================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $.01
(Title of class)
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 the past 90 days. YES:X NO:
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. X
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 21, 1997 was
approximately $369,341,068.
As of March 21, 1997, 23,324,085 shares of registrant's Common Stock,
par value $.01 per share, were outstanding.
Documents Incorporated by Reference
None
================================================================================
<PAGE>
TABLE OF CONTENTS
PART II.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994
Statements of Stockholders' Equity for the years ended December 28,
1996, December 30, 1995 and December 31, 1994
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994
Notes to Consolidated Financial Statements
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K
23.1 Consent of BDO Seidman, LLP
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Company's consolidated financial statements and notes
thereto in Item 8 herein.
Overview
The Company's results of operations in recent years have been
significantly impacted by strategies and transactions undertaken by the Company
to expand its business, both domestically and internationally, in part to
address significant changes in the healthcare industry, including potential
national healthcare reform, trends toward managed care, cuts in Medicare,
consolidation of healthcare distribution companies and collective purchasing
arrangements. The Company's results of operations in recent years have also been
impacted by the Reorganization.
From 1992 through 1994, the Company was a party to a series of
transactions leading to the Reorganization that resulted in, among other things,
the Company being separated from Holdings and the distribution of shares of the
Common Stock of the Company to its then current stockholders. In December 1992,
an executive officer of the Company received certain stock grants in the Company
and Schein Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6
million, respectively, and cash of approximately $5.3 million to pay income
taxes on the stock grants received. These stock grants were subject to the
occurrence of certain future events, including the fulfillment of the employment
term by the executive officer. Accordingly, these stock grants, totaling $8.8
million, were treated as deferred compensation while the cash payments were
charged to earnings as special management compensation in the year ended
December 26, 1992. During 1993, the Company amortized the deferred compensation
relating to stock grants by the Company to the executive officer resulting in a
charge to earnings of $0.6 million. In 1994, the contingencies relating to the
stock granted to the executive officer were eliminated, such that these shares
became fully vested. Accordingly, deferred compensation of $8.8 million, less
the 1993 amortization of $0.6 million, plus a mark-to-market adjustment (because
of certain repurchase features) of approximately $9.1 million, along with a $0.3
million cash payment for income taxes relating to the 1992 stock grants, was
expensed in 1994 as special management compensation.
In addition, in connection with the Reorganization, certain senior
management of the Company were issued shares of Common Stock of the Company in
1994 and 1995 to extinguish an obligation under a pre-existing long-term
incentive plan and to provide them with an ownership interest in the Company. In
connection with the issuance of the shares, a cash payment for income taxes
relating to such stock issuances of approximately $2.4 million was paid. This
cash bonus, plus $3.5 million, the fair value of the related stock issued, net
of amounts accrued under the long-term incentive plan of approximately $1.9
million, resulted in an additional special management compensation charge to the
Company of approximately $4.0 million in 1994. Charges to earnings for the year
ended 1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.
Additionally, the Company has granted certain employees options for shares
of the Company's Common Stock, which became exercisable upon the Company's
initial public offering on November 3, 1995, at which time substantially all
such options vested. Non-recurring special compensation charges for the options
issued
<PAGE>
to employees recorded in the fourth quarter of 1995 amounted to approximately
$2.8 million. In addition, the Company recorded an approximate $1.1 million
related tax benefit.
Special charges for special management compensation and special
professional fees incurred in connection with the Reorganization aggregated
$20.8 million and $23.6 million for 1995 and 1994, respectively.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales by market of the Company and the percentage change in such items for
the years ended 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Percentage Increase
Percentage of Net Sales (Decrease)
--------------------------------------------------------------------------------------------
Years Ended
----------------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994 1995 to 1996 1994 to 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales by Market (1):
Dental (2) 52.5% 53.2% 56.3% 32.9% 19.5%
Medical 23.0 20.3 18.5 52.3 39.8
Veterinary 4.3 4.8 5.7 20.5 5.2
Technology (3) 2.5 4.2 2.2 (19.7) 142.1
International (4) 17.7 17.5 17.3 36.5 28.4
-------- ------- --------
100.0% 100.0% 100.0% 34.7 26.6
</TABLE>
- -----------
(1) Restated to conform to 1996 presentation.
(2) Dental consists of the Company's dental business in the United States and
Canada.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(4) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily in Europe.
1996 Compared to 1995
Net sales increased $213.8 million, or 34.7%, to $830.0 million in
1996 from $616.2 million in 1995. Of the $213.8 million increase, approximately
$107.9 million represented a 32.9% increase in the Company's dental business,
$65.6 million represented a 52.3% increase in its medical business, $39.3
million represented a 36.5% increase in its international business and $6.0
million represented a 20.5% increase in the Company's veterinary business,
offset by a $5.1 million, or 19.7% decrease in its technology business. The
dental net sales increase was primarily the result of the Company's continued
emphasis on its integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), expansion into the U.S. market for large dental equipment and
acquisitions. Of the approximately $65.6 million increase in medical net sales,
approximately $20.9 million, or 31.9%, represents incremental net sales to renal
dialysis centers, with the effects of acquisitions and increased outbound
telesales activity primarily accounting for the balance of the increase in
medical net sales. In the international market, the increase in net sales was
due to acquisitions, primarily in France, and increased account penetration in
Germany and the United Kingdom. Unfavorable exchange rate translation
adjustments resulted in a net sales decrease of approximately $4.4 million
dollars. Had net sales for the International market been translated at the same
exchange rates in effect during 1995, net sales would have increased by an
additional 4.1%. In the
<PAGE>
veterinary market, the increase in net sales was due to the full year impact of
new product lines introduced in the fourth quarter of 1995, increased account
penetration and continued volume growth to customers of a veterinary-sponsored
purchasing service. As anticipated, net sales in the Company's technology group
was below last year's sales volume levels due to unusually high sales volume in
the fourth quarter of 1995 related to the introductory launch, at that time, of
the Company's Easy Dental (Registered) Plus Windows (Registered) based product.
Gross profit increased by $54.6 million, or 28.7%, to $245.2 million in
1996, from $190.6 million in 1995, while gross profit margin decreased by 1.4%
to 29.5% from 30.9% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(Registered) Plus
for Windows (Registered) products were sold in 1996. Excluding gross profit
margin for the Company's technology group, which was 64.9% for 1996 as
compared to 80.7% for 1995, gross profit margins were relatively unchanged at
28.6% for 1996 as compared to 28.7% for 1995.
Selling, general and administrative expenses increased by $44.8 million,
or 26.2%, to $215.6 million in 1996 from $170.8 million in 1995. Selling and
shipping expenses increased by $37.8 million, or 33.6%, to $150.3 million in
1996 from $112.5 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 18.1% in 1996 from 18.3% in 1995. The
decrease in selling and shipping expenses as a percentage of net sales was
primarily due to reductions in sales promotions offered by the Company's
technology group in conjunction with the introductory promotion of Easy
Dental(Registered) Plus for Windows(Registered) version which occurred during
1995. These introductory promotional expenses represented 0.6% of net sales
in 1995. Excluding these expenses from 1995, selling and shipping expenses, as a
percentage of net sales, would have been 0.4% higher than last year. This
increase was due primarily to various promotional programs and incremental field
sales and marketing personnel. General and administrative expenses increased
$7.0 million, or 12.0%, to $65.3 million in 1996 from $58.3 million in 1995,
primarily as a result of acquisitions. As a percentage of net sales, general and
administrative expenses decreased 1.6% to 7.9% in 1996 from 9.5% in 1995 due
primarily to the relatively fixed nature of general and administrative expenses
when compared to the 34.7% increase in sales volume for the same period.
Net interest expenses decreased $4.4 million to $1.0 million in 1996 from
$5.4 million in 1995. This decrease primarily resulted from the use of the
proceeds of the Company's follow-on offering in June 1996 to reduce debt and an
increase in interest income arising from the temporary investment of proceeds in
excess of debt and imputed interest income arising from non-interest bearing
extended payment term sales, offset in part by an increase in average interest
rates.
