<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period ended
October 26, 1996.
----- 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 21,645,281 shares of common stock as of
December 3, 1996.
Page 1 of 12
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PATTERSON DENTAL COMPANY
INDEX
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<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements 3-7
Condensed Consolidated Balance Sheets as of
October 26, 1996 and April 27, 1996 3
Condensed Consolidated Statements of Income for the three months
and six months ended October 26, 1996 and October 28, 1995 4
Condensed Consolidated Statements of Cash Flows for the three months
and six months ended October 26, 1996 and October 28, 1995 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 11-12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
1995:
This Form 10-Q for the period ended October 26, 1996 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 26, 1996, and
other documents filed with the Securities and Exchange Commission.
2
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PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
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<CAPTION>
October 26, April 27,
1996 1996
----------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,813 $ 46,056
Receivables, net.......................................... 83,418 77,215
Inventory................................................. 57,033 48,787
Prepaid expenses.......................................... 3,069 1,729
Deferred taxes............................................ 901 898
-------- --------
Total current assets.................................. 147,234 174,685
Property and equipment, net.................................. 35,842 25,740
Other ....................................................... 2,145 2,375
Intangibles and other........................................ 43,171 ---
-------- --------
Total assets.......................................... $228,392 $202,800
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable....................................... $ 48,225 $ 42,520
Accrued payroll expense................................ 9,910 9,504
Other accrued expenses................................. 8,998 8,421
Income taxes payable................................... 1,795 2,220
Note payable and current maturities of long-term debt.. 4,013 151
-------- --------
Total current liabilities....................... 72,941 62,816
Long-term debt............................................... 2,997 3,024
Deferred taxes............................................... 1,167 1,157
-------- --------
Total liabilities............................... 77,105 66,997
Deferred credits............................................. 8,240 8,682
Stockholders' equity:
Preferred stock........................................ --- 21,885
Common stock........................................... 217 177
Additional paid in capital............................. 53,833 31,435
Cumulative translation adjustment...................... 28 (189)
Retained earnings...................................... 104,869 89,713
Note receivable from ESOP.............................. (15,900) (15,900)
-------- --------
Total stockholders' equity...................... 143,047 127,121
-------- --------
Total liabilities and stockholders' equity...... $228,392 $202,800
======== ========
</TABLE>
See accompanying notes.
3
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ------------------
Oct. 26, Oct. 28, Oct. 26, Oct. 28,
1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................................ $161,878 $143,709 $304,071 $278,049
Cost of sales.................................... 104,684 93,444 196,782 180,106
-------- -------- -------- --------
Gross profit..................................... 57,194 50,265 107,289 97,943
Operating expenses............................... 45,308 39,580 86,257 77,357
-------- -------- -------- --------
Operating income................................. 11,886 10,685 21,032 20,586
Other income and expense:
Amortization of deferred credits............. 221 221 442 442
Finance income, net.......................... 387 323 845 561
Interest expense............................. (163) (105) (259) (211)
Profit (loss) on currency exchange........... 5 14 (4) 15
-------- -------- -------- --------
Income before income taxes....................... 12,336 11,138 22,056 21,393
Income taxes..................................... 4,505 4,139 7,993 8,075
-------- -------- -------- --------
Net income....................................... $ 7,831 $ 6,999 $ 14,063 $ 13,318
======== ======== ======== ========
Net income available for common shareholders..... $ 7,831 $ 6,841 $ 14,063 $ 13,008
======== ======== ======== ========
Earnings per common and common equivalent share.. $ 0.36 $ 0.32 $ 0.65 $ 0.60
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding........................... 21,670 21,535 21,625 21,525
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------
Oct. 26, Oct. 28,
1996 1995
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<S> <C> <C>
Operating activities:
Net income............................................. $ 14,063 $13,318
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................................... 2,062 1,744
Amortization of deferrals.......................... (442) (437)
Amortization of goodwill........................... 342 ---
Bad debt expense................................... 283 350
Change in assets and liabilities, net of acquired.. (5,430) (3,702)
-------- -------
Net cash provided by operating activities................. 10,878 11,273
Investing activities:
Additions to property and equipment, net............... (2,140) (2,476)
Acquisitions........................................... (56,274) ---
Net cash used in investing activities.................... (58,414) (2,476)
Financing activities:
Increase in revolving credit agreement................. 3,825 ---
Payments and retirement of long-term debt and
obligations under capital leases..................... (51) (66)
Common stock issued, net............................... 513 564
-------- -------
Net cash provided by financing activities................. 4,287 498
Effect of exchange rate changes on cash................... 6 (29)
-------- -------
Net increase (decrease) in cash and cash equivalents...... (43,243) 9,266
Cash and cash equivalents at beginning of period.......... 46,056 13,570
-------- -------
Cash and cash equivalents at end of period................ $ 2,813 $22,836
======== =======
</TABLE>
See accompanying notes.
