<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 28, 2000.
----- 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 67,413,365 shares of common stock as of
December 7, 2000.
Page 1 of 14
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PATTERSON DENTAL COMPANY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Consolidated Balance Sheets as of October 28, 2000 and
April 29, 2000 3
Consolidated Statements of Income for the Three and Six
Months Ended October 28, 2000 and October 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended October 28, 2000 and October 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
Safe Harbor Statement Under The Private Securities Litigation Reform Act
------------------------------------------------------------------------
Of 1995:
-------
This Form 10-Q for the period ended October 28, 2000, 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, 2000, 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
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
Oct. 28, April 29,
2000 2000
---------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 124,853 $ 113,453
Short-term investments.............................. 5,203 4,720
Receivables, net.................................... 147,384 132,419
Inventory........................................... 99,156 92,838
Prepaid expenses and other current assets........... 10,402 7,978
--------- ---------
Total current assets................................ 386,998 351,408
Property and equipment, net............................ 47,102 46,022
Intangibles, net....................................... 51,540 50,730
Other.................................................. 4,824 3,816
--------- ---------
Total assets........................................ $ 490,464 $ 451,976
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 81,563 $ 80,097
Accrued payroll expense.............................. 14,963 15,194
Income taxes payable................................. 3,334 1,110
Other accrued expenses............................... 17,678 16,505
--------- ---------
Total current liabilities............................ 117,538 112,906
Non-current liabilities................................ 3,238 3,458
--------- ---------
Total liabilities.................................... 120,776 116,364
Deferred credits....................................... 4,700 5,142
Stockholders' equity:
Preferred stock...................................... -- --
Common stock......................................... 674 674
Additional paid-in capital........................... 67,284 67,022
Accumulated other comprehensive loss................. (2,863) (2,060)
Retained earnings.................................... 312,955 277,896
Note receivable from ESOP............................ (13,062) (13,062)
--------- ---------
Total stockholders' equity.......................... 364,988 330,470
--------- ---------
Total liabilities and stockholders' equity.......... $ 490,464 $ 451,976
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -----------------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
--------- ---------- ---------- ----------
(26 weeks) (27 weeks)
<S> <C> <C> <C> <C>
Net sales ........................................................... $ 288,872 $ 248,435 $ 557,166 $ 503,034
Cost of sales ....................................................... 182,976 157,645 354,258 318,714
--------- --------- ---------- ----------
Gross profit ........................................................ 105,896 90,790 202,908 184,320
Operating expenses .................................................. 77,114 68,480 149,928 139,868
--------- --------- ---------- ----------
Operating income .................................................... 28,782 22,310 52,980 44,452
Other income and expense:
Amortization of deferred credits ................................ 226 221 447 442
Finance income, net ............................................. 1,398 1,149 2,745 2,040
Interest expense ................................................ (27) (56) (57) (102)
Profit (loss) on currency exchange .............................. (90) 23 (116) (36)
--------- --------- --------- ----------
Income before income taxes .......................................... 30,289 23,647 55,999 46,796
Income taxes ........................................................ 11,320 8,836 20,936 17,496
--------- --------- --------- ---------
Net income .......................................................... $ 18,969 $ 14,811 $ 35,063 $ 29,300
========= ========= ========= =========
Earnings per share - basic and diluted .............................. $ 0.28 $ 0. 22 $ 0.52 $ 0. 43
========= ========= ========= =========
Weighted average common and dilutive potential
common shares ................................................... 67,674 67,614 67,661 67,553
========= ========= ========= =========
</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. 28, Oct. 30,
2000 1999
--------- ----------
(26 weeks) (27 weeks)
<S> <C> <C>
Operating activities:
Net income................................................................. $ 35,063 $ 29,300
Adjustments to reconcile net income........................................