For 1996, the Company's provision for taxes was $11.3 million, while the
pre-tax income was $29.3 million. The difference between the Company's effective
tax rate of 38.6% and the Federal statutory rate relates primarily to state
income taxes offset by tax-exempt interest on municipal securities. In 1995, the
Company's provision for taxes was $5.1 million, while the pre-tax loss was $6.1
million. The difference between the tax provision and the amount that would have
been recoverable by applying the statutory rate to pre-tax loss was attributable
substantially to the non-deductibility for income tax purposes of the $17.5
million appreciation in the value of the stock issued to an executive officer
and other senior management of the Company. On a pro forma basis, excluding
special charges, taxes on income for 1995 were $6.3 million, resulting in an
effective tax rate of 42.9%. The difference between the pro forma effective tax
rate and the Federal statutory rate relates primarily to state income taxes and
currently non-deductible net operating losses of certain foreign subsidiaries,
primarily in France, which are not included in the Company's consolidated tax
return.
In the fourth quarter of 1996 the Company made adjustments which increased
net income by approximately $2,400. These adjustments, which related
predominately to estimated reserves for premium coupon
<PAGE>
redemptions, finance charges receivable, and income taxes, resulted from
management's updated evaluations of historical trends (reflecting changes in
business practices and other factors) and other assumptions underlying such
estimates. The amounts of such reserves in prior quarters were based on
reasonable estimates reflecting available facts and circumstances.
1995 Compared to 1994
Net sales increased $129.6 million, or 26.6%, to $616.2 million in 1995
from $486.6 million in 1994. Of the $129.6 million increase, approximately $53.4
million represented a 19.5% increase in the Company's dental business, $35.8
million represented a 39.8% increase in its medical business, $23.8 million
represented a 28.4% increase in its international business, $15.2 million
represented a 142.1% increase in its technology business and $1.4 million
represented a 5.2% increase in the Company's veterinary business. The dental net
sales increase, after taking into consideration acquisitions, was primarily due
to the Company's increase in field sales consultants and telesales personnel,
database marketing programs and promotional activities. Of the approximately
$35.8 million increase in medical net sales, approximately $17.0 million, or
47.5%, represents incremental net sales to renal dialysis centers, with the
effects of acquisitions and increased telesales personnel accounting for the
other major increase in net sales. In the international market, the increase in
net sales was due to the full year benefit of an acquisition made in France in
July 1994, acquisitions made in 1995, increased unit volume growth and favorable
exchange rate translation adjustments. The increase in net sales for the
Company's technology market was primarily the result of an increase in unit
sales due to the release of the new Windows(Registered) version of Easy Dental
(Registered) Plus software in December 1995 and substantial price increases.
The increased pricing on the Easy Dental(Registered) Plus software product
was accompanied by substantial sales promotions and related expense. In the
veterinary market, the Company now earns a commission on certain products
which the manufacturer now sells direct. Including those sales on a basis
similar to 1994, sales to the veterinary market would have increased by
approximately 19.0%.
Gross profit increased by $47.9 million, or 33.6%, to $190.6 million in
1995, from $142.7 million in 1994, while gross profit margin increased by 1.6%
to 30.9% from 29.3% for the same period. Of the 1.6% increase in gross profit
margin, approximately 87.5%, or 1.4%, was primarily attributed to increased
sales volume of the Company's Easy Dental(Registered) Plus software, which
carried a higher gross profit margin than other products sold by the Company.
The higher net sales volume for the Company's technology business, up 142.1%
to $25.9 million from $10.7 million for the same period last year, was
primarily due to the release of the new Windows(Registered) version of Easy
Dental(Registered) Plus software, which increased unit sales, coupled
with substantial price increases. The increased pricing on the Easy
Dental(Registered) Plus software product was accompanied with substantial
sales promotions. The balance of the change in gross profit margin was due
to changes in product mix.
Selling, general and administrative expenses increased by $42.2 million,
or 32.8%, to $170.8 million in 1995 from $128.6 million in 1994. Selling and
shipping expenses increased by $34.8 million, or 44.8%, to $112.5 million in
1995 from $77.7 million in 1994. As a percentage of net sales, selling and
shipping expenses increased 2.4% to 18.3% in 1995 from 15.9% in 1994. The
increase in selling and shipping expenses as a percentage of net sales was
primarily due to substantial sales promotions offered by the Company's
technology group in conjunction with the promotion of Easy Dental(Registered)
Plus software and the new Windows(Registered) version released in December
1995, which accounted for approximately 0.9% of the 2.4% increase in selling
and shipping expenses as a percentage of net sales. The balance of the
increase was due primarily to various promotional programs and incremental
field sales and marketing personnel. General and administrative expenses
increased $7.4 million, or 14.5%, to $58.3 million in 1995 from $50.9 million
in 1994, primarily as a result of acquisitions. As a percentage of net sales,
general and administrative expenses decreased 1.0% to 9.5% in
<PAGE>
1995 from 10.5% in 1994 due primarily to the relatively fixed nature of general
and administrative expenses when compared to the 26.6% increase in sales volume
for the same period.
Interest expense--net increased $1.9 million, or 54.3%, to $5.4 million in
1995 from $3.5 million in 1994. This increase was due to two factors: average
interest rates rose to 8.3% in 1995 from 6.4% in 1994, and the Company's average
borrowings increased by $11.3 million in 1995 as compared to 1994 as a result of
higher working capital requirements and financing of acquisitions.
Equity in earnings of affiliates increased by $1.0 million, or 200.0%, to
$1.5 million in 1995 from $0.5 million in 1994. This increase in equity in
earnings of affiliates was primarily due to an increase in earnings of one
unconsolidated affiliate which was the result of increased sales volume and the
acquisition of another unconsolidated affiliate during the fourth quarter of
1995.
In 1995, the Company's provision for taxes was $5.1 million, while the
pre-tax loss was $6.1 million. The difference between the tax provision and the
amount that would have been recoverable by applying the statutory rate to
pre-tax loss was attributable substantially to the non-deductibility for income
tax purposes of the $17.5 million appreciation in the value of the stock issued
to an executive officer and other senior management of the Company. On a pro
forma basis, to give effect to special charges, taxes on income for 1995 were
$6.3 million, resulting in an effective tax rate of 42.9%. The difference
between the pro forma effective tax rate and the Federal statutory rate relates
primarily to state income taxes and currently non-deductible net operating
losses of certain foreign subsidiaries, primarily in France, which are not
included in the Company's consolidated tax return. In 1994, the income tax
recovery was $1.6 million, while the pre-tax loss was $12.4 million. The
effective tax rate of the Company for 1994 differed from the Federal statutory
rate, primarily due to non-deductible special charges of approximately $9.1
million arising from the appreciation in the value of stock issued to an
executive officer of the Company and currently non-deductible net operating
losses of certain foreign subsidiaries.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Risk Management
The Company has operations in the United States, Canada, the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland and
Spain. Each of the Company's operations endeavors to protect its margins by
using foreign currency forward contracts to hedge the estimated foreign currency
payments to foreign vendors. The total U.S. dollar equivalent of all foreign
currency forward contracts hedging vendor payments was $5.0 million as of the
1996 fiscal year end.
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company experienced a negative
translation adjustment of $0.5 million in 1996 and a positive translation
adjustment of $0.3 million in 1995, which adjustments were reflected in the
balance sheet as an adjustment to stockholders' equity. The cumulative
translation adjustment at the end of 1996 showed a net negative translation
adjustment of $0.6 million.
<PAGE>
The Company issues a Canadian catalog once a year with prices stated in
Canadian dollars; however, orders are shipped from the Company's United States
warehouses resulting in U.S. dollar costs for Canadian dollar sales. To minimize
the exposure to fluctuations in foreign currency exchange rates, the Company
enters into foreign currency forward contracts with major international banks
and an unconsolidated 50%-owned company to convert estimated monthly Canadian
dollar receipts into U.S. dollars. The Company usually enters into the forward
contract prior to the issuance of its Canadian catalog and for the expected life
of the catalog. As of December 28, 1996, the Company had 28 forward contracts
outstanding for the forward sale of 5.2 million Canadian dollars. The last of
the contracts expires on October 31, 1997; however, the Company anticipates
entering into new contracts in the normal course of its business.
The Company borrowed money in U.S. dollars under a term loan related to
the Van den Braak acquisition. The Company loaned the proceeds to Henry Schein
B.V. in Netherland Guilders ("NLG") with principal and interest payable in NLGs.
