<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 January 25, 1997.
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
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(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 21,692,131 shares of common stock as of
February 21, 1997.
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
January 25, 1997 and April 27, 1996 3
Condensed Consolidated Statements of Income for the three months
and nine months ended January 25, 1997 and January 27, 1996 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended January 25, 1997 and January 27, 1996 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 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
- ---------------------------------------------------------------------------
1995:
- ----
This Form 10-Q for the period ended January 25, 1997 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
<TABLE>
<CAPTION>
January 25, April 27,
1997 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.. $ 11,521 $ 46,056
Receivables, net........... 77,602 77,215
Inventory.................. 68,337 48,787
Prepaid expenses........... 3,137 1,729
Deferred taxes............. 901 898
-------- --------
Total current assets... 161,498 174,685
Property and equipment, net... 35,845 25,740
Intangibles and other......... 44,634 2,375
-------- --------
Total assets........... $241,977 $202,800
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable..................................$ 54,269 $ 42,520
Accrued payroll expense........................... 11,110 9,504
Other accrued expenses............................ 10,272 8,421
Income taxes payable.............................. 1,001 2,220
Current maturities of long-term debt............. 188 151
-------- --------
Total current liabilities................... 76,840 62,816
Long-term debt......................................... 2,938 3,024
Deferred taxes......................................... 1,167 1,157
-------- --------
Total liabilities........................... 80,945 66,997
Deferred credits....................................... 8,018 8,682
Stockholders' equity:
Preferred stock................................... -- 21,885
Common stock...................................... 218 177
Additional paid in capital........................ 54,821 31,435
Cumulative translation adjustment................. (40) (189)
Retained earnings................................. 113,915 89,713
Note receivable from ESOP......................... (15,900) (15,900)
-------- --------
Total stockholders' equity.................. 153,014 127,121
-------- --------
Total liabilities and stockholders' equity.. $241,977 $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 Nine Months Ended
------------------ -----------------
Jan. 25, Jan. 27, Jan. 25, Jan. 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................................................. $176,055 $148,672 $480,126 $426,721
Cost of sales.............................................................. 112,197 96,524 308,979 276,630
-------- -------- -------- --------
Gross profit............................................................... 63,858 52,148 171,147 150,091
Operating expenses......................................................... 49,348 41,368 135,605 118,725
-------- -------- -------- --------
Operating income........................................................... 14,510 10,780 35,542 31,366
Other income and expense:
Amortization of deferred credits....................................... 222 221 664 663
Finance income, net.................................................... 76 446 921 1,007
Interest expense....................................................... (179) (96) (438) (307)
Profit (loss) on currency exchange..................................... (7) (12) (11) 3
-------- -------- -------- --------
Income before income taxes................................................. 14,622 11,339 36,678 32,732
Income taxes............................................................... 5,576 4,323 13,569 12,398
-------- -------- -------- --------
Net income................................................................. $ 9,046 $ 7,016 $ 23,109 $ 20,334
======== ======== ======== ========
Net income available for common shareholders............................... $ 9,046 $ 6,861 $ 23,109 $ 19,869
======== ======== ======== ========
Earnings per common and common equivalent share............................ $ 0.42 $ 0.32 $ 1.07 $ 0.92
======== ======== ======== ========
Weighted average common and common equivalent shares outstanding........... 21,714 21,546 21,655 21,532
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------
Jan. 25, Jan. 27,
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income ............................................. $ 23,109 $ 20,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................... 3,369 2,605
Amortization of goodwill ........................... 915 --
Amortization of deferrals .......................... (664) (656)
Bad debt expense ................................... 376 576
Change in assets and liabilities, net of acquired .. 1,604 4,733
-------- --------
Net cash provided by operating activities .................. 28,709 27,592
Investing activities:
Acquisitions ........................................... (61,171) (1,585)
Additions to property and equipment, net ............... (3,462) (5,304)
-------- --------
Net cash used in investing activities ...................... (64,633) (6,889)
Financing activities:
