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 26, 2002.
_________ 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
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Patterson Dental Company has outstanding 68,208,485 shares of common stock as of
December 4, 2002.
Page 1 of 17
PATTERSON DENTAL COMPANY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-8
Consolidated Balance Sheets as of October 26, 2002 and April 27, 2002 3
Consolidated Statements of Income for the Three Months
and Six Months Ended October 26, 2002 and October 27, 2001 4
Consolidated Statements of Cash Flows for the Six
Months Ended October 26, 2002 and October 27, 2001 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. 9-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Item 4 - Controls and Procedures 14
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 15
Certifications 16-17
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
1995:
This Form 10-Q for the period ended October 26, 2002, 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, 2002, and
other documents filed with the Securities and Exchange Commission. See also page
13 of this Form 10-Q.
2
PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 26, 2002 April 27, 2002
---------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 143,031 $ 125,986
Short-term investments 24,001 25,251
Receivables, net 201,774 222,435
Inventory 142,853 142,457
Prepaid expenses and other current assets 12,972 13,291
---------------- --------------
Total current assets 524,631 529,420
Property and equipment, net 57,089 57,140
Goodwill 121,430 115,079
Identifiable intangibles, net 9,910 11,149
Other 23,896 5,588
---------------- --------------
Total assets $ 736,956 $ 718,376
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 102,502 $ 133,637
Accrued payroll expense 20,746 28,311
Income taxes payable 5,398 7,815
Other accrued expenses 33,751 28,244
---------------- --------------
Total current liabilities 162,397 198,007
Non-current liabilities 2,377 2,637
---------------- --------------
Total liabilities 164,774 200,644
Deferred credits -- 3,372
STOCKHOLDERS' EQUITY
Common stock 682 681
Additional paid-in capital 92,760 90,777
Accumulated other comprehensive loss (3,239) (3,084)
Retained earnings 505,654 449,661
Notes receivable from ESOP (23,675) (23,675)
---------------- --------------
Total stockholders' equity 572,182 514,360
---------------- --------------
Total liabilities and stockholders' equity $ 736,956 $ 718,376
================ ==============
See accompanying notes.
3
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 400,821 $ 355,018 $ 788,560 $ 658,272
Cost of sales 263,047 233,815 517,611 430,002
----------- ----------- ----------- -----------
Gross margin 137,774 121,203 270,949 228,270
Operating expenses 95,316 85,248 189,628 162,875
----------- ----------- ----------- -----------
Operating income 42,458 35,955 81,321 65,395
Other income and expense:
Amortization of deferred credits -- 221 -- 442
Finance income, net 1,751 1,131 3,091 2,806
Interest expense (2) (34) (11) (71)
Loss on currency exchange (61) (86) (70) (49)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting change 44,146 37,187 84,331 68,523
Income taxes 16,601 13,905 31,710 25,628
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 27,545 23,282 52,621 42,895
Cumulative effect of accounting change-
see Note 7 -- -- 3,372 --
----------- ----------- ----------- -----------
Net income $ 27,545 $ 23,282 $ 55,993 $ 42,895
=========== =========== =========== ===========
Before cumulative effect of accounting change:
Earnings per share - basic $ 0.41 $ 0.34 $ 0.78 $ 0.63
=========== =========== =========== ===========
Earnings per share - diluted $ 0.40 $ 0.34 $ 0.77 $ 0.63
=========== =========== =========== ===========
After cumulative effect of accounting change:
Earnings per share - basic $ 0.41 $ 0.34 $ 0.82 $ 0.63
=========== =========== =========== ===========
Earnings per share - diluted $ 0.40 $ 0.34 $ 0.82 $ 0.63
=========== =========== =========== ===========
Weighted average common shares:
Basic 67,902 67,772 67,884 67,669
=========== =========== =========== ===========
Dilutive potential 68,604 68,253 68,555 68,133
=========== =========== =========== ===========
See accompanying notes.