To minimize the resultant exposure to fluctuations in foreign currency exchange
rates between the U.S. dollar and The Netherland Guilder, the Company entered
into a series of foreign currency forward contracts to sell NLGs for U.S.
dollars. As of December 28, 1996, the Company had 5 contracts outstanding for
the forward sale of NLG 7.1 million. The last contract expires on October 31,
1997.
The Company entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in October and November of 2001.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products and special inventory buying opportunities, (b) acquisitions, and (c)
capital expenditures. Since sales have been strongest during the fourth quarter
and special inventory buying opportunities are most prevalent just before the
end of the year, the Company's working capital requirements have been generally
higher from the end of the third quarter to the end of the first quarter of the
following year. The Company has financed its business primarily through its
revolving credit facilities and stock issuances.
Net cash used in operating activities for the year ended December 28, 1996
of $34.5 million resulted primarily from a net increase in working capital of
$63.9 million offset in part by net income, adjusted for non-cash charges
relating primarily to depreciation and amortization and deferred income taxes of
$27.2 million and $2.4 million, respectively. The increase in working capital
was primarily due to (i) a $43.1 million increase in accounts receivable
resulting primarily from increased net sales (80.7%) and extended payment terms
(10.9%), and a decrease in the percentage of customers who make payment with
their orders (5.7%), (ii) a $23.0 million increase in inventories, primarily due
to year-end inventory buying opportunities and (iii) an $8.6 million increase in
loans and other receivables offset in part by an increase in accounts payable
and other accrued expenses of $10.7 million. The Company anticipates future
increases in working capital as a result of its continued sales growth, extended
payment terms and special inventory buying opportunities.
Net cash used in investing activities for the year ended December 28, 1996
of $49.1 million resulted primarily from cash used to make acquisitions of $32.5
million and capital expenditures of $11.2 million. During the past three years,
the Company has invested more than $26.3 million in the development of new
computer systems, and expenditures for new operating facilities. The Company
expects that it will continue to invest in
<PAGE>
excess of $10.0 million per year in capital projects to modernize and expand its
facilities and infrastructure systems.
Net cash provided by financing activities for the year ended December 28,
1996 of $117.6 million resulted primarily from net cash proceeds from a
follow-on offering of the Company's Common Stock, which was completed on June
21, 1996 amounting to $124.1 million, partially offset by net debt repayments of
approximately $5.6 million.
A balloon payment of approximately $3.5 million is due on October 31, 1997
under a term loan associated with a foreign acquisition. In addition, with
respect to certain acquisitions and joint ventures, holders of minority
interests in the acquired entities or ventures have the right at certain times
to require the Company to acquire their interest at either fair market value or
a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of December 28, 1996 of $41.7
million consist of bank balances and investments in short-term tax exempt
securities rated AAA by Moody's (or an equivalent rating). These investments
have staggered maturity dates, none of which exceed three months, and have a
high degree of liquidity as the securities are actively traded in public
markets.
The Company entered into an amended revolving credit facility on January
31, 1997 that increased its main credit facility from $65.0 million to $100.0
million, extended the facility termination date to January 30, 2002 and reduced
the interest rate on the Company's borrowings under the facility. Borrowings
under the credit facility were $18.0 million at December 28, 1996. Certain of
the Company's subsidiaries have additional credit facilities available which
totaled $13.2 million at December 28, 1996 under which $6.7 million had been
borrowed.
The aggregate purchase price of the acquisitions completed during 1996 was
approximately $38.8 million, payable $32.5 million in cash, $0.9 million in
notes and $5.4 million in stock. The cash portion of the purchase price was
primarily funded by proceeds from the Company's initial public offering,
completed in November 1995, and a follow-on offering, completed in June 1996.
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million. Additionally, on March 7, 1997, the Company entered
into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
Micro Bio-Medics, Inc. (Nasdaq:MBMI) will merge into a wholly-owned subsidiary
of the Company.
The Company believes that its cash and cash equivalents of $41.7 million
as of December 28, 1996, its anticipated cash flow from operations, its ability
to access public debt and equity markets and the availability of funds under its
existing credit agreements will provide it with sufficient liquidity to meet its
currently foreseeable short-term and long-term capital needs.
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry Schein,
Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 1996. We have
also audited the financial statement schedule listed in the accompanying index.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedule. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Henry Schein, Inc.
and Subsidiaries at December 28, 1996 and December 30, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
March 7, 1997
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------------------ --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 41,673 $ 7,603
Accounts receivable, less reserves of $7,305 and $6,335
respectively........................................ 140,197 91,248
Inventories.............................................. 126,632 96,515
Deferred income taxes.................................... 6,189 6,896
Other.................................................... 29,665 19,492
---------- ----------
Total current assets.................................. 344,356 221,754
Property and equipment, net.............................. 37,154 29,713
Goodwill and other intangibles, net ..................... 53,420 24,389
Investments and other.................................... 29,006 21,011
---------- ----------
$463,936 $296,867
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 87,988 $ 65,105
Bank credit lines........................................ 6,716 9,325
Accruals:
Salaries and related expenses......................... 11,041 9,074
Other................................................. 25,395 31,008
Current maturities of long-term debt..................... 8,461 3,343
------------ ----------
Total current liabilities............................. 139,601 117,855
Long-term debt.............................................. 24,569 30,381
Other liabilities........................................... 2,715 1,233
------------ ----------
Total liabilities..................................... 166,885 149,469
---------- --------
Minority interest........................................... 5,289 4,547
------------ ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000;
issued: 22,272,441 and 18,358,673, respectively....... 222 183
Additional paid-in capital............................... 254,180 123,866
Retained earnings ....................................... 39,086 19,746
Treasury stock, at cost, 60,529 and 51,679 shares,
respectively ......................................... (1,090) (769)
Foreign currency translation adjustment.................. (636) (175)
------------ -------------
Total stockholders' equity............................ 291,762 142,851
--------- ---------
$463,936 $296,867
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------------ ---------------- -------------
<S> <C> <C> <C>
Net sales...................................... $829,962 $616,209 $486,610
Cost of sales.................................. 584,738 425,625 343,922
----------- ----------- -----------
Gross profit................................ 245,224 190,584 142,688
Operating expenses:
Selling, general and administrative......... 215,561 170,823 128,560
Special management compensation............. --- 20,797 21,596
Special professional fees .................. --- --- 2,007
----------- ----------- -----------
Operating income (loss).................. 29,663 (1,036) (9,475)
Other income (expense):
Interest income............................. 2,456 475 251
Interest expense ........................... (3,421) (5,833) (3,756)
Other-net................................... 636 276 541
----------- ----------- -----------
Income (loss) before taxes on income
(recovery), minority interest and
equity in earnings of affiliates..... 29,334 (6,118) (12,439)
Taxes on income (recovery) .................... 11,343 5,126 (1,630)
Minority interest in net income of subsidiaries 246 509 561
Equity in earnings of affiliates............... 1,595 1,537 494
----------- ----------- -----------
Net income (loss).............................. $ 19,340 $(10,216) $(10,876)
=========== =========== ===========
Net income per common share.................... $ 0.93
===========
Weighted average common and common
equivalent shares outstanding............... 20,724
===========
Pro forma:
Historical net loss......................... $ (10,216) $(10,876)
Pro forma adjustments:
Special management compensation and
professional fees.................... 20,797 23,603
Tax effect of above...................... (1,174) (5,749)
------------ ------------
Pro forma net income........................ $ 9,407 $ 6,978
============ ===========
Pro forma net income per common share....... $ 0. 70 $ 0.58
============ ===========
Pro forma weighted average common and
common equivalent shares outstanding..... 13,447 12,127
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Additional
--------------------------------- Paid-in Retained
Shares Amount Capital Earnings
----------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 25, 1993................................. 11,390,544 $114 $ 11,225 $ 41,390
Net loss................................................... --- --- --- (10,876)
Deemed dividend............................................ --- --- --- (552)
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent)................................. --- --- 9,104 ---
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan... 489,456 5 3,460 ---
Recognition of deferred compensation....................... --- --- --- ---
Stock issued to ESOP trust ................................ 128,257 1 899 ---
Reclassification of redeemable stock issued as special
compensation and to ESOP trust.......................... (2,084,398) (21) (14,724) ---
Foreign currency translation adjustment.................... --- --- --- ---
------------- ------- -------- -----------
Balance, December 31, 1994................................. 9,923,859 99 9,964 29,962
Net loss................................................... --- --- --- (10,216)
Shares issued for acquisition.............................. 1,260,416 13 6,500 ---
