10-Q 1 d10q.txt FORM 10-Q 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 JANUARY 25, 2003. ___ 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 68,010,967 shares of common stock as of March 4, 2003. Page 1 of 17 PATTERSON DENTAL COMPANY INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-8 Consolidated Balance Sheets as of January 25, 2003 and April 27, 2002 3 Consolidated Statements of Income for the Three Months and Nine Months Ended January 25, 2003 and January 26, 2002 4 Consolidated Statements of Cash Flows for the Nine Months Ended January 25, 2003 and January 26, 2002 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 6 - Exhibits and Reports on Form 8-K 14 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 January 25, 2003, 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) January 25, 2003 April 27, 2002 ---------------- -------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 135,365 $ 125,986 Short-term investments 28,292 25,251 Receivables, net 223,269 222,435 Inventory 150,631 142,457 Prepaid expenses and other current assets 12,730 13,291 --------- --------- Total current assets 550,287 529,420 Property and equipment, net 56,636 57,140 Goodwill 125,395 115,079 Identifiable intangibles, net 9,290 11,149 Other 22,482 5,588 --------- --------- Total assets $ 764,090 $ 718,376 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 102,577 $ 133,637 Accrued payroll expense 26,408 28,311 Income taxes payable 5,137 7,815 Other accrued expenses 34,312 28,244 --------- --------- Total current liabilities 168,434 198,007 Non-current liabilities 2,393 2,637 --------- --------- Total liabilities 170,827 200,644 Deferred credits -- 3,372 STOCKHOLDERS' EQUITY Common stock 680 681 Additional paid-in capital 82,661 90,777 Accumulated other comprehensive loss (2,159) (3,084) Retained earnings 535,756 449,661 Notes receivable from ESOP (23,675) (23,675) --------- --------- Total stockholders' equity 593,263 514,360 --------- --------- Total liabilities and stockholders' equity $ 764,090 $ 718,376 ========= ========= See accompanying notes. 3 PATTERSON DENTAL COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended January 25, January 26, January 25, January 26, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net sales $ 421,070 $ 357,394 $ 1,209,630 $ 1,015,666 Cost of sales 273,305 231,786 790,916 661,788 ----------- ----------- ----------- ----------- Gross margin 147,765 125,608 418,714 353,878 Operating expenses 101,288 87,027 290,916 249,902 ----------- ----------- ----------- ----------- Operating income 46,477 38,581 127,798 103,976 Other income and expense: Amortization of deferred credits -- 221 -- 663 Finance income, net 1,681 949 4,772 3,755 Interest expense (34) (12) (45) (83) Profit (loss) on currency exchange 108 (70) 38 (119) ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of accounting change 48,232 39,669 132,563 108,192 Income taxes 18,130 14,837 49,840 40,465 ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change 30,102 24,832 82,723 67,727 Cumulative effect of accounting change- See Note 7 -- -- 3,372 -- =========== =========== =========== =========== Net income $ 30,102 $ 24,832 $ 86,095 $ 67,727 =========== =========== =========== =========== Before cumulative effect of accounting change: Earnings per share - basic $ 0.44 $ 0.37 $ 1.22 $ 1.00 =========== =========== =========== =========== Earnings per share - diluted $ 0.44 $ 0.36 $ 1.21 $ 0.99 =========== =========== =========== =========== After cumulative effect of accounting change: Earnings per share - basic $ 0.44 $ 0.37 $ 1.27 $ 1.00 =========== =========== =========== =========== Earnings per share - diluted $ 0.44 $ 0.36 $ 1.26 $ 0.99 =========== =========== =========== =========== Weighted average common shares: Basic 67,797 67,687 67,855 67,675 Dilutive potential 68,406 68,225 68,505 68,163
See accompanying notes. 4 PATTERSON DENTAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended January 25, 2003 January 26, 2002 ---------------- ---------------- Operating activities: Income before cumulative effect of accounting change $ 82,723 $ 67,727 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 8,011 6,684 Amortization of deferred credits -- (664) Amortization of intangibles 1,858 3,909 Bad debt expense 697 1,326 Change in assets and liabilities, net of acquired (59,074) (32,742) --------- --------- Net cash provided by operating activities 34,215 46,240 Investing activities: Additions to property and equipment, net (8,658) (8,356) Acquisitions, net (4,956) (86,123) (Purchase) sale of short-term investments (3,041) 1,736 --------- --------- Net cash used in investing activities (16,655) (92,743) Financing activities: Payments and retirement of long-term debt and obligations under capital leases (275) (300) Common stock repurchased, net (8,117) (4,826) --------- --------- Net cash used in financing activities (8,392) (5,126) Effect of exchange rate changes on cash 211 (784) --------- --------- Net increase (decrease) in cash and cash equivalents 9,379 (52,413) Cash and cash equivalents at beginning of period 125,986 160,024 --------- --------- Cash and cash equivalents at end of period $ 135,365 $ 107,611 ========= =========
