<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 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
--------- ----------
(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 22,051,446 shares of common stock as of
December 3, 1997.
Page 1 of 13
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PATTERSON DENTAL COMPANY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Condensed Consolidated Balance Sheets as of
October 25, 1997 and April 26, 1997 3
Condensed Consolidated Statements of Income for the three months
and six months ended October 25, 1997 and October 26, 1996 4
Condensed Consolidated Statements of Cash Flows for the six
months ended October 25, 1997 and October 26, 1996 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
1995:
This Form 10-Q for the period ended October 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 25, 1997, and
other documents filed with the Securities and Exchange Commission.
2
<PAGE>
PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
October 25, April 26,
1997 1997
----------- ----------
(unaudited) (restated)
Current assets:
Cash and cash equivalents................ $ 21,220 $ 9,095
Receivables, net......................... 94,175 95,132
Inventory................................ 69,435 65,486
Prepaid expenses......................... 2,743 2,927
Deferred taxes........................... 1,289 1,178
-------- --------
Total current assets................. 188,862 173,818
Property and equipment, net................. 36,128 35,563
Intangibles ................................ 42,688 43,813
Other ...................................... 2,454 2,117
-------- --------
Total assets......................... $270,132 $255,311
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 47,497 $ 48,472
Accrued payroll expense.................. 10,261 12,281
Other accrued expenses................... 9,682 9,268
Income taxes payable..................... 3,092 1,677
Bank indebtedness........................ 3,535 3,927
Current maturities of long-term debt..... 182 1,300
-------- --------
Total current liabilities............ 74,249 76,925
Long-term debt.............................. 3,810 5,565
Deferred taxes.............................. 1,362 1,362
-------- --------
Total liabilities.................... 79,421 83,852
Deferred credits............................ 7,355 7,797
Stockholders' equity:
Preferred stock.......................... --- ---
Common stock............................. 221 219
Additional paid in capital............... 58,512 56,168
Cumulative translation adjustment........ (869) (899)
Retained earnings........................ 140,561 123,243
Note receivable from ESOP................ (15,069) (15,069)
-------- --------
Total stockholders' equity........... 183,356 163,662
-------- --------
Total liabilities and stockholders'
equity.............................. $270,132 $255,311
======== ========
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. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
-------- -------- -------- --------
(restated) (restated)
<S> <C> <C> <C> <C>
Net sales........................................ $191,635 $169,013 $371,623 $318,312
Cost of sales.................................... 120,887 109,127 235,009 205,652
-------- -------- -------- --------
Gross profit..................................... 70,748 59,886 136,614 112,660
Operating expenses............................... 55,059 47,487 107,592 90,917
-------- -------- -------- --------
Operating income................................. 15,689 12,399 29,022 21,743
Other income and expense:
Amortization of deferred credits............. 222 221 442 442
Finance income, net.......................... 263 442 452 986
Interest expense............................. (222) (280) (417) (507)
Profit (loss) on currency exchange........... (12) 5 (21) (4)
-------- -------- -------- --------
Income before income taxes....................... 15,940 12,787 29,478 22,660
Income taxes..................................... 5,877 4,695 11,075 8,250
-------- -------- -------- --------
Net income....................................... $ 10,063 $ 8,092 $ 18,403 $ 14,410
======== ======== ======== ========
Earnings per common and common equivalent share.. $0.46 $ 0.37 $0.84 $0.66
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding........................... 22,115 21,782 22,033 21,738
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------
Oct. 25, Oct. 26,
1997 1996
--------- ----------
(restated)
<S> <C> <C>
Operating activities:
Net income............................................. $18,403 $ 14,410
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................................... 2,727 2,151
Amortization of deferrals.......................... (442) (442)
Amortization of goodwill........................... 1,173 342
Bad debt expense................................... 440 283
Change in assets and liabilities, net of acquired.. (4,279) (5,048)
------- --------
Net cash provided by operating activities................. 18,022 11,696
Investing activities:
Additions to property and equipment, net............... (3,187) (2,218)
Acquisitions........................................... --- (56,478)
Cash received from acquisitions........................ 69 204
Other.................................................. (56) (7)
------- --------
Net cash used in investing activities.................... (3,174) (58,499)
Financing activities:
(Decrease) increase in bank indebtedness............... (359) 3,217
Payments and retirement of long-term debt and
obligations under capital leases..................... (2,998) (176)
Common stock issued, net............................... 634 513
------- --------
Net cash provided by financing activities.............. (2,723) 3,554
Effect of exchange rate changes on cash................... --- 6
------- --------
Net increase (decrease) in cash and cash equivalents...... 12,125 (43,243)
Cash and cash equivalents at beginning of period.......... 9,095 46,056
------- --------
Cash and cash equivalents at end of period................ $21,220 $ 2,813
======= ========
</TABLE>
See accompanying notes.