4
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
October 26, 2002 October 27, 2001
---------------- ----------------
Operating activities:
Income before cumulative effect of
accounting change $ 52,621 $ 42,895
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 5,363 4,462
Amortization of deferred credits -- (442)
Amortization of intangibles 1,237 2,473
Bad debt expense 531 1,071
Change in assets and liabilities, net of acquired (34,292) (22,514)
---------------- ----------------
Net cash provided by operating activities 25,460 27,945
Investing activities:
Additions to property and equipment, net (6,906) (6,105)
Acquisitions, net (4,527) (84,182)
Sale (purchase) of short-term investments 1,250 (577)
---------------- ----------------
Net cash used in investing activities (10,183) (90,864)
Financing activities:
Payments and retirement of long-term debt and
obligations under capital leases (181) (217)
Common stock issued, net 1,984 (6,791)
---------------- ----------------
Net cash provided by (used in) financing activities 1,803 (7,008)
Effect of exchange rate changes on cash (35) (355)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 17,045 (70,282)
Cash and cash equivalents at beginning of period 125,986 160,024
---------------- ----------------
Cash and cash equivalents at end of period $ 143,031 $ 89,742
================ ================
See accompanying notes.
5
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
October 26, 2002
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position of the Company as of October 26, 2002, and the
results of operations and the cash flows for the periods ended October 26,
2002 and October 27, 2001. Such adjustments are of a normal recurring
nature. The results of operations for the quarter ended October 26, 2002
and October 27, 2001, are not necessarily indicative of the results to be
expected for the full year. The balance sheet at April 27, 2002, 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
2002 Annual Report on Form 10-K filed on July 25, 2002.
The consolidated financial statements of Patterson Dental Company include
the assets and liabilities of PDC Funding Company, LLC, a wholly owned
subsidiary and a separate legal entity under Minnesota law. The assets of
PDC Funding Company, LLC, would be available first and foremost to satisfy
the claims of its creditors. There are no known creditors of PDC Funding
Company, LLC.
2. The fiscal year end of the Company is the last Saturday in April. The
second quarter of fiscal 2003 and 2002 represent the 13 weeks ended October
26, 2002 and October 27, 2001, respectively.
3. Total comprehensive income was $27,978 and $55,838 for the three and six
months ended October 26, 2002, respectively, and $23,349 and $42,499 for
the three and six months ended October 27, 2001, respectively.
4. On July 9, 2002 the Company purchased Distribution Quebec Dentaire, Inc.
(DQD), a full-service distributor of dental supplies and equipment serving
the province of Quebec. The operating results of DQD are included in the
consolidated statements of income since the date of acquisition. Pro forma
results of operations have not been presented since the effect of the
acquisition was not material to the Company.
The Company also acquired the assets of J. A. Webster, Inc. in July 2001.
The following pro forma summary presents the results of operations, as if
the acquisition had occurred at the beginning of the prior fiscal year. The
pro forma results of operations are not necessarily indicative of the
results that would have been achieved had the two companies been combined:
Six Months Ended
October 27, 2001
----------------
Net sales $691,900
Net Income 43,367/(1)/
Earnings per share - basic and diluted $ 0.64/(1)/
(1) Reflects the amortization of certain identifiable intangible assets.
Because the transaction was consummated following the effective date
specified in the recently issued Statement of the Financial Accounting
Standards Board No. 142 "Goodwill and Other Intangible Assets," the Company
is not
6
amortizing goodwill for this transaction, but the goodwill becomes subject
to periodic evaluations of possible impairment in its value.