See accompanying notes. 5 PATTERSON DENTAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) January 25, 2003 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 January 25, 2003, and the results of operations and the cash flows for the periods ended January 25, 2003 and January 26, 2002. Such adjustments are of a normal recurring nature. The results of operations for the quarter ended January 25, 2003 and January 26, 2002, 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 third quarter of fiscal 2003 and 2002 represent the 13 weeks ended January 25, 2003 and January 26, 2002, respectively. 3. Total comprehensive income was $31,182 and $87,020 for the three and nine months ended January 25, 2003, respectively, and $23,582 and $66,081 for the three and nine months ended January 26, 2002 respectively. 4. On April 2, 2002 and July 9, 2002, respectively, the Company purchased Thompson Dental Company ("Thompson"), an eastern regional dental supplier in the U.S., and Distribution Quebec Dentaire, Inc. ("DQD"), a full-service distributor of dental supplies and equipment serving the province of Quebec, Canada. The operating results of Thompson and DQD are included in the consolidated statements of income since the dates of acquisition. Pro forma results of operations have not been presented since the effect of the acquisitions 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: Nine Months Ended January 26, 2002 ---------------- Net sales $1,049,294 Net income 68,118 (1) Earnings per share - basic $1.00 (1) Earnings per share - diluted $0.99 (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 6 Company is not 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 Nine Months Ended ------------------ ----------------- Jan. 25, Jan. 26, Jan. 25, Jan. 26, 2003 2002 2003 2002 ------ ------ ------ ------ Denominator: Denominator for basic earnings per share - weighted-average shares 67,797 67,687 67,855 67,675 Effect of dilutive securities: Stock Option Plans 520 449 567 401 Employee Stock Purchase Plan 9 9 9 8 Capital Accumulation Plan 80 80 74 79 ------ ------ ------ ------ Dilutive potential common shares 609 538 650 488 ------ ------ ------ ------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 68,406 68,225 68,505 68,163 ====== ====== ====== ====== 6. Certain financial information regarding the Company's reportable segments is as follows:
Three Months Ended Nine Months Ended ----------------------- ----------------------- Jan. 25, Jan. 26, Jan. 25, Jan. 26, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net sales: Dental supply: Consumable dental and printed office products $ 210,178 $ 189,807 $ 641,561 $ 572,455 Equipment and software 141,396 103,059 342,089 272,016 Other 29,248 27,126 93,493 80,881 ---------- ---------- ---------- ---------- 380,822 319,992 1,077,143 925,352 Veterinary supply 40,248 37,402 132,487 90,314 ---------- ---------- ---------- ---------- Consolidated net sales $ 421,070 $ 357,394 $1,209,630 $1,015,666 ========== ========== ========== ========== Operating income: Dental supply $ 44,119 $ 36,781 $ 117,930 $ 98,971 Veterinary supply 2,358 1,800 9,868 5,005 ---------- ---------- ---------- ---------- Consolidated operating income $ 46,477 $ 38,581 $ 127,798 $ 103,976 ========== ========== ========== ==========
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 Nine Months Ended January 26, 2002 January 26, 2002 ------------------ ----------------- Net Earnings: Reported net income $ 24,832 $ 67,727 Deferred credit amortization (221) (663) Goodwill amortization, net of tax 614 1,829 ---------- ---------- Adjusted net earnings $ 25,225 $ 68,893 ========== ========== Earnings per share: Reported basic $ 0.37 $ 1.00 Deferred credit amortization -- (0.01) Goodwill amortization, net of tax -- 0.03 ---------- ---------- Adjusted basic earnings per share $ 0.37 $ 1.02 ========== ========== Reported diluted $ 0.36 $ 0.99 Deferred credit amortization -- (0.01) Goodwill amortization, net of tax 0.01 0.03 ---------- ---------- Adjusted diluted earnings per share $ 0.37 $ 1.01 ========== ========== Goodwill by operating segment is as follows: January 25, 2003 April 27, 2002 ---------------- -------------- Dental Supply $ 66,759 $ 57,017 Veterinary Supply 58,636 58,062 -------- -------- Total $125,395 $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 Company 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 Nine Months Ended --------------------------- --------------------------- Jan. 25, 2003 Jan. 26, 2002 Jan. 25, 2003 Jan. 26, 2002 ------------- ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 64.9% 64.9% 65.4% 65.2% ----- ----- ----- ----- Gross profit 35.1% 35.1% 34.6% 34.8% Operating expenses 24.1% 24.3% 24.0% 24.6% ----- ----- ----- ----- Operating income 11.0% 10.8% 10.6% 10.2% Other income and expense, net 0.4% 0.3% 0.6% 0.4% Income before income tax 11.4% 11.1% 11.2% 10.6% Net Income 7.1% 6.9% 7.1% 6.6% ===== ===== ===== =====