to net cash provided by operating
activities:
Depreciation........................................................ 3,932 3,455
Amortization of deferrals........................................... (447) (443)
Amortization of goodwill............................................ 1,639 1,485
Bad debt expense.................................................... 456 584
Change in assets and liabilities, net of acquired................... (21,279) (12,826)
--------- ---------
Net cash provided by operating activities......................................... 19,364 21,555
Investing activities:
Additions to property and equipment, net................................... (4,661) (7,301)
Acquisitions, net.......................................................... (2,486) (2,654)
Purchase of short-term investments......................................... (483) (11,252)
--------- ---------
Net cash used in investing activities............................................ (7,630) (21,207)
Financing activities:
Payments and retirement of long-term debt and
obligations under capital leases......................................... (439) (301)
Common stock issued, net................................................... 257 732
--------- ---------
Net cash provided by (used in) financing activities............................... (182) 431
Effect of exchange rate changes on cash........................................... (152) 33
--------- ---------
Net increase in cash and cash equivalents......................................... 11,400 812
Cash and cash equivalents at beginning of period.................................. 113,453 78,746
--------- ---------
Cash and cash equivalents at end of period........................................ $ 124,853 $ 79,558
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
PATTERSON DENTAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
October 28, 2000
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of October 28,
2000, and the results of operations and the cash flows for the periods
ended October 28, 2000 and October 30, 1999. Such adjustments are of a
normal recurring nature. The results of operations for the quarter ended
October 28, 2000 and October 30, 1999, are not necessarily indicative of
the results to be expected for the full year. The balance sheet at April
29, 2000, 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 2000 Annual Report on Form 10-K filed on July
25, 2000.
2. The fiscal year end of the Company is the last Saturday in April. The
second quarter of fiscal year 2001 and 2000 represent the 13 weeks ended
October 28, 2000 and October 30, 1999, respectively. The first six months
of fiscal year 2001 include 26 weeks while the first six months of fiscal
year 2000 include 27 weeks.
3. Total comprehensive income was $18,034 and $34,260 for the three and six
months ended October 28, 2000, respectively, and $15,412 and $29,650 for
the three and six months ended October 30, 1999, respectively.
4. On June 13, 2000 the Company declared a two-for-one stock split in the form
of a 100% stock dividend payable July 21, 2000, to shareholders of record
on June 30, 2000. All references in the financial statements and related
notes to weighted average shares outstanding, share issuances, related
prices and per share amounts have been restated to reflect the split.
6
<PAGE>
5. The following table sets forth the denominator for the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67,396 67,350 67,389 67,330
Effect of dilutive securities:
Director Stock Option Plan 153 138 173 121
Employee Stock Purchase Plan 11 10 11 10
Capital Accumulation Plan 114 116 88 92
------ ------ ------ ------
Dilutive potential common shares 278 264 272 223
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 67,674 67,614 67,661 67,553
====== ====== ====== ======
</TABLE>
6. In September 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs"
(Issue 00-10), which is required to be applied no later than the Company's
fiscal fourth quarter. The Issue requires companies to classify as revenue
all amounts related to shipping and handling that are billed to a customer
in a sale transaction. If shipping or handling costs are significant and
are not included in cost of sales, companies must disclose both the amount
of such costs and the line item on the income statement where such costs
are reported. Historically the Company has reported the net cost of our
shipping and handling activities as an operating expense. The consensus of
this Issue will probably result in some reclassifications within the
structure of the Company's operating statement thus revising certain
operating ratios. These potential reclassifications will have no impact on
reported earnings. Management is continuing to review the impact of Issue
00-10 on the Company's financial statements and the options available, but
has formed no definitive opinion as to how it will implement the standard.
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.
Three Months Ended Six Months Ended
------------------ ----------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
------- ------- ------- -------
Net sales........................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 63.3% 63.4% 63.6% 63.4%
----- ----- ----- -----
Gross profit..................... 36.7% 36.6% 36.4% 36.6%
Operating expenses............... 26.7% 27.6% 26.9% 27.8%
----- ----- ----- -----
Operating income................. 10.0% 9.0% 9.5% 8.8%
Other income and expense, net.... 0.5% 0.5% 0.5% 0.5%
----- ----- ----- -----
Income before income taxes....... 10.5% 9.5% 10.0% 9.3%
Income taxes..................... 3.9% 3.5% 3.7% 3.5%
----- ----- ----- -----
Net income....................... 6.6% 6.0% 6.3% 5.8%
===== ===== ===== =====
QUARTER ENDED OCTOBER 28, 2000 COMPARED TO QUARTER ENDED OCTOBER 30, 1999.
