<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 July 25, 1998.
_____ 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
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(Address of Principal Executive Offices)
(Zip Code)
(651) 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 33,317,041 shares of common stock as of
September 4, 1998.
Page 1 of 12
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PATTERSON DENTAL COMPANY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-8
Condensed Consolidated Balance Sheets as of
July 25, 1998 and April 25, 1998 3
Condensed Consolidated Statements of Income for the three
months ended July 25, 1998 and July 26, 1997 4
Condensed Consolidated Statements of Cash Flows for the three
months ended July 25, 1998 and July 26, 1997 5
Notes to Condensed Consolidated Financial
Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
1995:
This Form 10-Q for the period ended July 25, 1998 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 16, 1998, and
other documents filed with the Securities and Exchange Commission. See also page
10 of this Form 10-Q.
2
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PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
July 25, April 25,
1998 1998
--------- ---------
(unaudited)
Current assets:
Cash and cash equivalents ..................... $ 38,143 $ 35,619
Receivables, net .............................. 97,336 106,252
Inventory ..................................... 97,146 81,810
Prepaid expenses .............................. 2,741 2,802
Deferred taxes ................................ 1,178 1,178
--------- ---------
Total current assets ....................... 236,544 227,661
Property and equipment, net .......................... 35,609 37,998
Intangibles, net ..................................... 47,410 48,013
Other ................................................ 2,437 2,701
--------- ---------
Total assets ............................... $ 322,000 $ 316,373
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 57,373 $ 60,652
Accrued payroll expense ....................... 8,640 13,852
Other accrued expenses ........................ 13,522 13,426
Income taxes payable .......................... 7,472 2,009
Bank indebtedness ............................. 3,378 2,033
Current maturities of long-term debt .......... 221 2,433
--------- ---------
Total current liabilities .................. 90,606 94,405
Long-term debt ....................................... 2,665 2,736
Deferred taxes ....................................... 2,017 2,017
--------- ---------
Total liabilities .......................... 95,288 99,158
Deferred credits ..................................... 6,691 6,912
Stockholders' equity:
Preferred stock ............................... -- --
Common stock .................................. 333 333
Additional paid-in capital .................... 63,568 63,134
Accumulated other comprehensive income ........ (2,569) (1,624)
Retained earnings ............................. 173,026 162,797
Note receivable from ESOP ..................... (14,337) (14,337)
--------- ---------
Total stockholders' equity ................. 220,021 210,303
--------- ---------
Total liabilities and stockholders' equity.. $ 322,000 $ 316,373
========= =========
See accompanying notes.
3
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
------------------
July 25, July 26,
1998 1997
--------- ---------
(restated)
Net sales .................................... $ 200,073 $ 179,988
Cost of sales ................................ 126,482 114,122
--------- ---------
Gross profit ................................. 73,591 65,866
Operating expenses ........................... 57,348 52,533
--------- ---------
Operating income ............................. 16,243 13,333
Other income and expense:
Amortization of deferred credits ......... 222 220
Finance income, net ...................... 404 189
Interest expense ......................... (140) (195)
Profit (loss) on currency exchange ....... (66) (9)
--------- ---------
Income before income taxes ................... 16,663 13,538
Income taxes ................................. 6,434 5,198
--------- ---------
Net income ................................... $ 10,229 $ 8,340
========= =========
Earnings per share - basic and diluted ....... $ 0.31 $ 0.25
========= =========
Weighted average common and dilutive potential
common shares ............................ 33,387 32,928
========= =========
See accompanying notes.