Stock issued in initial public offering.................... 5,090,000 51 72,417 ---
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering......................................... 2,084,398 20 32,180 ---
Issuance of compensatory stock options..................... --- --- 2,805 ---
Purchase of treasury stock (51,679 shares)................. --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
------------- ------- --------- ----------
Balance, December 30, 1995................................. 18,358,673 183 123,866 19,746
Net income................................................. --- --- --- 19,340
Shares issued for acquisitions............................. 155,183 2 5,424 ---
Stock issued in follow-on offering......................... 3,734,375 37 124,070 ---
Stock issued to ESOP trust................................. 24,210 --- 820 ---
Purchase of treasury stock (8,850 shares).................. --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
------------- ------- -------- ----------
Balance, December 28, 1996................................. 22,272,441 $222 $254,180 $39,086
============= ======= ======== ==========
<CAPTION>
Foreign
Currency Deferred Total
Treasury Translation Compen- Stockholders'
Stock Adjustment sation Equity
----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, December 25, 1993................................. $ --- $(635) $(8,197) $ 43,897
Net loss................................................... --- --- --- (10,876)
Deemed dividend............................................ --- --- --- (552)
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent)................................. --- --- (9,104) ---
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan... --- --- --- 3,465
Recognition of deferred compensation....................... --- --- 17,301 17,301
Stock issued to ESOP trust ................................ --- --- --- 900
Reclassification of redeemable stock issued as special
compensation and to ESOP trust.......................... --- --- --- (14,745)
Foreign currency translation adjustment.................... --- 177 --- 177
--------- -------- ---------- -----------
Balance, December 31, 1994................................. --- (458) --- 39,567
Net loss................................................... --- --- --- (10,216)
Shares issued for acquisition.............................. --- --- --- 6,513
Stock issued in initial public offering.................... --- --- --- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering......................................... --- --- --- 32,200
Issuance of compensatory stock options..................... --- --- --- 2,805
Purchase of treasury stock (51,679 shares)................. (769) --- --- (769)
Foreign currency translation adjustment.................... --- 283 --- 283
----------- ----- ---------- ----------
Balance, December 30, 1995................................. (769) (175) --- 142,851
Net income................................................. --- --- --- 19,340
Shares issued for acquisitions............................. --- --- --- 5,426
Stock issued in follow-on offering......................... --- --- --- 124,107
Stock issued to ESOP trust................................. --- --- --- 820
Purchase of treasury stock (8,850 shares).................. (321) --- --- (321)
Foreign currency translation adjustment.................... --- (461) --- (461)
----------- ------- ---------- -----------
Balance, December 28, 1996................................. $(1,090) $(636) $ --- $291,762
=========== ======= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
-------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 19,340 $(10,216) $(10,876)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 7,898 6,037 3,811
Provision for losses and allowances on accounts
receivable...................................... 970 2,016 1,061
Stock issued to ESOP trust ............................. 820 --- 900
Provision (benefit) for deferred income taxes........... 2,397 (1,091) (3,553)
Special management compensation......................... --- 20,289 18,866
Undistributed earnings of affiliates.................... (1,595) (1,537) (494)
Minority interest in net income of subsidiaries......... 246 509 561
Other................................................... (619) (558) (965)
Changes in assets and liabilities:
Increase in accounts receivable.................. (43,063) (35,055) (12,809)
Increase in inventories.......................... (22,962) (7,342) (5,412)
Increase in other current assets................. (8,603) (4,411) (3,571)
Increase in accounts payable and accruals........ 10,683 20,562 18,759
-------- ---------- ----------
Net cash provided by (used in) operating activities........ (34,488) (10,797) 6,278
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.................................... (11,213) (9,219) (5,919)
Business acquisitions, net of cash acquired............. (32,540) (16,377) ---
Other................................................... (5,338) (3,893) (1,972)
---------- ------------ -----------
Net cash used in investing activities...................... (49,091) (29,489) (7,891)
--------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 1,154 3,698 5,391
Principal payments on long-term debt.................... (4,688) (15,289) (1,150)
Proceeds from issuance of stock......................... 124,107 72,468 ---
Proceeds from borrowings from banks..................... 4,449 2,446 3,764
Purchase of treasury stock.............................. (321) (769) ---
Payments on borrowings from banks....................... (6,478) (20,826) (4,200)
Deemed dividend......................................... -- --- (552)
Other................................................... (574) 1,711 445
------------- ---------- -----------
Net cash provided by financing activities.................. 117,649 43,439 3,698
--------- --------- -----------
Net increase in cash and cash equivalents................. 34,070 3,153 2,085
Cash and cash equivalents, beginning of year............... 7,603 4,450 2,365
------------ --------- -----------
Cash and cash equivalents, end of year..................... $ 41,673 $ 7,603 $ 4,450
========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Henry
Schein, Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates which are 50% or less owned
are accounted for under the equity method. All material intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the
last Saturday of December. Accordingly, fiscal years ended December 28, 1996 and
December 30, 1995 consisted of 52 weeks and the fiscal year ended December 31,
1994 consisted of 53 weeks.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered,
except for the portion of revenues from sales of practice management software
which is attributable to noncontractual postcontract customer support, which is
deferred and recognized ratably over the period in which the support is expected
to be provided.
Inventories
Inventories consist substantially of finished goods and are valued at
the lower of cost or market. Cost is determined by the first-in, first-out
("FIFO") method.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
---------
Buildings and improvements................................ 40
Machinery and warehouse equipment......................... 5 - 10
Furniture, fixtures and other............................. 3 - 10
Computer equipment and software........................... 5 - 7
Amortization of leasehold improvements is computed using the
straight-line method over the lesser of the useful life of the assets or the
lease term.
Taxes on Income
The Company filed a consolidated Federal income tax return with Schein
Holdings, Inc. for the period ended September 30, 1994 (see Note 2). For the
balance of 1994 the Company filed a consolidated Federal income tax return with
its 80% or greater owned subsidiaries and expects to continue to do so
thereafter. Income taxes for financial statement presentation were calculated
through the period ending September 30, 1994 as if the Company filed a separate
tax return.
Premium Coupon Program
The Company issues premium coupons to certain customers in conjunction
with sales of its products which are redeemable for gifts. Premium coupon
redemptions are accrued as issued based upon expected redemption rates.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows is not
material.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's
foreign subsidiaries are determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation adjustment account
in stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in earnings, except for certain hedging transactions
(see below).
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the basis of the transaction when it is
completed.
In order to manage interest rate exposure, the Company has entered into
interest rate swap agreements to exchange variable rate debt based on LIBOR into
fixed rate debt without the exchange of the underlying principal amounts. Net
payments or receipts under the agreements are recorded as adjustments to
interest expense.
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for
long-term debt approximates fair value because the underlying instruments are at
variable rates which are repriced frequently.
Acquisitions
The net assets of businesses purchased are recorded at their fair value
at the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 30 years.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through December 28, 1996.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based compensation."
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
(a) Historical
Historical per share information is computed using the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares relating to the stock options issued to executive management in 1995, the
shares issued to senior management in 1994, and the shares contributed to the
ESOP trust in 1994 have been treated as if they were outstanding since the
beginning of 1994. Such ESOP shares and common equivalent shares relating to the
stock options are calculated using the treasury stock method, using the initial
public offering price of $16.00 per share for assumed repurchase. Historical per
share information for 1995 and 1994 is not considered relevant as it would
differ materially from pro forma per share data, given the significance of the
pro forma adjustments.
(b) Pro Forma Net Income Per Share
Pro forma net income per share is computed using pro forma net income
and the pro forma weighted average number of common and common equivalent shares
outstanding, after reflecting a 99-for-1 stock split effected immediately prior
to the initial public offering. The common equivalent shares for pro-forma net
income per share were computed on the same basis as the historical basis.
(c) Supplemental Earnings Per Share
As required by APB Opinion No. 15, supplementary net income per share
for the year ended December 28, 1996 was $.93. For this calculation, the
weighted average number of common shares includes the shares assumed to provide
the proceeds, at the follow-on offering price, needed to retire average
revolving credit borrowings and debt for the period from the beginning of the
year (or the date the debt was incurred) to the respective retirement date, and
the pro forma net income was adjusted to exclude the related financing and
interest expenses of the debt.