5
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PATTERSON DENTAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
OCTOBER 26, 1996
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position as of October 26, 1996, and the results of
operations and the cash flows for the periods ended October 26, 1996, and
October 28, 1995. Such adjustments are of a normal recurring nature. The
results of operations for the quarter and six months ended October 26, 1996, and
October 28, 1995, are not necessarily indicative of the results to be expected
for the full year. The balance sheet at April 27, 1996, 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 1996 Annual
Report on Form 10-K.
2. The fiscal year end of the Company is the last Saturday in April. The
second quarter and six months of fiscal year 1997 and 1996 represents the 13
weeks and the twenty-six weeks ended October 26, 1996 and October 28, 1995,
respectively.
3. On July 3, 1996 all 3,552,856 shares of the Company's Preferred Stock
Series A held by the Patterson Dental Company Employee Stock Ownership Plan
("ESOP") were converted to 3,837,083 shares of the Company's Common Stock in
accordance with the terms of the Preferred Stock Series A. The terms of the
constituent instrument defining the rights of holders of the Preferred Stock
Series A were not modified; however, upon the conversion of the shares of
Preferred Stock Series A to Common Stock, there were no remaining shares of
Preferred Stock Series A issued and outstanding. Previously, the ESOP was
funded through preferred stock dividends. With the conversion to common stock,
the funding of the ESOP will now be reflected as a charge to operating expense.
This annual charge is estimated to be approximately $800,000.
4. On September 30, 1996 the Company increased the existing revolving credit
agreement from $30 million to $40 million. This agreement provides for
unsecured borrowings and sales of installment contract receivables. Also, an
additional $20 million revolving line of credit was established. Both lines
mature on September 29, 1997 and include similar terms and conditions.
5. On October 1, 1996 the Company purchased the Colwell division of Deluxe
Corporation ("Colwell") for an aggregate purchase price of $61.1 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
6
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the results of operations that would have occurred had the acquisition been made
as of those dates or future results.
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 26, 1996 October 28, 1995
----------------- -----------------
(In thousands except per share data)
<S> <C> <C>
Net sales $327,836 $305,315
Net income 15,333 12,005
Earnings per share $0.71 $0.54
</TABLE>
On August 12, 1996 the Company also acquired Thau-Nolde, Inc. in a transaction
accounted for as a pooling of interests. The acquisition was not material to
the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain operational data.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
Oct. 26, Oct. 28, Oct. 26, Oct. 28,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 64.7% 65.0% 64.7% 64.8%
------ ------ ------ ------
Gross profit...................................... 35.3% 35.0% 35.3% 35.2%
Operating expenses................................ 28.0% 27.6% 28.4% 27.8%
------ ------ ------ ------
Operating income.................................. 7.3% 7.4% 6.9% 7.4%
Other income and expense, net..................... 0.3% 0.4% 0.3% 0.3%
------ ------ ------ ------
Income before income taxes........................ 7.6% 7.8% 7.2% 7.7%
Income taxes...................................... 2.8% 2.9% 2.6% 2.9%
------ ------ ------ ------
Net income........................................ 4.8% 4.9% 4.6% 4.8%
====== ====== ====== ======
</TABLE>
As discussed in Note 5 to the Condensed Consolidated Financial Statements,
Patterson purchased the Colwell division of Deluxe Corporation on October 1,
1996. The quarter and six months include the results of Colwell for the four
weeks ended October 26, 1996. Colwell's sales of $4.8 million
7
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were better than expected. Colwell's higher gross margins had a favorable impact
on consolidated gross margins and operating margin for the quarter and six
months ended October 26, 1996, even though the consolidated results included
only four weeks for this newly acquired business. Colwell is expected to have a
continuing positive effect on both gross margins and operating margins for the
balance of the fiscal year. The acquisition of Colwell utilized all of the
Company's excess cash and required it to borrow against its revolving line of
credit. This resulted in increased interest expense in the quarter and six
months and is expected to continue through the balance of this fiscal year.