QUARTER ENDED JANUARY 25, 2003 COMPARED TO QUARTER ENDED JANUARY 26, 2002. Net Sales. Net sales for the three months ended January 25, 2003 ("Current Quarter") totaled $421.1 million, a 17.8% increase from $357.4 million reported for the three months ended January 26, 2002 ("Prior Quarter"). Dental supply sales rose 19.0% to $380.8 million, paced by sales of equipment, which grew 37.2% reflecting strong demand for core dental equipment, the CEREC(R)3 dental restorative system and digital radiography systems. While software unit sales were down quarter-over-quarter, a gain in momentum nearly doubled the second quarter sales. Consumable and printed office products increased 10.7% in the Current Quarter. Sale of other services and products, consisting primarily of parts, technical service labor, software support and insurance e-claims, increased 7.8%. The estimated internal growth of the dental segment was approximately 14%-15%. The acquisitions of Thompson Dental Company ("Thompson") and Distribution Quebec Dentaire ("DQD") also contributed to the total sales improvement. See Note 4 to the Consolidated Financial Statements. Canadian dental sales rebounded after a slower second quarter, increasing to $28.7 million, or 25.5% over the Prior Quarter. The impact of DQD, acquired in July 2002, contributed approximately 16 percentage points of this growth. Equipment sales led the increase, growing 50.5%, primarily due to robust CEREC and digital radiography sales. 9 Veterinary sales increased 7.6% to $40.2 million compared to $37.4 million in the Prior Quarter. The promotional sales of a major heart worm medication in the Prior Quarter negatively impacted sales growth by 2.7% in the Current Quarter. Gross Margins. Gross profit increased 17.6% over the Prior Quarter solely as a result of higher sales volumes while the margin remained flat at 35.1%. Dental supply posted a slight decline of 10 basis points in margin primarily due to the change in the overall mix of sales between consumables and equipment. Consumable sales generally carry a higher gross margin overall than equipment. 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 17.6% and were flat as a ratio to sales. The Company continued to invest in new marketing programs and our technical service initiatives in the third quarter. Over the past few quarters, the Company has made substantial investments in people and training to support its office networking and digital radiography single-source technology solution, which was fully rolled out in the Current Quarter. While the Company is encouraged with the sales related to the hardware component of this program, the investment that we are making had a dampening effect on the operating expense rate. The implementation of new systems for managing and strengthening the technical service operation affected the expense rate 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 fee and communication costs. In addition, the Current Quarter expense rate reflects the impact of the Thompson acquisition, which was contributory to operating earnings but to a lesser degree than the Company's historical dental business. The operating income contribution from this incremental business is expected to continue to improve as we go forward. Operating Income. Operating income increased 20.5% and improved 20 basis points as a percent of sales. Higher sales volumes accounted for most of the increase in operating income while the improvement in operating margin was primarily the result of the discontinuance of goodwill amortization in the Current Quarter due to the adoption of SFAS No. 142. Other Income. Other income, net of expenses, was $1.8 million for the Current Quarter compared to $1.1 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. 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 non-taxable deferred credits discussed above. 10 Earnings Per Share, Before Cumulative Effect of Accounting Change. Diluted earnings per share increased to $0.44 versus $0.36 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. NINE-MONTHS ENDED JANUARY 25, 2003 COMPARED TO NINE-MONTHS ENDED JANUARY 26, 2002. Net Sales. Net sales for the nine months ended January 25, 2003 ("Current Period") increased 19.1% to $1,209.6 million from $1,015.7 million in the nine months ended January 26, 2002 ("Prior Period"). Nine-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, and the Thompson and DQD acquisitions as discussed above. Sales for the Dental segment increased 16.4% to $1,077.1 million, led by strong equipment sales, including increasing sales of CEREC and digital radiography in both the U.S. and Canada in the third quarter. Practice management software sales, while down from Prior Period, improved in the third quarter from soft first and second quarter levels. Consumables continue to grow in the double digits but growth has slowed slightly over the nine months. Other products and services sales improved 15.6%, driven by software and equipment related services. Canadian dental sales increased 17.3% over last year led by strong sales of equipment. The acquisition of DQD in July 2002 contributed between 9% and 10% to the overall sales increase in Canada. Currency exchange rates had a nominal impact on results