<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 31, 1999.
______ 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)
(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 33,678,333 shares of common stock as of
September 8, 1999.
Page 1 of 13
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PATTERSON DENTAL COMPANY
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Condensed Consolidated Balance Sheets as of
July 31, 1999 and April 24, 1999 3
Condensed Consolidated Statements of Income for the three
months ended July 31, 1999 and July 25, 1999 4
Condensed Consolidated Statements of Cash Flows for the three
months ended July 31, 1999 and July 25, 1999 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
- ---------------------------------------------------------------------------
1995:
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This Form 10-Q for the period ended July 31, 1999 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 19, 1999, and other documents filed with
the Securities and Exchange Commission. See also pages 11-12 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
<TABLE>
<CAPTION>
July 31, April 24,
1999 1999
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(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents....................... $ 73,182 $ 78,746
Short-term investments.......................... 9,711 -
Receivables, net................................ 105,920 112,521
Inventory....................................... 101,640 91,722
Prepaid expenses and other current assets....... 4,869 3,655
-------- --------
Total current assets........................ 295,322 286,644
Property and equipment, net........................ 38,574 37,018
Intangibles, net................................... 46,318 46,867
Other.............................................. 2,378 2,721
-------- --------
Total assets................................ $382,592 $373,250
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable................................ $ 63,760 $ 67,213
Accrued payroll expense......................... 7,114 14,342
Other accrued expenses.......................... 14,845 16,556
Income taxes payable............................ 7,892 166
Current maturities of long-term debt............ 445 415
-------- --------
Total current liabilities................... 94,056 98,692
Long-term debt..................................... 1,523 1,682
Deferred taxes..................................... 1,650 1,650
-------- --------
Total liabilities........................... 97,229 102,024
Deferred credits................................... 5,806 6,027
Stockholders' equity:
Preferred stock................................. --- ---
Common stock.................................... 336 336
Additional paid-in capital...................... 67,113 66,992
Retained earnings............................... 228,249 213,761
Accumulated other comprehensive loss............ (2,473) (2,222)
Note receivable from ESOP....................... (13,668) (13,668)
-------- --------
Total stockholders' equity.................. 279,557 265,199
-------- --------
Total liabilities and stockholders' equity.. $382,592 $373,250
======== ========
</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
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July 31, July 25,
1999 1998
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(14 Weeks) (13 Weeks)
<S> <C> <C>
Net sales..................................... $254,599 $200,073
Cost of sales................................. 161,068 126,482
-------- --------
Gross profit.................................. 93,531 73,591
Operating expenses............................ 71,388 57,348
-------- --------
Operating income.............................. 22,143 16,243
Other income and expense:
Amortization of deferred credits............ 221 222
Finance income, net......................... 891 404
Interest expense............................ (46) (140)
Loss on currency exchange................... (59) (66)
-------- --------
Income before income taxes.................... 23,150 16,663
Income taxes.................................. 8,661 6,434
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Net income.................................... $ 14,489 $ 10,229
======== ========
Earnings per share - basic and diluted........ $0.43 $0.31
======== ========
Weighted average and dilutive potential
common shares................................. 33,747 33,387
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
July 31, July 25,
1999 1998
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(14 weeks) (13 weeks)
<S> <C> <C>
Operating activities:
Net income............................................. $ 14,489 $ 10,229
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................................... 1,752 1,483
Amortization of deferrals.......................... (221) (221)
Amortization of goodwill........................... 738 669
Bad debt expense................................... 305 246
Change in assets and liabilities, net of acquired.. (8,766) (10,312)
-------- --------
Net cash provided by operating activities................. 8,297 2,094
Investing activities:
Proceeds from sale of facilities....................... --- 2,250
Additions to property and equipment, net............... (3,347) (1,566)
Acquisitions, net...................................... (750) ---
Purchase of investments................................ (9,711) ---
-------- --------
Net cash (used in) provided by investing activities....... (13,808) 684
Financing activities:
Increase in bank indebtedness.......................... --- 1,471
Payments and retirement of long-term debt and
obligations under capital leases..................... (146) (2,161)
Common stock issued, net............................... 121 434
-------- --------
Net cash used by financing activities..................... (25) (256)
Effect of exchange rate changes on cash................... (28) 2
-------- --------
Net (decrease) increase in cash and cash equivalents...... (5,564) 2,524
Cash and cash equivalents at beginning of period.......... 78,746 35,619
-------- --------
Cash and cash equivalents at end of period................ $ 73,182 $ 38,143
======== ========
</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 31, 1999
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 31, 1999, and the results of
operations and the cash flows for the periods ended July 31, 1999, and July
25, 1998. Such adjustments are of a normal recurring nature. The results of
operations for the quarter ended July 31, 1999, and July 25, 1998, are not
necessarily indicative of the results to be expected for the full year. The
balance sheet at April 24, 1999, 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 1999 Annual Report on Form 10-K
filed on July 19, 1999.