Colwell's impact on the consolidated net income was $0.5 million for both the
quarter and six month periods, and is expected to have a continuing positive
effect on net income for the balance of this fiscal year.
QUARTER ENDED OCTOBER 26, 1996 COMPARED TO QUARTER ENDED OCTOBER 28, 1995.
NET SALES. Net sales increased 12.6% to $161.9 million for the three
months ended October 26, 1996 ("Current Quarter") from $143.7 million for
the three months ended October 28, 1995 ("Prior Quarter"). There were four
weeks of Colwell sales in the Current Quarter. Sales increased $18.2, with
Colwell contributing $4.8 million of the increase. Excluding Colwell, sales
were up $13.4 million or 9.3% due primarily to increased unit sales and
price increases.
GROSS PROFIT. Gross profit margin increased to 35.3% for the Current
Quarter from 35.0% for the Prior Quarter. The 30 basis point gross margin
increase is due to the higher margins from the Colwell acquisition. Gross
profit increased 13.8% to $57.2 million for the Current Quarter from $50.3
million for the Prior Quarter. The increase in gross profit was due
primarily to the increase in sales.
OPERATING EXPENSES. Operating expenses increased 14.5% to $45.3
million for the Current Quarter from $39.6 million for the Prior Quarter.
The increase in operating expenses is primarily related to the increase in
sales. Operating expenses as a percent of sales increased from 27.6% to
28.0% due to a change in the ESOP and increased health care costs. As a
result of the conversion of the ESOP preferred stock, the funding of the
ESOP is now reflected as an operating expense of approximately $200,000 per
quarter. Previously, the funding of the ESOP was reflected as preferred
stock dividends.
OPERATING INCOME. Operating income increased 11.2% to $11.9 million
for the Current Quarter from $10.7 million for the Prior Quarter. Operating
income as a percent of net sales decreased slightly from 7.4% to 7.3%, as a
result of increased operating expenses as a percent of sales.
8
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FINANCE INCOME. Finance income, net of expenses, was $387,000 for the
Current Quarter compared to $323,000 for the Prior Quarter. Finance income
increased $64,000 due primarily to additional short term investment of
cash.
INTEREST EXPENSE. Interest expense increased to $163,000 for the
Current Quarter from $105,000 for the Prior Quarter. This increase is due
mainly to the acquisition of Colwell and the utilization of the revolving
bank loan.
INCOME TAXES. The effective income tax rate decreased to 36.5% for the
current quarter from 37.2% for the Prior Quarter and results from lower
state income taxes.
SIX MONTHS ENDED OCTOBER 26, 1996 COMPARED TO SIX MONTHS ENDED OCTOBER 28,
1995.
NET SALES. Net sales increased 9.4% to $304.1 million for the six
months ended October 26, 1996 ("Current Period") from $278.1 million for
the six months ended October 28, 1995 ("Prior Period"). There were four
weeks of Colwell sales in the Current Period. Sales increased $26.0 million
with Colwell contributing $4.8 million of the increase. Excluding Colwell,
sales were up $21.2 million or 7.6% due primarily to increased unit sales
and price increases.
GROSS PROFIT. Gross profit margin increased to 35.3% for the Current
Period from 35.2% for the Prior Period due to the higher margins from the
Colwell acquisition. Gross profit increased 9.5% to $107.3 million for the
Current Period from $97.9 million for the Prior Period. The increase in
gross profit was due primarily to the increase in sales.
OPERATING EXPENSES. Operating expenses increased 11.5% to $86.3
million for the Current Period from $77.4 million for the Prior Period. The
increase in operating expenses is primarily related to the increase in
sales. Operating expenses as a percent of sales have increased from 27.8%
to 28.4% due to increased health care costs and the change in the ESOP
funding as discussed earlier.