Net Sales. Net sales for the three months ended October 28, 2000
("Current Quarter") increased 16.3% to $288.9 million from $248.4 million
for the three months ended October 30, 1999 ("Prior Quarter"). Strong
demand across all product-lines contributed to the $40.5 million sales
increase. Sales of consumable dental supplies, including printed office
products, increased 11.4% to $181.2 million led by the 14.0% sales growth
of consumable dental products in the U.S. market. Sales of printed office
products negatively impacted consumable dental supply sales in the Current
Quarter declining 2.5% versus the year-earlier period. Dental equipment and
software totaled $84.3 million up from $65.6 million in the same period in
fiscal 2000. The 28.4% increase in equipment and software sales was driven
by significantly higher volumes of new-generation dental equipment. Sales
of clinical software grew with digital equipment, but total software unit
sales declined in the Current Quarter due to reduced sales of front-office
practice management software. Sales of practice management software were
boosted significantly in the Prior Quarter by the need of many dental
offices to become Y2K compliant. Sales of other services and products grew
16.0% to $23.4 million in the Current Quarter compared to $20.2 million in
the Prior Quarter due to strong sales of software-related services,
technical services and parts.
8
<PAGE>
Gross Margin. Gross margins increased $15.1 million or 16.6% over
the Prior Quarter due mostly to the increased sales volumes. The gross
margin rate improved to 36.7% in the Current Quarter from 36.6% in the
Prior Quarter. The 10 basis point increase in the gross margin rate
reflects better margins at the point-of-sale and the shift in the sales mix
toward higher-margin, new-generation dental equipment.
Operating Expenses. Operating expenses increased 12.6% to $77.1
million in the Current Quarter but declined as a percent of sales from
27.6% in the Prior Quarter to 26.7% for the Current Quarter. This 90 basis
point improvement was the result of increased sales volume without a
corresponding increase in non-selling salaries and other fixed expenses. A
reduction in net delivery costs also positively contributed to the
operating expense rate improvement. Incentive compensation negatively
impacted expenses in the Current Quarter increasing 40% over the Prior
Quarter due to the improved operating results of the Company in the period.
Operating Income. Operating income increased 29.0% to $28.8 million
for the Current Quarter from $22.3 million for the Prior Quarter. Operating
income increased as a percent of net sales from 9.0% to 10.0% due to the
combined improvement of operating leverage and the gross margin rate.
Other Income. Other income, net of expenses, was $1.5 million for the
Current Quarter compared to $1.3 million for the Prior Quarter. Other
income increased due primarily to higher average short-term investments of
cash.
Income Taxes. The effective income tax rate at 37.4% remained the
same as last year.
Net Income. Net income increased to $19.0 million, or 28.1% due to
the factors discussed above.
Earnings Per Share. Diluted earnings per share increased to $0.28
versus $0.22 reported a year ago, a 6 cent or 27.3% increase over the same
quarter a year ago.
SIX MONTHS ENDED OCTOBER 28, 2000 COMPARED TO SIX MONTHS ENDED OCTOBER 30, 1999.
Net Sales. Net sales increased 10.8% to $557.2 million for the six
months ended October 28, 2000 ("Current Period") from $503.0 million for
the six months ended October 30, 1999 ("Prior Period"). The Current Period
includes 26 weeks versus 27 weeks in the Prior Period. Excluding the impact
of the additional week, sales increased approximately 15%. Sales references
in parentheses exclude the additional week from the Prior Period.
Acquisitions contributed 3 percentage points, or approximately $14 million,
to the overall sales growth. Six-month trends are similar to second quarter
results. Sales of consumable dental supplies, including printed office
products, increased 7.3%(11%) due primarily to contributions from an
expanded sales force and an increase in the number of customers. The
printed office products business closed several sales locations and
experienced turnover in its direct sales force in this year's first quarter
resulting in a year-to-date decline in sales of 5.3%(2%). Dental equipment
and software sales increased 19.4%(24%) due to strong demand across the
equipment product lines. Equipment and software sales were negatively
impacted by the Company's software business, which faced a difficult sales
comparison with the year-earlier period. Sales of other services and
products increased 9.2% (13%) in the Current Period due mostly to increases
in technical services and parts.