5
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
October 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 October 25, 1997, and the results of
operations and the cash flows for the periods ended October 25, 1997, and
October 26, 1996. Such adjustments are of a normal recurring nature. The
results of operations for the quarter and six months ended October 25, 1997, and
October 26, 1996, are not necessarily indicative of the results to be expected
for the full year. The balance sheet at April 26, 1997, 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 1997 Annual
Report on Form 10-K filed on July 25, 1997, and the supplemental consolidated
financial statements included in the Current Report on Form 8-K filed November
26, 1997. The accompanying financial statements and Management's Discussion and
Analysis give retroactive effect to the acquisition of Canadian Dental Supply
Ltd. ("CDS") and include CDS for all periods presented. See Note 4. below.
2. The fiscal year end of the Company is the last Saturday in April. The
second quarter and six months of fiscal year 1998 and 1997 represent the 13
weeks and the twenty-six weeks ended October 25, 1997 and October 26, 1996,
respectively.
3. 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 the results of operations that would have
occurred had the acquisition been made as of those dates or future results.
Six Months Ended
----------------
October 26, 1996
----------------
(restated)
Net sales............... $342,077
Net income.............. 15,680
Earnings per share...... $ 0.72
6
<PAGE>
On July 18, 1997 the Company acquired EagleSoft Incorporated in a transaction
accounted for as a pooling of interests. The acquisition was not material to
the financial statements.
4. Effective August 26, 1997, the Company acquired Canadian Dental Supply Ltd.
("CDS") a Vancouver, British Columbia based distributor of dental supplies and
equipment. Each share of CDS's outstanding common stock was converted into the
right to receive 4.216 shares of Company common stock. The Company issued
112,432 shares of its common stock to acquire CDS. The transaction was
accounted for as a pooling of interests. The accompanying financial statements
and Management's Discussion and Analysis give retroactive effect to the
acquisition and include CDS for all periods presented.
Separate results of operations for the periods prior to the merger with CDS
are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
July 26, July 27, Oct. 26,
1997 1996 1996
-------- -------- ---------
Net Sales
---------
Patterson Dental Company $173,311 $142,193 $304,071
CDS 6,677 7,106 14,241
-------- -------- --------
Total Combined $179,988 $149,299 $318,312
======== ======== ========
Net Income
----------
Patterson Dental Company $ 8,263 $ 6,232 $ 14,063
CDS 77 86 347
-------- -------- --------
Total Combined $ 8,340 $ 6,318 $ 14,410
======== ======== ========
5. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 131 (SFAS 131) "Disclosures about Segments
of an Enterprise and Related Information." This statement, which is required to
be adopted for financial statements issued for periods beginning after December
15, 1997, establishes standards for the way that public business enterprises
report information about operating segments in financial reports issued to
shareholders. The Company has not yet determined the financial statement
disclosure impact of SFAS 131.
7
<PAGE>
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. 25, Oct. 26, Oct. 25, Oct. 26,
1997 1996 1997 1996
--------- --------- --------- ---------
(restated) (restated)
<S> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 63.1% 64.6% 63.2% 64.6%
----- ----- ----- -----
Gross profit................... 36.9% 35.4% 36.8% 35.4%
Operating expenses............. 28.7% 28.1% 29.0% 28.6%
----- ----- ----- -----
Operating income............... 8.2% 7.3% 7.8% 6.8%
Other income and expense, net.. 0.1% 0.3% 0.1% 0.3%
----- ----- ----- -----
Income before income taxes..... 8.3% 7.6% 7.9% 7.1%
Income taxes................... 3.0% 2.8% 2.9% 2.6%
----- ----- ----- -----
Net income..................... 5.3% 4.8% 5.0% 4.5%
===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 25, 1997 COMPARED TO QUARTER ENDED OCTOBER 26, 1996.
NET SALES. Net sales increased 13.4% to $191.6 million for the three
months ended October 25, 1997 ("Current Quarter") from $169.0 million for
the three months ended October 26, 1996 ("Prior Quarter"). There were
thirteen weeks of Colwell sales in the Current Quarter versus four weeks of
Colwell sales in the Prior Quarter. Sales grew $22.6 million, with Colwell
contributing $9.1 million of the increase. Excluding Colwell, sales were up
$13.5 million or 8.2% due primarily to strong demand for consumable
products and price increases.
GROSS PROFIT. Gross profit margin increased to 36.9% for the Current
Quarter from 35.4% for the Prior Quarter. The 150 basis point gross margin
increase is due to a combination of higher margins from U.S. Dental
operations, Colwell and Eaglesoft. Gross profit increased 18.1% to $70.7
million for the Current Quarter from $59.9 million for the Prior Quarter.
The majority of the increase in gross profit was due to increased sales.
8
<PAGE>
OPERATING EXPENSES. Operating expenses increased 15.9% to $55.1
million for the Current Quarter from $47.5 million for the Prior Quarter.
The increase in operating expenses was principally related to the higher
sales volume. Operating expenses as a percent of sales increased from
28.1% to 28.7% due primarily to the impact of Eaglesoft, which carries a
much higher operating expense ratio as a percent of sales than the rest of
the business, and increased health care costs.
OPERATING INCOME. Operating income increased 26.5% to $15.7 million
for the Current Quarter from $12.4 million for the Prior Quarter.
