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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
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(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
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(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 or any amendment to this
Form 10-K. 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
Portions of the Registrant's definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 28, 1996) are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
Page Number
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PART I
ITEM 1. Business 1
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 15
ITEM 6. Selected Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
ITEM 8. Financial Statements and Supplementary Data 26
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 57
PART III
ITEM 10. Directors and Executive Officers of the Registrant 57
ITEM 11. Executive Compensation 57
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 57
ITEM 13. Certain Relationships and Related Transactions 57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58
Financial Statement Schedules 60
Exhibit Index 73
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PART I
ITEM 1. Business
Recent Developments
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. 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 has 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. Upon completion of the acquisition, the Company believes that
it will become North America's largest distributor of healthcare products to
office-based healthcare practitioners and a leading provider of healthcare
products and services to the U.S. physician market.
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. The transaction is expected to
be completed by mid-1997 although no assurances can be given in this regard. For
a more complete description of the terms of the Merger Agreement and other
related agreements entered into in connection with the Merger Agreement,
reference is made to the Exhibits to this Form 10-K. The Company intends to file
a Registration Statement on Form S-4 with the Securities and Exchange Commission
with respect to the securities to be issued in connection with the Merger
Agreement.
General
The Company is the largest direct marketer of healthcare products and
services to office-based healthcare practitioners in the combined North American
and European markets. The Company has operations in the United States, Canada,
the United Kingdom, the Netherlands, Belgium, Germany, France, the Republic of
Ireland and Spain. The Company sells products and services to over 230,000
customers, primarily dental practices and dental laboratories, as well as
physician practices, veterinary clinics and institutions. In 1996, the Company
sold products to over 65% of the estimated 100,000 dental practices in the
United States. The Company believes that there is strong awareness of the "Henry
Schein" name among
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office-based healthcare practitioners due to its more than 60 years of
experience in distributing healthcare products. Through its comprehensive
catalogs and other direct sales and marketing programs, the Company offers its
customers a broad product selection of both branded and private brand products
which include approximately 50,000 stock keeping units ("SKUs") in North
America and approximately 40,000 SKUs in Europe at published prices that the
Company believes are below those of many of its competitors. The Company also
offers various value-added products and services, such as practice management
software. As of December 28, 1996, the Company had sold over 18,000 dental
practice management software systems, more than any of its competitors. On
February 28, 1997, the Company acquired 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 a 3,500 installed user base.
During 1996, the Company distributed over 9.0 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 500,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 450 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with over 300 field sales
consultants. The Company utilizes database segmentation techniques to more
effectively market its products and services to customers. In recent years, the
Company has continued to expand its management information systems and has
established strategically located distribution centers in the United States and
Europe to enable it to better serve its customers and increase its operating
efficiency. The Company believes that these investments, coupled with its broad
product offerings, enable the Company to provide its customers with a single
source of supply for substantially all their healthcare product needs and
provide them with convenient ordering and rapid, accurate and complete order
fulfillment. The Company estimates that approximately 99% of all orders in the
United States and Canada received before 7:00 p.m. and 4:00 p.m., respectively,
are shipped on the same day the order is received and approximately 90% of
orders are received by the customer within two days of placing the order. In
addition, the Company estimates that approximately 99% of all items ordered in
the United States and Canada are shipped without back ordering.
Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office-based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into joint ventures with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channelled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. The Company has
entered into or completed seventeen acquisitions during the year ended December
28, 1996. The businesses acquired included 10 dental and three medical
companies, a veterinary supply distributor and three international dental
companies, with aggregate net sales in their last fiscal year ends of
approximately $104.0 million, all of which were accounted for as purchase
transactions. Of these, fifteen were for majority ownership (100% in nine of the
transactions). In 1995, the Company acquired the distribution business of The
Veratex Corporation, a national direct marketer of dental, medical and
veterinary products, and Schein Dental Equipment Corp., a distributor and
manufacturer of large dental equipment. The Company also completed the majority
acquisition of 11 other companies and a 50% acquisition of one other company
during 1995.
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Corporate Structure Background
The Company was formed on December 23, 1992 as a wholly-owned subsidiary
of Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the
business in which the Company is now engaged and, in addition, owned 100% of the
outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a
company engaged in the manufacture and distribution of multi-source
pharmaceutical products. In December 1992, Holdings separated the Company's
business from Pharmaceutical by transferring to the Company all of the assets
(including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and
distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of
the healthcare distribution business now conducted by the Company. The Company
did not assume any other liabilities of Holdings, including the liabilities
associated with Pharmaceutical's business. In February 1994, the Company,
Holdings and their stockholders entered into a number of reorganization
agreements, and in September 1994, pursuant to such agreements, all of the
Company's common stock, par value $.01 per share ("Common Stock"), held by
Holdings was distributed to certain of the current stockholders of the Company
(the "Reorganization").
On November 8, 1995, the Company completed an initial public offering of
its Common Stock, and on June 21, 1996, the Company completed a follow-on
offering of its Common Stock. Proceeds from these offerings to the Company,
after expenses, were approximately $72.5 million and $124.1 million,
respectively. The proceeds enabled the Company to pay off certain indebtedness,
with the remaining proceeds available for general corporate purposes, including
subsequent acquisitions.
Customers
The Company serves over 230,000 customers worldwide in the dental, medical
and veterinary markets. The Company's dental customers include office-based
dental practices, dental laboratories, universities, institutions, governmental
agencies and large group and corporate accounts; medical customers include
office-based physician practices, podiatrists, renal dialysis centers, surgery
centers, institutions and governmental agencies; and the Company's veterinary
products are sold primarily to office-based veterinarians serving primarily
small animals.
The Company believes that its customers generally order from two or more
suppliers for their healthcare product needs, and often use one supplier as
their primary resource. The Company believes that its customers generally have
larger order sizes and order more frequently from their primary suppliers. The
Company estimates that it serves as a primary supplier to less than 10% of its
total customer base, and believes it has an opportunity to increase sales by
increasing its level of business with those customers for which it serves as a
secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, renal dialysis centers and surgery centers.
More recently, as cost-containment pressures have resulted in increased demand
for low-cost products and value-added services, the Company has targeted
specific groups of practices under common ownership, institutions, and
professional groups. For example, the Company has an exclusive direct marketing
agreement with an American Medical Association ("AMA") sponsored service and a
veterinarian sponsored service, pursuant to which member practitioners have
access to the services' lower priced products. In 1996, the AMA-sponsored
service and the veterinarian-sponsored purchasing service accounted for net
sales of over $27.4 million. These services, government institutions and
agencies, and other large or collective purchasers, require low-cost pricing and
detailed product and usage information and reporting. The Company believes it is
well situated to meet the needs of these customers, given its broad, low-cost
3
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product offerings and its management information systems. No single customer
accounted for more than 4.7% of net sales in 1996.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through frequent direct marketing contact,
emphasize the Company's broad product lines, competitive prices and ease of
order placement. In addition, the Company's marketing efforts involve personal
interaction with field sales consultants in certain locations. The key elements
of the Company's program in the United States are:
o Direct Marketing. During 1996, the Company distributed over 9.0
million pieces of direct marketing material, including catalogs, flyers,
order stuffers and other promotional materials to approximately 500,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 300
pages and includes approximately 20,000 SKUs. The number of catalogs and
other material received by each customer depends upon the market they
serve as well as their purchasing history. The Company's catalogs include
detailed descriptions and specifications of both branded and private brand
products and are utilized by healthcare practitioners as a reference
source. By evaluating its customers' purchasing patterns, area of
specialty, past product selections and other criteria, the Company
identifies customers who may respond better to specific promotions or
products. To facilitate its direct marketing activities, the Company
maintains an in-house advertising department which performs many creative
services, which the Company believes streamlines the production process,
provides greater flexibility and creativity in catalog production, and
results in cost savings.
o Telesales. The Company supports its direct marketing with over 450
inbound and outbound telesales representatives who facilitate order
processing and generate new sales through direct and frequent contact with
customers. Inbound telesales representatives are responsible for assisting
customers in purchasing decisions as well as answering product pricing and
availability questions. In addition to assisting customers, inbound
telesales representatives also market complementary or promotional
products. The Company's telesales representatives utilize on-line computer
terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying
history.
The Company utilizes outbound telesales representatives and programs
to better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts. The
Company's U.S. dental outbound telesales representatives accounted for
approximately $101.6 million of the Company's net sales in 1996. The
Company has approximately 100 medical and veterinary telesales
representatives who make outbound calls in addition to handling inbound
telesales. Outbound telesales representatives strive to manage long-term
relationships with these customers through frequent and/or regularly
scheduled phone contact and personalized service.
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic training
sessions and special sales programs and receive incentives, including
monthly commissions.
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o Field Sales Consultants. In 1992, the Company initiated its field
sales consultant program and now has over 300 field sales consultants
covering certain of its major North American and European markets. The
field sales consultants concentrate on attracting new customers and
increasing sales to customers who do not currently order a high percentage
of their total product needs from the Company. This strategy is designed
to complement the Company's direct marketing and telesales strategies and
to enable the Company to better market, service and support the sale of
more sophisticated products and equipment. Once a field sales consultant
has established a relationship with a customer, the representative
encourages the customer to use the Company's automated ordering process or
its telesales representatives for its day-to-day needs. This simplifies
the ordering process for the customer and increases the effectiveness of
the field sales consultant.
Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
PROTONE(R) (the Company's 24-hour automated phone service) or its computerized
order entry system. The Company has developed an enhanced Windows(R)-based
version of its computerized order entry system, known as ArubA(R), which was
introduced at the end of 1995.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 90% of orders are received within two days of placing
the order. The Company continually monitors its customer service through
customer surveys, focus groups and daily statistical reports. The Company
maintains a liberal return policy to better assure customer satisfaction with
its products.
5
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Products
The following chart sets forth the principal categories of products
offered by the Company and certain top selling types of products in each
category, with the percentage of 1996 net sales in parenthesis:
<TABLE>
<CAPTION>
Dental Products (69.5%)
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<S> <C> <C>
Consumable Dental Products Dental Laboratory
and Small Equipment (57.5%) Products (5.1%) Large Dental Equipment (6.9%)
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X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs, Units and Lights; X-Rays;
Handpieces; Preventatives; Impression Acrylics; Articulators; and and Equipment Repair
Materials; Composites; and Anesthetics Abrasives
Value-Added Products
Medical Products (23.4%) Veterinary Products (4.4%) and Services (2.7%)
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Branded and Generic Pharmaceuticals; Branded and Generic Software and Related Products;
Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Products; Financial Products; and other value-
Infection Control; and Vitamins and Dental Products added products
</TABLE>
The percentage of 1995 and 1994 net sales was as follows: consumable
dental products and small equipment, 59.3% and 61.8%, respectively; dental
laboratory products, 5.8% and 6.6%, respectively; large dental equipment, 2.2%
and 3.6%, respectively; medical products, 23.5% and 20.1%, respectively;
veterinary products, 4.9% and 5.7%, respectively; and value-added products and
services, 4.3% and 2.2%, respectively.
Consumable Supplies and Equipment
The Company offers approximately 50,000 SKUs to its customers in North
America, of which approximately 40,000 SKUs are offered to its dental customers,
approximately 14,000 are offered to its medical customers and approximately
17,000 are offered to its veterinary customers. Over 16% of the Company's
products are offered to all three types of the Company's customers in North
America. The Company offers approximately 40,000 SKUs to its customers in
Europe. Approximately 4,000 of the Company's SKUs accounted for 80% of the
Company's sales in the United States in 1996. Approximately 15% of the Company's
net sales in 1996 were from sales of products offered under the Henry Schein
private brand (i.e., products manufactured by various third parties and HS
Pharmaceutical for distribution by the Company under the Henry Schein(R) brand).
The Company believes that the Henry Schein private brand line of over 5,000 SKUs
offered in the United States and Canada is one of the most extensive in the
industry. The Company also distributes certain generic pharmaceuticals
manufactured by HS Pharmaceutical, a 50%- owned company, and manufactures and
distributes certain large dental equipment through Schein Dental Equipment Corp.
("Schein Dental Equipment"), a distributor and manufacturer of large dental
equipment which was owned 73.7% by Marvin H. Schein, a director and principal
stockholder of the Company prior to its acquisition by the Company. The Company
updates its product offerings regularly to meet its customers' changing needs.
6
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Value-Added Products and Services
In an effort to promote customer loyalty, the Company offers certain
value-added products and services. These products and services include the
following:
o Practice Management Software. The Company sells practice
management software systems to its dental and veterinary customers. The
Company has sold over 18,000 of its Easy Dental(R) Plus software systems
as of the end of fiscal 1996, and over 2,400 of its AVImark(R) veterinary
software systems. In December 1995, the Company released its new
Windows(R) version of Easy Dental(R) Plus and has since sold or converted
over 4,800 such systems by the end of 1996. The Company's practice
management software provides practitioners with patient treatment history,
billing and accounts receivable analysis and management, an appointment
calendar, electronic claims processing and word processing programs, and
the Company provides technical support and conversion services from other
software. In addition, the Easy Dental(R) Plus software allows the
customer to connect with the Company's order entry management systems. On
February 28, 1997, the Company acquired all of the outstanding common
stock of Dentrix Dental Systems, Inc., which had net sales for 1996 of
approximately $10.3 million and has an approximate 3,500 installed user
base. The Dentrix system is one of the most comprehensive clinically-based
dental practice management software package in the United States. The
Dentrix premium software product complements Easy Dental (R) Plus , the
Company's high-value practice management system. The Company believes the
combined software products offering enhances its ability to provide its
customers with the widest array of system solutions to help manage their
practices. With this acquisition, the Company now has an installed user
base of approximately 21,000.
o Financial Services. The Company has begun to offer its customers
assistance in managing their practices by providing access to a number of
financial services and products at rates which the Company believes are
lower than what they would be able to secure independently. The patient
financing program provides the Company's customers a method for reducing
receivables and improving cash flow by providing patients access to
financing. The Company facilitates the processing of credit applications,
payments to its customers and electronic bankcard processing and offers
electronic insurance claims submission services for faster, cheaper
processing of patient reimbursements, all through a third-party provider
for a transaction fee. The Company does not assume any financial
obligation to its customers or their patients in these programs.
o Equipment Repair and Installation. The Company offers a repair
service, ProRepair(R), which provides one to two-day turnaround for
handpieces and certain small equipment. The Company also provides
in-office installation and repair services for large equipment in certain
markets in North America and Europe. In accordance with its plan to expand
its repair service business and sales of large dental equipment in
connection with its acquisition of Schein Dental Equipment, in 1996 the
Company opened 15 new equipment sales and service centers in North America
and four in Europe, with a total of 35 centers open at the end of 1996.
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Information Systems
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. In the United States, the Company is in the
process of expanding and upgrading its order processing information system and,
during February 1997 completed the upgrading of its accounts receivable
information system. Additionally, worldwide, the Company is in the process of
installing an integrated information system for its large dental equipment sales
and service functions. Such a system will centralize the tracking of customers'
equipment orders as well as spare parts inventories and repair services.
Distribution
The Company distributes its products in the United States and Canada
primarily from its strategically located distribution centers in the Eastern,
Central, and Western United States. The Company maintains significant inventory
levels of certain products in order to satisfy customer demand for prompt
delivery and complete order fulfillment of their product needs. These inventory
levels are managed on a daily basis with the aid of the Company's sophisticated
purchasing and stock status management information systems. The Company's
European distribution centers include locations in the United Kingdom, France,
The Netherlands, Germany and Spain. Once a customer's order is entered, it is
electronically transmitted to the distribution center nearest the customer's
location and a packing slip for the entire order is printed for order
fulfillment. The Company's automated freight manifesting and laser bar code
scanning facilitates the speed of the order fulfillment. The Company currently
ships almost all of its orders in the United States by United Parcel Service. In
certain areas of the United States, the Company delivers its orders via contract
carriers.
Purchasing
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 1,200
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
distribution centers. In 1996, the Company's top 10 vendors and the Company's
single largest vendor, accounted for approximately 28.2% and 9.7%, respectively,
of the Company's aggregate purchases.
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Competition
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the products the Company sells are available to
the Company's customers from a number of suppliers. In addition, competitors of
the Company could obtain exclusive rights from manufacturers to market
particular products. Manufacturers could also seek to sell directly to
end-users, and thereby eliminate the role of distributors, such as the Company.
Significant price reductions by the Company's competitors could result in a
similar reduction in the Company's prices as a consequence of its policy of
matching its competitors' lowest advertised prices. Any of these competitive
pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as
well as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products, the
Company's two principal national competitors are Patterson Dental Co. and
Sullivan Dental Products, Inc. In addition, the Company competes against a large
number of other distributors that operate on a national, regional and local
level. The Company's largest competitors in the sale of medical products are
General Medical Corp. and Physician's Sales and Service, Inc., which are
national distributors. In the veterinary product market, the Company's two
principal national competitors include The Butler Company and Burns Veterinary
Supply. The Company also competes against a large number of small local and
regional veterinary distributors, as well as a number of manufacturers that sell
direct to veterinarians whose practices are directed primarily to small animals.
With regard to the Company's practice management software, the Company competes
against a fragmented group of competitors, none of which currently have a
significant share of the market. The Company believes that it competes in Canada
substantially on the same basis as in the United States.
The Company also faces intense competition in its international markets,
where the Company competes on the basis of price and customer service against a
large number of dental product distributors and manufacturers in the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland and
Spain. The Company has several large competitors in these markets, including
ORBIS and the GACD Group.
Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned company, HS
Pharmaceutical, which distributes and manufactures generic pharmaceuticals) were
to receive an adverse report following an inspection by the Food and Drug
Administration (the "FDA") or the Drug Enforcement Administration, or if a
competitor were to receive prior approval of new products from the FDA. A
violation of a law by HS Pharmaceutical could cause its operations to be
suspended. A suspension could have an adverse effect on the Company's equity in
earnings of affiliates and could cause the Company to seek alternative sources
of products manufactured by HS Pharmaceutical, possibly at higher prices than
currently paid by the Company.
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The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well as certain other trademarks. Pursuant to certain agreements executed in
connection with the reorganization of the Company, both the Company and Schein
Pharmaceutical, Inc. are entitled to use the "Schein" name in connection with
their respective businesses, but Schein Pharmaceutical, Inc. is not entitled to
use the name "Henry Schein." The Company intends to protect its trademarks to
the fullest extent practicable.