Common stock issued, net ............................... 1,502 769
Payments and retirement of long-term debt and
obligations under capital leases ..................... (100) (86)
-------- --------
Net cash provided by financing activities .................. 1,402 683
Effect of exchange rate changes on cash .................... (13) (81)
-------- --------
Net increase (decrease) in cash and cash equivalents ....... (34,535) 21,305
Cash and cash equivalents at beginning of period ........... 46,056 13,570
-------- --------
Cash and cash equivalents at end of period ................. $ 11,521 $ 34,875
======== ========
</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)
January 25, 1997
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 25, 1997, and the results of
operations and the cash flows for the periods ended January 25, 1997, and
January 27, 1996. Such adjustments are of a normal recurring nature. The results
of operations for the quarter and nine months ended January 25, 1997, and
January 27, 1996, 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 third
quarter and nine months of fiscal year 1997 and 1996 represents the 13 weeks and
the thirty-nine weeks ended January 25, 1997 and January 27, 1996, 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 $61.0 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
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>
Nine Months Ended
-----------------
January 25, 1997 January 27, 1996
----------------- -----------------
(In thousands except per share data)
<S> <C> <C>
Net sales.................... $503,891 $467,724
Net income................... 24,379 18,809
Earnings per share........... $ 1.13 $ 0.85
</TABLE>
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 Nine Months Ended
------------------ -----------------
Jan. 25, Jan. 27, Jan. 25, Jan. 27,
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 63.8% 64.9% 64.4% 64.8%
------ ------ ------ ------
Gross profit............................... 36.2% 35.1% 35.6% 35.2%
Operating expenses......................... 28.0% 27.8% 28.2% 27.8%
------ ------ ------ ------
Operating income........................... 8.2% 7.3% 7.4% 7.4%
Other income and expense, net.............. 0.1% 0.3% 0.2% 0.3%
------ ------ ------ ------
Income before income taxes................. 8.3% 7.6% 7.6% 7.7%
Income taxes............................... 3.2% 2.9% 2.8% 2.9%
------ ------ ------ ------
Net income................................. 5.1% 4.7% 4.8% 4.8%
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</TABLE>
As discussed in Note 5 to the Condensed Consolidated Financial Statements,
Patterson purchased the Colwell division of Deluxe Corporation on October 1,
1996. Colwell's sales of $19.7 million for the seventeen weeks ended January 25,
1997 were better than expected. Colwell's higher gross margins had a favorable
impact on consolidated gross margins and operating margin for the quarter and
nine months ended January 25, 1997. The acquisition of Colwell utilized all of
the Company's
7
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excess cash and increased borrowings against the company's revolving line of
credit, increasing interest expense and reducing interest income for the quarter
and nine months. As of January 25, 1997, all borrowings under the revolving line
of credit associated with the acquisition of Colwell were paid down through
internally generated cash.
Colwell's impact on consolidated operating earnings was $3.3 million for the
quarter and $4.4 million for the nine month period. It is expected to have a
continuing positive effect on operating earnings for the balance of the fiscal
year.
QUARTER ENDED JANUARY 25, 1997 COMPARED TO QUARTER ENDED JANUARY 27, 1996.
Net Sales. Net sales increased 18.4% to $176.1 million for the three
months ended January 25, 1997 ("Current Quarter") from $148.7 million for
the three months ended January 27, 1996 ("Prior Quarter"). Sales increased
$27.4 million, with Colwell contributing $14.9 million of the increase.
Excluding Colwell, sales were up $12.5 million or 8.4% due primarily to
increased
unit sales and price increases.
Gross Profit. Gross profit margin increased to 36.2% for the Current
Quarter from 35.1% for the Prior Quarter. The 110 basis point gross margin
increase is due to the higher margins from the Colwell acquisition. Gross
profit increased 22.5% to $63.9 million for the Current Quarter from $52.1
million for the Prior Quarter. The increase in gross profit was due
primarily to increased sales.
Operating Expenses. Operating expenses increased 19.3% to $49.3
million for the Current Quarter from $41.4 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 27.8% to
28.0% due to a change in accounting for the ESOP and increased employee
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 34.6% to $14.5 million
for the Current Quarter from $10.8 million for the Prior Quarter. Operating
income as a percent of net sales increased from 7.3% to 8.2% due primarily
to the increase in gross margins discussed earlier.
Finance Income. Finance income, net of expenses, was $76,000 for the
Current Quarter compared to $446,000 for the Prior Quarter. Finance income
decreased $370,000 due primarily to utilization of our cash for the Colwell
acquisition.
Interest Expense. Interest expense increased to $179,000 for the
Current Quarter from $96,000 for the Prior Quarter. This increase is due
mainly to the acquisition of Colwell and the utilization of the revolving
bank loan during the quarter.