2. The fiscal year end of the Company is the last Saturday in April. The first
quarter of fiscal year 2000 includes 14 weeks, while the first quarter of
fiscal 1999 ended July 25, 1998 includes 13 weeks.
3. Cash equivalents consist of investments in money market funds, highly rated
commercial paper and government securities. The maturities of these
securities at the time of purchase is 90 days or less. Short-term investments
consist of highly rated commercial paper and government securities with
maturities longer than 90 days at the date of purchase. All cash equivalents
and short-term investments are classified as available for sale and cost
approximates market value.
4. In 1999, the Company adopted SFAS No. 130, Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' investment, to be included in other comprehensive income. The
adoption of SFAS 130 resulted in revised and additional disclosures but had
no impact on the Company's consolidated financial position, results of
operations or liquidity.
5. On July 27, 1998, the Company acquired the assets of Dentaplex, Inc. This
acquisition was accounted for as a purchase and, accordingly, the net assets
and operating results are included in the Company's financial statements from
the date of acquisition. The results of operations of Dentaplex, Inc. were
not material to the financial statements on a pro forma basis.
6. On February 5, 1999, the Company acquired Professional Business Systems, Inc.
in exchange for 214,317 shares of common stock. The acquisition was accounted
for as a pooling-of-interests and was not material to the financial
statements on a pro forma basis. The financial statements do not reflect the
financial position and results of the operations prior to the date of
acquisition based on materiality.
7. On June 26, 1999, the Company acquired Barr Dental Supply, Inc. This
acquisition was accounted for as a purchase and, accordingly, the net assets
and operating results are included in the Company's financial statements from
the date of acquisition. The results of operations of Barr Dental Supply,
Inc. are not material to the financial statements on a pro forma basis.
6
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8. The following table sets forth the denominator for the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
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July 31, July 25,
1999 1998
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Denominator:
<S> <C> <C>
Denominator for basic earnings per
share - weighted-average shares 33,655 33,291
Effect of dilutive securities:
Director Stock Option Plan 52 57
Employee Stock Purchase Plan 5 5
Capital Accumulation Plan 35 34
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Dilutive potential common shares 92 96
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Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 33,747 33,387
======= =======
</TABLE>
7
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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
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July 31, July 25,
1999 1998
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<S> <C> <C>
Net sales................... 100.0% 100.0%
Cost of sales............... 63.3% 63.2%
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Gross profit................ 36.7% 36.8%
Operating expenses.......... 28.0% 28.7%
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Operating income............ 8.7% 8.1%
Other income, net........... 0.4% 0.2%
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Income before income taxes.. 9.1% 8.3%
Income taxes................ 3.4% 3.2%
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Net income.................. 5.7% 5.1%
======= ======
</TABLE>
QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED JULY 25, 1998.
Net Sales. Net sales increased 27.3% to $ 255.0 million for the three
months ended July 31, 1999 ("Current Quarter") from $ 200.1 million for the
three months ended July 25, 1998 ("Prior Quarter"). The Current Quarter
includes 14 weeks versus 13 weeks in the Prior Quarter. Excluding the
impact of the additional week, sales increased approximately 18.2%. Sales
references in parentheses exclude the additional week. Sales of dental
products increased 25.5%(16.6%) due to contributions from an expanded
dental sales force which increased 11.0% and an increase in number and
volume of purchases by customers. Sales of sundries increased 27.3%(17.6%)
due primarily to the increased number of customers. Equipment sales
increased 28.0%(19.9%) on strong demand across the line. Sales of printed
office products through Colwell Systems were up 40.1%. Excluding the impact
of an acquisition (Professional Business Systems) and the additional week
sales increased 5.4%. An expanded product offering and the marketing
efforts of the dental sales force were the major factors contributing to
the increase. EagleSoft software sales increased 93.1%(75.0%) reflecting
strong demand for computerized practice management software and support
services.