Employees
As of December 28, 1996, the Company had more than 3,200 full-time
employees in North America and Europe, including approximately 450 telesales
representatives, 300 field sales consultants, 1,000 warehouse employees, 120
computer programmers and technicians, 350 management employees and 980 office,
clerical and administrative employees. None of the Company's employees are
represented by a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
Seasonality
The Company's business has been subject to seasonal and other quarterly
influences. Net sales and operating profits have been generally higher in the
fourth quarter due to the timing of sales of software, year-end promotions and
purchasing patterns of office-based healthcare practitioners and have been
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.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 2, 3, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; and the results of legal
proceedings. The matters referred to in forward looking statements could be
affected by the risks and uncertainties involved in the Company's business.
These risks and uncertainties include, but are not limited to, the effect of
economic and market conditions, the impact of the consolidation of healthcare
practitioners, the impact of healthcare reform, opportunities for acquisitions
and the Company's ability to effectively integrate acquired companies, the
acceptance and quality of software products, acceptance and ability to manage
operations in foreign markets, possible disruptions in the Company's computer
systems or telephone systems, possible increases in shipping rates or
interruptions in shipping service, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and
regulation, as well as certain other risks described above in this Item under
"Competition" and "Government Regulation," and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K.
10
<PAGE>
The Company's principal executive offices are located at 135 Duryea Road,
Melville, New York 11747, and its telephone number is 516-843-5500. As used in
this Report, the term the "Company" refers to Henry Schein, Inc., a Delaware
corporation, and its subsidiaries, 50%-owned companies and predecessor, unless
otherwise stated.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- --- -----------------------------------------------------
Corporate
<S> <C> <C>
Stanley M. Bergman.... 47 Chairman, Chief Executive Officer and President
James P. Breslawski... 43 Executive Vice President
Gerald A. Benjamin.... 44 Senior Vice President-- Administration and Customer
Satisfaction
Leonard A. David...... 48 Vice President--Human Resources and Special
Counsel
Diane Forrest......... 50 Senior Vice President--Information Services
and Chief Information Officer
Stephen R. LaHood..... 49 Senior Vice President--Distribution Services
Mark E. Mlotek........ 41 Vice President, General Counsel and Secretary
Steven Paladino....... 39 Senior Vice President and Chief Financial
Officer
Business Units
Jeffrey P. Gasparini.. 41 Senior Vice President--Medical Group
Ian G. Rosmarin....... 46 President--Professional Services Group
Larry M. Gibson....... 50 President--Practice Management Technologies Division
James W. Stahly....... 48 President--North American Dental Group
Michael Zack.......... 44 Senior Vice President--International Group
</TABLE>
Stanley M. Bergman has been Chairman, Chief Executive Officer, and
President since 1989 and a director of the Company since 1982. Mr. Bergman held
the position of Executive Vice President of the Company and Schein
Pharmaceutical, Inc. from 1985 to 1989 and Vice President of Finance and
Administration of the Company from 1980 to 1985. Mr. Bergman is a certified
public accountant.
James P. Breslawski has been Executive Vice President of the Company since
1990, with primary responsibility for the North American Dental Group, the
Veterinary Group and corporate creative services, and a director of the Company
since 1990. Between 1980 and 1990, Mr. Breslawski held various positions with
the Company, including Chief Financial Officer, Vice President of Finance and
Administration and Controller. Mr. Breslawski is a certified public accountant.
11
<PAGE>
Gerald A. Benjamin has been Senior Vice President of Administration and
Customer Satisfaction since 1993, including responsibility for the worldwide
human resource function, and has been a director of the Company since September
1994. Prior to holding his current position, Mr. Benjamin was Vice President of
Distribution Operations of the Company from 1990 to 1992 and Director of
Materials Management of the Company from 1988 to 1990. Before joining the
Company, Mr. Benjamin was employed for 13 years in various management positions
at Estee Lauder, where his last position was Director of Materials Planning and
Control.
Leonard A. David has been Vice President of Human Resources and Special
Counsel since January 1995. Mr. David held the office of Vice President, General
Counsel and Secretary from 1990 to 1995 and practiced corporate and business law
for eight years prior to joining the Company. Mr. David has been a director of
the Company since September 1994.
Diane Forrest joined the Company in 1994 as Senior Vice President of
Information Services and Chief Information Officer. Prior to joining the
Company, Ms. Forrest was employed by Tambrands Inc. as Vice President of
Information Services from 1987 to 1994, KPMG Peat Marwick as Senior Manager in
the management consulting division from 1982 to 1987 and Nabisco Brands, Inc. as
Corporate Manager of Manufacturing Systems from 1978 to 1982.
Stephen R. LaHood joined the Company in 1992 as Senior Vice President of
Distribution Services and is also responsible for purchasing. Prior to joining
the Company, Mr. LaHood was employed by Lex/Schweber Electronics Inc. as Vice
President of Operations and Quality from 1988 to 1991. Mr. LaHood also spent ten
years at Johnson & Johnson Products, Inc., where his last position was Manager
of Corporate Business Planning and thereafter, seven years at Schering-Plough
Corporation where his last position was Senior Director of Manufacturing
Operations.
Mark E. Mlotek joined the Company in December 1994 as Vice President,
General Counsel and Secretary and became a director of the Company in September
1995. Prior to joining the Company, Mr. Mlotek was a partner in the law firm of
Proskauer Rose Goetz & Mendelsohn LLP, counsel to the Company, specializing in
mergers and acquisitions, corporate reorganizations and tax law from 1989 to
1994.
Steven Paladino has been Senior Vice President and Chief Financial Officer
of the Company since 1993 and has been a director of the Company since 1992.
From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from
1987 to 1990 served as Corporate Controller of the Company. Before joining the
Company, Mr. Paladino was employed as a public accountant for seven years and
most recently was with the international accounting firm of BDO Seidman, LLP.
Mr. Paladino is a certified public accountant.
Jeffrey P. Gasparini joined the Company in February 1996 as Senior Vice
President of the Medical Group. Prior to joining the Company, Mr. Gasparini was
employed by General Medical Corp. from 1982 to 1996, where his last position was
Corporate Vice President, Operations and member of the Executive Board.
Ian G. Rosmarin joined the Company in 1992 as General Manager of the
Canadian Division and in 1993 was named to his current position of President of
the Professional Service Group of the Company. Prior to joining the Company, Mr.
Rosmarin was President of Rosmarin Management and Investment Corporation for 13
years. Mr. Rosmarin is a Canadian Chartered Accountant.
12
<PAGE>
Larry M. Gibson joined the Company as President of the Practice Management
Technologies Division on February 24, 1997 concurrent with the acquisition of
Dentrix Dental Systems, Inc. Before joining the Company, Mr. Gibson was founder,
Chairman and CEO of Dentrix, started in 1980. Prior to his employment with
Dentrix, Mr. Gibson was employed by Weidner Communication Systems from 1978.
James W. Stahly joined the Company in 1994 as President of the North
American Dental Group of the Company. Before joining the Company, Mr. Stahly was
employed by Fox Meyer Corporation for seven years where his last position was
Senior Vice President -- Hospital and Alternate Care Sales. Prior to his
employment with Fox Meyer, Mr. Stahly spent 16 years at McKesson Drug Company.
Michael Zack has been responsible for the International Group of the
Company since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to 1989
and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to
1984.
ITEM 2. Properties
The Company owns or leases the following properties:
<TABLE>
<CAPTION>
Approximate
Own or Square Lease
Property Location Lease Footage Expiration Date
-------- -------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Corporate
Headquarters......... Eastern United States Lease 100,000 December 2005
Distribution Center.. Eastern United States Own 173,000 N/A
Distribution Center.. Central United States Lease 225,000 December 1999
Distribution Center.. Western United States Lease 115,500 June 2002
Distribution Center.. United Kingdom Lease 85,000 August 2005
Manufacturing
Facilities........... Western United States Own 75,000 N/A
</TABLE>
The Company also leases warehouse, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain and the United Kingdom. Two 50%-owned companies
also lease space in the United States and Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business.
The Company has additional operating capacity at its listed facilities.
13
<PAGE>
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 28,
1996, the Company was named a defendant in 12 such cases. The Company believes
it is adequately covered by insurance in all these cases, subject to certain
self retention limits, and that none of the currently pending cases should have
a material adverse effect on the Company.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is covered by indemnification from the manufacturer of the product.
There can be no assurance that the coverage maintained by the Company is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost, or that indemnification agreements will provide
adequate protection for the Company.
As part of the Company's effort to expand its field sales force, the
Company frequently hires field sales consultants with experience in the
office-based healthcare practitioner industry. The Company's hiring practices
have from time to time resulted in litigation instituted by former employers of
the field sales consultants hired by the Company. On October 19, 1995, an action
was filed against the Company by H. Meer Dental Supply Co., Inc. ("Meer") in the
United States District Court for the Eastern District of Michigan, Southern
Division. The complaint alleged unfair competition, predatory pricing or
anticompetitive conduct and, through the hiring of Meer sales representatives,
improper interference with Meer's relationships with its employees and customers
and misappropriation of trade secrets. The lawsuit sought unspecified damages
and an injunction against the Company. In November 1996, the Company entered
into a settlement of the action brought by Meer, which contains a limited
provision for mutual non-solicitation but permits employment of the other's
employees consistent with the Company's need to employ experienced sales and
service representatives. The settlement did not involve the payment of any
money. There are two additional litigations that similarly allege improper
interference with employee and customer relationships. The plaintiffs in these
actions seek unspecified damages, and one of the plaintiffs also seeks an
injunction against the Company. The Company intends to vigorously defend these
litigations. The Company believes that neither of these actions will have a
material adverse effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
14
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The following table sets forth for the periods indicated the high and low
reported sales prices of the Common Stock on the NASDAQ National Market System
from November 3, 1995, the date of the commencement of the Company's Initial
Public Offering (the "IPO"), through March 21, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<C> <C> <C>
Fiscal 1995:
4th Quarter (from November 3, 1995) $29-1/2 $20-3/8
Fiscal 1996:
1st Quarter $30-3/4 $23-1/2
2nd Quarter $43-1/2 $27-1/2
3rd Quarter $40-1/4 $31-1/4
4th Quarter $41-1/4 $32-3/4
Fiscal 1997:
1st Quarter (through March 21, 1997) $27 $25-1/2
</TABLE>
The Company's Common Stock is quoted through the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "HSIC." On March 21, 1997,
there were approximately 136 holders of record of the Common Stock. On March 21,
1997, the last reported sales price was $26-5/8.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
Issuance of Unregistered Securities
On July 10, 1996 and November 1, 1996, the Company completed the 100%
acquisition of two companies and issued, in partial consideration for one
acquisition and in full consideration for another acquisition, 37,197 and
117,986 shares, respectively, of its Common Stock, with an aggregate value of
approximately $5.4 million. These transactions were completed without
registration under the Securities Act in reliance upon exemptions provided by
Section 4(2) of the Securities Act.
15
<PAGE>
ITEM 6. Selected Financial Data
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 28, 1996 set forth below has been derived from the
audited consolidated financial statements of the Company. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The Selected Operating Data, Net Sales By Market Data and Balance Sheet
Data presented below have not been audited.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................... $ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
Cost of sales ............... 584,738 425,625 343,922 294,693 257,226
--------- --------- --------- --------- ---------
Gross profit ................ 245,224 190,584 142,688 121,017 105,699
Selling, general and
administrative expenses ... 215,561 170,823 128,560 109,574 96,287
Special management
compensation(1) ........... -- 20,797 21,596 617 5,283
Special contingent
consideration(2) .......... -- -- -- 3,216 --
Special professional
fees(3) ................... -- -- 2,007 2,224 2,227
--------- --------- --------- --------- ---------
Operating income (loss) ..... 29,663 (1,036) (9,475) 5,386 1,902
Interest income ............. 2,456 475 251 856 1,210
Interest expense ............ (3,421) (5,833) (3,756) (3,216) (2,953)
Other income (expense) - net 636 276 541 (634) 255
--------- --------- --------- --------- ---------
Income (loss) before taxes
on income (recovery),
minority interest and
equity in earnings of
affiliates ................ 29,334 (6,118) (12,439) 2,392 414
Taxes on income (recovery) .. 11,343 5,126 (1,630) 1,351 622
Minority interest in net
(loss) of subsidiaries
income ................... 246 509 561 318 (249)
Equity in earnings of
affiliates ................ 1,595 1,537 494 1,296 514
--------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change ......... 19,340 (10,216) (10,876) 2,019 555
Cumulative effect of
accounting change ......... -- -- -- 1,891 --
--------- --------- --------- --------- ---------
Net income (loss) ........... $ 19,340 ($ 10,216) ($ 10,876) $ 3,910 $ 555
========= ========= ========= ========= =========
Net income per common share . $ .93
Average shares outstanding .. 20,724
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Pro Forma Income Data (4):
Pro forma operating income .................... $ 19,761 $ 14,128
Pro forma net income .......................... $ 9,407 $ 6,978
Pro forma net income per
common share ............................... $. 70 $. 58
Pro forma average shares
outstanding ................................ 13,447 12,127
Selected Operating Data:
Number of orders shipped ...................... 3,078,000 2,629,000 2,274,000 2,044,000 1,824,000
Average order size ............................ $ 270 $ 234 $ 214 $ 203 $ 199
Net Sales by Market Data (5):
Dental(6) ..................................... $ 435,643 $ 327,697 $ 274,337 $ 253,223 $ 234,655
Medical ....................................... 191,186 125,565 89,789 71,021 51,923
Veterinary .................................... 35,329 29,330 27,872 24,312 19,481
Technology(7) ................................. 20,805 25,914 10,685 7,738 5,825
International(8) .............................. 146,999 107,703 83,927 59,416 51,041
---------- ---------- ---------- ---------- ----------
$ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
========== ========== ========== ========== ==========
Balance Sheet Data
(at period end):
Working capital ............................... $ 204,755 $ 103,899 $ 76,392 $ 74,125 $ 28,276
Total assets .................................. 463,936 296,867 190,020 160,793 137,957
Total debt .................................... 39,746 43,049 61,138 56,567 41,373
Redeemable stock (9) .......................... -- -- 14,745 -- --
Minority interest ............................. 5,289 4,547 1,823 1,051 411
Stockholders' equity .......................... 291,762 142,851 39,567 43,897 40,117
</TABLE>
- ----------
(1) Includes: (a) for 1995, non-cash special management compensation charges
of $17.5 million arising from final mark-to-market adjustments (reflecting
an increase in estimated market value from 1994 to the initial public
offering price of $16.00 per share) for stock grants made to an executive
officer of the Company in 1992 and other stock issuances made to certain
other senior management of the Company (because of certain repurchase
features which expired with the initial public offering), an approximate
$2.8 million non-cash special management compensation charge (also based
on the initial public offering price of $16.00 per share) relating to
compensatory options granted in 1995, and a cash payment of $0.5 million
for additional income taxes resulting from such stock issuances; (b) for
1994, non-cash special management compensation arising from accelerated
amortization of deferred compensation arising from the 1992 stock grants
to an executive officer of the Company of $17.3 million, which included a
1994 mark-to-market adjustment (because of the repurchase features
referred to above) of $9.1 million, due to the resolution, with the
closing of the Reorganization, of certain contingencies surrounding the
issuance of the stock grants, non-cash special management compensation
charges of $1.6 million (net of prior accruals of approximately $1.9
million under an executive incentive plan) arising from stock issuances to
certain other senior management of the Company, valued at $3.5 million,
and cash payments for income taxes of approximately $2.4 million resulting
from these stock issuances and $0.3 million for additional income taxes
resulting from the 1992 stock grants; (c) for 1993, non-cash special
management compensation charges of $0.6 million in amortization of
deferred compensation arising from the 1992 stock grants; and (d) for
17
<PAGE>
1992, cash payments of $5.3 million for income taxes resulting from stock
grants made to an executive officer of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Overview" in Item 7 herein.
(2) Includes $0.7 million paid in connection with an acquisition and $2.5
million resulting from the buyout of employees' rights to future income
contained in their employment agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7
herein.
(3) Includes special professional fees incurred by the Company in connection
with the Reorganization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 herein.
(4) Reflects the pro forma elimination of special charges incurred in 1995 and
1994 for special management compensation of $20.8 million and $21.6
million, respectively, and special professional fees incurred in 1994 of
$2.0 million, arising from the Reorganization, and the related tax effects
of $1.2 million and $5.8 million for 1995 and 1994, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 herein.
(5) Restated to conform with 1996 presentation.
(6) Dental consists of the Company's dental business in the United States and
Canada.
(7) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(8) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily Europe.
(9) Redeemable stock includes stock issued for compensation which was subject
to repurchase by the Company at fair market value in the event of
termination of employment of the holder of such shares, as well as shares
purchased by the trust for the Company's ESOP and allocable to the ESOP
participants. With the completion of the Company's initial public
offering, the stock issued for compensation and the ESOP Common Stock were
no longer subject to repurchase. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 herein.
18
<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 result 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
19
<PAGE>
issued 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
---------------------------------------------------------------------
Net Sales by Market (1):
<S> <C> <C> <C> <C> <C>
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
20
<PAGE>
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 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 (R) Plus Windows
(R) 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(R) Plus for
Windows (R) 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(R) Plus for Windows(R) 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
21
<PAGE>
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.
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(R) version of Easy Dental(R) Plus
software in December 1995 and substantial price increases. The increased pricing
on the Easy Dental(R) 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(R) 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(R) version of Easy Dental(R) Plus software, which
increased unit sales, coupled with substantial price increases. The increased
pricing on the Easy Dental(R) 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.
22
<PAGE>
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(R) Plus
software and the new Windows(R) 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 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.
23
<PAGE>
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.
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) $43.1 million increase in accounts receivable resulting
from increased sales and extended payment terms, and a decrease in the
percentage of customers who make payment with their orders, (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.
24
<PAGE>
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 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 the Merger Agreement pursuant to which 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 liquidity sufficient to meet its
currently foreseeable capital needs.