5. The following table sets forth the denominator for the computation of basic
and diluted earnings per share:
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67,902 67,772 67,884 67,669
Effect of dilutive securities:
Stock Option Plans 604 378 591 376
Employee Stock Purchase Plan 10 8 9 9
Capital Accumulation Plan 88 95 71 79
----------- ----------- ----------- -----------
Dilutive potential common shares 702 481 671 464
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 68,604 68,253 68,555 68,133
=========== =========== =========== ===========
6. Certain financial information regarding the Company's reportable segments
is as follows:
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net sales:
Dental supply:
Consumable dental and
printed office products $ 219,078 $ 194,989 $ 431,383 $ 382,648
Equipment and software 103,464 89,387 200,693 168,957
Other 33,058 27,212 64,245 53,755
----------- ----------- ------------ -----------
355,600 311,588 696,321 605,360
Veterinary supply 45,221 43,430 92,239 52,912
----------- ----------- ------------ -----------
Consolidated net sales $ 400,821 $ 355,018 $ 788,560 $ 658,272
=========== =========== ============ ===========
Operating income:
Dental supply $ 38,786 $ 33,314 $ 73,811 $ 62,190
Veterinary supply 3,672 2,641 7,510 3,205
----------- ----------- ------------ -----------
Consolidated operating income $ 42,458 $ 35,955 $ 81,321 $ 65,395
=========== =========== ============ ===========
7. In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets", which eliminated the
systematic amortization of goodwill. The statement also required that
goodwill be reviewed for impairment at adoption and at least annually
thereafter.
7
The Company adopted Statement No. 142 in the first quarter of fiscal 2003 and as
such discontinued amortization of goodwill effective April 28, 2002. With the
adoption of the statement, the Company recognized as the cumulative effect of a
change in accounting principle the remaining balance of its unamortized deferred
credits. The deferred credits were negative goodwill that arose from
acquisitions in the 1980's and amounted to approximately $3.4 million at the
time of the adoption. The Company completed the required transitional impairment
tests of goodwill and determined the fair value to be in excess of the carrying
value of these assets.
The following table reconciles reported fiscal 2002 net earnings and basic and
diluted net earnings per share before the cumulative effect of an accounting
change had this statement been effective April 29, 2001:
Three Months Ended Six Months Ended
October 27, 2001 October 27, 2001
---------------- ----------------
Net Earnings:
Reported net income $ 23,282 $ 42,895
Deferred credit amortization (221) (442)
Goodwill amortization, net of tax 611 1,215
---------------- ----------------
Adjusted net earnings $ 23,672 $ 43,668
================ ================
Earnings per share:
Reported basic $ 0.34 $ 0.63
Deferred credit amortization -- --
Goodwill amortization, net of tax 0.01 0.02
---------------- ----------------
Adjusted basic earnings per share $ 0.35 $ 0.65
================ ================
Reported diluted $ 0.34 $ 0.63
Deferred credit amortization -- (0.01)
Goodwill amortization, net of tax 0.01 0.02
---------------- ----------------
Adjusted diluted earnings per share $ 0.35 $ 0.64
================ ================
Goodwill by operating segment is as follows:
October 26, 2002 April 27, 2002
---------------- --------------
Dental Supply $ 62,799 $ 57,017
Veterinary Supply 58,631 58,062
---------------- --------------
Total $ 121,430 $ 115,079
================ ==============
The change in the dental supply segment goodwill is predominantly the result of
the preliminary purchase price allocation for the acquisition of Distribution
Quebec Dentaire in July 2002 and adjustment of the preliminary purchase price
allocation associated with the purchase of Thompson Dental Supply in April 2002.
The Company continues to amortize intangibles with finite lives. Identifiable
intangible assets are primarily comprised of non-compete agreements arising from
previous acquisitions made by the Company.
8
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. 26, 2002 Oct. 27, 2001 Oct. 26, 2002 Oct. 27, 2001
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.6% 65.9% 65.6% 65.3%
------------- ------------- ------------- -------------
Gross profit 34.4% 34.1% 34.4% 34.7%
Operating expenses 23.8% 24.0% 24.1% 24.7%
------------- ------------- ------------- -------------
Operating income 10.6% 10.1% 10.3% 10.0%
Other income and expense, net 0.4% 0.4% 0.4% 0.4%
Income before income tax and cumulative
effect of accounting change 11.0% 10.5% 10.7% 10.4%
Income taxes 4.1% 3.9% 4.0% 3.9%
------------- ------------- ------------- -------------
Income before cumulative effect of
accounting change 6.9% 6.6% 6.7% 6.5%
============= ============= ============= =============
QUARTER ENDED OCTOBER 26, 2002 COMPARED TO QUARTER ENDED OCTOBER 27, 2001.