9
<PAGE>
Gross Margin. Gross margins increased $18.6 million to $202.9
million for the Current Period due solely to the increase in sales
volumes. The gross margin rate decreased to 36.4% for the Current
Period from 36.6% for the Prior Period. Although margins improved in
the second quarter, the increase was not sufficient to offset the mix
related margin decline experienced in the first quarter due to lower
software and printed office product sales as a percent of total sales.
Operating Expenses. Operating expenses increased 7.2% to $149.9
million for the Current Period from $139.9 million for the Prior
Period. The increase in operating expenses was related to greater
sales volume. The Company gained efficiencies from its infrastructure
and controlled costs resulting in a 90 basis point reduction in the
operating expense rate which declined from 27.8% in the Prior Period
to 26.9% in the Current Period.
Operating Income. Operating income increased 19.2% to $53.0
million for the Current Period from $44.5 million for the Prior
Period. Operating income, which increased as a percent of net sales
from 8.8% to 9.5%, benefited from a reduction in operating costs and
improved operating leverage but was negatively impacted by the
reduction in the gross margin rate.
Other Income. Other income, net of expenses, was $3.0 million for
the Current Period compared to $2.3 million for the Prior Period.
Other income increased $0.7 million due primarily to increased average
short-term investments of cash.
Income Taxes. The effective income tax rate at 37.4% remained the
same as last year.
Net Income. Net income was $35.1 million, up $5.8 million or
19.7% from $29.3 million reported in the first six-months of last year
due to the factors discussed above.
Earnings Per Share. Earnings per share were $0.52 which
represents a 9 cent or 20.9% increase over the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Cash generated from operating
activities was our principal source of funds during the six months
ended October 28, 2000 and was used primarily to invest in working
capital, fund capital expenditures and make acquisitions.
Operating activities generated cash of $19.4 million in the first six
months of 2000, compared to the same period in 2000 where operating
activities provided cash of $21.6 million. The decrease of $2.2
million was primarily due to an increase in accounts receivable. Days
sales outstanding increased to 46 days at the end of the quarter, an
increase of 3 days from the beginning of the year. This increase was
the result of carrying an additional $13 million of equipment
contracts in receivables that related to an equipment promotion in
June, July and August. These contracts will be sold in the Company's
third fiscal quarter. The increase in accounts receivable was
partially offset by a decline in inventory year-over-year and an
increase in net income.
Capital expenditures for the first six months of 2000 declined $2.6
million from the prior year period when the Company was funding the
construction of a new distribution center.
10
<PAGE>
For the six-months ended October 28, 2000 the Company invested $2.5
million to acquire one dental distribution business and eCheck-Up.com,
a newly developed Internet service that will provide on-line payroll,
human resources and accounts payable processing through its web site.
In comparison, the Company spent $2.7 million in the prior year period
to acquire two dental distribution businesses.
Available liquid resources at October 28, 2000 consisted of $130.1
million of cash and short-term investments and $16.1 million available
under existing bank lines. 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.
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, 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.
. Because the cost of paper stock represents over half the cost of
the Company's paper and printed products, future operating
results may be subject to fluctuations in paper prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk during the three
months ended October 28, 2000. For additional information refer to
item 7A of the Company's 2000 Form 10K.
12
<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 11, 2000.
c)(1) The shareholders voted for one director nominee, Burt E. Swanson,
for a three year term. 60,419,086 shares were voted for Mr.
Swanson and 2,618,662 shares withheld authority. There were no
abstentions and no broker non-votes.
(2) The shareholders voted to approve the amendments to the Company's
Employee Stock Purchase Plan to increase the number of shares
reserved thereunder for issuance from 675,000 to 1,375,000 and to
modify the eligibility requirements for participation by reducing
the number of months of continuous employment with the Company
from twelve (12) months to six (6) months. The vote was
62,551,738 shares for, 373,847 shares against and 112,162
abstentions. There were no broker non-votes.
(3) The shareholders voted to ratify the appointment of Ernst & Young
LLP as independent auditors of the Company for the fiscal year
ending April 28, 2001. The vote was 62,948,669 shares for, 59,935
shares against and 29,144 abstentions. There were no broker
non-votes.
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 25, 2000.
13
<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 12, 2000
By: /s/ R. Stephen Armstrong
-------------------------
R. Stephen Armstrong
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
14