25
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
Report of Independent Certified Public Accountants............................27
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995.............. 28
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ..........................29
Statements of Stockholders' Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 .........30
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ............................31
Notes to Consolidated Financial Statements .............................32-56
Schedule, years ended December 28, 1996,
December 30, 1995 and December 31, 1994
II - Valuation and Qualifying Accounts ...............................72
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or
the notes thereto.
26
<PAGE>
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
27
<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.
28
<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.
29
<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 Treasury
Shares Amount Capital Earnings Stock
------------- ----------- ----------- ------------ --------
<S> <C> <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) .................... -- -- -- -- (769)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 30, 1995 .................................... 18,358,673 183 123,866 19,746 (769)
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) ..................... -- -- -- -- (321)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 28, 1996 .................................... 22,272,441 $ 222 $ 254,180 $ 39,086 $ (1,090)
=========== =========== =========== =========== =========
<CAPTION>
Foreign
Currency Deferred Total
Translation Compen- Stockholders'
Adjustment sation Equity
----------- ------------ -----------
<S> <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)
Foreign currency translation adjustment ....................... 283 -- 283
-------- ----------- -----------
Balance, December 30, 1995 .................................... (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)
Foreign currency translation adjustment ....................... (461) -- (461)
-------- ----------- -----------
Balance, December 28, 1996 .................................... $ (636) $ -- $ 291,762
======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
30
<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.
31
<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.
32
<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:
<TABLE>
<CAPTION>
Years
----------
<S> <C>
Buildings and improvements 40
Machinery and warehouse equipment 5 - 10
Furniture, fixtures and other 3 - 10
Computer equipment and software 5 - 7
</TABLE>
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).
33
<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."
34
<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
Supplementary net income per share (which is required by APB Opinion No.
15) 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.
35
<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.
36
<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:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
----------- ----------
<S> <C> <C>
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
======= =======
</TABLE>
37
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 4--PROPERTY AND EQUIPMENT--NET
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
----------- ----------
<S> <C> <C>
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
Less accumulated depreciation and
amortization ..................... 39,453 33,904
------- -------
Net property and equipment ......... $37,154 $29,713
======= =======
</TABLE>
NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ -----------
<S> <C> <C>
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
======= =======
</TABLE>
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.
38
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 6--INVESTMENTS AND OTHER
Investments and other consist of:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
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
======= =======
</TABLE>
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 is
as follows:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
----------- -----------
<S> <C> <C>
Current assets ............. $38,172 $28,904
Total assets ............... 47,103 35,220
Liabilities ................ 30,939 22,995
Stockholders' equity ....... 16,164 12,225
</TABLE>
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ................. $103,169 $55,090 $34,003
Operating income .......... 7,044 5,147 3,183
Net income ................ 3,775 2,920 1,428
</TABLE>
39
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
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 in the event
certain financial targets are satisfied.
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.
<TABLE>
<CAPTION>
Years Ended
--------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
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...... 19,699 10,029
Pro forma net income per common share ............. $ 0.95 $ 0.75
</TABLE>
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.
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.
40
<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 $ 490,734
Net income (loss) ............................ 21,236 (9,333) (10,371)
Pro forma net income, reflecting adjustment in
1995 and 1994 to exclude special management
compensation and professional fees ......... 21,236 10,290 7,483
Pro forma net income per common share ........ $ 0.98 $ 0.71 $ 0.57
</TABLE>
41
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
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>
42
<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.
43
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
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>
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>
44
<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.
45
<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 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>
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.
46
<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
(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.
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 LongTerm
Receivables at December 28, 1996 is $18,355 and $7,785, respectively, related to
Easy Dental(R) 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 imputed interest relating to
these non-interest bearing extended payment term receivables. Imputed interest
relating to these receivables was not material for 1995 and 1994.
47
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
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.
48
<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.
<TABLE>
<CAPTION>
1996 United States Europe Consolidated
- ----------------------- ------------- ------ ------------
<S> <C> <C> <C>
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 4,704 1,333 6,037
amortization...........
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 2,524 1,287 3,811
amortization...........
Capital expenditures... 4,425 1,494 5,919
</TABLE>
* Includes special management compensation, special professional fees and
special contingent consideration expense of $20,797 and $23,603 for 1995
and 1994, respectively.
49
<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 $2,805 excess of the initial public offering
price of $16.00 over the exercise price 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 is 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.
50
<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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
</TABLE>
- ----------
(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>
51
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS--(Continued)
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Range of Weighted-Average Weighted- Weighted-
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
29.00 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>
(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.
52
<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:
<TABLE>
<CAPTION>
<S> <C>
1997........................................... $ 9,704
1998........................................... 8,760
1999........................................... 7,469
2000........................................... 5,968
2001........................................... 4,666
Thereafter..................................... 11,769
-------
Total minimum lease payments................... $48,336
=======
</TABLE>
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.
53
<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:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest....................... $3,708 $6,124 $3,132
Income taxes................... 8,988 5,540 2,451
</TABLE>
In conjunction with business acquisitions, the Company used cash as
follows:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
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 $ ---
======= ======= =======
</TABLE>
In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.
54
<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:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------
April 1, July 1, September 30, December 30,
1995 1995 1995 1995
-------- --------- ------------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
55
<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,
primarily relating to changes in estimated accruals. The aggregate effect of
such adjustments increased net income in the fourth quarter by approximately
$2,400.
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.
56
<PAGE>
ITEM 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 1997
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. Executive Compensation
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as
a part of this report are listed on the index on page 26.
2. Financial Statement Schedules
<TABLE>
<CAPTION>
(i) HS PHARMACEUTICAL, INC. AND SUBSIDIARIES Page Number
-----------
<S> <C>
Report of Independent Certified Public Accountants....................................... 60
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995...................... 61
Statements of Income and Retained Earnings for the years ended
December 28, 1996, December 30, 1995 and
December 31, 1994 ......................................................... 62
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ................................... 63
Notes to Consolidated Financial Statements ..............................................64-71
(ii) Valuation and Qualifying Accounts .................................................. 72
</TABLE>
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
During the fourth quarter of 1996, there were no reports filed on Form
8-K.
58
<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 March 28, 1997.
Henry Schein, Inc.
By: /s/ Stanley M. Bergman
-----------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Stanley M. Bergman Chairman, Chief Executive Officer, and
- ----------------------- President (principal executive officer) March 28, 1997
Stanley M. Bergman
/s/ Steven Paladino Senior Vice President, Chief Financial
- ----------------------- Officer and Director (principal financial and
Steven Paladino accounting officer) March 28, 1997
/s/ James P. Breslawski Director March 28, 1997
- -----------------------
James P. Breslawski
/s/ Gerald A. Benjamin Director March 28, 1997
- -----------------------
Gerald A. Benjamin
/s/ Leonard A. David Director March 28, 1997
- -----------------------
Leonard A. David
/s/ Mark E. Mlotek Director March 28, 1997
- -----------------------
Mark E. Mlotek
/s/ Barry Alperin Director March 28, 1997
- -----------------------
Barry Alperin
/s/ Pamela Joseph Director March 28, 1997
- -----------------------
Pamela Joseph
/s/ Donald J. Kabat Director March 28, 1997
- -----------------------
Donald J. Kabat
/s/ Marvin H. Schein Director March 28, 1997
- -----------------------
Marvin H. Schein
/s/ Irving Shafran Director March 28, 1997
- -----------------------
Irving Shafran
</TABLE>
59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
HS Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of HS
Pharmaceutical, Inc. and Subsidiaries as of December 28, 1996 and December 30,
1995 and the related consolidated statements of income and retained earnings and
cash flows for each of the three years in the period ended December 28, 1996.
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. 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 HS Pharmaceutical,
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.
BDO SEIDMAN, LLP
New York, New York
February 5, 1997
60
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current:
Cash $ 291,738 $ ---
Accounts receivable, less allowance for doubtful
accounts of $172,196 and $95,703................ 9,214,519 7,062,447
Inventories........................................ 5,138,874 4,258,660
Advances to affiliates............................. 668,568 543,925
Prepaid expenses and other......................... 819,254 565,845
---------- -----------
Total current assets 16,132,953 12,430,877
Property and equipment, net........................... 4,200,088 3,539,376
Goodwill and other intangibles, less accumulated
amortization of $300,789 and $201,479 ............. 2,507,055 165,439
Advances and notes to affiliates...................... 1,114,074 1,076,723
Deposits and other assets............................. 67,966 5,786
----------- -----------
$24,022,136 $17,218,201
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................... $1,057,570 $ 324,875
Revolving credit agreement......................... 1,106,000 ---
Accounts payable and accrued expenses.............. 4,865,854 4,266,631
Income taxes payable............................... 543,592 480,684
Current portion of long-term debt.................. 1,536,428 834,700
----------- -----------
Total current liabilities 9,109,444 5,906,890
Long-term debt, less current portion.................. 2,997,788 2,195,980
Deferred income taxes................................. 191,500 152,000
----------- -----------
Total liabilities 12,298,732 8,254,870
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock--no par value, shares authorized 200;
issued and outstanding 20....................... 40,100 40,100
Additional paid-in capital......................... 342,745 342,745
Retained earnings.................................. 11,340,559 8,580,486
----------- -----------
Total stockholders' equity.................. 11,723,404 8,963,331
----------- -----------
$24,022,136 $17,218,201
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net sales.............................. $30,305,702 $28,123,977 $24,500,962
Cost of sales.......................... 18,507,815 17,467,680 15,925,685
----------- ----------- -----------
Gross profit........................ 11,797,887 10,656,297 8,575,277
Operating expenses:
Selling, general and administrative. 6,995,028 6,157,515 5,615,183
----------- ----------- -----------
Operating income................. 4,802,859 4,498,782 2,960,094
Other income (expense):
Interest expense, net............... (577,712) (500,293) (395,159)
Foreign exchange remeasurement
gain (loss)...................... (43,599) (10,163) 47,543
Other .............................. 166,431 147,387 ---
---------- ----------- -----------
Income before taxes on income.... 4,347,979 4,135,713 2,612,478
Taxes on income........................ 1,587,906 1,368,131 1,004,000
----------- ----------- -----------
Net income............................. 2,760,073 2,767,582 1,608,478
Retained earnings, beginning of year... 8,580,486 5,812,904 4,204,426
----------- ----------- -----------
Retained earnings, end of year......... $11,340,559 $ 8,580,486 $ 5,812,904
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $2,760,073 $2,767,582 $1,608,478
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 597,184 425,861 469,763
Provision for losses on accounts receivable............. 55,682 15,000 38,843
Provision for obsolete inventories...................... 112,677 --- ---
Provision for deferred income taxes..................... 39,500 81,000 16,000
Other .................................................. --- 5,000 25,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............ (1,761,616) 180,067 (1,821,447)
Increase in inventories............................... (323,245) (1,199,165) (33,420)
(Increase) decrease in advances to affiliates......... (161,994) (381,170) 156,123
Increase in prepaid expenses and other................ (239,287) (138,634) (212,711)
(Increase) decrease in deposits and other............. (58,608) 263,270 (258,071)
Increase in accounts payable and accrued expenses.... 178,650 415,386 940,230
Increase (decrease) in income taxes payable........... 62,908 339,870 (1,763,056)
---------- ---------- ----------
Net cash provided by (used in) operating activities.......... 1,261,924 2,774,067 (834,268)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures....................................... (662,725) (369,978) (1,156,332)
Business acquisition, net of cash acquired................. (800,000) --- ---
---------- ---------- ----------
Net cash (used) in investing activities...................... (1,462,725) (369,978) (1,156,332)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank overdraft...................... 131,904 (575,847) (309,837)
Credit line borrowings, net................................ 1,106,000 (1,000,000) 1,000,000
Proceeds from long-term debt............................... 217,816 --- 1,792,020
Principal payments on long-term debt....................... (963,181) (828,242) (491,583)
---------- ---------- ----------
Net cash provided by (used in) financing activities.......... 492,539 (2,404,089) 1,990,600
---------- ---------- ----------
Net increase in cash......................................... 291,738 --- ---
Cash, beginning of year...................................... --- --- ---
---------- ---------- ----------
Cash, end of year............................................ $ 291,738 $ --- $ ---
========== ========== ==========
Supplemental cash flow information:
Interest paid.............................................. $ 802,331 $ 608,216 $ 387,101
Taxes paid................................................. $1,535,744 $ 996,520 $2,836,776
Business acquisitions
Fair value of assets acquired, excluding cash.............. $4,070,265 $ --- ---
Less liabilities assumed and created upon acquisition ..... 3,270,265 --- ---
---------- ---------- ----------
$ 800,000 $ --- $ ---
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
Description of Business
HS Pharmaceutical, Inc. and Subsidiaries (the "Company") manufactures and
distributes pharmaceutical products and sells other accessory products to
dental, medical and veterinary distributors worldwide.
Principles of Consolidation
The consolidated financial statements include the accounts of HS
Pharmaceutical, Inc. and all of its wholly-owned subsidiaries. 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.
Inventories
Inventories are valued at the lower of cost or market value. Manufactured
inventories of raw materials, work-in-progress and finished goods are valued
using standard costing methods, which approximate the first-in, first-out
("FIFO") method. The cost of inventory purchased for resale is determined by the
FIFO method.
64
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF 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:
<TABLE>
<CAPTION>
Years
----------
<S> <C>
Buildings and improvements........ 40
Machinery and warehouse equipment. 5 - 10
Computer hardware................. 5
Capital lease equipment........... 5 - 10
</TABLE>
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful lives of the assets or the lease term.
Goodwill
Goodwill represents the excess of costs over the fair value of assets acquired
and is amortized using the straight-line method over a life of 30 years.
Intangibles
Intangibles consist of costs incurred in connection with obtaining
abbreviated new drug applications, investigational new drug exemptions and
licenses, permits and approvals relating to the manufacture and sale of
pharmaceutical products. These costs are being amortized using the straight-line
method over their estimated useful lives which is expected to be 20 years.
Taxes on Income
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities.
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.
Foreign Currency Remeasurement
Monetary assets and liabilities denominated in foreign currency have been
remeasured into the functional currency (the U.S. dollar) at the year-end rate
of exchange (U.S. $1 = Canadian $1.35, $1.35 and $1.40 at December 28, 1996,
December 30, 1995 and December 31, 1994, respectively). Non-monetary items are
remeasured at historical rates. Revenue and expenses are remeasured based on the
average monthly rate. Foreign exchange remeasurement gains and losses are
included in the determination of net income for the year.
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.
65
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials............................. $1,969,239 $1,110,857
Work-in-progress.......................... 38,259 136,062
Finished goods............................ 3,131,376 3,011,741
---------- ----------
$5,138,874 $4,258,660
========== ==========
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Land.................................. $ 23,474 $ 23,474
Building.............................. 1,335,465 1,331,400
Machinery and equipment............... 7,414,138 5,552,819
Computer hardware..................... 318,481 281,645
Capital lease equipment............... 277,545 359,658
Leasehold improvements................ 261,823 199,519
---------- ----------
9,630,926 7,748,515
Less accumulated depreciation and
amortization...................... 5,430,840 4,209,139
---------- ----------
Net property and equipment............ $4,200,086 $3,539,376
========== ==========
</TABLE>
NOTE 4--BANK OVERDRAFT AND REVOLVING CREDIT AGREEMENT
The bank overdraft and revolving credit agreements are due on demand and
bear interest at the U.S. prime rate, the Canadian prime rate and LIBOR plus
3/4%, respectively. These facilities are secured by a general assignment of
accounts receivable, a general security agreement on all machinery and
equipment, a $2,500,000 demand debenture on building and land, a postponement of
claim, and a guarantee bond.
66
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--BUSINESS ACQUISITIONS
On March 15, 1996, the Company acquired substantially all of the net assets
of a manufacturer and distributor of private label dental products. The
acquisition was accounted for as a purchase and, accordingly, the results of the
acquiree are included in the consolidated financial statements from January 1,
1996, the effective date of the agreement. The aggregate purchase price is
estimated at $2,850,000, the maximum contingent amount which is based upon
future revenues attained. The purchase price, which was financed through
available cash resources and a note payable to the seller in the amount of
$1,793,874 (See Note 6), has been allocated to the net assets acquired based
upon their respective fair market values.
The excess of the acquisition costs over the fair value of the identifiable
net assets acquired of $2,440,926 has been recorded as goodwill.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Unsecured acquisition note payable over 5 years
with annual payments ranging from $250,000 to
$500,000, including interest at 6%, due March 15,
2000.................................................. $1,793,874 $ ---
Term loans payable in monthly installments
maturing at varying dates from August
1997 through February 2000, with interest at Canadian
prime plus 0.25%..................................... 1,723,462 1,877,901
Notes payable bearing interest at prime, payable in
annual installments of $191,885 principal, plus
interest, due March 31, 2001......................... 959,424 1,151,308
Capital lease obligations .............................. 57,456 1,471
---------- ----------
4,534,216 3,030,680
Less: Current portion................................... 1,536,428 834,700
---------- ----------
$2,997,788 $2,195,980
========== ==========
</TABLE>
67
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT--(Continued)
Principal payments on long-term debt mature as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997..................................... $1,536,428
1998..................................... 797,684
1999..................................... 873,479
2000..................................... 663,048
2001..................................... 663,577
----------
$4,534,216
==========
</TABLE>
NOTE 7--RELATED PARTY TRANSACTIONS
(a) Certain services of a 50% shareholder are provided to the Company at
the shareholder's cost. Total charges from this shareholder were approximately
$160,000 , $83,000 and $109,000 for 1996, 1995 and 1994, respectively. At
December 28, 1996 and December 30, 1995, "Advances to affiliates" includes net
amounts due (to) from this shareholder of approximately $1,113,000 and
($390,000), respectively, and "Accounts payable and accrued expenses" includes
amounts due to this shareholder of approximately $900,000 and $927,000,
respectively.
In March 1991, the Company entered into an agreement with this same
shareholder to supply products at prices and quantities as defined in the
agreement. Sales to this same shareholder (including sales under this agreement)
accounted for approximately 26%, 22% and 24% of the Company's sales for 1996,
1995 and 1994, respectively. Included in "Accounts receivable" at December 28,
1996 and December 30, 1995 were approximately $1,680,000 and $1,356,000,
respectively, for amounts due from this shareholder.