NOTE 2--REORGANIZATION
On December 26, 1992, Henry Schein, Inc., a New York corporation ("Old
HSI"), reorganized its corporate structure to split into separate healthcare
distribution and pharmaceutical companies (the "Split"). The Split was
accomplished by transferring substantially all of Old HSI's assets and
liabilities relating to the distribution business to Henry Schein USA, Inc., a
newly formed corporation ("New HSI"). Subsequent to the Split, the name of Old
HSI was changed to Schein Holdings, Inc. and the name of New HSI was changed to
Henry Schein, Inc. ("HSI"). As a result of the Split, Schein Holdings, Inc.
("Holdings") became the parent of the Company and Schein Pharmaceutical, Inc.
(the pharmaceutical company, "SPINC").
The accompanying financial statements give retroactive effect to the
Split as described above, and reflect the historical cost bases of the assets
and liabilities of the distribution business.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 2 --REORGANIZATION (Continued)
On February 16, 1994, the shareholders of Holdings and HSI and certain
HSI management entered into an agreement (the "HSI Agreement") whereby certain
voting and non-voting shares of HSI stock were exchanged for new voting stock of
HSI, a 100-for-1 stock split was effectuated, and certain additional agreements
were entered into between HSI, the shareholders and management. The effect of
the stock exchanges was that Holdings distributed all of its shares in HSI to
certain shareholders of Holdings in exchange for its stock.
The HSI Agreement was subject to approval by the Westchester County
Surrogate Court, which approval was obtained on September 20, 1994. The HSI
Agreement was also subject to the closing of a transaction between the
shareholders of Holdings and Miles, Inc. ("Miles", an unrelated third party)
involving the sale by shareholders of Holdings of 28% of their shares to Miles.
In connection with the reorganization, during 1992 HSI issued 1,466,685
shares of common stock (valued at $6,173) to one of its executive officers and
147,312 shares of common stock (valued at $620) to an executive officer of
SPINC. In addition, SPINC issued shares to one of its executive officers and an
executive officer of HSI. Each company made cash payments to its respective
executive officer to cover the income taxes relating to the stock issuances. The
HSI shares issued to its executive officer originally were to vest after 10
years of employment. The other stock issuances were forfeitable if certain
events did not occur.
The stock issuances to HSI's executive officer were accounted for based
on the estimated fair value at the date of issuance, as deferred compensation,
which was classified as a reduction of stockholders' equity in the financial
statements of the applicable company whose executive officer received the
shares. Accordingly, the fair value of the shares of HSI issued to the executive
officer of SPINC was recorded as a distribution to Holdings. Conversely, the
fair value of the shares issued to HSI's executive officer by SPINC in the
amount of $2,641 was treated as a contribution to HSI's capital. The cash
payment to HSI's executive officer in the amount of $5,283 was charged to
operations in 1992 as a special management compensation charge. In 1994, an
additional cash payment of $258 was paid to HSI's executive officer to pay
certain additional income taxes attributable to the 1992 stock issuance and was
recorded as a special management compensation charge.
As part of the HSI Agreement, the vesting and events of forfeiture were
removed and the stock issued in 1992 became fully vested. Accordingly, the
estimated fair value of the stock issuances to HSI's executive officer were
revalued to reflect the fair values of HSI and SPINC at the time of vesting and
the related deferred compensation, net of amortization, of $17,301 was charged
to earnings as special management compensation in 1994.
Additionally, pursuant to previous commitments, certain senior
management of HSI were issued 489,456 shares including 91,377 shares issued
subsequent to December 31, 1994 and 83,259 shares issued prior to the closing of
the initial public offering in part to extinguish a previously accrued liability
under a pre-existing long-term incentive plan. In connection with the issuance
of these shares, a cash payment of approximately $2,472 was paid to cover the
income taxes relating to this stock issuance and was charged, along with the
estimated fair value of the related stock issued of $3,465, less the related
obligations extinguished of approximately $1,900, as special compensation and is
included in special compensation in 1994.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 2 -- REORGANIZATION (Continued)
The shares issued to the executive officer and the senior management of
HSI were subject to repurchase by HSI at fair market value in the event
employment was terminated for any reason or an initial public offering of HSI's
stock did not occur by December 31, 1999. The repurchase feature was eliminated
upon the closing of the initial public offering. Special management compensation
for the year ended December 30, 1995 includes a $17,484 charge to operations to
reflect the appreciation in the market value of stock grants and issuances based
on the initial public offering price of $16.00 per share and a cash payment of
approximately $508 to cover income taxes related to those stock grants and
issuances.
In addition, special management compensation for the year ended
December 30, 1995 includes a charge of $2,805 to reflect the excess of the
initial public offering price over the exercise price of Class A options issued
to certain executive management in May 1995 (see Note 14(a)).
Special charges incurred in connection with this reorganization consist
of special management compensation expense of $20,797 and $21,596 for the years
ended 1995 and 1994, respectively, and special professional fees of $2,007 for
1994.
In 1994, the Company incurred special professional fees on behalf of
its stockholders relating to the reorganization in the amount of $552. This
amount was deemed to be a dividend and deducted from retained earnings.
NOTE 3--OTHER CURRENT ASSETS
Other current assets consist of the following:
December 28, December 30,
1996 1995
----------- -----------
Prepaid expenses ................... $ 5,314 $ 3,941
Vendor rebates receivable........... 11,798 5,744
Amounts due from affiliates ........ 5,154 2,084
Refundable income taxes............. 727 2,645
Other............................... 6,672 5,078
--------- ---------
$29,665 $19,492
========= =========
NOTE 4--PROPERTY AND EQUIPMENT--NET
Major classes of property and equipment consist of the following:
December 28, December 30,
1996 1995
------ ----
Land............................... $ 1,445 $ 1,718
Buildings and leasehold
improvements..................... 24,726 23,288
Machinery and warehouse equipment.. 14,937 10,509
Furniture, fixtures and other...... 14,585 12,165
Computer equipment and software.... 20,914 15,937
-------- --------
76,607 63,617
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 4--PROPERTY AND EQUIPMENT--NET (Continued)
Less accumulated depreciation and
amortization............................ 39,453 33,904
-------- --------
Net property and equipment................ $37,154 $29,713
======= =======
NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
December 28, December 30,
1996 1995
----------- ------------
Goodwill................................. $ 52,407 $ 22,267
Other.................................... 4,672 3,917
----------- ------------
57,079 26,184
Less accumulated
amortization........................... 3,659 1,795
----------- ------------
$ 53,420 $ 24,389
=========== ============
Goodwill represents the excess of the purchase price of acquisitions
over the fair value of net assets acquired. During 1996, four acquisitions
accounted for $16,887 of the increase in goodwill. Other intangibles include
covenants not to compete, customer lists and deferred acquisition costs.
Goodwill and other intangibles are amortized on a straight-line basis over
periods not exceeding 30 years.
NOTE 6--INVESTMENTS AND OTHER
Investments and other consist of:
December 28, December 30,
1996 1995
------------ ------------
Investments in unconsolidated affiliates...... $11,524 $ 9,865
Long-term receivables (see Note 11(b))........ 11,051 8,399
Other......................................... 6,431 2,747
------------ ------------
$29,006 $21,011
============ ============
The Company's investments are predominately 50% owned unconsolidated
affiliates consisting of various companies involved in the healthcare
distribution business and HS Pharmaceutical, Inc., which manufactures generic
pharmaceuticals. As of December 28, 1996, the Company's investments in
unconsolidated affiliates were $2,859 more than the Company's proportionate
share of the underlying equity of these affiliates. This amount, which has been
treated as goodwill, is being amortized over 30 years and charged to equity in
the operating results of these companies. As of December 28, 1996, approximately
$6,632 of the Company's retained earnings represented undistributed earnings of
affiliates. Combined financial data for substantially all of these companies
follows:
December 28, December 30,
1996 1995
------------ -----------
Current assets....................... $38,172 $28,904
Total assets......................... 47,103 35,220
Liabilities.......................... 30,939 22,995
Stockholders' equity................. 16,164 12,225
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 6--INVESTMENTS AND OTHER (Continued)
Years Ended
----------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Net sales............. $103,169 $55,090 $34,003
Operating income...... 7,044 5,147 3,183
Net income............ 3,775 2,920 1,428
NOTE 7--BUSINESS ACQUISITIONS
The Company acquired 34 healthcare distribution businesses between 1994
and 1996, including, on July 7, 1995, the distribution business of The Veratex
Corporation ("Veratex"), a national direct marketer of medical, dental and
veterinary products, and on July 10, 1996, Scientific Supply Company, Inc., a
regional distributor of medical supplies. The total amount of cash paid and
promissory notes issued for these acquisitions was approximately $33,423,
$22,710 and $2,660, for 1996, 1995 and 1994, respectively. The Company also
issued 155,183 shares of common stock in 1996 in connection with two of its
acquisitions and 1,260,416 shares of common stock in connection with one of its
1995 acquisitions, of which approximately 928,700 shares were issued to a
stockholder of the Company. These acquisitions have been accounted for under the
purchase method, except one from an affiliate which involves carryover of
predecessor basis with respect to the affiliate's proportionate share of net
assets. Operations of these businesses have been included in the consolidated
financial statements from their acquisition dates.