in the Current Period. Veterinary supply sales improved 6.9% on a pro forma basis (as if this acquisition had occurred at the beginning of fiscal 2002) to $132.5 million in the Current Period. After giving affect to product introduction volume and follow-on fall promotional sales of a new heart worm medication during the Prior Period, the veterinary segment's comparable sales increase was approximately 15% for the first nine months of the fiscal year. Gross Margins. Gross margins represented 34.6% of sales, down 20 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. There was no change in gross margin compared to last year in the dental segment. Operating Expenses. Operating expenses increased $41.0 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 nine months of operating results for Webster Veterinary Supply compared to seven 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 30 basis points after the amortization of certain identifiable intangible assets. Discontinuance of goodwill amortization resulting from the adoption of SFAS No. 142 also positively impacted the year-over-year expense rate by approximately 30 basis points. Excluding the impact of the adoption of SFAS No. 142, the Current Period operating expense rate for the historical dental business was unchanged from the Prior Period. Nine month performance in the dental business operating expense rate is similar to third quarter results reflecting the strategic investments the Company is undertaking to capitalize 11 on market opportunities, as well as in infrastructure and systems to strengthen efficiencies and reduce costs. Also similar to the third quarter the nine-month expense rate reflects the integration and leveraging of the Thompson acquisition. Operating Income. Operating income grew by 22.9% and improved 40 basis points as a percent of sales. The elimination of goodwill amortization benefited operating income by $2.6 million or 30 basis points compared to Prior Period. Other Income. Other income increased $0.5 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 increase. Income Taxes. The effective tax rate increased to 37.6% up from 37.4% in the Prior Period reflecting the impact of the elimination of the amortization of the non-taxable deferred credits discussed above. Earnings Per Share, Before Cumulative Effect of Accounting Change. Diluted earnings per share increased to $1.21 versus $0.99 a year ago. Had amortization of goodwill and the deferred credits ceased in the Prior Period, Prior Period earnings would have increased by $1.2 million or $0.02 per diluted share. LIQUIDITY AND CAPITAL RESOURCES Over the past nine months, Patterson generated $34.2 million of cash from operations, compared to $46.2 million in the Prior Period. The $12.0 million decline in operating cash flows, despite a 22.1% increase in earnings, primarily stemmed from significant financing activities in the third quarter. Contractual stipulations of the new commercial paper conduit agreement combined with the Company's contract terms and the timing of selling the contracts created a temporary increase in the receivable balance. Days sales outstanding were 48 days at the end of the third quarter. Inventory turns were 6.9, an improvement of .3 turns over the Prior Period. We invested $5.0 million to acquire Distribution Quebec Dentaire Inc., and to settle certain contingent consideration obligations related to previous acquisitions. In comparison, we used $86.1 million of cash in the Prior Period primarily to purchase the assets of J. A. Webster, Inc. The Company also repurchased $13.1 million of common stock versus $8.3 million in the Prior Period. 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 $163.7 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. Also, 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. o 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. o The ability of the Company to retain its base of customers and to increase its market share. o The ability of the Company to maintain satisfactory relationships with qualified and motivated sales personnel. o 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. o 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. o Reduced growth in expenditures for dental services by private dental insurance plans. o 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. o 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. o 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 January 25, 2003. 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.20 Patterson Dental Company Stock Option Plan For Canadian Employees 10.21 Credit Agreement dated as of November 22, 2002 among Patterson Dental Company, The Lenders, and Bank One. 99.2 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.ss.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. 14 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: March 10, 2003 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: March 10, 2003 /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: March 10, 2003 /s/ R. Stephen Armstrong ------------------------ R. Stephen Armstrong Chief Financial Officer 17