 per share, which repurchase totalled $277,500.
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.
10
<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: May 13, 1997 TIMOTHY J. SULLIVAN, President
and Principal Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,667
<SECURITIES> 0
<RECEIVABLES> 32,358
<ALLOWANCES> 983
<INVENTORY> 41,305
<CURRENT-ASSETS> 78,227
<PP&E> 12,415
<DEPRECIATION> 5,891
<TOTAL-ASSETS> 104,683
<CURRENT-LIABILITIES> 22,382
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 81,385
<TOTAL-LIABILITY-AND-EQUITY> 104,683
<SALES> 60,181
<TOTAL-REVENUES> 60,506
<CGS> 39,461
<TOTAL-COSTS> 39,461
<OTHER-EXPENSES> 17,956
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 3,077
<INCOME-TAX> 1,231
<INCOME-CONTINUING> 1,846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,846
<EPS-PRIMARY> .178
<EPS-DILUTED> .177
</TABLE>