Gross Profit. Gross margin was 36.7% for the Current Quarter versus
36.8% for the Prior Quarter. Gross profit increased 27.1% to $93.5 million
for the Current Quarter from $73.6 million for the Prior Quarter. The
majority of the increase in gross profit was due to increased sales volume
and the additional week of sales in the Current Quarter.
8
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Operating Expenses. Operating expenses increased 24.5% to $71.4
million for the Current Quarter from $57.3 million for the Prior Quarter.
The increase in operating expenses was principally related to increased
variable costs related to the higher sales volume. Operating expenses as a
percent of sales decreased to 28.0% for the Current Quarter from 28.7% in
the Prior Quarter due primarily to improved operating leverage across all
product groups.
Operating Income. Operating income increased 36.3% to $22.1 million
for the Current Quarter from $16.2 million for the Prior Quarter. Operating
income as a percent of net sales increased to 8.7% from 8.1%, due to
improved operating leverage and the resulting reduction of operating
expenses in relation to sales.
Other Income. Other income, net of expenses, was $1.0 million for the
Current Quarter compared to $0.4 million for the Prior Quarter. The
increase was due to the higher average balance of investable cash.
Income Taxes. The effective income tax rate decreased to 37.4% for
the Current Quarter from 38.6% for the Prior Quarter. The decrease in rate
was caused by the profit and utilization of tax-loss carryforwards in
Canada versus a loss in that country in the Prior Quarter. No tax benefit
was recorded for the loss in the Prior Quarter.
Net Income was $14.5 million, up $4.3 million or 41.6% from $10.2
million reported in the first quarter of last year due to the factors
discussed above.
Earnings per Share were 43 cents which represents an 12 cent or 40.2%
increase over the same quarter a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Available liquid resources at July 31, 1999 consisted of $82.9 million in
cash and short-term investments and $10.8 million available under existing
bank lines. Inventory increased $ 9.9 million from the beginning of the
fiscal year, however, increased volumes resulted in an increase in
inventory turns from 6.0 to 6.2 turns at July 31, 1999. Accounts
receivable decreased $6.6 million to $105.9 million from $112.5 million at
the end of fiscal 1999 and days sales outstanding declined to 40 days
versus 43 at year end. The Company believes that cash and short-term
investments and the remainder of its credit lines are sufficient to meet
any existing and presently anticipated cash 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
to achieve its corporate objectives.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of the widespread use of computer
programs which were written using two digits rather than four to define the
applicable year in performing computations or decision-making functions.
The Company has completed its assessment of its major information
technology and technology reliant operating systems, including its internal
accounting, general ledger, billing, inventory and accounts payable
systems. Necessary modifications or replacements of existing systems,
including testing of these systems, have been substantially completed. The
Company
9
<PAGE>
anticipates that the remaining remediation and testing of these systems
will be completed by September 30, 1999. The Company has also assessed the
need for modifications or replacements of existing hardware, particularly
personal computers, and has completed this assessment phase. The
remediation and testing of existing hardware has been completed. As a
result, the Company believes that substantially all critical business
systems and hardware are Year 2000 compliant. The Company has been
implementing the necessary modifications and replacements of its operating
systems in the ordinary course of its business over the last four years and
believes the incremental costs to complete this program were less than
$200,000. Over the past four years the Company has invested approximately
$500,000 in new systems.
The Company is also dependent on its vendors to supply the products it
sells and on service providers, including transportation providers and
utilities. The Company has sought assurances from its significant
suppliers of products and services to determine the impact on the Company
if such suppliers fail to convert their computer systems. While many of
the Company's significant suppliers have assured the Company that their
systems are currently Year 2000 compliant, or will be made Year 2000
compliant prior to December 31, 1999, the Company has not yet received such
assurances from a sufficient number of its product suppliers to enable the
Company to complete its assessment of the impact on the Company if a
substantial number of significant suppliers fail to convert their systems.