(b) In March 1991, the other 50% shareholder of the Company granted the
Company a ten-year license to use certain of their trademarks. Royalties of
$75,000 annually are required under the terms of the agreement and were paid in
1996, 1995 and 1994.
In the ordinary course of business, the Company sells products to this
same shareholder. Net sales to this shareholder amounted to approximately
$1,090,000, $608,000 and $1,167,000 for 1996, 1995 and 1994, respectively.
Included in "Accounts receivable" at December 28, 1996 and December 30, 1995
were approximately $271,000 and $88,000, respectively, for amounts due from this
shareholder.
In addition, the Company also purchases pharmaceutical products from this
shareholder. Net purchases from this shareholder amounted to approximately
$1,080,000, $4,434,000 and $3,773,000 for 1996, 1995 and 1994, respectively.
Included in "Accounts payable and accrued expenses" at December 28, 1996 were
approximately $5,549,000 and $974,000 respectively, for amounts due to this
shareholder.
(c) Interest expense related to accounts payable and accrued expenses
owing to the above shareholders amounted to approximately $65,000, $51,000 and
$65,000 for 1996, 1995 and 1994, respectively.
68
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--RELATED PARTY TRANSACTIONS--(Continued)
(d) An affiliated company supplies a new product line to the Company.
Included in "Advances to affiliates" are net amounts due from this affiliate of
approximately $1,225,000 and $974,000 at December 28, 1996 and December 30,
1995, respectively. Included in net advances is a note receivable of
approximately $823,000 at December 28, 1996. Principal on this note is due in
various annual installments beginning in 1997 through 2005, with an interest
rate to be determined annually.
NOTE 8--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2005. Total rental expense for 1996, 1995 and 1994 was
approximately $ 416,000 , $163,000 and $153,000, respectively. At December 28,
1996, future minimum annual rental payments under these leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
1997..................................... $ 383,135
1998..................................... 378,153
1999..................................... 311,725
2000..................................... 200,554
2001..................................... 198,400
Thereafter............................... 2,929,500
----------
$4,401,467
==========
</TABLE>
(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.
NOTE 9 -TAXES ON INCOME
Taxes on income are based on income before taxes as follows:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Domestic............................ $2,233,668 $2,500,916 $1,193,905
Foreign............................. 2,114,311 1,634,797 1,418,573
---------- ---------- ---------
Total income before taxes on income. $4,347,979 $4,135,713 $2,612,478
========== ========== ==========
</TABLE>
69
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES ON INCOME -- (Continued)
The provisions for taxes on income was as follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
Current tax expense:
U.S. Federal............ $ 748,423 $ 764,670 $ 382,000
State and local......... 139,925 26,801 124,000
Foreign................. 660,058 495,660 482,000
---------- ---------- ----------
Total current............. 1,548,406 1,287,131 988,000
Deferred tax expense:
Foreign................. 39,500 81,000 16,000
---------- ---------- ----------
Total provision........... $1,587,906 $1,368,131 $1,004,000
========== ========== ==========
</TABLE>
The deferred tax liability arises from temporary differences relating to
depreciation and amortization.
The Company's effective tax rate approximates the U.S. Federal statutory
rate.
NOTE 10--MAJOR CUSTOMERS AND EXPORT SALES
Sales to two unaffiliated customers accounted for approximately 38%, 25%
and 25% of net sales in 1996, 1995 and 1994, respectively.
NOTE 11--EMPLOYEE BENEFIT PLAN
Effective January 1, 1992, the Company adopted a 401(k) profit sharing
plan to provide retirement benefits for eligible employees. Matching
contributions by the Company, which were determined by the board of directors,
were approximately $41,000, $39,000 and $36,000 for 1996, 1995 and 1994,
respectively.
In addition, the Company maintains a defined contribution plan for
eligible employees. Contributions to this plan, which were determined by the
board of directors, were approximately $92,000 , $92,000 and $97,000 for 1996,
1995 and 1994, respectively.
70
<PAGE>
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and temporary cash investments. The carrying value of
financial instruments approximated fair value as of December 28, 1996 because of
the short maturity of these instruments.
Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its dispersion across different
geographic areas. The Company maintains an allowance for losses based on the
expected collectability of all receivables.
71
<PAGE>
HENRY SCHEIN, INC.
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Add
---------
Balance
at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful
accounts ............... $2,015 $ 246 $ -- $2,261
Other accounts receivable
allowances(1) .......... 1,243 815 -- 2,058
------ ------- ------- ------
$3,258 $ 1,061 $ -- $4,319
====== ======= ======= ======
Year ended December 30, 1995
Allowance for doubtful
accounts ............... $2,261 $ 253 $ -- $2,514
Other accounts receivable
allowances(1) .......... 2,058 1,763 -- 3,821
------ ------- ------- ------
$4,319 $ 2,016 $ -- $6,335
====== ======= ======= ======
Year ended December 28, 1996
Allowance for doubtful
accounts ............... $2,514 $ 1,402 $ -- $3,916
Other accounts receivable
allowances(1) .......... 3,821 -- (432) 3,389
------ ------- ------- ------
$6,335 $ 1,402 $ (432) $7,305
====== ======= ======= ======
</TABLE>
- --------------
(1) Primarily allowance for sales returns.
72
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
Unless otherwise indicated, exhibits are incorporated by reference to the
correspondingly numbered exhibits in the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528)
3.1 Form of Amended and Restated Articles of Incorporation
3.2 Form of Bylaws
9.1 Voting Trust Agreement dated September 30, 1994, as
amended, among the Company, the Estate of Jacob M.
Schein, the Trusts under Articles Third and Fourth of
the Will of Jacob M. Schein, the Trust established by
Pamela Joseph under Trust Agreement dated February 9,
1994, the Trust established by Martin Sperber under
Trust Agreement dated September 19, 1994, management
stockholders and Stanley M. Bergman, as voting trustee
9.2 Agreements dated December 27, 1994 among the Company,
various executive officers and Stanley M. Bergman, as
voting trustee
9.3 Agreements dated as of May 1, 1995 among the Company,
various executive officers and Stanley M. Bergman, as
voting trustee
10.1 Amended and Restated HSI Agreement (the "HSI
Agreement"), effective as of February 16, 1994, among
the Company, Marvin H. Schein, the Trust established by
Marvin H. Schein under Trust Agreement dated September
9, 1994, the Charitable Trust established by Marvin H.
Schein under Trust Agreement dated September 12, 1994,
the Estate of Jacob M. Schein, the Trusts established by
Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under
Trust Agreement dated February 9, 1994, the Trust
established by Martin Sperber under Trust Agreement
dated September 19, 1994, the Trust established by
Stanley M. Bergman under Trust Agreement dated September
15, 1994, Pamela Schein, Pamela Joseph, Martin Sperber,
Stanley M. Bergman, Steven Paladino and James P.
Breslawski (collectively, the "HSI Parties")
10.2 HSI Registration Rights Agreement dated September 30,
1994, among the Company, Pamela Schein, the Trust
established by Pamela Joseph under Trust Agreement dated
February 9, 1994, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by Marvin
H. Schein under Trust Agreement dated September 19,
1994, the Charitable Trust established by Marvin H.
Schein under Trust Agreement dated September 12, 1994,
Martin Sperber, the Trust established by Martin Sperber
under Trust Agreement dated September 19, 1994, Stanley
M. Bergman and the Trust established by Stanley M.
Bergman under Trust Agreement dated September 15, 1994
10.3 Letter Agreement dated September 30, 1994 to the Company
from Marvin H. Schein, Pamela Joseph and Pamela Schein
10.4 Release to the HSI Agreement dated September 30, 1994
73
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.5 Separation Agreement dated as of September 30, 1994 by
and between the Company, Schein Pharmaceutical, Inc. and
Schein Holdings, Inc.
10.6 Restructuring Agreement dated September 30, 1994
among Schein Holdings, Inc., the Company, the Estate
of Jacob M. Schein, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated
September 9, 1994, the Charitable Trust established
by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, Pamela Joseph, the
Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994; the Trusts under
Articles Third and Fourth of the Will of Jacob M.
Schein; Stanley M. Bergman, the Trust established by
Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Martin Sperber, the Trust
established by Martin Sperber under Trust Agreement
dated December 31, 1993, and the Trust established
by Martin Sperber under Trust Agreement dated
September 19, 1994
10.7 Agreement and Plan of Corporate Separation and
Reorganization dated as of September 30, 1994 among
Schein Holdings, Inc., the Company, the Estate of
Jacob M. Schein, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated
September 9, 1994, the Charitable Trust established
by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, the Trust
established Article Fourth of the Will of Jacob M.
Schein for the benefit of Pamela Schein and her issue
under Trust Agreement dated September 29, 1994,
Pamela Joseph, the Trust established by Pamela Joseph
under Trust Agreement dated February 9, 1994, the
Trust established by Pamela Joseph under Trust
Agreement dated September 28, 1994 and the Trusts
under Articles Third and Fourth of the Will of Jacob
M. Schein
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended
and restated effective as of July 1, 1995**
10.9 Henry Schein, Inc. Amendment and Restatement of the
Supplemental Executive Retirement Plan**
10.10 Henry Schein, Inc. Summary Executive Incentive Plan**
10.11 Consulting Agreement dated September 30, 1994 between
the Company and Marvin H. Schein**
10.12 Employment Agreement dated as of January 1, 1992 between
the Company and Stanley M. Bergman**
10.13 Amended and Restated Stock Issuance Agreement dated as
of December 24, 1992 between the Company and Stanley M.
Bergman**
10.14 Stock Issuance Agreements dated December 27, 1994
between the Company and various executive officers**
10.15 Agreement and Plan of Merger dated as of September 1,
1995, among Henry Schein, Inc., Schein Dental Equipment
Corp., Marvin Schein and others
10.16 Stock Purchase Agreement dated August 25, 1995, by Henry
Schein, Inc., PRN Medical, Inc. and its shareholders,
and Florida Doctor Supply, Inc. and its shareholders
10.17 Restated Standard Indemnity Agreement dated February 8,
1993, as amended January 25, 1993, by and between Showa
Denko America, Inc. and the Company
74
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.18 Guaranty Agreement by and between Showa Denko K.K. and
the Company, relating to the Restated Standard Indemnity
Agreement dated February 8, 1993, as amended January 25,
1993, by and between Showa Denko America, Inc. and the
Company
10.19 Stock Issuance Agreements dated as of May 1, 1995
between the Company and executive officers
10.20 Agreement of Purchase and Sale of Assets dated February
28, 1996 by and among the Company, Benton Dental, Inc.
and Modern Dental Concepts, Inc.+
10.21 Credit Agreement dated as of December 8, 1994 between
the Company and The Chase Manhattan Bank, N.A.
10.22 Loan Agreement dated May 5, 1995 by and between the
Company and New York State Urban Development Corporation
10.23 Term Loan Agreement dated as of November 15, 1993
between Henry Schein Europe, Inc. and Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A.
10.24 Corporate Guarantee dated November 15, 1993 by the
Company, Zahn Dental Co., Inc. Zahn Dental (Florida),
Inc., Zahn Dental (Mass), Inc., Tri- State Medical
Supply, Inc. and Zahn Holdings, Inc. with respect to the
Term Loan dated as of November 15, 1993 between Henry
Schein Europe, Inc. and Cooperatieve Centrale
Raiffeisen-Boerenleenbank, B.A.
10.25 Joint and Several Guarantee dated February 7, 1995 by
the Company in favor of Banque Nationale de Paris
10.26 Joint and Several Guarantee dated February 7, 1995 by
the Company in favor of Banque Francaise du Commerce
Exterieur
10.27 Guarantee dated March 1, 1996 by the Company in favor of
Deutsche Bank AG+
10.28 Lease Agreement dated December 22, 1995 by and between
Dugan Realty, L.L.C. and the Company+
10.29 Commercial Guaranty dated August 1, 1994 by the Company
in favor of the Mid-City National Bank
10.30 Discretionary Line of Credit dated August 18, 1995
between PNC Bank, Delaware and one of the Company's 50%
owned companies
10.31 Discretionary Line of Credit Demand Note dated
August 18, 1995 in favor of one of the Company's 50%
owned companies
10.32 Loan Agreement dated March 30, 1992 between the Royal
Bank of Scotland plc, Henry Schein U.K. Holdings Limited
and BDG U.K. Holdings Limited
10.33 Loan Agreement dated January 28, 1994 between the Royal
Bank of Scotland plc, Henry Schein U.K. Holdings Limited
and Dental Express (Supplies) Limited
10.34 Credit Agreement dated June 5, 1995 among Canadian
Imperial Bank of Commerce and one of the Company's 50%
owned companies
10.35 Master Lease Agreement dated as of February 28, 1991
between General Electric Capital Corporation and the
Company
10.36 Master Lease Agreement dated December 2, 1994 between
Chase Equipment Leasing, Inc. and the Company
10.37 Software License Agreement dated as of June 20, 1995
between the Company and XcelleNet, Inc.
10.38 Software License Agreement dated as of October 31, 1994,
as amended, between J.D. Edwards & Company
75
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.39 Software Update Agreement dated as of October 31, 1994,
as amended, between J.D. Edwards & Company
10.40 Software Services Agreement dated as of October 31,
1994, as amended, between J.D. Edwards & Company
10.41 Lease dated December 3, 1990 between WRC Properties,
Inc. and the Company
10.42 Lease dated March 2, 1992 between Vista Distribution
Center, Inc. and the Company
10.43 Lease dated as of September 30, 1993, as amended
October 14, 1993 and May 23, 1995, by and between
Broad Hollow Realty Co. and the Company
10.44 Lease dated April 27, 1995 by Lyndean Investments
Limited to Kent Dental Limited and Henry Schein U.K.
Holdings Limited
10.45 Lease dated October 23, 1994 between Georg and Pia
Netzhammer and Henry-Schein Dentina GmbH (English
translation and original version)
10.46 Lease dated January 11, 1995 between Lyndean Investments
Limited, Kent Dental Limited and Henry Schein U.K.
Holdings Limited
10.47 Stock Purchase Agreement dated as of August 18, 1995
among the Company, the Mark Family Partnership and others
10.48 Group Purchasing Program Agreement dated March 31, 1994,
as amended June 26, 1995, by and between AMA Resources,
Inc. and the Company
10.49 Hospital Supply Purchase Agreement dated as of
November 10, 1994 between Veterinary Centers of America,
Inc. and the Company
10.50 Award of Contract to the Company dated April 14, 1995 by
Department of the Army
10.51 Sales Agent Agreement dated March 1, 1995 by and between
Merck & Co., Inc. and the Company
10.52 Supply Agreement dated March 20, 1991
10.53 Shareholders' Agreement dated March 20, 1991
10.54 Non-Negotiable Promissory Note dated March 20, 1991 from
the Company to N-Tech
10.55 Guaranty dated March 20, 1991 by the Company and others
in favor of N-Tech, Inc.
10.56 Demand Debenture dated December 20, 1988 from one of the
Company's 50% owned companies to Canadian Imperial Bank
of Commerce
10.57 Pledge Agreement dated December 20, 1988 of one of the
Company's 50% owned companies to Canadian Imperial Bank
of Commerce
10.58 Shareholders' Agreement dated as of December 1, 1990 by
and among the shareholders of Henry Schein Espana, S.A.
10.59 Shareholders' Agreement dated as of April 1, 1991 between
the shareholders of Schein-Dentina, B.V. (English
translation)
10.60 Put and Call Option Agreement dated August 29, 1991
between Schein International (Europe) Inc. and the
shareholders of Henry Schein U.K. Holdings Limited
10.61 Deed of Guarantee dated August 29, 1991 between Henry
Schein, Inc. and the shareholders of Henry Schein U.K.
Holdings Limited
10.62 Stock Purchase Agreement dated November 1, 1992 among SSN
Healthcare Supply, Inc., the Company, Tri-State Medical
Supply, Inc. and a shareholder
10.63 Stock Purchase and Shareholders' Agreement dated
March 19, 1993 by and among S.A. Hospithera and Henry Schein
Europe, Inc.
76
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.64 Agreement dated March 19, 1993 by and among S.A.
Hospithera N.V., Henry Schein Europe Inc., and S.A. Henry
Schein Hospithera N.V.
10.65 Supply Agreement dated as of March 15, 1993 between Henry
Schein B.V. and S.A. Henry Schein Hospithera N.V.
10.66 Put and Call Option Agreement dated July 1, 1993 between
P.W. White Holdings Limited and Henry Schein Europe Inc.
10.67 Shareholders' Agreement dated July 1, 1993 between the
shareholders of Henry Schein UK Holdings Ltd.
10.68 Consortium Agreement dated July 1, 1993 between the
shareholders of Henry Schein UK Holdings Ltd.
10.69 Guarantee dated July 1, 1993 between the Company and P.W.
White Holdings Limited
10.70 Restructuring Agreement dated July 30, 1993 by and among
the Company, Dental Plan, Inc., and certain of its
employees
10.71 Share Purchase Agreement dated as of November 17, 1993 by
and among Henry Schein B.V. and Johannes Cornelis van den
Braak
10.72 Asset Purchase and Business Development Agreement dated
May 23, 1994 among the Company, Chicago Medical Equipment
Company, and its principal stockholder, Universal
Footcare Holdings Corp., Universal Footcare Products,
Inc. and Universal Footcare Sales Co., L.L.C.
10.73 Sales Service Agreement dated as of August 1, 1994
between Universal Footcare Products, Inc. and Universal
Footcare Sales Co., L.L.C.
10.74 Unanimous Shareholders Agreement dated August 4, 1994
among Henry Schein Canada Inc., the Company, 972704
Ontario Inc. and its shareholders, and Consolidated
Dental Ltd.
10.75 Share Purchase Agreement dated June 27, 1994 by and
between the shareholders of Henry Schein France S.A.
10.76 Shareholders Agreement dated January 1, 1995 among SSN
Healthcare Supply, Inc., South Jersey Medical Supply Co.,
Inc., South Jersey Surgical Supply Co., Inc., and its
shareholders
10.77 Shareholders Agreement dated as of January 24, 1995 by
and among the shareholders of Dentisoft, Inc.
10.78 Purchase Agreement dated as of June 14, 1995 among The
Veratex Corporation, the Company and HSI Michigan Corp.