8
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Income Taxes. The effective income tax rate was 38.1% for the Current
Quarter or equal to the Prior Quarter.
NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 27,
1996.
Net Sales. Net sales increased 12.5% to $480.1 million for the nine
months ended January 25, 1997 ("Current Period") from $426.7 million for the
nine months ended January 27, 1996 ("Prior Period"). There were seventeen
weeks of Colwell sales in the Current Period. Sales increased $53.4 million
with Colwell contributing $19.7 million of the increase. Excluding Colwell,
sales were up $33.7 million or 7.9% due primarily to increased unit sales and
price increases.
Gross Profit. Gross profit margin increased to 35.6% for the Current
Period from 35.2% for the Prior Period due to the higher margins from the
Colwell acquisition. Gross profit increased 14% to $171.1 million for the
Current Period from $150.1 million for the Prior Period. The increase in
gross profit was due primarily to increased sales.
Operating Expenses. Operating expenses increased 14.2% to $135.6
million for the Current Period from $118.7 million for the Prior Period. The
increase in operating expenses is primarily related to increased sales.
Operating expenses as a percent of sales have increased from 27.8% to 28.2%
due to increased employee health care costs and the change in the ESOP
funding as discussed earlier.
Operating Income. Operating income increased 13.3% to $35.5 million
for the Current Period from $31.4 million for the Prior Period. Operating
income as a percent of net sales was 7.4%, the same as the Prior Period.
Finance Income. Finance income, net of expenses, was $921,000 for the
Current Period compared to $1,007,000 for the Prior Period. Finance income
decreased $86,000 due primarily to utilization of cash for the Colwell
acquisition.
Interest Expense. Interest expense increased to $438,000 for the
Current Period from $307,000 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 37.0% for the
Current Period from 37.9% for the Prior Period and results from lower state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Available liquid resources at January 25, 1997 consisted of $11.5
million cash and cash equivalents and $33.5 million available under bank
lines. The acquisition of Colwell on
9
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October 1, 1996 utilized a substantial portion of the Company's cash
balances and increased debt under the revolving credit agreement during the
third quarter. All borrowings under the revolving credit agreement
associated with the Colwell acquisition were paid down by the end of the
third quarter. Inventory at January 25, 1997 was $68.3 million which
represented an $11 million increase from October 26, 1996 due primarily to
calendar year-end forward buying to maximize volume rebates and in advance
of vendor price increases. This additional inventory should be sold off by
the end of the fiscal year. A similar purchase was made in previous years.
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 obtain the
necessary funds for use in accomplishing its corporate objectives.
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.
. 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
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. 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.
. Future operating results of the Company's Colwell subsidiary depend upon
its ability to attract and retain customers by offering quick response
time and innovative products that meet industry reporting standards.
Because the cost of paper stock represents over half the cost of its
paper and printed products, future operating results may be subject to
fluctuations in paper prices. In addition, the introduction of computer-
based technologies into the management of health care practices may
affect future demand for printed products.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Item 27 Financial Data Schedule.
(a) Reports on Form 8-K
On December 13, 1996 the Company filed a report on Form 8-K/A,
as Amendment No. 1 to the report on Form 8-K filed October 15,
1996 relating to the acquisition of the Colwell division of
Deluxe Corporation. The form 8-K/A filed on December 13, 1996,
contained the financial statements and pro forma financial
information required to be filed pursuant to Item 7 of Form
8-K.
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.
11
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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, 1997
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> 9-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-END> JAN-25-1997
<CASH> 11,521
<SECURITIES> 0
<RECEIVABLES> 82,183
<ALLOWANCES> 4,581
<INVENTORY> 68,337
<CURRENT-ASSETS> 161,498
<PP&E> 50,460
<DEPRECIATION> 14,615
<TOTAL-ASSETS> 241,977
<CURRENT-LIABILITIES> 76,840
<BONDS> 2,938
<COMMON> 218
0
0
<OTHER-SE> 152,796
<TOTAL-LIABILITY-AND-EQUITY> 241,977
<SALES> 480,126
<TOTAL-REVENUES> 480,126
<CGS> 308,979
<TOTAL-COSTS> 308,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438
<INCOME-PRETAX> 36,678
<INCOME-TAX> 13,569
<INCOME-CONTINUING> 23,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,109
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
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