4
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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July 25, July 26,
1998 1997
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(restated)
<S> <C> <C>
Operating activities:
Net income ............................................. $ 10,229 $ 8,340
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation .................................... 1,483 1,361
Amortization of deferrals ....................... (221) (220)
Amortization of goodwill ........................ 669 587
Bad debt expense ................................ 246 229
Change in assets and liabilities, net of acquired (10,312) (9,283)
-------- --------
Net cash provided by operating activities ..................... 2,094 1,014
Investing activities:
Proceeds from sale of facilities ....................... 2,250 --
Additions to property and equipment, net ............... (1,566) (1,911)
Other .................................................. -- (12)
-------- --------
Net cash provided (used) in investing activities ............. 684 (1,923)
Financing activities:
Increase (decrease) in bank indebtedness ............... 1,471 (443)
Payments and retirement of long-term debt and
obligations under capital leases ..................... (2,161) (133)
Common stock issued, net ............................... 434 404
-------- --------
Net cash used in financing activities ......................... (256) (172)
Effect of exchange rate changes on cash ....................... 2 4
-------- --------
Net increase (decrease) in cash and cash equivalents .......... 2,524 (1,077)
Cash and cash equivalents at beginning of period .............. 35,619 9,095
-------- --------
Cash and cash equivalents at end of period .................... $ 38,143 $ 8,018
======== ========
</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)
JULY 25, 1998
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 July 25, 1998, and the results of operations
and the cash flows for the periods ended July 25, 1998, and July 26, 1997. Such
adjustments are of a normal recurring nature. The results of operations for the
first quarter ended July 25, 1998, and July 26, 1997, are not necessarily
indicative of the results to be expected for the full year. The balance sheet at
April 25, 1998, 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 1998 Annual Report on Form 10-K filed on July 16, 1998. 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 3 below.
2. The fiscal year end of the Company is the last Saturday in April. The first
quarter of fiscal year 1999 and 1998 represent the 13 weeks ended July 25, 1998
and July 26, 1997, respectively.
3. 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 6.324 shares of Company common stock. The Company issued
168,648 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 period prior to the merger with
CDS are as follows:
Three Months Ended
July 26,
1997
----
Net Sales
---------
Patterson Dental Company $173,311
CDS 6,677
--------
Total Combined $179,988
========
Net Income
----------
Patterson Dental Company $ 8,263
CDS 77
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Total Combined $ 8,340
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Other Changes in Stockholders' Equity
-------------------------------------
Patterson Dental Company $ 1,260
CDS (22)
--------
Total Combined $ 1,238
========
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4. On January 12, 1998 the Company declared a 3 for 2 stock split in the form of
a 50% stock dividend payable February 17, 1998, to stockholders' of record
January 30, 1998. The accompanying financial statements and Management's
Discussion and Analysis give retroactive effect to the 3 for 2 stock split.
5. On February 2, 1998, the Company acquired Hill Dental Company, Inc. ("Hill")
a Birmingham, Alabama based distributor of dental supplies and equipment. Each
share of Hill's outstanding common stock was converted into the right to receive
9.39 shares of Company common stock subject to certain conditions. The Company
issued 100,770 shares of its common stock in connection with the Hill
acquisition. The results of the operations of Hill in the prior year first
quarter are not material to the financial statements on a pro forma basis.
6. As of April 26, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement establishes
new rules for the display of comprehensive income and its components; however,
the adoption of the Statement had no impact on the Company's net income or
stockholders' equity. Statement 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
Total comprehensive income for the three months ended July 25, 1998 and July 26,
1997 is as follows:
Three Months Ended
------------------
July 25, July 26,
1998 1997
---- ----
Net income $10,229 $8,340
Other comprehensive income (loss):
Foreign currency translation adjustments (945) 131
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Total comprehensive income $ 9,284 $8,471
======= ======
7. In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." All earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the Statement 128 requirements.
The following table sets forth the denominator for the computation of basic and
diluted earnings per share:
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 33,291 32,844
7
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Effect of dilutive securities:
Director Stock Option Plan 57 39
Employee Stock Purchase Plan 5 7
Capital Accumulation Plan 34 38
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Dilutive potential common shares 96 84
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 33,387 32,928
======== =======
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.
Three Months Ended
------------------
July 25, July 26,
1998 1997
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Net sales....................................... 100.0% 100.0%
Cost of sales................................... 63.2% 63.4%
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Gross profit.................................... 36.8% 36.6%
Operating expenses.............................. 28.7% 29.2%
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Operating income................................ 8.1% 7.4%
Other income and expense, net................... 0.2% 0.1%
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Income before income taxes...................... 8.3% 7.5%
Income taxes.................................... 3.2% 2.9%
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Net income...................................... 5.1% 4.6%
======= =======
QUARTER ENDED JULY 25, 1998 COMPARED TO QUARTER ENDED JULY 26, 1997.
NET SALES. Net sales increased 11.2% to $200.1 million for
the three months ended July 25, 1998 ("Current Quarter") from $180.0
million for the three months ended July 26, 1997 ("Prior Quarter").