10.79 Form of Henry Schein, Inc. Non-Employee Director Stock
Option Plan +**
10.80 Supply Agreement made as of July 7, 1995 between Tidi
Products, Inc. and the Company
10.81 Agreement Subject to Conditions Precedent dated July 21,
1995 between Henry Schein Europe Inc., Henry Schein
France S.A., Gerard Ifker, Didier Cochet, Frederic Ladet,
Jean-Hugues Lelievre and Christophe Morales (English
Translation)
10.82 Put and Call Option Agreement dated June 9, 1995 between
William Roger Killiner and Henry Schein U.K. Holdings
Limited
10.83 Put and Call Option Agreement dated June 9, 1995 between
Anthony Alan Anderson and Henry Schein U.K. Holdings
Limited.
10.84 Agreement of Purchase and Sale of Assets dated as of
July 1, 1995 by and among Precision Dental Specialties,
Inc. and its shareholders, PDS Acquisition Corp., and the
Company
10.85 Shareholders Agreement dated as of July 1, 1995 by and
among Precision Dental Specialties, Inc. and its
shareholders, PDS Acquisition Corp., and the Company
10.86 Agreement dated January 1, 1995 between Henry Schein (UK)
Holdings Ltd. and The Royal Bank of Scotland plc
77
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.87 Agreement dated March 4, 1993 between Henry Schein (UK)
Holdings Ltd. and The Royal Bank of Scotland plc
10.88 Loan Agreement dated November 16, 1993 between Henry
Schein B.V. and others and Crediet-en-Effectenbank N.V.
(English translation and original version)
10.89 Multicurrency Credit Policy between Henry Schein Espana,
S.A. and others and Banco Popular Espanol, S.A. (English
translation and original version)
10.90 Amended and Restated Credit Agreement (the "Amended
Credit Agreement") dated as of July 5, 1995 among the
Company, The Chase Manhattan Bank, N.A., Natwest Bank,
N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank,
B.A. "Rabobank Nederland", New York Branch and European
American Bank (previously Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Commission File No.
33-96528))
10.91 First Amendment to the Amended Credit Agreement dated
December 15, 1995 among the Company, The Chase Manhattan
Bank, N.A., Natwest Bank, N.A., Cooperatieve Centrale
Raiffeisen Boerenleenbank, B.A. "Rabobank Nederland", New
York Branch and European American Bank+
10.92 Agreement and Plan of Merger dated March 7, 1997 between
the Company and Micro Bio-Medics, Inc.
11.1 Statement re: computation of per share income (loss)+
21.1 List of Subsidiaries of the Registrant
23.1 Consent of BDO Seidman, LLP+
27.1 Financial Data Schedules+
- --------------
+ Filed herewith
** Indicates management contract or compensatory plan or arrangement.
78
Exhibit 10.92
AGREEMENT AND PLAN OF MERGER
by and among
HENRY SCHEIN, INC.,
HSI ACQUISITION CORP.
and
MICRO BIO-MEDICS, INC.
Dated March 7, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I THE MERGER............................................ 1
Section 1.1 The Merger............................................ 1
Section 1.2. Effective Time of the Merger.......................... 2
Section 1.3. Closing............................................... 2
ARTICLE II THE SURVIVING CORPORATION............................ 2
Section 2.1 Certificate of Incorporation.......................... 2
Section 2.2 By-Laws............................................... 2
Section 2.3 Directors and Officers of Surviving Corporation....... 2
ARTICLE III CONVERSION OF SHARES.................................. 3
Section 3.1 Exchange Ratio........................................ 3
Section 3.2 Exchange of Company Common Stock; Procedures.......... 4
Section 3.3 Dividends; Transfer Taxes; Escheat.................... 4
Section 3.4 No Fractional Securities.............................. 5
Section 3.5 Closing of Company Transfer Books..................... 5
Section 3.6 Further Assurances.................................... 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE
COMPANY............................................... 6
Section 4.1 Organization.......................................... 6
Section 4.2 Capitalization........................................ 6
Section 4.3 Company Subsidiaries.................................. 7
Section 4.4 Authority Relative to this Agreement.................. 7
Section 4.5 Consents and Approvals; No Violations................. 8
Section 4.6 Reports and Financial Statements...................... 8
Section 4.7 Absence of Certain Changes or Events; Material
Contracts............................................. 9
Section 4.8 Litigation............................................ 9
Section 4.9 Absence of Undisclosed Liabilities.................... 9
Section 4.10 No Default............................................ 9
Section 4.11 Taxes................................................. 10
Section 4.12 Title to Properties; Encumbrances..................... 11
Section 4.13 Intellectual Property................................. 11
Section 4.14 Compliance with Applicable Law........................ 12
Section 4.15 Information in Disclosure Documents and
Registration Statement................................ 12
Section 4.16 Employee Benefit Plans; ERISA......................... 13
Section 4.17 Environmental Laws and Regulations.................... 14
Section 4.18 Vote Required......................................... 15
Section 4.19 Opinion of Financial Advisor.......................... 15
Section 4.20 Accounting Matters.................................... 15
Section 4.21 NYBCL Section 912..................................... 15
Section 4.22 Labor Matters......................................... 15
<PAGE>
Section 4.23 Affiliate Transactions................................ 16
Section 4.24 Brokers............................................... 16
Section 4.25 Tax Matters........................................... 16
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT.............. 16
Section 5.1 Organization.......................................... 16
Section 5.2 Capitalization........................................ 17
Section 5.3 Authority Relative to this Agreement.................. 17
Section 5.4 Consents and Approvals No Violations.................. 18
Section 5.5 Reports and Financial Statements...................... 18
Section 5.6 Absence of Certain Changes or Events; Material
Contracts............................................. 18
Section 5.7 Information in Disclosure Documents and
Registration Statement................................ 19
[Section 5.8 Absence of Undisclosed Liabilities.................... 19
[Section 5.9 Brokers............................................... 19
[Section 5.10 Opinion of Financial Advisor.......................... 19
[Section 5.11 Accounting Matters.................................... 20
[Section 5.12 Tax Matters........................................... 20
Section 5.13 Brokers............................................... 20
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER................ 20
Section 6.1 Conduct of Business by the Company Pending
the Merger............................................ 20
Section 6.2 Conduct of Business by Parent Pending the Merger...... 22
Section 6.3 Conduct of Business of Sub............................ 22
ARTICLE VII ADDITIONAL AGREEMENTS........................................ 22
Section 7.1 Access and Information................................ 22
Section 7.2 No Solicitation....................................... 23
Section 7.3 Registration Statement................................ 24
Section 7.4 Proxy Statements; Stockholder Approval................ 24
Section 7.5 Compliance with the Securities Act.................... 25
Section 7.6 Reasonable Best Efforts............................... 25
Section 7.7 Proxy and Option Agreement............................ 26
Section 7.8 Company Stock Options................................. 26
Section 7.9 Public Announcements.................................. 27
Section 7.10 Expenses.............................................. 27
Section 7.11 Listing Application................................... 27
Section 7.12 Supplemental Disclosure............................... 27
Section 7.13 Letters of Accountants................................ 27
<PAGE>
ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE MERGER..................... 28
Section 8.1 Conditions to Each Party's Obligation to
Effect the Merger..................................... 28
Section 8.2 Conditions to Obligations of Parent and Sub to
Effect the Merger......................................29
Section 8.3 Conditions to Obligation of the Company to
Effect the Merger..................................... 30
ARTICLE IX TERMINATION........................................... 31
Section 9.1 Termination........................................... 31
Section 9.2 Effect of Termination................................. 32
ARTICLE X GENERAL PROVISIONS.................................... 33
Section 10.1 Amendment and Modification............................ 33
Section 10.2 Waiver................................................ 33
Section 10.3 Survivability; Investigations......................... 34
Section 10.4 Notices............................................... 34
Section 10.5 Descriptive Headings; Interpretation.................. 35
Section 10.6 Entire Agreement; Assignment.......................... 35
Section 10.7 Governing Law......................................... 35
Section 10.8 Severability.......................................... 35
Section 10.9 Counterparts.......................................... 35
<PAGE>
SCHEDULES
Schedule 4.2(b) Rights to Acquire Capital Stock
Schedule 4.2(c) Vesting and Modification of Company Stock Options
Schedule 4.3 Subsidiaries of the Company
Schedule 4.5 No Violations
Schedule 4.6 Accounting Changes
Schedule 4.7 Absence of Certain Changes
Schedule 4.9 Undisclosed Liabilities
Schedule 4.10 No Defaults
Schedule 4.11 Taxes
Schedule 4.12 Liens
Schedule 4.13(a) Intellectual Property
Schedule 4.14 Compliance with Applicable Laws
Schedule 4.16 Employee Benefit Plans
Schedule 4.17(a) Compliance with Environmental Laws and Regulations
Schedule 4.17(b) Asbestos; Underground Storage, Etc.
Schedule 4.17(c) Certain Communications and Requests for Information;
Remediation
Schedule 4.23 Affiliate Transactions
Schedule 5.1 Subsidiaries of Parent
Schedule 5.4 No Violations (Parent)
Schedule 5.5 Accounting Changes (Parent)
Schedule 5.8 Undisclosed Liabilities (Parent)
Schedule 5.9 Compliance with Applicable Laws (Parent)
Schedule 6.1 Conduct of Business
Schedule 6.2(d) Changes to Parent's Capitalization
Schedule 8.2(h) Required Governmental Approvals
<PAGE>
EXHIBITS
Exhibit A Proxy and Option Agreement
Exhibit B Affiliate Agreement
Exhibit C Opinion of Otterbourg, Steindler, Houston & Rosen, P.C.
Exhibit D Opinion of Proskauer Rose Goetz & Mendelsohn LLP
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated March 7, 1997, by and among Henry
Schein, Inc., a Delaware corporation ("Parent"), HSI Acquisition Corp., a New
York corporation and wholly-owned subsidiary of Parent ("Sub"), and Micro
Bio-Medics, Inc., a New York corporation (the "Company").
The Boards of Directors of Parent and Sub and the Company deem it
advisable and in the best interests of their respective stockholders that Parent
acquire the Company pursuant to the terms and conditions of this Agreement, and,
in furtherance of such acquisition, such Boards of Directors have unanimously
approved the merger of Sub with and into the Company in accordance with the
terms of this Agreement and the New York Business Corporation Law (the "NYBCL").
Concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Parent's willingness to enter into this
Agreement, certain holders of shares of the Common Stock, par value $.03 per
share, of the Company (the "Company Common Stock") are entering into an
agreement with Parent and Sub in the form attached hereto as Exhibit A (the
"Proxy and Option Agreement") granting Parent the right to vote such shares of
the Company Common Stock and granting Parent an option to purchase such shares
of the Company Common Stock in accordance with the terms set forth in the Proxy
and Option Agreement.
For federal income tax purposes, it is intended that the Merger (as
defined in Section 1.1) shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
For accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
In consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows: ARTICLE I
THE MERGER
Section 1.1 The Merger. In accordance with the provisions of this
Agreement and the NYBCL, at the Effective Time (as defined in Section 1.2), Sub
shall be merged with and into the Company (the "Merger"), the separate existence
of Sub shall thereupon cease, and the Company shall be the surviving corporation
in the Merger (sometimes hereinafter called the "Surviving Corporation") and
shall continue its corporate existence under the laws of the State of New York.
The Merger shall have the effects set forth in Section 906 of the NYBCL.
<PAGE>
Section 1.2. Effective Time of the Merger. The Merger shall become
effective at the time of filing of, or at such later time specified in, a
properly executed Certificate of Merger, in the form required by and executed in
accordance with the NYBCL, filed with the Secretary of State of the State of New
York in accordance with the provisions of Section 904 of the NYBCL. Such filing
shall be made as soon as practicable after the Closing (as defined in Section
1.3). When used in this Agreement, the term "Effective Time" shall mean the date
and time at which the Merger shall become effective.
Section 1.3. Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Proskauer
Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York, at 10:00 a.m.,
on the day on which all of the conditions set forth in Article VIII are
satisfied or waived or on such other date and at such other time and place as
Parent and the Company shall agree (such date, the "Closing Date").
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Certificate of
Incorporation of Sub in effect at the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until amended in accordance with
applicable law, except that the name of the Surviving Corporation shall be
"Micro Bio-Medics, Inc.".
Section 2.2 By-Laws. The By-Laws of Sub as in effect at the
Effective Time shall be the By-Laws of the Surviving Corporation until amended
in accordance with applicable law.
Section 2.3 Directors and Officers of Surviving Corporation.
(a) The directors of Sub at the Effective Time shall be the initial
directors of the Surviving Corporation and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified in the manner provided in the Certificate of Incorporation or By-Laws
of the Surviving Corporation or as otherwise provided by law.
(b) The officers of the Company at the Effective Time shall be the
initial officers of the Surviving Corporation and shall hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualified in the manner provided in the Certificate of Incorporation or
By-Laws of the Surviving Corporation, or as otherwise provided by law.
2
<PAGE>
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Exchange Ratio. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be canceled
in accordance with Section 3.1(b) and other than shares of Company Common
Stock as to which appraisal rights shall have been duly demanded under the
NYBCL ("Dissenting Shares")) shall be converted into the right to receive
0.62 (the "Exchange Ratio") of a share of the Common Stock, par value $.01
per share, of Parent (the "Parent Common Stock"), payable upon the
surrender of the certificate formerly representing such share of Company
Common Stock.
(b) All shares of Company Common Stock that are held by the Company
as treasury shares shall be canceled and retired and cease to exist, and
no securities of Parent or other consideration shall be delivered in
exchange therefor.
(c) Each share of Common Stock, par value $.01 per share, of Sub
("Sub Common Stock") issued and outstanding immediately prior to the
Effective Time shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.03 per share, of the
Surviving Corporation.
(d) Each outstanding option to purchase Company Common Stock set
forth on Schedule 4.2(b) (each, a "Company Stock Option") and each warrant
to purchase Company Common Stock set forth on Schedule 4.2(b) (each, a
"Company Warrant") shall be assumed by Parent as more specifically
provided in Section 7.8.
(e) The holders of Dissenting Shares, if any, shall be entitled to
payment by the Surviving Corporation of the appraised value of such shares
to the extent permitted by and in accordance with the provisions of
Section 623 of the NYBCL; provided, however, that (i) if any holder of the
Dissenting Shares shall, under the circumstances permitted by the NYBCL,
subsequently deliver a written withdrawal of such holder's demand for
appraisal of such shares, or (ii) if any holder fails to establish such
holder's entitlement to rights to payment as provided in such Section 623,
or (iii) if neither any holder of Dissenting Shares nor the Surviving
Corporation has filed a petition demanding a determination of the value of
all Dissenting Shares within the time provided in such Section 623, such
holder or holders (as the case may be) shall forfeit such right to payment
for such shares and such shares shall thereupon be deemed to have been
converted into Parent Common Stock pursuant to Section 3.1(a) as of the
Effective Time. The Surviving Corporation shall be solely responsible for,
and shall pay out of its own funds, any amounts which become due and
payable to holders of Dissenting Shares, and such amounts shall not be
paid directly or indirectly by Parent.
3
<PAGE>
Section 3.2 Exchange of Company Common Stock; Procedures.
(a) Prior to the Closing Date, Parent shall designate a bank or
trust company reasonably acceptable to the Company to act as Exchange Agent
hereunder (the "Exchange Agent"). As soon as practicable after the Effective
Time, Parent shall deposit with or for the account of the Exchange Agent stock
certificates representing the number of shares of Parent Common Stock issuable
pursuant to Section 3.1 in exchange for outstanding shares of Company Common
Stock, which shares of Parent Common Stock shall be deemed to have been issued
at the Effective Time.
(b) As soon as practicable after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") that were
converted pursuant to Section 3.1 into the right to receive shares of Parent
Common Stock (i) a form of letter of transmittal specifying that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent and (ii)
instructions for use in surrendering such Certificates in exchange for
certificates representing shares of Parent Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor (x) a certificate representing that number of whole
shares of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article III and (y) cash in lieu of any
fractional shares of Parent Common Stock to which such holder is entitled
pursuant to Section 3.4, after giving effect to any required tax withholdings,
and the Certificate so surrendered shall forthwith be canceled. In the event of
a transfer of ownership of Company Common Stock which is not registered in the
transfer records of the Company, a certificate representing the proper number of
shares of Parent Common Stock may be issued to a transferee if the Certificate
representing such Company Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer, and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 3.2(b), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender a certificate representing shares of Parent Common
Stock and cash in lieu of any fractional shares of Parent Common Stock as
contemplated by this Article III.
Section 3.3 Dividends; Transfer Taxes; Escheat. No dividends or
distributions that are declared on shares of Parent Common Stock will be paid to
persons entitled to receive certificates representing shares of Parent Common
Stock until such persons surrender their Certificates. Upon such surrender,
there shall be paid, to the person in whose name the certificates representing
such shares of Parent Common Stock shall be issued, any dividends or
distributions with respect to such shares of Parent Common Stock which have a
record date after the Effective Time and shall have become payable between the
Effective Time and the time of such surrender. In no event shall the person
entitled to receive such dividends or distributions be entitled to receive
interest thereon. Promptly following the date which is six months after the
Effective Time, the Exchange Agent shall deliver to the Surviving Corporation
all cash, certificates and other documents in its possession relating to the
transactions described in this
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Agreement, and any holders of Company Common Stock who have not theretofore
complied with this Article III shall look thereafter only to the Surviving
Corporation for the shares of Parent Common Stock, any dividends or
distributions thereon, and any cash in lieu of fractional shares thereof to
which they are entitled pursuant to this Article III. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to a
holder of Company Common Stock for any shares of Parent Common Stock, any
dividends or distributions thereon or any cash in lieu of fractional shares
thereof delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws upon the lapse of the applicable time periods
provided for therein.