Certain acquisitions provide for contingent consideration, primarily
cash, to be paid in the event certain financial performance targets are
satisfied over periods typically not exceeding three years from the date of
acquisition. The Company's policy is to record a liability for such amounts when
it becomes probable that targets will be met. As of December 28, 1996 no
liabilities have been recorded for contingent consideration.
The summarized unaudited pro forma results of operations set forth
below for 1996 and 1995 assume the acquisitions occurred as of the beginning of
each of these periods.
Years Ended
--------------------------
December 28, December 30,
1996 1995
------------ ------------
Net sales........................................... $877,925 $762,333
Net income (loss)................................... 19,699 (9,594)
Pro forma net income, reflecting adjustment in 1995
to exclude special management compensation and
professional fees ............................. 19,699 10,029
Pro forma net income per common share............... $0.95 $0.75
Pro forma net income per common share, including acquisitions, may not
be indicative of actual results, primarily because the pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings that may result from the Company's integration efforts.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS (Continued)
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interest transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.2 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7 - BUSINESS ACQUISITIONS (Continued)
The following summarized pro-forma unaudited results of operations
combines the results of the Company and Dentrix assuming the acquisition of
Dentrix occurred on December 26, 1993:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales...................................... $840,122 $623,302 $490,834
Historical net income (loss)................... 22,523 (8,801) (10,065)
Pro-forma net income(1)........................ 21,326 10,289 7,483
Pro-forma net income per common share.......... $ 0.98 $ 0.71 0.57
</TABLE>
- --------------
(1) Reflects adjustment in all years for income taxes that would have been
provided for by Dentrix had it not been an S Corporation, and in 1995 and 1994
to exclude special management compensation and professional fees.
NOTE 8--BANK CREDIT LINES
At December 28, 1996, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $13,157, expiring through
December 1997. Borrowings of $6,716 under these credit lines at interest rates
ranging from 3.5% to 7.5% were collateralized by accounts receivable, inventory
and property and equipment of the subsidiaries with an aggregate net book value
of $17,163 at December 28, 1996.
NOTE 9--LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Borrowings under Revolving Credit Agreement (a)................ $18,040 $17,000
Notes payable for business acquisitions (b).................... 3,930 6,783
Notes payable to banks, interest variable (8.0% at December
28, 1996), payable in quarterly installments ranging from
$16 to $34 through 2003, secured by inventory and
accounts receivable in the amount of $21,192................ 1,932 2,020
Mortgage payable to bank in quarterly installments of
$14,interest at 5.2% through November 2013, collateralized
by a building with a net book value of $1,606............... 987 1,137
Various notes and loans payable with interest, in varying
installments through 2001, uncollateralized................. 8,141 6,784
------------ ------------
Total.......................................................... 33,030 33,724
Less current maturities........................................ 8,461 3,343
------------ ------------
Total long-term debt........................................... $24,569 $30,381
============ ============
</TABLE>
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9--LONG-TERM DEBT (Continued)
(a) Revolving Credit Agreement
On January 31, 1997, the Company entered into an amended revolving
credit agreement which, among other things, increased the maximum borrowings to
$100 million from $65 million, extended the term of the agreement to January 30,
2002 and reduced the interest rate charged to the Company. The interest rate on
any borrowings under the agreement is based on prime or LIBOR as defined in the
agreement, which were 8.25% and 5.69%, respectively, at December 28, 1996. The
borrowings outstanding at December 28, 1996 were at interest rates ranging from
6.3% to 8.25%. The agreement provides for a sliding scale fee ranging from .1%
to .3%, based upon certain financial ratios, on any unused portion of the
commitment. The agreement also provides, among other things, that HSI will
maintain, on a consolidated basis, as defined, a minimum tangible net worth,
current, cash flow, and interest coverage ratios, a maximum leverage ratio, and
contains restrictions relating to annual dividends in excess of $500, guarantees
of subsidiary debt, investments in subsidiaries, mergers and acquisitions,
liens, capital expenditures, certain changes in ownership and employee and
shareholder loans.
(b) Notes Payable for Business Acquisitions
In November 1993, a subsidiary of the Company entered into a term loan
agreement for $5,290 with a bank. The proceeds of this loan were used to acquire
a dental supply distribution company. Principal is payable in semi-annual
installments of $227 through October 1997, with a final balloon payment of
$3,474 on October 31, 1997. Interest is payable quarterly at a rate of 6.5% per
year. The agreement also provides for the same financial covenants and
restrictions as the revolving credit agreement. In October 1995, the Company
entered into a term loan agreement for $2,400 with a third party. The proceeds
of this loan were used to acquire a medical distribution company. The loan was
repaid in June 1996.
As of December 28, 1996, the aggregate amounts of long-term debt
maturing in each of the next five years are as follows: 1997- $8,461; 1998-
$1,670; 1999-$774; 2000- $710, 2001- $689.
NOTE 10--TAXES ON INCOME (RECOVERY)
Taxes on income (recovery) are based on income (loss) before taxes on
income (recovery), minority interest and equity in earnings of affiliates as
follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Domestic................................ $27,091 $(7,435) $(13,978)
Foreign................................. 2,243 1,317 1,539
------------ ------------ ------------
Total income (loss) before taxes
on income (recovery), minority
interest and equity in earnings of
affiliates............................ $29,334 $(6,118) $(12,439)
============ ============ ============
</TABLE>
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (RECOVERY) (Continued)
The provision for (recovery of) income taxes on income (loss) was as
follows:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense (recovery):
U.S. Federal............................... $ 7,182 $ 4,677 $ 1,528
State and local............................ 1,069 924 459
Foreign.................................... 695 616 (64)
------------ ------------ ------------
Total current................................. 8,946 6,217 1,923
------------ ------------ ------------
Deferred tax expense (benefit):
U.S. Federal............................... 1,466 (836) (3,563)
State and local............................ 778 (285) (155)
Foreign.................................... 153 30 165
------------ ------------ ------------
Total deferred................................ 2,397 (1,091) (3,553)
------------ ------------ ------------
Total provision (recovery).................... $11,343 $ 5,126 $ (1,630)
============ ============ ============
</TABLE>
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (RECOVERY) (Continued)
The tax effects of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Current deferred tax assets:
Inventory, premium coupon redemptions
and accounts receivable valuation
allowances................................... $2,798 $3,592
Uniform capitalization adjustments to
inventories.................................. 1,520 1,472
Accrued special professional fees and other
accrued liabilities.......................... 1,871 1,832
-------- -------
Total current deferred tax asset ...................... 6,189 6,896
-------- -------
Non-current deferred tax assets (liabilities):
Property and equipment.............................. (1,607) (428)
Provision for long-term executive incentive
compensation and other accrued liabilities... (85) (110)
Net operating losses of foreign subsidiaries........ 1,928 2,403
------- -------
Total non-current deferred tax asset................... 236 1,865
Valuation allowance for non-current deferred
tax assets................................... (1,928) (2,403)
---------- --------
Net non-current deferred tax liabilities............... (1,692) (538)
---------- ---------
Net deferred tax asset................................. $ 4,497 $6,358
======== ======
</TABLE>
The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior carryback years to realize the tax benefit for
deductible temporary differences. The non-current deferred liability is included
in Other liabilities on the Consolidated Balance Sheets.
