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
PATTERSON DENTAL COMPANY INDEX <TABLE> <CAPTION> Page ---- <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: - ---- 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
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS <TABLE> <CAPTION> July 31, April 24, 1999 1999 --------- --------- (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
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------- July 31, July 25, 1999 1998 ------ ------ (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 -------- -------- 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
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended ---------------------- July 31, July 25, 1999 1998 ---------- ---------- (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
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
8. The following table sets forth the denominator for the computation of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended ------------------ July 31, July 25, 1999 1998 ------- ------- 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 ------- ------- Dilutive potential common shares 92 96 ------- ------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 33,747 33,387 ======= ======= </TABLE> 7
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 ------------------- July 31, July 25, 1999 1998 ------- ------- <S> <C> <C> Net sales................... 100.0% 100.0% Cost of sales............... 63.3% 63.2% ------- ------ Gross profit................ 36.7% 36.8% Operating expenses.......... 28.0% 28.7% ------- ------ Operating income............ 8.7% 8.1% Other income, net........... 0.4% 0.2% ------- ------ Income before income taxes.. 9.1% 8.3% Income taxes................ 3.4% 3.2% ------- ------ 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
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
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
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
. 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
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