Section 3.4 No Fractional Securities. No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional interests shall not
entitle the owner thereof to vote or to any rights of a security holder. In lieu
of any such fractional securities, each holder of Company Common Stock who would
otherwise have been entitled to a fraction of a share of Parent Common Stock
upon surrender of such holder's Certificates will be entitled to receive, and
Parent will timely provide (or cause to be provided) to the Exchange Agent
sufficient funds to make, a cash payment (without interest) determined by
multiplying (i) the fractional interest to which such holder would otherwise be
entitled (after taking into account all shares of Company Common Stock then held
of record by such holder) and (ii) the average of the per share closing prices
for Parent Common Stock on the Nasdaq National Market ("Nasdaq") for the five
trading days immediately preceding the Effective Time. It is understood (i) that
the payment of cash in lieu of fractional shares of Parent Common Stock is
solely for the purpose of avoiding the expense and inconvenience to Parent of
issuing fractional shares and does not represent separately bargained-for
consideration and (ii) that no holder of Company Common Stock will receive cash
in lieu of fractional shares of Parent Common Stock in an amount greater than
the value of one full share of Parent Common Stock.
Section 3.5 Closing of Company Transfer Books. At the Effective
Time, the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall thereafter be made on such stock transfer
books. If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Article
III.
Section 3.6 Further Assurances. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of Sub or the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of each of Sub and the Company or otherwise, all such deeds, bills of
sale, assignments and assurances and to take and do, in such names and on such
behave or otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect
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or confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out the
purposes of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 4.1 Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has the corporate power to carry on its business as it is now being
conducted or presently proposed to be conducted. The Company is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified will not have a material adverse effect,
individually or in the aggregate, on the financial condition, results of
operations, business, assets, liabilities, prospects or properties of the
Company and its Subsidiaries (as defined below) taken as a whole, or the ability
of the Company to consummate the Merger and the other transactions contemplated
by this Agreement (a "Company Material Adverse Effect"). As used in this
Agreement, the term "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated, of
which (x) such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held by such
party or any Subsidiary of such party do not have a majority of the voting
interest in such partnership) or (y) at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party and/or one or more of its Subsidiaries.
Section 4.2 Capitalization.
(a) The authorized capital stock of the Company consists of
20,000,000 shares of Company Common Stock and 1,000,000 shares of Preferred
Stock, par value $1.00 per share, of the Company (the "Company Preferred
Stock"). As of the date hereof, (i) 5,072,848 shares of Company Common Stock are
issued and outstanding, (ii) no shares of Company Preferred Stock are issued and
outstanding, (iii) Company Stock Options to acquire 1,842,668 shares of Company
Common Stock are outstanding under all stock option plans of the Company or
otherwise, (iv) Company Warrants to acquire 106,420 shares of Company Common
Stock are outstanding, and (v) 2,524,090 shares of Company Common Stock are
reserved for issuance pursuant to the Company Stock Options, the Company
Warrants and all other Rights (as hereinafter defined) to purchase or otherwise
receive capital stock or other securities of the Company. All of the issued and
outstanding shares of Company Common Stock are validly issued, fully paid and
nonassessable.
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(b) Except as set forth on Schedule 4.2(b), (i) there is no
outstanding right, subscription, warrant, call, option or other agreement or
arrangement (including, without limitation, pursuant to any employee benefit
plan) of any kind (collectively, "Rights") to purchase or otherwise to receive
from the Company or any of its Subsidiaries, any of the outstanding authorized
but unissued or treasury shares of the capital stock or any other security of
the Company or any of its Subsidiaries or to require the Company or any of its
Subsidiaries to purchase any such security, (ii) there is no outstanding
security of any kind convertible into or exchangeable for such capital stock,
and (iii) there is no voting trust or other agreement or understanding to which
the Company or any of its Subsidiaries is a party or is bound with respect to
the voting of the capital stock of the Company or any of its Subsidiaries. The
conversion of the Company Stock Options provided for in Section 7.8 of this
Agreement is in accordance with the respective terms of the Company Stock
Options and the plans under which they were issued.
(c) Since December 1, 1995, except as set forth on Schedule 4.2(c),
the Company has not in any manner accelerated or provided for the acceleration
of the vesting or exercisability of, or otherwise modified the terms and
conditions applicable to, any of the Company Stock Options, whether set forth in
the governing stock option plans of the Company, a stock option grant, award or
other agreement or otherwise. Except as set forth on Schedule 4.2(c), none of
the awards, grants or other agreements pursuant to which Company Stock Options
were issued have provisions which accelerate the vesting or right to exercise
such options upon the execution of this Agreement (including the documents
attached as Exhibits hereto), the consummation of the transactions contemplated
hereby (or thereby) or any other "change of control" events.
Section 4.3 Company Subsidiaries. Schedule 4.3 contains a complete
and accurate list of all Subsidiaries of the Company. Each Subsidiary of the
Company that is a corporation is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation. Each
Subsidiary of the Company that is a partnership is duly formed and validly
existing under the laws of its jurisdiction of formation. Each Subsidiary of the
Company has the corporate power or the partnership power, as the case may be, to
carry on its business as it is now being conducted or presently proposed to be
conducted. Each Subsidiary of the Company is duly qualified as a foreign
corporation or a foreign partnership, as the case may be, authorized to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified will
not have a Company Material Adverse Effect. All of the outstanding shares of
capital stock of the Subsidiaries of the Company that are corporations are
validly issued, fully paid and nonassessable, except to the extent provided in
Section 630 of the NYBCL. All of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of the Company are owned by the
Company or a Subsidiary of the Company, in each case, except as set forth in the
Company SEC Reports (as hereinafter defined), free and clear of any liens,
pledges, security interests, claims, charges or other encumbrances of any kind
whatsoever ("Liens").
Section 4.4 Authority Relative to this Agreement. The Company has
the requisite corporate power and authority to execute and deliver this
Agreement and to consummate
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the transactions contemplated hereby. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated on its part hereby have been duly authorized by the Company's Board
of Directors and, except for the approval of its stockholders to be sought at
the stockholders meeting contemplated by Section 7.4(a) with respect to this
Agreement, no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or for the Company to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms.
Section 4.5 Consents and Approvals; No Violations. Neither the
execution, delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby, will (i)
conflict with or result in any breach of any provisions of the charter, by-laws
or other organizational documents of the Company or any of its Subsidiaries,
(ii) require a filing with, or a permit, authorization, consent or approval of,
any federal, state, local or foreign court, arbitral tribunal, administrative
agency or commission or other governmental or other regulatory authority or
administrative agency or commission (a "Governmental Entity"), except in
connection with or in order to comply with the applicable provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), state
securities or "blue sky" laws, the By-Laws of the National Association of
Securities Dealers (the "NASD"), the filing and recordation of a Certificate of
Merger as required by the NYBCL, and filing with the New York Board of Pharmacy
and with the New York State Department of Social Services (as required by 18
NYCRR Section 502.5(b), (iii) except as set forth on Schedule 4.5, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, or result in the creation of a Lien on any property or
asset of the Company or any of its Subsidiaries pursuant to, any of the terms,
conditions or provisions of any material note, bond, mortgage, indenture,
license, contract, agreement or other instrument or obligation (each, a
"Contract") to which the Company or any of its Subsidiaries is a party or by
which any of them or any of their properties or assets may be bound or (iv)
violate any material law, order, writ, injunction, decree, statute, rule or
regulation of any Governmental Entity applicable to the Company, any of its
Subsidiaries or any of their properties or assets.
Section 4.6 Reports and Financial Statements. The Company has timely
filed all reports required to be filed with the Securities and Exchange
Commission (the "SEC") pursuant to the Exchange Act or the Securities Act since
December 1, 1993 (collectively, the "Company SEC Reports"), and has previously
made available to Parent true and complete copies of all such Company SEC
Reports. Such Company SEC Reports, as of their respective dates, complied in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act, as the case may be, and none of such Company SEC Reports contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the Company SEC Reports have
been
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prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods indicated (except as otherwise noted
therein) and fairly present the consolidated financial position of the Company
and its consolidated Subsidiaries as at the dates thereof and the consolidated
results of operations and cash flows of the Company and its consolidated
Subsidiaries for each of the periods then ended, except that in the case of the
unaudited consolidated financial statements included in any Form 10-Q, the
presentation and disclosures conform with the applicable rules of the Exchange
Act, but include all adjustments necessary to conform to GAAP requirements with
respect to interim financial statements. Except as set forth on Schedule 4.6,
since December 1, 1993, there has been no change in any of the significant
accounting (including tax accounting) policies, practices or procedures of the
Company or any of its consolidated Subsidiaries.
Section 4.7 Absence of Certain Changes or Events; Material
Contracts. Except as set forth on Schedule 4.7 or in the Company SEC Reports,
since December 1, 1995, (i) neither the Company nor any of its Subsidiaries has
conducted its business and operations other than in the ordinary course of
business and consistent with past practices or taken any actions that, if it had
been in effect, would have violated or been inconsistent with the provisions of
Section 6.1 and (ii) there has not been any fact, event, circumstance or change
affecting or relating to the Company or any of its Subsidiaries which has had or
is reasonably likely to have a Company Material Adverse Effect. Except as set
forth on Schedule 4.7, the transactions contemplated by this Agreement will not
constitute a change of control under or require the consent from or the giving
of notice to a third party pursuant to the terms, conditions or provisions of
any material Contract to which Parent or any of its Subsidiaries is a party, or
require any payment to be made under any Contract to which the Parent or any of
its Subsidiaries is a party.
Section 4.8 Litigation. Except for litigation disclosed in the notes
to the financial statements included in the Company's Annual Report to
Stockholders for the year ended November 30, 1995 or in the Company SEC Reports
filed subsequent thereto, there is no suit, action, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its Subsidiaries, the outcome of which, in the reasonable
judgment of the Company, is likely to have a Company Material Adverse Effect;
nor is there any judgment, decree, injunction, ruling or order of any
Governmental Entity outstanding against the Company or any of its Subsidiaries
having, or which is reasonably likely to have, a Company Material Adverse
Effect.
Section 4.9 Absence of Undisclosed Liabilities. Except for
liabilities or obligations which are accrued or reserved against in the
Company's financial statements (or reflected in the notes thereto) included in
the Company SEC Reports or which were incurred after August 31, 1996 in the
ordinary course of business and consistent with past practice, and except as set
forth on Schedule 4.9, none of the Company and its Subsidiaries has any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of a nature required by GAAP to be reflected in a consolidated balance sheet (or
reflected in the notes thereto) or which would reasonably be expected to have a
Company Material Adverse Effect.
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Section 4.10 No Default. Except as set forth on Schedule 4.10,
neither the Company nor any Subsidiary of the Company is in default or violation
(and no event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (i)
its charter, by-laws or comparable organizational documents, (ii) any material
Contract to which the Company or any of its Subsidiaries is a party or by which
they or any of their properties or assets may be bound, or (iii) any material
order, writ, injunction or decree, or any material statute, rule or regulation,
of any Governmental Entity applicable to the Company or any of its Subsidiaries.
Section 4.11 Taxes.
(a) The Company has heretofore delivered or made available to Parent
true, correct and complete copies of the consolidated federal, state, local and
foreign income, franchise sales and other Tax Returns (as hereinafter defined)
filed by the Company and the Company Subsidiaries for each of the Company's
years ended November 30, 1995, 1994, 1993, 1992 and 1991 inclusive. Except as
set forth on Schedule 4.11, the Company has duly filed, and each Subsidiary has
duly filed, all material federal, state, local and foreign income, franchise,
sales and other Tax Returns required to be filed by the Company or any of its
Subsidiaries. All such Tax Returns are true, correct and complete, in all
material respects, and the Company and its Subsidiaries have paid all Taxes (as
hereinafter defined) shown on such Tax Returns and have made adequate provision
for payment of all accrued but unpaid material Taxes anticipated in respect of
all periods since the periods covered by such Tax Returns. Except as set forth
on Schedule 4.11, all material deficiencies assessed as a result of any
examination of Tax Returns of the Company or any of its Subsidiaries by federal,
state, local or foreign tax authorities have been paid or reserved on the
financial statements of the Company in accordance with GAAP consistently
applied, and true, correct and complete copies of all revenue agent's reports,
"30-day letters," or "90-day letters" or similar written statements proposing or
asserting any Tax deficiency against the Company or any of its Subsidiaries for
any open year have been heretofore delivered to Parent. The Company has
heretofore delivered or will make available to Parent true, correct and complete
copies of all written tax-sharing agreements and written descriptions of all
such unwritten agreement or arrangements to which the Company or any of its
Subsidiaries is a party. Except as set forth in Schedule 4.11, no material issue
has been raised during the past five years by any federal, state, local or
foreign taxing authority which, if raised with regard to any subsequent period,
could reasonably be expected to result in a proposed material deficiency for any
such subsequent period. Except as disclosed in Schedule 4.11 hereof, neither the
Company nor any of its Subsidiaries has granted any extension or waiver of the
statutory period of limitations applicable to any claim for any material Taxes.
Schedule 4.11 lists the consolidated federal income tax returns of the Company
and its Subsidiaries that have been examined by and settled with the Internal
Revenue Service (the "Service"). Except as set forth in Schedule 4.11, (i) no
consent has been filed under Section 341(f) of the Code with respect to any of
the Company or the Subsidiaries of the Company; (ii) neither the Company nor any
of the Subsidiaries of the Company has participated in, or cooperated with, an
international boycott within the meaning of Section 999 of the Code; and (iii)
neither the Company nor any of the Subsidiaries of the Company has issued or
assumed any corporate acquisition indebtedness, as defined in Section 279(b) of
the Code. The Company and each Subsidiary of the Company have complied (and
until the Effective
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Time will comply) in all material respects with all applicable laws, rules and
regulations relating to the payment and withholding of Taxes (including, without
limitation, withholding of Taxes pursuant to Sections 1441 and 1442 of the Code
or similar provisions under any foreign laws) and have, within the time and in
the manner prescribed by law, withheld from employee wages and paid over to the
proper governmental authorities all amounts required to be so withheld and paid
over under all applicable laws.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, charges, fees, levies, duties, imposts or other assessments, including,
without limitation, income, gross receipts, excise, property, sales, use,
transfer, gains, license, payroll, withholding, capital stock and franchise
taxes, imposed by the United States, or any state, local or foreign government
or subdivision or agency thereof, including any interest, penalties or additions
thereto. For purposes of this Agreement, the term "Tax Return" shall mean any
report, return or other information or document required to be supplied to a
taxing authority in connection with Taxes.
Section 4.12 Title to Properties; Encumbrances. Except as described
in the following sentence, each of the Company and its Subsidiaries has good,
valid and marketable title to, or a valid leasehold interest in, all of its
material properties and assets (real, personal and mixed, tangible and
intangible), including, without limitation, all the properties and assets
reflected in the consolidated balance sheet of the Company and its Subsidiaries
as of August 31, 1996 included in the Company's Quarterly Report on Form 10-Q
for the period ended on such date (except for properties and assets disposed of
in the ordinary course of business and consistent with past practices since
August 31, 19. None of such properties or assets are subject to any Liens
(whether absolute, accrued, contingent or otherwise), except (i) as specifically
set forth in the Company SEC Reports; (ii) Liens for taxes, assessments or other
governmental charges not delinquent or being contested in good faith and by
appropriate proceedings and with respect to which proper reserves have been
taken by the Company or its Subsidiaries and have been duly reflected on their
books and records and, with respect to reserves taken on or prior to August 31,
1996, the financial statements of the Company ("Proper Reserves"); (iii)
deposits or pledges to secure obligations under workmen's compensation, social
security or similar laws, or under unemployment insurance as to which the
Company and its Subsidiaries are not in default; (iv) deposits or pledges to
secure bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of business of the Company or its
Subsidiaries; (v) judgment Liens listed on Schedule 4.12 that have been stayed
or bonded and mechanics', workmen's, materialmen's or other like liens with
respect to obligations which are not due or which are being contested in good
faith by the Company or its Subsidiaries and as to which they have taken Proper
Reserves; and (vi) minor imperfections of title and encumbrances, if any, which
are not substantial in amount, do not materially detract from the value of the
property or assets subject thereto and do not materially impair the operations
of any of the Company and its Subsidiaries.
Section 4.13 Intellectual Property.
(a) Except as set forth on Schedule 4.13(a), the Company and its
Subsidiaries are the sole and exclusive owners of all material patents, patent
applications, patent rights,
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trademarks, trademark rights, trade names, trade name rights, copyrights,
service marks and registrations for and applications for registration of
trademarks, service marks and copyrights, and are the sole and exclusive owners
of, or have an irrevocable, royalty free right to use, all material technology
and know-how, trade secrets, rights in computer software and other proprietary
rights and information and all technical and user manuals and documentation made
or used in connection with any of the foregoing, in each case used or held for
use in connection with the businesses of the Company or any of its Subsidiaries
as currently conducted (collectively, the "Intellectual Property"), free and
clear of all Liens except as set forth on Schedule 4.13(a) and except minor
imperfections of title and encumbrances, if any, which are not substantial in
amount, do not materially detract from the value of the Intellectual Property
subject thereto and do not impair in any material respect the operations of any
of the Company and its Subsidiaries.
(b) All outstanding registrations and applications for Intellectual
Property (i) are valid, subsisting, in proper form and enforceable, and have
been duly maintained, including the submission of all necessary filings and fees
in accordance with the legal and administrative requirements of the appropriate
jurisdictions and (ii) have not lapsed, expired or been abandoned, and no
application or registration therefor is the subject of any pending, or, to the
knowledge of the Company, threatened legal or governmental proceeding before any
registration authority in any jurisdiction.
(c) To the knowledge of the Company, there are no conflicts with or
infringements of any Intellectual Property by any third party. The conduct of
the businesses of the Company and its Subsidiaries as currently conducted
(collectively, the "Business") does not conflict with or infringe in any way any
proprietary right of any third party, which conflict or infringement would have
a Company Material Adverse Effect, and there is no claim, suit, action or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any of its Subsidiaries (i) alleging any such conflict or
infringement with any third party's proprietary rights, or (ii) challenging the
ownership, use, validity or enforceability of the Intellectual Property.
Section 4.14 Compliance with Applicable Law. Except as set forth on
Schedule 4.14 or as disclosed in the Company SEC Reports, (i) the Company and
its Subsidiaries hold, and are in compliance with the terms of, all material
permits, licenses, exemptions, orders and approvals of all Governmental Entities
necessary for the current and presently proposed conduct of their respective
businesses ("Company Permits"), (ii) no fact exists or event has occurred, and
no action or proceeding is pending or, to the Company's knowledge, threatened,
that has a reasonable possibility of resulting in a revocation, nonrenewal,
termination, suspension or other material impairment of any material Company
Permits, (iii) the businesses of the Company and its Subsidiaries are not being
conducted in violation, in any material respect, of any material applicable law,
ordinance, regulation, judgment, decree or order of any Governmental Entity
("Applicable Law"), and (iv) to the knowledge of the Company, (x) no
investigation or review by any Governmental Entity with respect to the Company
or its Subsidiaries is pending or threatened or has been undertaken within the
past six years, and (y) no Governmental Entity has indicated an intention to
conduct the same.