The tax provisions (recovery) differ from the amount computed using the
Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Provision (recovery) at Federal statutory rate......... $10,267 $(2,141) $(4,354)
State income taxes, net of Federal income tax effect... 1,575 582 53
Net foreign and domestic losses for which no tax
benefits are available............................... --- 574 23
Foreign income taxed at other than the Federal
statutory rate....................................... (55) (25) (214)
Non-deductible appreciation in stock issued as
special management compensation...................... --- 6,109 3,318
Deduction for charitable contributions................. --- --- (180)
Tax exempt interest.................................... (237) --- ---
Other.................................................. (207) 27 (276)
------------ ------------ ------------
Income tax provision (recovery)............... $11,343 $ 5,126 $(1,630)
============ ============ ============
</TABLE>
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10 - TAXES ON INCOME (RECOVERY) (Continued)
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been and
will continue to be reinvested. These earnings could become subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the foreign subsidiaries. It is not practicable to determine the amount
of additional tax, if any, that might be payable on the foreign earnings;
however, the Company believes that foreign tax credits would substantially
offset any U.S. tax. At December 28, 1996, the cumulative amount of reinvested
earnings was approximately $2,078.
NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
(a) Financial Instruments
To reduce its exposure to fluctuations in foreign currencies and
interest rates, the Company is party to foreign currency forward contracts and
interest rate swaps with major financial institutions.
While the Company is exposed to credit loss in the event of
nonperformance by the counterparties of these contracts, the Company does not
anticipate nonperformance by the counterparties. The Company does not require
collateral or other security to support these financial instruments.
As of December 28, 1996, the Company has outstanding foreign currency
forward contracts aggregating $9,790 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of the
Canadian dollar ($3,946), Swiss Franc ($707), The Netherland Guilder ($4,776),
Deutsche Mark ($180), and Japanese Yen ($181). The contracts expire at various
dates through October 1997. At December 28, 1996, the Company had net deferred
losses from foreign currency forward contracts of $27.
As of December 28, 1996, interest rate swaps totaling $13,000 were
outstanding. The swaps are used to convert floating rate debt to fixed rate debt
to reduce the Company's exposure to interest rate fluctuations. The net result
was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13,000 of the Company's debt. The swaps expire in
October and November 2001. Under the interest rate environment during the year
ended December 28, 1996, the net fair value of the Company's interest rate swap
agreements resulted in a recognized loss of $299.
In October 1994, a subsidiary of the Company recorded a $509 foreign
currency gain relating to an intercompany loan intended to be repaid. This gain
is reflected in the Other-net section of the Consolidated Statements of
Operations.
(b) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued)
The Company places its short-term cash investments with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and its
dispersion across different types of healthcare professionals and geographic
areas. The Company maintains an allowance for losses based on the expected
collectability of all receivables. Included in Accounts Receivable and Long term
receivables at December 28, 1996 is $18,355 and $7,785, respectively, related to
Easy Dental(Registered) Plus software sales with non-interest bearing extended
payment terms. Total unamortized discounts at December 28, 1996 amounted to
$1,487 based on an imputed interest rate of 8.25%. Included in interest income
for the year ended December 28, 1996 was approximately $998 of inputed interest
relating to these non-interest bearing extended payment term receivables.
Imputed interest relating to these receivables was not material for 1995 and
1994.
NOTE 12--RELATED PARTY TRANSACTIONS
(a) In the ordinary course of business, the Company purchases pharmaceutical
products from certain unconsolidated affiliates. Net purchases from these
affiliates amounted to $15,037, $8,730 and $12,055 in 1996, 1995 and 1994,
respectively. Included in Accounts Payable at December 28, 1996 and December 30,
1995 were $1,523 and $1,591, respectively, for amounts due to these affiliates
for purchases made from them.
(b) The Company also shares certain services with these and other
unconsolidated affiliates which are charged to the affiliates at cost. The
Company charged these affiliates $602, $891 and $1,691 during 1996, 1995 and
1994, respectively, for these services. In addition, sales (at cost) to
unconsolidated affiliates were $5,832, $3,784 and $3,160 in 1996, 1995 and 1994,
respectively.
(c) The Company recorded interest income of $129, $88 and $87, and interest
expense of $32, $26 and $13 in 1996, 1995 and 1994, respectively, attributable
to transactions with unconsolidated affiliates. Included in the Other section of
current assets are amounts due from unconsolidated affiliates of $5,154 and
$2,051 at December 28, 1996 and December 30, 1995, respectively.
(d) A subsidiary of the Company leases its primary operating facility from
an officer of the subsidiary. Rent expense attributed to this facility amounted
to $209 for 1996 and 1995.
(e) During 1994, a subsidiary of the Company entered into a sales service
agreement with an entity ("Salesco") owned by an officer of the subsidiary.
Under the terms of this agreement the subsidiary is required to reimburse
Salesco for all reasonable expenses incurred in connection with the services it
provides to the subsidiary and pay a fee to Salesco based upon a formula applied
to its pre-tax profit. Amounts paid during 1996, 1995 and 1994 under this
agreement were not material.
(f) The Company purchases products from Schein Dental Equipment
Corp. ("SDEC"), formerly owned by a stockholder. In September 1995, the Company
acquired SDEC. Net purchases from SDEC prior to the acquisition amounted to
$1,803 and $1,738, in 1995 and 1994, respectively.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 13--SEGMENT AND GEOGRAPHIC DATA
The Company is engaged principally in one line of business, the distribution
of healthcare products to healthcare practitioners and professionals. The
following table presents information about the Company by geographic area. There
were no material amounts of sales or transfers among geographic areas and there
were no material amounts of United States export sales. No one European country
represents a significant geographic area.
1996 United States Europe Consolidated
- ---- ------------- ------ ------------
Net sales............................. $693,968 $135,994 $829,962
Operating income ..................... 26,267 3,396 29,663
Pre-tax income........................ 27,091 2,243 29,334
Identifiable assets................... 394,410 69,526 463,936
Depreciation and amortization......... 5,929 1,969 7,898
Capital expenditures.................. 9,817 1,396 11,213
1995
- ----
Net sales............................. $516,794 $ 99,415 $616,209
Operating income (loss)............... (3,626)* 2,590 (1,036)
Pre-tax income (loss)................. (7,435)* 1,317 (6,118)
Identifiable assets................... 243,677 53,190 296,867
Depreciation and amortization......... 4,704 1,333 6,037
Capital expenditures.................. 5,523 3,696 9,219
1994
- ----
Net sales............................. $402,683 $ 83,927 $486,610
Operating income (loss)............... (11,649)* 2,174 (9,475)
Pre-tax income (loss)................. (13,978)* 1,539 (12,439)
Identifiable assets................... 155,772 34,248 190,020
Depreciation and amortization......... 2,524 1,287 3,811
Capital expenditures.................. 4,425 1,494 5,919
* Includes special management compensation and special
professional fees of $20,797 and $23,603 for 1995 and 1994, respectively.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS
(a) Stock Compensation Plan
The Company maintains a 1994 Stock Option Plan for the benefit of certain
employees under which 679,635 shares of common stock may be issued. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and nonqualified stock options may be issued under the Plan.
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the initial
public offering, at which time the excess of the initial public offering price
of $16.00 over the exercise price ($2,805) was charged to special management
compensation expense. On November 3, 1995, the Company issued Class B options to
acquire 413,400 shares of common stock to certain employees at an exercise price
of $16.00 per share. During 1996, Class A options totalling 16,500 and Class B
options totalling 10,200 were forfeited and 48,000 Class B options were issued.
The exercise price of all Class B options equalled the market price on the date
of grant and accordingly no compensation cost was recognized. Substantially all
Class B options become exercisable ratably over three years from the date of
issuance.
The Class A and Class B options are exercisable up to the tenth anniversary
of the date of issuance, subject to acceleration upon termination of employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1996,10,000 options were granted to certain non-employee directors
at an exercise price of $29.00 per share which was equal to the market price on
the date of grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
weighted average fair value of options granted during 1996 and 1995 was $14.75
and $10.00, respectively. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995; risk-free interest rates of 6%
for both years; volatility factor of the expected market price of the Company's
Common Stock of 30% for both years; and a weighted-average expected life of the
option of 10 years.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS (Continued)
Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---- ----
Net income:
As reported, reflecting adjustment in 1995 to exclude
special management compensation(1) ..................... $19,340 $ 9,407
Pro forma .............................................. 18,060 9,227
Net income per common share:
As reported, reflecting adjustment in 1995 to
exclude special management compensation (1)............. $ 0.93 $ 0.70
Pro forma ............................................... 0.87 0.69
- -------------------------
(1) Special management compensation in 1995 includes the value of Class A
options which became exercisable upon the closing of the initial
public offering.