Operating income as a percent of net sales increased from 7.3% to 8.2%, due
to higher gross margins.
FINANCE INCOME. Finance income, net of expenses, was $263,000 for the
Current Quarter compared to $442,000 for the Prior Quarter. Finance income
decreased $179,000 due to lower average short term investments of cash.
INTEREST EXPENSE. Interest expense decreased to $222,000 for the
Current Quarter from $280,000 for the Prior Quarter. This decrease is due
mainly to lower borrowings under the revolving bank loan.
INCOME TAXES. The effective income tax rate increased slightly to
36.9% for the Current Quarter from 36.7% for the Prior Quarter.
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26, 1996.
NET SALES. Net sales increased 16.7% to $371.6 million for the six
months ended October 25, 1997 ("Current Period") from $318.3 million for
the six months ended October 26, 1996 ("Prior Period"). There were twenty
six weeks of Colwell sales in the Current Period versus four weeks in the
Prior Period. Sales increased $53.3 million with Colwell contributing
$22.6 million of the increase. Excluding Colwell, sales were up $30.8
million or 9.8% due primarily to increased unit sales and price
increases.
GROSS PROFIT. Gross profit margin increased to 36.8% for the Current
Period from 35.4% for the Prior Period due to the higher margins from
Colwell and U.S. operations. Gross profit increased 21.3% to $136.6
million for the Current Period from $112.7 million for the Prior Period.
the increase in gross profit was due primarily to the increase in sales.
OPERATING EXPENSES. Operating expenses increased 18.3% to $107.6
million for the Current Period from $90.9 million for the Prior Period.
The majority of the increase in operating expenses was related to increased
sales. Operating expenses as a percent of sales have increased from 28.6%
to 29.0% due to increased health care and advertising costs.
9
<PAGE>
OPERATING INCOME. Operating income increased 33.5% to $29.0 million
for the Current Period from $21.7 million for the Prior Period. As a
percent of net sales, operating income increased from 6.8% to 7.8%, due to
higher gross margins.
FINANCE INCOME. Finance income, net of expenses, was $452,000 for the
Current Period compared to $986,000 for the Prior Period. Finance income
decreased $534,000 due primarily to lower short term investment of cash.
INTEREST EXPENSE. Interest expense decreased to $417,000 for the
Current Period from $507,000 for the Prior Period. This decrease is due
mainly to a reduction in the use of the revolving bank loan.
INCOME TAXES. The effective income tax rate increased to 37.6% for
the Current Period from 36.4% for the Prior Period due primarily to
higher levels of tax free investment income in the Prior Period related
to short term investments of excess cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Available liquid resources at October 25, 1997 consisted of $21.2 million
in cash and cash equivalents and $28.3 million available under bank lines.
The company believes that cash and cash equivalents 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.
- 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.
10
<PAGE>
- 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.
11
<PAGE>
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 8,
1997.
c)(1) The shareholders voted for one director nominee, Burt E. Swanson,
for a three year term. 19,634,818 shares were voted for Mr. Swanson
and 212,833 shares withheld authority. There were no abstentions and
no broker non-votes.
(2) The shareholders voted to ratify the appointment of Ernst & Young LLP
as independent auditors of the Company for the fiscal year ending
April 25, 1998. The vote was 19,830,501 shares for, 3,786 against and
13,364 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 September 5, 1997 the Company filed a report on Form 8-K relating
to the acquisition on Canadian Dental Supply Ltd. and the issuance of
stock in connection therewith.
On November 26, 1997 the Company filed a report on Form 8-K to present
restated financial statements and other financial information as a
result of the August 26, 1997 acquisition of Canadian Dental Supply
Ltd. accounted for as a pooling of interests, and to report the
issuance of additional shares in connection with the acquisition.
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 25, 1997.
12
<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.
PATTERSON DENTAL COMPANY
(Registrant)
Dated: December 5, 1997.
By: /s/ Ronald E. Ezerski
--------------------------
Ronald E. Ezerski
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PATTERSON DENTAL COMPANY FOR THE SIX
MONTHS ENDED OCTOBER 25, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> OCT-25-1997
<CASH> 21,220
<SECURITIES> 0
<RECEIVABLES> 98,010
<ALLOWANCES> 3,835
<INVENTORY> 69,435
<CURRENT-ASSETS> 188,862
<PP&E> 55,796
<DEPRECIATION> 19,668
<TOTAL-ASSETS> 270,132
<CURRENT-LIABILITIES> 74,249
<BONDS> 3,810
0
0
<COMMON> 221
<OTHER-SE> 183,135
<TOTAL-LIABILITY-AND-EQUITY> 270,132
<SALES> 371,623
<TOTAL-REVENUES> 371,623
<CGS> 235,009
<TOTAL-COSTS> 235,009
<OTHER-EXPENSES> 107,592
<LOSS-PROVISION> 440
<INTEREST-EXPENSE> 417
<INCOME-PRETAX> 29,478
<INCOME-TAX> 11,075
<INCOME-CONTINUING> 18,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,403
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