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Section 4.15 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by the Company for inclusion
in (i) the Registration Statement to be filed with the SEC by Parent on Form S-4
under the Securities Act for the purpose of registering the shares of Parent
Common Stock to be issued in connection with the Merger (the "Registration
Statement") or (ii) the proxy statement to be distributed in connection with the
Company's meeting of stockholders to vote upon this Agreement (the "Proxy
Statement") will, in the case of the Registration Statement, at the time it
becomes effective and at the Effective Time, or, in the case of the Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the meeting of stockholders of the Company to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply as to form in all material
respects with the applicable provisions of the Exchange Act, and the rules and
regulations promulgated thereunder, except that no representation is made by the
Company with respect to statements made therein based on information supplied by
Parent or its representatives for inclusion in the Proxy Statement or with
respect to information concerning Parent or any of its Subsidiaries incorporated
by reference in the Proxy Statement.
Section 4.16 Employee Benefit Plans; ERISA.
(a) Schedule 4.16 hereto sets forth a true and complete list of each
material employee benefit plan, arrangement or agreement that is maintained, or
was maintained at any time during the five (5) calendar years preceding the date
of this Agreement (the "Company Plans"), by the Company or by any trade or
business, whether or not incorporated (a "Company ERISA Affiliate"), which
together with the Company would be deemed a "single employer" within the meaning
of Section 4001 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
(b) Each of the Company Plans that is subject to ERISA is and has
been in compliance with ERISA and the Code in all material respects; each of the
Company Plans intended to be "qualified" within the meaning of Section 401(a) of
the Code is so qualified; no Company Plan has an accumulated or waived funding
deficiency within the meaning of Section 412 of the Code; neither the Company
nor any Company ERISA Affiliate has incurred, directly or indirectly, any
material liability (including any material contingent liability) to or on
account of a Company Plan pursuant to Title IV of ERISA; no proceedings have
been instituted to terminate any Company Plan that is subject to Title IV of
ERISA; no "reportable event," as such term is defined in Section 4043(b) of
ERISA, has occurred with respect to any Company Plan; and no condition exists
that presents a material risk to the Company or any Company ERISA Affiliate of
incurring a liability to or on account of a Company Plan pursuant to Title IV of
ERISA.
(c) The current value of the assets of each of the Company Plans
that are subject to Title IV of ERISA, based upon the actuarial assumptions (to
the extent reasonable) presently used by the Company Plans, exceeds the present
value of the accrued benefits under each such Company Plan; no Company Plan is a
multiemployer plan (within the meaning of Section
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4001(a)(3) of ERISA) and no Company Plan is a multiple employer plan as defined
in Section 413 of the Code; and all material contributions or other amounts
payable by the Company as of the Effective Time with respect to each Company
Plan in respect of current or prior plan years have been either paid or accrued
on the balance sheet of the Company. To the knowledge of the Company, there are
no material pending, threatened or anticipated claims (other than routine claims
for benefits) by, on behalf of or against any of the Company Plans or any trusts
related thereto.
(d) Neither the Company nor any Company ERISA Affiliate, nor any
Company Plan, nor any trust created thereunder, nor any trustee or administrator
thereof has engaged in a transaction in connection with which the Company or any
Company ERISA Affiliate, any Company Plan, any such trust, or any trustee or
administrator thereof, or any party dealing with any Company Plan or any such
trust could be subject to either a material civil penalty assessed pursuant to
Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section
4975 or 4976 of the Code. No Company Plan provides death or medical benefits
(whether or not insured), with respect to current or former employees of the
Company or any Company ERISA Affiliate beyond their retirement or other
termination of service other than (i) coverage mandated by applicable law or
(ii) death benefits under any "employee pension plan," as that term is defined
in Section 3(2) of ERISA).
Section 4.17 Environmental Laws and Regulations. (a) Except as set
forth on Schedule 4.17(a): (i) the Company and its Subsidiaries are and have
been, in all material respects, in compliance with, and there are no outstanding
allegations by any person or entity that the Company or its Subsidiaries has not
been in compliance with, all material applicable laws, rules, regulations,
common law, ordinances, decrees, orders or other binding legal requirements
relating to pollution (including the treatment, storage and disposal of wastes
and the remediation of releases and threatened releases of materials), the
preservation of the environment, and the exposure to materials in the
environment or work place ("Environmental Laws") and (ii) the Company and its
Subsidiaries currently hold all material permits, licenses, registrations and
other governmental authorizations (including exemptions, waivers, and the like)
and financial assurance required under Environmental Laws for the Company and
its Subsidiaries to operate their businesses as currently conducted.
(b) Except as set forth on Schedule 4.17(b), to the knowledge of the
Company (and without special investigation for purposes hereof) (i) there is no
friable asbestos-containing material in or on any real property currently owned,
leased or operated by the Company or its Subsidiaries and (ii) there are and
have been no underground storage tanks (whether or not required to be registered
under any applicable law), dumps, landfills, lagoons, surface impoundments,
injection wells or other land disposal units in or on any property currently
owned, leased or operated by the Company or its Subsidiaries.
(c) Except as set forth on Schedule 4.17(c), (i) neither the Company
nor its Subsidiaries has received (x) any written communication from any person
stating or alleging that any of them may be a potentially responsible party
under any Environmental Law (including, without limitation, the Federal
Comprehensive Environmental Response, Compensation, and
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Liability Act of 1980, as amended) with respect to any actual or alleged
environmental contamination or (y) any request for information under any
Environmental Law from any Governmental Entity with respect to any actual or
alleged material environmental contamination; and (ii) none of the Company, its
Subsidiaries or any Governmental Entity is conducting or has conducted (or, to
the knowledge of the Company, is threatening to conduct) any environmental
remediation or investigation.
Section 4.18 Vote Required. The affirmative vote of the holders of
two-thirds of the outstanding shares of the Company Common Stock are the only
votes of the holders of any class or series of the Company's capital stock
necessary to approve the Merger. The Board of Directors of the Company, at a
meeting duly called and held on March 7, 1997, unanimously (i) approved this
Agreement and the Proxy and Option Agreement, (ii) determined that the
transactions contemplated hereby and thereby are fair to and in the best
interests of the holders of Company Common Stock and (iii) determined to
recommend this Agreement, the Merger and the other transactions contemplated
hereby to such holders for approval and adoption. The resolutions of the
Company's Board of Directors taking the actions described in the preceding
sentence have not been rescinded, withdrawn, amended or otherwise modified,
remain in full force and effect, and constitute the only action of such Board of
Directors with respect to the Merger or the other transactions contemplated by
this Agreement.
Section 4.19 Opinion of Financial Advisor. The Company has received
the opinion of Houlihan, Lokey, Howard & Zukin, Inc., dated March 7, 1997,
substantially to the effect that the consideration to be received in the Merger
by the holders of Company Common Stock is fair to such holders from a financial
point of view, a copy of which opinion has been delivered to Parent.
Section 4.20 Accounting Matters. None of the Company, any of its
Subsidiaries or any of their respective directors, officers or stockholders has
taken any action which would prevent the accounting for the Merger as a pooling
of interests in accordance with Accounting Principles Board Opinion No. 16, the
interpretative releases pursuant thereto and the pronouncements of the SEC.
Section 4.21 NYBCL Section 912. Prior to the date hereof, the Board
of Directors of the Company has approved this Agreement and the Proxy and Option
Agreement, and the Merger and the other transactions contemplated hereby and
thereby, and such approval is sufficient to render inapplicable to the Merger
and any of such other transactions the provisions of Section 912 of the NYBCL.
Section 4.22 Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to, or bound by, any collective bargaining agreement,
contract or other understanding with a labor union or labor organization and, to
the knowledge of the Company, there is no activity involving any employees of
the Company or its Subsidiaries seeking to certify a collective bargaining unit
or engaging in any other organizational activity.
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Section 4.23 Affiliate Transactions. Except as set forth in Schedule
4.23 or as disclosed in the Company SEC Reports, there are no Contracts or other
transactions between the Company or any of its Subsidiaries, on the one hand,
and any (i) officer or director of the Company or any of its Subsidiaries, (ii)
record or beneficial owner of five percent or more of the voting securities of
the Company or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or beneficial
owner, on the other hand.
Section 4.24 Brokers. Except for its financial advisors, Houlihan,
Lokey, Howard & Zukin, Inc., Bangert, Dawes, Reade, Davis & Thom, Incorporated,
and Royce Investment Group, Inc. no broker, finder or financial advisor is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company, and the Company has delivered
to the Parent true, complete and correct copies of (or, in the case of any oral
agreement or arrangement, a true, complete and correct summary of) each
agreement or arrangement pursuant to which either of such advisors is entitled
to any such fee or commission.
Section 4.25 Tax Matters. The Company knows of no fact or
circumstance which is reasonably likely to cause the Merger to be treated other
than as a tax-free reorganization under Section 368(a) of the Code.
Section 4.26 Accounts Receivable. All of the accounts and notes
receivable of the Company and its Subsidiaries set forth on the books and
records of the Company or to be incurred after the date hereof (in each case net
of the applicable reserves reflected or, with respect to future accounts and
notes receivable, to be reflected on the books and records of the Company and in
the financial statements included in the Company's SEC reports): (i) represent
or will represent sales actually made or to be made in the ordinary course of
business for goods or services delivered or rendered to unaffiliated customers
in bona fide arm's length transactions, (ii) constitute or will constitute valid
claims, and (iii) are, or upon incurrence will be, good and collectible, in each
case at the aggregate recorded amounts thereof without right of recourse,
defense, deduction, return of goods, counterclaim, or offset and have been or
will be collected in the ordinary course of business and consistent with past
experience.
Section 4.27 Inventory. All inventory of the Company and its
Subsidiaries is (net of the applicable reserves reflected on the books and
records of the Company and inthe financial statements included in the Company's
SEC reports) of merchantable quality, free of defects in workmanship or design
and is usable and salable at normal profit margins and in accordance with
historical sales practices in the ordinary course of the business of the Company
and its Subsidiaries. The Inventory (net of such reserves) does not include any
items which are obsolete, damaged, excessive, below standard quality or slow
moving (i.e., items that are for discontinued or expected to be discontinued
product lines, or items that have not been used or sold within 12 months prior
to the date hereof).
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
Section 5.1 Organization. Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power to carry on its business as it is now being
conducted or presently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not have a material adverse effect individually
or in the aggregate, on the financial condition, results of operations,
business, assets, liabilities, prospects or properties of Parent and its
Subsidiaries taken as a whole or on the ability of Parent to consummate the
Merger and the other transactions contemplated by this Agreement (a "Parent
Material Adverse Effect"). Sub is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York. Sub has not
engaged in any business (other than in connection with this Agreement and the
transactions contemplated hereby) since the date of its incorporation. Schedule
5.1 contains a complete and accurate list of all Subsidiaries of Parent.
Section 5.2 Capitalization.
(a) The authorized capital stock of Parent consists of 60,000,000
shares of Parent Common Stock and 1,000,000 shares of Preferred Stock, par value
$.01 per share, of Parent ("Parent Preferred Stock"). As of the date hereof, (i)
approximated 23,282,000 shares of Parent Common Stock are issued and
outstanding, (ii) no shares of Parent Preferred Stock are issued and
outstanding, (iii) options to acquire approximately 800,000 shares of Parent
Common Stock (the "Parent Stock Options") are outstanding under all stock option
plans of Parent, and (iv) approximately 800,000 shares of Parent Common Stock
are reserved for issuance pursuant to the Parent Stock Options and all other
Rights to purchase or otherwise receive capital stock or other securities of
Parent. All of the outstanding shares of capital stock of Parent are, and the
shares of Parent Common Stock issuable in exchange for shares of Company Common
Stock at the Effective Time in accordance with this Agreement will be, when so
issued, duly authorized, validly issued, fully paid and nonassessable.
(b) The authorized capital stock of Sub consists of 1,000 shares of
Sub Common Stock, of which 1,000 shares, as of the date hereof, were issued and
outstanding. All of such outstanding shares are owned by Parent, and are validly
issued, fully paid and nonassessable.
(c) Except as disclosed in this Section 5.2, (i) there are no
outstanding Rights to purchase or otherwise to receive from Parent or Sub any of
the outstanding authorized but unissued or treasury shares of the capital stock
or any other security of Parent or Sub, (ii) there is no outstanding security of
any kind convertible into or exchangeable for such capital stock, and
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(iii) there is no voting trust or other agreement or understanding to which
Parent or Sub is a party or is bound with respect to the voting of the capital
stock of Parent or Sub.
(d) Parent and its subsidiaries do not beneficially own any shares
of the Company's voting stock and, to Parent's knowledge, none of its affiliates
or associates (as such terms are defined in Section 912 of the NYBCL)
beneficially own any shares of the Company's voting stock.
Section 5.3 Authority Relative to this Agreement. Each of Parent and
Sub has the requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by each of Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated on its part hereby have been
duly authorized by their respective Boards of Directors, and by Parent as the
sole stockholder of Sub, and no other corporate proceedings on the part of
Parent or Sub are necessary to authorize this Agreement or for Parent and Sub to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Parent and Sub and constitutes a
valid and binding agreement of each of Parent and Sub, enforceable against
Parent and Sub in accordance with its terms.
Section 5.4 Consents and Approvals No Violations. Neither the
execution, delivery and performance of this Agreement by Parent or Sub, nor the
consummation by Parent or Sub of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provisions of the Certificate of
Incorporation or By-Laws of Parent or of Sub, (ii) require a filing with, or a
permit, authorization, consent or approval of, any Governmental Entity except in
connection with or in order to comply with the applicable provisions of the HSR
Act, the Securities Act, the Exchange Act, state securities or "blue sky" laws,
the By-Laws of the NASD, and the filing and recordation of a Certificate of
Merger as required by the NYBCL, (iii) except as set forth on Schedule 5.4
hereto, result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation of a
Lien on any property or asset of Parent or any of its Subsidiaries pursuant to,
any of the terms, conditions or provisions of any material Contract to which
Parent or Sub is a party or by which either of them or any of their properties
or assets may be bound or (iv) violate any material law, order, writ,
injunction, decree, statute, rule or regulation of any Governmental Entity
applicable to Parent, Sub or any of their properties or assets.
Section 5.5 Reports and Financial Statements. Parent has timely
filed all reports required to be filed with the SEC pursuant to the Exchange Act
or the Securities Act since November 3, 1995 (collectively, the "Parent SEC
Reports"), and has previously made available to the Company true and complete
copies of all such Parent SEC Reports. Such Parent SEC Reports, as of their
respective dates, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may be, and
none of such SEC Reports contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Parent
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included in the Parent SEC Reports have been prepared in accordance with GAAP
consistently applied throughout the periods indicated (except as otherwise noted
therein) and fairly present the consolidated financial position of Parent and
its consolidated Subsidiaries as at the dates thereof and the consolidated
results of operations and cash flows of Parent and its consolidated Subsidiaries
for each of the periods then ended, except that in the case of the unaudited
consolidated financial statements included in any Form 10-Q, the presentation
and disclosures conform with the applicable rules of the Exchange Act, but
include all adjustments necessary to conform to GAAP requirements with respect
to interim financial statements. Since December 31, 1995, there has been no
change in any of the significant accounting (including tax accounting) policies,
practices or procedures of the Parent or, except as set forth on Schedule 5.5,
any of its consolidated Subsidiaries.
Section 5.6 Absence of Certain Changes or Events; Material
Contracts. Except as set forth in the Parent SEC Reports, since September 29,
1996, (i) Parent has not conducted its business and operations other than in the
ordinary course of business and consistent with past practices or taken any of
the actions set forth in Section 6.2(b) and (ii) there has not been any fact,
event, circumstance or change affecting or relating to Parent and its
Subsidiaries which has had or is reasonably likely to have a Parent Material
Adverse Effect.
Section 5.7 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by Parent or Sub for inclusion
in (i) the Registration Statement or (ii) the Proxy Statement will in the case
of the Registration Statement, at the time it becomes effective and at the
Effective Time, or, in the case of the Proxy Statement or any amendments thereof
or supplements thereto, at the time of the mailing of the Proxy Statement and
any amendments or supplements thereto, and at the time of the meeting of
stockholders of the Company to be held in connection with the Merger, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement will comply as to form in all material
respects with the applicable provisions of the Securities Act and the Exchange
Act, and the rules and regulations promulgated thereunder, except that no
representation is made by Parent with respect to statements made therein based
on information supplied by the Company or its respective representatives for
inclusion in the Registration Statement or the Proxy Statement or with respect
to information concerning the Company or any of its Subsidiaries incorporated by
reference in the Registration Statement or the Proxy Statement.
Section 5.8 Absence of Undisclosed Liabilities. Except for
liabilities or obligations which are accrued or reserved against in Parent's
consolidated financial statements (or reflected in the notes thereto) included
in the Company SEC Reports or which were incurred after September 30, 1996 in
the ordinary course of business and consistent with past practice, and except as
set forth on Schedule 5.8, none of Parent and its Subsidiaries has any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of a nature required by GAAP to be reflected in a consolidated balance sheet (or
reflected in the notes thereto) or which would have a Parent Material Adverse
Effect.
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Section 5.9 Compliance with Applicable Law. Except as set forth on
Schedule 5.9 or as disclosed in the Parent SEC Reports, (i) the Parent and its
Subsidiaries hold, and are in compliance with the terms of, all material
permits, licenses, exemptions, orders and approvals of all Governmental Entities
necessary for the current and presently proposed conduct of their respective
businesses ("Parent Permits"), (ii) no fact exists or event has occurred, and no
action or proceeding is pending or, to Parent's knowledge, threatened, that has
a reasonable possibility of resulting in a revocation, nonrenewal, termination,
suspension or other material impairment of any material Parent Permits, (iii)
the businesses of Parent and its Subsidiaries are not being conducted in
violation of Applicable Law, and (iv) to the knowledge of Parent, (x) no
investigation or review by any Governmental Entity with respect to Parent or its
Subsidiaries is pending or threatened and (y) no Governmental Entity has
indicated an intention to conduct the same.