Net Sales. Net sales for the three months ended October 26, 2002
("Current Quarter") totaled $400.8 million, a 12.9% increase from $355.0
million reported for the three months ended October 27, 2001 ("Prior
Quarter").
Dental supply sales improved 14.1% to $355.6 million in the Current
Quarter, with the recent acquisitions of Thompson Dental Company and
Distribution Quebec Dentaire, Inc., or DQD, accounting for approximately 4%
to 5% of the year-over-year increase. Equipment sales, excluding software
unit sales, were also a key sales growth driver in the Current Quarter
increasing 16.7%, fueled by strong growth of both new generation and basic
equipment lines. However, total software sales were down due to lower
volumes of traditional front-office practice management software.
Consumable and printed product sales grew 12.4% in the Current Quarter.
Sales of other services and products, consisting primarily of parts,
technical service labor, software support and insurance e-claims, increased
21.5%.
Canadian dental sales were up 9.5% in the Current Quarter due
principally to the acquisition of DQD. Excluding the acquisition, revenue
growth during the Current Quarter reflected weakness in certain regional
markets.
9
Veterinary supply sales increased 4.1% in the second quarter to $45.2
million. Results of the veterinary supply segment were affected by robust
introductory and promotional sales of a major heart worm medication in the
year earlier quarter and the decision of the manufacturer to scale back sales
and marketing support for this product during the fall months of the current
period. Excluding this factor, veterinary supply sales rose approximately
16.0% in the Current Quarter.
Gross Margins. Gross margins increased 13.7% over the Prior Quarter due
a combination of higher sales volumes and a 30 basis point expansion in the
gross margin rate. The consolidated gross margin rate benefited from
favorable changes in product mix within the veterinary supply segment. Dental
supply gross margins were the same as last year reflecting a shift in sales
mix to a higher percentage of consumables and equipment due to dental
acquisitions together with lower high-margin software revenues. This year's
gross margins also reflect the benefit of above average finance contract
sales during the quarter.
Operating Expenses. Results for the Current Quarter include the impact
of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
resulting in the cessation of goodwill amortization. Additional information
regarding the adoption of SFAS No. 142 is included in the Notes to the
Consolidated Financial Statements on pages 7 and 8 of this document. That
information is incorporated by reference into this section of this report.
After adjusting the Prior Quarter to exclude goodwill amortization, Current
Quarter operating expenses increased 13.0% and were flat as a ratio to sales.
The Company continued to invest in new marketing programs and technical
service initiatives in the second quarter. Over the past few quarters, the
Company has made substantial investments in people and training to support
its single-source technology solution aimed at automating and networking the
dental office. While the Company realized sales and modest profits from this
program in the Current Quarter, it had a dampening effect on the Company's
operating expense rate. The implementation of new systems for managing and
strengthening the Company's technical service operation affected the expense
rate in the Current Quarter as well. The Company expects these new systems to
improve operating efficiencies and contribute to sales growth over time. For
the short-term, however, this initiative will continue to add incremental
expense for the Company consisting primarily of additional training, software
licensing fees and communication costs. The Current Quarter expense rate also
reflects the impact of the acquisition of Thompson Dental, which was
contributory to operating earnings in the Current Quarter but to a lesser
degree than the Company's historical dental business. We expect the operating
income contribution to increase from this incremental business in the second
half of the fiscal year.
Operating Income. Operating income increased 18.1% and improved 50
basis points as a percent of sales. Higher sales volumes accounted for most
of the increase. The improvement in operating income as a percent of sales is
primarily the result of a positive sales mix in the veterinary supply
business. The discontinuation of goodwill amortization in the Current Quarter
due to adoption of SFAS No. 142 also helped improve operating income.
Other Income. Other income, net of expenses, was $1.7 million for the
Current Quarter compared to $1.2 million for the Prior Quarter. The benefit
of higher financing income from equipment contracts was mitigated by the
elimination of the amortization of deferred credits associated with the
adoption of SFAS No. 142.