A summary of the status of the Company's two fixed stock option plans as of
December 28, 1996 and December 30, 1995, and changes during the years ending
those dates is presented below:
<TABLE>
<CAPTION>
December 28, 1996 December 30, 1995
---------------------------- --------------------------------
Shares Weighted Average Shares Weighted Average
(000) Exercise Price (000) Exercise Price
------ ---------------- ------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 651,297 $11.69 --- $ ---
Granted.................................. 58,000 30.02 651,297 11.69
Exercised................................ (1,000) 16.00 --- ---
Forfeited................................ (26,700) 8.71 --- ---
-------- --------
Outstanding at end of year............... 681,597 $13.36 651,297 $11.69
======== ========
Options exercisable at year-end.......... 359,597 $ 8.74 237,897 $ 4.21
Weighted-average fair value of
options granted during the year........ $14.75 $10.00
</TABLE>
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ -----------------------------------
Weighted-Average Weighted- Weighted-
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------ ------------ ----------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 4.21.................. 221,397 8.8 years $ 4.21 221,397 $ 4.21
16.00................. 402,200 8.8 16.00 138,200 16.00
29 to 36.25........... 58,000 9.3 30.02 --- ---
------- -------
$ 4.21 to 36.25......... 681,597 8.8 $13.36 359,597 $ 8.74
======= =======
</TABLE>
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS (Continued)
(b) Profit Sharing Plans
The Company has qualified noncontributory profit sharing plans for eligible
employees. Contributions to the plans as determined by the Board of Directors
and charged to operations during 1996, 1995 and 1994 amounted to $3,057, $2,178
and $1,719, respectively.
(c) Employee Stock Ownership Plan (ESOP)
In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplements the
Company's Profit Sharing Plan. Under this plan, the Company issued 24,210 and
128,257 shares of HSI common stock to the trust in 1996 and 1994, at an
estimated fair value of $820 and $900, respectively, which amounts were charged
to operations during 1995 and 1994. For 1996, the Company will contribute 3% of
eligible compensation with shares of the Company's common stock.
(d) Supplemental Executive Retirement Plan
In 1994, the Company instituted a nonqualified supplemental executive
retirement plan for eligible employees. Contributions, as determined by the
Board of Directors and charged to operations, were $84, $68, and $27 for 1996,
1995 and 1994, respectively.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 15--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2009. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 28, 1996 are as follows:
1997................................................. $ 9,704
1998................................................. 8,760
1999................................................. 7,469
2000................................................. 5,968
2001................................................. 4,666
Thereafter........................................... 11,769
--------
Total minimum lease payments......................... $ 48,336
========
Total rental expense for 1996, 1995 and 1994 was $9,667, $7,324 and $5,874,
respectively.
(b) Litigation
Various claims, suits and complaints, such as those involving government
regulations and product liability, arise in the ordinary course of the Company's
business. In the opinion of the Company, all such pending matters are without
merit, covered by insurance or are of such kind, or involve such amounts, as
would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
(c) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2002 (except for a lifetime consulting agreement with a principal
stockholder which provides for initial compensation of $283 per year, increasing
$25 every fifth year beginning in 2002). The agreements provide for varying base
aggregate annual payments of approximately $4,106 per year which decrease
periodically to approximately $1,366 per year. In addition, some agreements have
provisions for incentive and additional compensation.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes amounted to the following:
Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Interest....................... $3,708 $6,124 $3,132
Income taxes................... 8,988 5,540 2,451
In conjunction with business acquisitions, the Company used cash as
follows:
Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Fair value of assets acquired,
excluding cash.................. $50,970 $59,544 $3,525
Less liabilities assumed and
created upon acquisition........ 18,430 43,167 3,525
------- ------- ------
Net cash paid.................... $32,540 $16,377 $ ---
======= ======= ======
In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 17--OTHER INCOME (EXPENSE)-NET
Other income (expense)-net consists of the following:
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Investment gains.................... $ 80 $ --- $ ---
Gain on sale of assets.............. 520 33 100
Net foreign exchange gain ......... 3 43 415
Other non-operating income.......... 33 200 26
----- ----- -----
$ 636 $ 276 $ 541
===== ===== =====
NOTE 18--QUARTERLY INFORMATION (Unaudited)
The following table sets forth summary quarterly unaudited financial
information for 1996 and 1995, excluding non-recurring special charges and the
related tax effects:
Quarters Ended
-----------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
--------- -------- ------------- ------------
Net sales................. $185,359 $194,722 $212,529 $237,352
Gross profit.............. 54,949 57,930 61,944 70,401
Operating income.......... 4,704 6,470 7,621 10,868
Net income................ 2,464 4,214 5,290 7,372
Earnings per share........ $ 0.13 $ 0.22 $ 0.24 $ 0.33
Quarters Ended
----------------------------------------------
April 1, July 1, September 30, December 30,
1995 1995 1995 1995
-------- ------- ------------- ------------
Net sales................. $136,040 $139,753 $156,667 $183,749
Gross profit................. 40,315 42,107 48,090 60,072
Pro forma operating income... 2,986 4,689 5,188 6,898
Pro forma net income......... 936 2,066 2,093 4,312
Pro forma earnings per share. $ 0.08 $ 0.17 $ 0.17 $ 0.26
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 18--QUARTERLY INFORMATION (Unaudited) (Continued)
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software, year-end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of software
enhancements, timing of purchases, special promotional campaigns, fluctuations
in exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 1996 the Company made adjustments which
increased net income by approximately $2,400. These adjustments, which related
predominately to estimated reserves for premium coupon redemptions, finance
charges receivable, and taxes, resulted from management's updated evaluations of
historical trends (reflecting changes in business practices and other factors)
and other assumptions underlying such estimates. The amounts of such reserves in
prior quarters were based on reasonable estimates reflecting available facts and
circumstances.
Earnings per share calculations for each quarter were based on the weighted
average number of shares outstanding for each period, and the sum of the
quarters may not necessarily be equal to the full year earnings per share
amount.
NOTE 19 -- SUBSEQUENT EVENTS
On March 7, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Micro Bio-Medics, Inc. (MBMI) will
merge into a wholly-owned subsidiary of the Company. As a result of the
transaction, which has been approved by the Boards of Directors of MBMI and the
Company, outstanding shares of MBMI's common stock will be exchanged at a fixed
rate of 0.62 of a share of the Company's Common Stock for each outstanding 1.0
share of MBMI. Each of the members of MBMI's board of directors have granted to
the Company a proxy to vote their shares of MBMI common stock in favor of the
Merger Agreement and an option, exercisable under certain circumstances, to
acquire their shares for the consideration that they would have received under
the Merger Agreement in respect of those shares.
MBMI distributes medical supplies to physicians and hospitals in the New
York metropolitan area, as well as to healthcare professionals in sports
medicine, emergency medicine, school health, industrial safety, government and
laboratory markets nationwide. MBMI had net sales of approximately $150.0
million and earnings of approximately $1.7 million for its fiscal year ended
November 30, 1996. The completion of the transaction is subject to the
satisfaction of customary closing conditions, including, among others, MBMI
shareholder approval and Hart-Scott-Rodino waiting periods.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized, in the
City of Melville, State of New York, on June 24, 1997.
HENRY SCHEIN, INC.
/s/ Stanley M. Bergman
By: ________________________
Stanley M. Bergman
Chairman, Chief Executive Officer and President
<PAGE>
Exhibit 23-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, NY
We hereby consent to the incorporation by reference in the Registration
Statements of Henry Schein, Inc. on Form S-8, filed with the Securities and
Exchange Commission on June 6, 1996, of our reports dated March 7, 1997 on the
consolidated financial statements and schedule of Henry Schein, Inc. Annual
report on Form 10-K/A for the year ended December 28, 1996.
BDO Seidman, LLP
New York, New York
June 24, 1997