The Year 2000 efforts of third parties are ultimately beyond the Company's
control. The risk to the Company if significant product vendors fail to
convert their computer systems and, as a result, are unable to ship
products to the Company in a timely manner after the year 2000 is that the
Company may not be able to offer such products to its customers and will be
able to offer only replacement products, if available. The Company
generally has more than one source of supply for almost all categories of
products it sells. The risks to the Company if significant service
providers fail to timely convert their computer systems may include, in the
case of vital utility services, the inability of a branch office or
distribution center to operate. In such an event, the Company does have the
ability to shift its distribution and branch office operations to other
distribution centers and branches within its system. However,
notwithstanding the Company's efforts to substitute products or shift
distribution or branch operations, the inability of significant suppliers
of products and services to complete their Year 2000 resolution process in
a timely fashion could materially adversely affect the Company. The amount
of lost revenue and the impact on the Company can not be reasonably
estimated at this time.
The Company currently has no contingency plans in place in the event all
phases of the Year 2000 program are not completed or significant suppliers
of products and services fail to complete their Year 2000 resolution
process. The Company is in the process of evaluating whether such a plan is
necessary.
The Company believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the failure of
significant suppliers of products and services to the Company to resolve
their own Year 2000 issues could materially adversely affect the Company.
In addition, disruptions in the economy generally as a result of Year 2000
issues also could materially adversely affect the Company.
The foregoing discussion regarding Year 2000, including the discussion of
the timing and effectiveness of the Company's Year 2000 remediation
efforts, contains forward-looking statements which are based on
management's best estimates derived using assumptions and information
considered reasonable. These forward-looking statements involve inherent
risks and uncertainties,
10
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and actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the Company's ability to locate and correct all relevant
Year 2000 computer code and the ability of significant suppliers of
products and services to effectively address the Year 2000 issue. Such
material differences could result in business disruption, operational
problems, and similar risks.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain information of a non-historical nature contain forward-looking
statements. Words such as "believes," "expects," "plans," "estimates" and
variations of such words are intended to identify such forward-looking
statements. The statements are not guaranties of future performance and are
subject to certain risks, uncertainties or assumptions that are difficult
to predict: therefore, the Company cautions 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. 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.
. The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
11
<PAGE>
. 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 local full-service distributors and mail-order
distributors of dental products, while maintaining current or improved
profit margins.
. Continued ability of the Company 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.
. Future operating results of the Company's printed office products
group depends upon its ability to attract and retain customers by
offering quick response time and innovative products that meet
industry reporting standards. 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. 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.
(b) Reports on Form 8-K.
On July 2, 1999 the Company filed a report on Form 8-K relating to
the resignation of Ronald E. Ezerski and the election of R.
Stephen Armstrong as Executive Vice President, Treasurer and Chief
Financial Officer of the Company effective July 31, 1999.
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 19, 1999.
12
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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 13, 1999.
By: /s/ R. Stephen Armstrong
----------------------------
R. Stephen Armstrong
Executive Vice President, Treasurer and
Chief
Financial Officer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> APR-25-1999
<PERIOD-END> JUL-31-1999
<CASH> 73,182
<SECURITIES> 9,711
<RECEIVABLES> 110,050
<ALLOWANCES> 4,130
<INVENTORY> 101,640
<CURRENT-ASSETS> 295,322
<PP&E> 68,646
<DEPRECIATION> 30,072
<TOTAL-ASSETS> 382,592
<CURRENT-LIABILITIES> 94,056
<BONDS> 1,523
0
0
<COMMON> 336
<OTHER-SE> 279,221
<TOTAL-LIABILITY-AND-EQUITY> 382,592
<SALES> 254,599
<TOTAL-REVENUES> 254,599
<CGS> 161,068
<TOTAL-COSTS> 161,068
<OTHER-EXPENSES> 71,388
<LOSS-PROVISION> 305
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 23,150
<INCOME-TAX> 8,661
<INCOME-CONTINUING> 14,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,489
<EPS-BASIC> .43
<EPS-DILUTED> .43
</TABLE>