10
Income Taxes. The effective income tax rate in the Current Quarter was
37.6%, which was adjusted up from the 37.4% rate used in Prior Quarter to
reflect the impact of the elimination of the amortization of the deferred
credits discussed above.
Earnings Per Share, Before Cumulative Effect of Accounting Change.
Diluted earnings per share increased to $0.40 versus $0.34 a year ago. Had
amortization of goodwill and the deferred credits ceased in the Prior
Quarter, Prior Quarter earnings would have increased by $0.4 million or less
than $0.01 per diluted share.
Six-months Ended October 26, 2002 Compared to six-months Ended OCTOBER 27, 2001.
Net Sales. Net sales for the six months ended October 26, 2002
("Current Period") increased 19.8% to $788.6 million from $658.3 million in
the six months ended October 27, 2001 ("Prior Period"). Six month results
include two months of incremental sales from the acquisition of the assets of
J. A. Webster, Inc. which annualized into the Company's results in July 2002.
Dental supply sales grew 15.0%. Six month trends parallel second
quarter results where increases reflect strong sales in consumables and
equipment with acquisitions contributing between 4% and 5% to the overall
sales increase. Sales of consumable dental supplies, including printed office
products, increased 12.7% paced by the US dental market where consumable
sales increased 14.0%. Equipment and software sales increased 18.8%. The
Company experienced double digit growth in all major equipment product
offerings. However, a decline in front-office practice management software
tempered sales growth of this product category. Sales of other services and
products, up 19.5%, benefited from strong sales of technical service labor
and parts, software support and insurance e-claims.
Canadian dental sales increased 13.1% over last year led by strong
sales of equipment. The acquisition of DQD in July 2002 contributed between
5% and 6% to the overall sales increase in Canada. Currency exchange rates
had a nominal impact on results in the Current Period.
Veterinary supply sales improved 7.7% on a pro forma basis amounting to
$92.2 million in the Current Period.
Gross Margins. Gross margins represented 34.4% of sales, down 30 basis
points from the Prior Period reflecting the impact of the acquisition of the
assets of J. A. Webster, Inc. which did not annualize into the Company's
results until July 2002. Gross margins in the veterinary business are
typically in the lower to mid 20's compared to the mid 30's for the dental
business. The gross margins for the dental business were better than last
year by 10 basis points.
Operating Expenses. Operating expenses increased $26.8 million, or
16.4%. As a percentage of sales, operating expenses declined 60 basis points
from the Prior Period. Current Period operating expenses as a percent of
sales reflects six months of operating results for Webster Veterinary Supply
compared to four months in the Prior Period. Since the operating expense rate
in the veterinary business is lower than in the dental business, this
disparity provides a favorable year-over-year impact of approximately 40
basis points after the amortization of certain identifiable intangible
assets. Discontinuation of goodwill amortization resulting from the adoption
of FAS 142 also positively impacted the year-over-year expense rate by
approximately 20 basis points. Excluding the impact of the adoption of FAS
142, the Current Period operating expense rate for the historical dental
business was unchanged from the Prior Period. Six month performance in the
dental business
11
operating expense rate is similar to second quarter results reflecting the
strategic investments the Company is undertaking to capitalize on market
opportunities, as well as in infrastructure and systems to strengthen
efficiencies and reduce costs. Also analogous to the second quarter is the
pressure on the expense rate from the integration and leveraging of the
Thompson Dental acquisition.
Operating Income. Operating income grew by 24.4% and improved 30 basis
points as a percent of sales. The elimination of goodwill amortization
benefited operating income by $1.7 million or 20 basis points.
Other Income. Other income declined $0.1 million in the Current Period.
The cessation of the amortization of deferred credits associated with the
adoption of SFAS No. 142 net of increased interest income resulted in the
decrease.
Income Taxes. The effective tax rate increased to 37.6% up from 37.4%
in the Prior Period.
Earnings Per Share, Before Cumulative Effect of Accounting Change.