OPERATING INCOME. Operating income increased 2.2% to $21.0 million for
the Current Period from $20.6 million for the Prior Period. Operating
income as a percent of net sales decreased from 7.4% to 6.9%, as a result
of increased operating expenses as a percent of sales.
9
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FINANCE INCOME. Finance income, net of expenses, was $845,000 for the
Current Period compared to $561,000 for the Prior Period. Finance income
increased $284,000 due primarily to additional short term investment of
cash.
INTEREST EXPENSE. Interest expense increased to $259,000 for the
Current Period from $211,000 for the Prior Period. This increase is due
mainly to the acquisition of Colwell and the utilization of the revolving
bank loan.
INCOME TAXES. The effective income tax rate decreased to 36.2% for the
Current Period from 37.7% for the Prior Period and results from lower state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Available liquid resources at October 26, 1996 consisted of $2.8 million
cash and cash equivalents and $37.5 million available under bank lines. The
acquisition of Colwell during the second quarter utilized a substantial
portion of the Company's cash balances and increased debt under the
revolving credit agreement. On September 30, 1996 in anticipation of the
Colwell acquisition, the Company increased an existing bank line from $30
million to $40 million and established an additional $20 million revolving
line of credit. Both credit lines mature on September 29, 1997 and include
similar terms and conditions. The Company believes that funds from
operations and the remainder of its credit lines are sufficient to meet any
other existing and presently anticipated needs. In addition, because of its
low debt to equity ratio, the Company believes it has sufficient debt
capacity to replace its existing revolver and provide the necessary funds
for potential acquisitions.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company wishes to caution shareholders and prospective investors that
the following important factors, among others, could in the future affect the
Company's actual operating results which could differ materially from those
expressed in any forward-looking statements made by the Company. The statements
under this caption are intended to serve as cautionary statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for such
purpose. The order in which such factors appear below should not be construed
to indicate their relative importance or priority.
. Reduced growth in expenditures for dental services by private dental
insurance plans.
10
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. 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.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company's Annual Meeting of Shareholders was held on September
9, 1996
c)(1) The shareholders voted for two director nominees, Ronald E. Ezerski
and Andre B. Lacy, for a three year term. 19,184,559 shares were
voted for Mr. Ezerski and 52,577 shares withheld authority.
19,061,509 shares were voted for Mr. Lacy and 175,627 shares
withheld authority. There were no abstentions and no broker non-
votes.
11
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(2) The shareholders voted to approve the Company's Capital Accumulation
Plan. The vote was 18,457,989 shares for, 665,780 shares against and
56,228 abstentions. There were 57,139 broker non-votes.
(3) The shareholders voted to ratify the appointment of Ernst & Young LLP
as independent auditors of the Company for the fiscal year ending
April 26, 1997. The vote was 19,223,401 shares for, 5,193 against and
8,542 abstentions. There were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Item 27 Financial Data Schedule.
(b) Reports on Form 8-K.
On October 15, 1996 the Company filed a report on Form 8-K for the
acquisition of the Colwell division of Deluxe Corporation.
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 26, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATTERSON DENTAL COMPANY
(Registrant)
Dated: December 6, 1996.
By: /s/ Ronald E. Ezerski
--------------------------
Ronald E. Ezerski
Vice President and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-END> OCT-26-1996
<CASH> 2,813
<SECURITIES> 0
<RECEIVABLES> 88,023
<ALLOWANCES> 4,605
<INVENTORY> 57,033
<CURRENT-ASSETS> 147,234
<PP&E> 49,500
<DEPRECIATION> 13,658
<TOTAL-ASSETS> 228,392
<CURRENT-LIABILITIES> 72,941
<BONDS> 2,997
<COMMON> 217
0
0
<OTHER-SE> 142,830
<TOTAL-LIABILITY-AND-EQUITY> 228,392
<SALES> 304,071
<TOTAL-REVENUES> 304,071
<CGS> 196,782
<TOTAL-COSTS> 196,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> 22,056
<INCOME-TAX> 7,993
<INCOME-CONTINUING> 14,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,063
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