U.S. dental sales increased 13.7% due to strong equipment sales and the
acquisition of Hill Dental in February, 1998. Canadian sales were down
3.5% in Canadian
8
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dollars but were down 8.8% in U.S. dollars due to an unfavorable
exchange rate during the Current Quarter. Colwell sales were down 3.8%,
while EagleSoft sales were $2.0 million greater than the Prior Quarter.
GROSS PROFIT. Gross profit margin increased to 36.8% for the
Current Quarter from 36.6% for the Prior Quarter. The 20 basis point
gross margin increase is due to a combination of greater production
efficiencies at Colwell and growth in high margin software sales. Gross
profit increased 11.7% to $73.6 million for the Current Quarter from
$65.9 million for the Prior Quarter. The majority of the increase in
gross profit was due to increased sales volume.
OPERATING EXPENSES. Operating expenses increased 9.2% to $57.3
million for the Current Quarter from $52.5 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
decreased from 29.2% to 28.7% due primarily to improved operating
leverage in the U.S. and Canadian dental operations.
OPERATING INCOME. Operating income increased 21.8% to $16.2
million for the Current Quarter from $13.3 million for the Prior
Quarter. Operating income as a percent of net sales increased to 8.1%
from 7.4%, due to higher sales volume, improved margins and lower
operating expenses as a percent of sales.
FINANCE INCOME. Finance income, net of expenses, was $0.4
million for the Current Quarter compared to $0.2 million for the Prior
Quarter. The increase in finance income was caused by higher average
short term investments of cash.
INTEREST EXPENSE. Interest expense decreased to $0.1 million
for the Current Quarter from $0.2 million for the Prior Quarter. This
decrease is due mainly to lower borrowings under the revolving bank
loan agreements.
INCOME TAXES. The effective income tax rate increased slightly
to 38.6% for the Current Quarter from 38.4% for the Prior Quarter. This
increase was caused by an increase in the Canadian operating loss for
which no tax benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
Available liquid resources at July 25, 1998 consisted of $38.1 million
cash and cash equivalents and $28.8 million available under bank lines.
Inventory increased $15.3 million in the quarter due to increased
forward buying. The Company believes that cash and cash equivalents and
the remainder of its credit lines are sufficient to meet any 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.
IMPACT OF YEAR 2000
The Company has performed an assessment of its major information
technology and technology reliant operating systems and expects that
all necessary modifications or replacements of existing
9
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systems will be completed by the end of fiscal 1999. Progress in this
effort is being monitored by senior management. Based on current
expenditures and estimates, the costs of addressing the Year 2000 issue
are not expected to be material to the financial results or operations
of the Company. The Company intends to contact its significant vendors
and suppliers regarding the Year 2000 issue and the status of their
compliance. At this time, the impact on the Company if significant
vendors or suppliers are not in compliance cannot be reasonably
estimated. However, the Company intends to develop plans to mitigate
the impact on the Company's operations of vendors or suppliers who are
not in compliance with the Year 2000 issue.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain information of a non-historical nature contained in this Form
10-Q include forward looking statements. The statements are not
guarantees of future performance and are subject to certain risks,
uncertainties or assumptions that are difficult to predict and may be
beyond the Company's ability to control. Accordingly, 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.
* The ability of the Company and its suppliers to upgrade their
computer systems to adequately address the Year 2000 issue.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Item 27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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 16, 1998.
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: September 4, 1998.
By: /s/ Ronald E. Ezerski
----------------------
Ronald E. Ezerski
Executive Vice President, Treasurer and Chief
Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-26-1998
<PERIOD-END> JUL-25-1998
<CASH> 38,143
<SECURITIES> 0
<RECEIVABLES> 101,297
<ALLOWANCES> 3,961
<INVENTORY> 97,146
<CURRENT-ASSETS> 236,544
<PP&E> 59,056
<DEPRECIATION> 23,447
<TOTAL-ASSETS> 322,000
<CURRENT-LIABILITIES> 90,606
<BONDS> 2,665
0
0
<COMMON> 333
<OTHER-SE> 219,688
<TOTAL-LIABILITY-AND-EQUITY> 322,000
<SALES> 200,073
<TOTAL-REVENUES> 200,073
<CGS> 126,482
<TOTAL-COSTS> 126,482
<OTHER-EXPENSES> 57,348
<LOSS-PROVISION> 246
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 16,663
<INCOME-TAX> 6,434
<INCOME-CONTINUING> 10,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,229
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
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