Diluted earnings per share increased to $0.77 versus $0.63 a year ago. Had
amortization of goodwill and the deferred credits ceased in the Prior Year,
Prior Year earnings would have increased by $0.8 million or $0.01 per diluted
share.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal 2003, Patterson generated $25.5 million of
cash from operations, compared to $28.0 million in the year-earlier period.
Operating cash flow declined relative to the prior year despite a 22.7%
increase in earnings. The $2.5 million decrease results primarily from a
reduction in accounts payable levels including the expiration of extended
billing terms from Fort Dodge for its Proheart-6(R) heartworm medication.
Days sales outstanding were 45 days at the end of the second quarter.
Inventory turns stood at 6.7, essentially unchanged from the year-earlier
period.
We invested $4.5 million to acquire Distribution Quebec Dentaire Inc., and to
settle certain contingent consideration obligations related to previous
acquisitions. In comparison, we used $84.2 million of cash in the Prior
Quarter primarily to purchase the assets of J. A. Webster, Inc.
The Company expects funds generated by operations and existing cash and cash
equivalents to continue to be its most significant sources of liquidity. The
Company currently believes funds generated from the expected results of
operations and available cash and cash equivalents of $167.0 million will be
sufficient to meet the Company's working capital needs and finance
anticipated expansion plans and strategic initiatives for the next fiscal
year. In November 2002, the Company entered into a new credit facility, which
provides for an unsecured line of credit of up to $50 million. Should
additional investment opportunities arise, management believes that the
strength of the Company's earnings, cash flows and balance sheet will permit
the Company to obtain additional debt or equity capital, if necessary, at a
reasonable cost.
12
CRITICAL ACCOUNTING POLICIES
There has been no material change in the Company's Critical Accounting
Policies, as disclosed in its 2002 Annual Report on Form 10-K filed July
25, 2002.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain information of a non-historical nature contains forward-looking
statements. Words such as "believes," "expects," "plans," "estimates,"
"intends" 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 cause the Company's actual operating results to 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.
. The Company's ability to meet increased competition from national,
regional and local full-service distributors and mail-order
distributors of dental and veterinary products, while maintaining
current or improved profit margins.
. The 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.
. The 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.
. Changes in the 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.
. Reduced growth in expenditures for dental services by private dental
insurance plans.
. The 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.
. Changes in the economics of the veterinary supply market, including
reduced growth in per capita expenditures for veterinary services and
reduced growth in the number of households owning pets.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk during the three months
ended October 26, 2002. For additional information refer to Item 7A of the
Company's 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined in Exchange Act Rules 13a-14(c) and
15d-14(c). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in alerting them timely to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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 9, 2002.
(c)(1) The shareholders voted for one director nominee, Harold C.
Slavkin, for a one year term, and two director nominees, Ronald
E. Ezerski and Andre B. Lacy, for three year terms. 61,423,448
shares were voted for Mr. Slavkin and 1,131,640 shares withheld
authority. 61,423,448 shares were voted for Mr. Ezerski and
1,131,640 shares withheld authority. 61,423,448 shares were voted
for Mr. Lacy and 1,131,640 shares withheld authority There were no
abstentions and no broker non-votes.
(2) The shareholders voted to approve the Company's 2002 Stock Option
Plan. The vote was 58,500,333 shares for, 3,949,685 shares against
and 105,070 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 26, 2003. The vote was 60,844,490 shares for,
1,661,113 shares against and 47,357 abstentions. There were no
broker non-votes.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C.(S)1350, as Adopted, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(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, 2002.
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 9, 2002
By: /s/ R. Stephen Armstrong
------------------------
R. Stephen Armstrong
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
15
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Peter L. Frechette, the Chief Executive Officer of Patterson Dental Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patterson Dental
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation , to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 9, 2002 /s/ Peter L. Frechette
----------------------
Peter L. Frechette
Chief Executive Officer
16
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, R. Stephen Armstrong, the Chief Financial Officer of Patterson Dental
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patterson Dental
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation , to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 9, 2002 /s/ R. Stephen Armstrong
------------------------
R. Stephen Armstrong
Chief Financial Officer
17