Section 5.10 Litigation. Except for litigation disclosed in the
notes to the financial statements included in Parent's Annual Report to
Stockholders for the year ended December 31, 1995 or in Parent SEC Reports filed
subsequent thereto, there is no suit, action, proceeding or investigation
pending or, to the knowledge of Parent, threatened against or affecting Parent
or any of its Subsidiaries, the outcome of which, in the reasonable judgment of
Parent, is likely to have a Parent Material Adverse Effect; nor is there any
judgment, decree, injunction, ruling or order of any Governmental Entity
outstanding against Parent or any of its Subsidiaries having, or which is
reasonably likely to have, a Parent Material Adverse Effect.
Section 5.11 Opinion of Financial Advisor. Parent has received the
opinion of Tanner & Co., Inc., dated March 7, 1997, substantially to the effect
that the consideration to be received in the Merger by the holders of Company
Common Stock is fair to the holders of Parent Common Stock from a financial
point of view, a copy of which opinion has been delivered to the Company.
Section 5.12 Accounting Matters. None of the Parent, any of its
Subsidiaries or any of their respective directors, officers or stockholders has
taken any action which would prevent the accounting for the Merger as a pooling
of interests in accordance with Accounting Principles Board Opinion No. 16, the
interpretative releases pursuant thereto and the pronouncements of the SEC.
Section 5.13 Tax Matters. Parent knows of no fact or circumstance
which is reasonably likely to cause the Merger to be treated other than as a
tax-free reorganization under Section 368(a) of the Code.
Section 5.14 Brokers. Except for its financial advisor, Tanner &
Co., Inc., no broker, finder or financial advisor is entitled to any brokerage
finder's or other fee or commission in connection with the Merger or the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent or Sub.
Section 5.15 No Default. Neither Parent nor any Subsidiary of Parent
is in default or violation (and no event has occurred which with notice or the
lapse of time or both would constitute a default or violation) of any term,
condition or provision of (i) its charter, by-laws or
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comparable organizational documents, (ii) any material Contract to which Parent
or any of its Subsidiaries is a party or by which they or any of their
properties or assets may be bound, or (iii) any material order, writ, injunction
or decree, or any material statute, rule or regulation, of any Governmental
Entity applicable to Parent or any of its Subsidiaries.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger.
From the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, unless Parent shall otherwise agree in writing,
or as otherwise expressly contemplated by this Agreement:
(a) the Company shall conduct, and cause each of its Subsidiaries to
conduct, its business only in the ordinary and usual course consistent with past
practice, and the Company shall use, and cause each of its Subsidiaries to use,
its reasonable efforts to preserve intact the present business organization,
keep available the services of its present officers and key employees, and
preserve the goodwill of those having business relationships with it;
(b) the Company shall not, nor shall it permit any of its
Subsidiaries to, (i) amend its charter, bylaws or other organizational
documents, (ii) split, combine or reclassify any shares of its outstanding
capital stock, (iii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property, or (iv) directly or indirectly
redeem or otherwise acquire any shares of its capital stock or shares of the
capital stock of any of its Subsidiaries;
(c) the Company shall not, nor shall it permit any of its
Subsidiaries to, (i) authorize for issuance, issue or sell or agree to issue or
sell any shares of, or Rights to acquire or convertible into any shares of, its
capital stock or shares of the capital stock of any of its Subsidiaries (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), except for the issuance of
shares of Company Common Stock upon the exercise of Company Stock Options
outstanding on the date of this Agreement, or amend any outstanding Company
Stock Option, Company Warrant or other Right, except that the Company may amend
the terms of the Company Stock Options set forth on Schedule 4.2(b) under the
heading "1987 Plan" to provide that the holders thereof may exercise such
options prior to their expiration dates regardless of whether such holders are
then serving as directors of the Company; (ii) merge or consolidate with another
entity; (iii) acquire or purchase an equity interest in or a substantial portion
of the assets of another corporation, partnership or other business organization
(except for such potential acquisitions, and on substantially such terms, as
have been described in a letter executed and delivered by the Company and Parent
simultaneously with the execution and delivery of this Agreement and provided
that the Company keeps Parent informed as to the status of all negotiations with
respect thereto (including any termination of such negotiations) and gives
Parent prior notice of the consummation of any such
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acquisition and the signing of any agreement with respect thereto) or otherwise
acquire any assets outside the ordinary and usual course of business and
consistent with past practice or otherwise enter into any material contract,
commitment or transaction outside the ordinary and usual course of business
consistent with past practice; (iv) sell, lease, license, waive, release,
transfer, encumber or otherwise dispose of any of its assets outside the
ordinary and usual course of business and consistent with past practice; (v)
incur, assume or prepay any material indebtedness or any other material
liabilities other than in the ordinary course of business and consistent with
past practice; (vi) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person other than a Subsidiary of the Company or customers, in each
case in the ordinary course of business and consistent with past practice; (vii)
make, extend or modify in any material respect any loans, advances or capital
contributions to, or investments in, any other person, other than to
Subsidiaries of the Company or loans to employees of the Company or any of its
Subsidiaries, in an aggregate amount not exceeding $25,000, for such reasons,
and on such terms and conditions, as are consistent with past practice; (viii)
authorize or make capital expenditures in excess of the respective amounts set
forth on Schedule 6.1 hereto; (ix) permit any insurance policy naming the
Company or any Subsidiary of the Company as a beneficiary or a loss payee to be
canceled or terminated other than in the ordinary course of business; or (x)
enter into any contract, agreement, commitment or arrangement with respect to
any of the foregoing;
(d) the Company shall not, nor shall it permit its Subsidiaries to,
(i) adopt, enter into, terminate or amend (except as may be required by
Applicable Law) any Company Plan or other arrangement for the current or future
benefit or welfare of any director, officer or current or former employee, (ii)
increase in any manner the compensation or fringe benefits of, or pay any bonus
to, any director, officer or employee (except for normal increases in
compensation in the ordinary course of business consistent with past practice
and accrued and unpaid bonuses in respect of the Company's fiscal year ended
November 30, 1996 that are consistent with past practice and have been properly
accrued and reflected on the Company's books and records, or (iii) take any
action to fund or in any other way secure, or to accelerate or otherwise remove
restrictions with respect to, the payment of compensation or benefits under any
employee plan, agreement, contract, arrangement or other Company Plan (including
the Company Stock Options);
(e) the Company shall not, nor shall it permit its Subsidiaries to,
take any action with respect to, or make any material change in, its accounting
or tax policies or procedures, except as required by law or to comply with GAAP;
and
(f) the Company shall not (i) take any action or allow any action to
be taken by any of its Subsidiaries or affiliates which would jeopardize the
treatment of Parent's acquisition of the Company as a pooling of interests for
accounting purposes; or (ii) take any action which would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
Section 6.2 Conduct of Business by Parent Pending the Merger. From
the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement,
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unless the Company shall otherwise agree in writing, or as otherwise expressly
contemplated by this Agreement:
(a) Parent shall conduct its business and the business of its
Subsidiaries in a manner designed, in the good faith judgment of its Board of
Directors, to enhance the long-term value of the Parent Common Stock and the
business prospects of Parent and its Subsidiaries;
(b) Parent shall not (i) split, combine or reclassify any shares of
its outstanding capital stock; or (ii) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property;
(c) Parent shall not authorize for issuance, issue or sell or agree
to issue or sell any shares of, or Rights to acquire or convertible into any
shares of, its capital stock, except for (i) the issuance of shares of Parent
Common Stock (x) upon the exercise of Parent Stock Options or other Rights
outstanding on the date of this Agreement or (y) upon the exercise of Rights
described in the immediately following clause (ii), (ii) the issuance of Rights
pursuant to existing employee benefit plans or arrangements in a manner
consistent with past practice, and (iii) the issuance of shares of Parent Common
Stock in connection with arms' length acquisitions with non-affiliates; and
(d) Except as described on Schedule 6.2(d), Parent shall not, nor
shall it permit any of its Subsidiaries to, (i) amend its charter, bylaws or
other organizational documents, (ii) split, combine or reclassify any shares of
its outstanding capital stock, or (iii) directly or indirectly redeem or
otherwise acquire any shares of its capital stock or shares of the capital stock
of any of its Subsidiaries.
Section 6.3 Conduct of Business of Sub. During the period from the
date of this Agreement to the Effective Time, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this
Agreement. It is understood that Sub was formed by Parent solely for the purpose
of effecting the Merger, and that Sub will have no material assets and no
material liabilities prior to the Merger. Parent shall cause Sub to perform its
obligations under this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. Each of the Company and Parent
shall (and shall cause its Subsidiaries and its and their respective officers,
directors, employees, auditors and agents to) afford to the other and to the
other's officers, employees, financial advisors, legal counsel, accountants,
consultants and other representatives reasonable access, during normal business
hours throughout the period from the date hereof until the earlier of the
Effective Time and the termination of this Agreement, to all of its books and
records and its properties, plants and personnel and, during such period, each
shall furnish promptly to the other a copy of each report,
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schedule and other document filed or received by it pursuant to the requirements
of federal securities laws, provided that no investigation pursuant to this
Section 7.1 shall affect any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
Merger. Unless otherwise required by law, each of Parent and the Company agrees
that it (and its respective Subsidiaries and its and their respective
representatives) shall hold in confidence all non-public information so acquired
in accordance with the terms of the confidentiality agreement between Parent and
the Company executed in November 1996 (the "Confidentiality Agreement").
Section 7.2 No Solicitation.
(a) Prior to the Effective Time, the Company agrees that neither it,
any of its Subsidiaries or its affiliates, nor any of the respective directors,
officers, employees, affiliates, agents or representatives of the foregoing
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its Subsidiaries) will, directly or
indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing non-public information) any inquiries or the making of
any proposal with respect to or which may reasonably be expected to lead to, any
merger, consolidation or other business combination involving the Company or any
Subsidiary of the Company (other than any acquisition by the Company permitted
under Section 6.1(c)) or the acquisition of all or any significant assets or
capital stock of the Company or any Subsidiary of the Company taken as a whole
(an "Acquisition Transaction") or negotiate, explore or otherwise engage in
discussions with any corporation, partnership, person, other entity or group (as
defined in Section 13(d)(2) of the Exchange Act) (other than Parent and its
representatives) in furtherance of such inquiries or with respect to any
Acquisition Transaction, or endorse any Acquisition Transaction, or enter into
any agreement, arrangement or understanding with respect to any such Acquisition
Transaction or which would require it to abandon, terminate or fail to
consummate the Merger or any other transaction contemplated by this Agreement;
provided, however, that the Company may, in response to an unsolicited written
proposal from a third party, furnish information to and engage in discussions
with such third party, in each case only if the Board of Directors of the
Company determines in good faith by a majority vote, after consultation with its
financial advisor, Houlihan, Lokey, Howard & Zukin, Inc., and after reviewing
the advice of outside counsel to the Company, that such action is reasonably
likely to be required by the fiduciary duties of the Board of Directors and,
prior to taking such action, the Company (i) provides reasonable notice to
Parent to the effect that it is taking such action and (ii) receives from such
corporation, partnership, person or other entity or group (and delivers to
Parent) an executed confidentiality agreement in reasonably customary form. The
Company agrees that as of the date hereof, it, its Subsidiaries and affiliates,
and the respective directors, officers, employees, agents and representatives of
the foregoing, shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any person (other than Parent and
its representatives) conducted heretofore with respect to any Acquisition
Transaction. The Company agrees to immediately advise Parent in writing of any
inquiries or proposals (or desire to make a proposal) received by (or indicated
to), any such information requested from, or any such negotiations or
discussions sought to be initiated or continued with, any of it, its
Subsidiaries or affiliates, or any of the respective directors, officers,
employees, agents or representatives of the foregoing, in each case from a
corporation,
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partnership, person or other entity or group (other than Parent and its
representatives) with respect to an Acquisition Transaction, and the terms
thereof, including the identity of such third party, and to update on an ongoing
basis or upon Parent's request, the status thereof, as well as any actions taken
or other developments pursuant to this Section 7.2(a). Notwithstanding anything
in the foregoing provisions of the Section 7.2(a) to the contrary: (i) the
Company shall not disclose any information received by it or any of its
directors, officers, employees, agents or representatives pursuant to the
Confidentiality Agreement or any other confidentiality or other similar
agreement between the Company and Parent to any person in violation of such
agreement and (ii) the Company shall not be obligated to disclose to Parent any
confidential information provided to the Company by any third party in violation
of any confidentiality agreement between the Company and such third party
provided for in this Section 7.2.
(b) Except as set forth in this Section 7.2(b), the Board of
Directors of the Company shall not (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to the Parent or the Sub, the approval
or recommendation by the Board of Directors of this Agreement or the Merger,
(ii) approve or recommend, or propose to approve or recommend, any Acquisition
Transaction or (iii) cause the Company to enter into any agreement with respect
to any Acquisition Transaction. Notwithstanding the foregoing, in the event that
prior to the Effective Time the Board of Directors of the Company determines in
good faith by a majority vote, after consultation with its financial advisor,
Houlihan, Lokey, Howard & Zukin, Inc., and after reviewing the advice of outside
counsel to the Company, that such action is reasonably likely to be required by
the fiduciary duties of the Board of Directors, the Board of Directors of the
Company may withdraw or modify its approval or recommendation of this Agreement
and the Merger, approve or recommend an Acquisition Transaction or cause the
Company to enter into an agreement with respect to an Acquisition Transaction,
provided, in each case, that such Board determines in its good faith reasonable
judgment, by a majority vote after consultation with its financial advisor and
after reviewing the advice of outside counsel to the Company, that the
Acquisition Transaction is more favorable to the stockholders of the Company
than the Merger. The Company shall provide reasonable prior notice to the Parent
or the Sub to the effect that it is taking such action.
Section 7.3 Registration Statement. As promptly as practicable,
Parent and the Company shall in consultation with each other prepare and file
with the SEC the Proxy Statement and Parent in consultation with the Company
shall prepare and file with the SEC the Registration Statement. Each of Parent
and the Company shall use its reasonable best efforts to have the Registration
Statement declared effective as soon as practicable. Parent shall also use its
reasonable best efforts to take any action required to be taken under state
securities or "blue sky" laws in connection with the issuance of the shares of
Parent Common Stock pursuant to this Agreement in the Merger. The Company shall
furnish Parent with all information concerning the Company and the holders of
its capital stock and shall take such other action as Parent may reasonably
request in connection with the Registration Statement and the issuance of shares
of Parent Common Stock, and Parent shall furnish the Company with all
information concerning Parent and the holders of its capital stock and shall
take such other action as the Company may reasonably request in connection with
the Proxy Statement. If at any time prior to the Effective Time any event or
circumstance relating to Parent, any Subsidiary of Parent, the Company, any
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Subsidiary of the Company, or their respective officers or directors, should be
discovered by such party which should be set forth in an amendment or a
supplement to the Registration Statement or Proxy Statement, such party shall
promptly inform the other thereof and take appropriate action in respect
thereof.
Section 7.4 Proxy Statements; Stockholder Approval.
(a) The Company, acting through its Board of Directors, shall,
subject to and in accordance with applicable law and its Certificate of
Incorporation and By-Laws, promptly and duly call, give notice of and, as soon
as practicable following the date upon which the Registration Statement becomes
effective, hold a meeting of the holders of Company Common Stock for the purpose
of voting to approve and adopt this Agreement and the transactions contemplated
hereby, and, except as otherwise provided in Section 7.2(b), (i) recommend
approval and adoption of this Agreement and the transactions contemplated
hereby, by the stockholders of the Company and include in the Proxy Statement
such recommendation and (ii) take all reasonable and lawful action to solicit
and obtain such approval.
(b) The Company, as promptly as practicable, shall cause the
definitive Proxy Statement to be mailed to its stockholders.
(c) At or prior to the Closing, the Company shall deliver to Parent
a certificate of its Secretary setting forth the voting results from its
stockholder meeting.
Section 7.5 Compliance with the Securities Act.
(a) At least 10 days prior to the Effective Time, the Company shall
cause to be delivered to Parent a list identifying all persons who were at the
record date for its stockholders' meeting convened in accordance with Section
7.4 hereof, "affiliates" of the Company, as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act (the "Affiliates").
(b) The Company shall use its reasonable best efforts to cause each
person who is identified as one of its Affiliates in its list referred to in
Section 7.5(a) above to deliver to Parent (with a copy to the Company), at least
10 days prior to the Effective Time, a written agreement, in the form attached
hereto as Exhibit B (the "Affiliate Agreement").
(c) If any Affiliate of the Company refuses to provide an Affiliate
Agreement, Parent may place appropriate legends on the certificates evidencing
the shares of Parent Common Stock to be received by such Affiliate pursuant to
the terms of this Agreement and to issue appropriate stop transfer instructions
to the transfer agent for shares of Parent Common Stock to the effect that the
shares of Parent Common Stock received by such Affiliate pursuant to this
Agreement only may be sold, transferred or otherwise conveyed (i) pursuant to an
effective registration statement under the Securities Act, (ii) in compliance
with Rule 145 promulgated under the Securities Act, or (iii) pursuant to another
exemption under the Securities Act.
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Section 7.6 Reasonable Best Efforts. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, the obtaining of
all necessary waivers, consents and approvals and the effecting of all necessary
registrations and filings. Without limiting the generality of the foregoing, as
promptly as practicable, the Company, Parent and Sub shall make all filings and
submissions under the HSR Act as may be reasonably required to be made in
connection with this Agreement and the transactions contemplated hereby. Subject
to the Confidentiality Agreement, the Company will furnish to Parent and Sub,
and Parent and Sub will furnish to the Company, such information and assistance
as the other may reasonably request in connection with the preparation of any
such filings or submissions. Subject to the Confidentiality Agreement, the
Company will provide Parent and Sub, and Parent and Sub will provide the
Company, with copies of all material written correspondence, filings and
communications (or memoranda setting forth the substance thereof) between such
party or any of its representatives and any Governmental Entity, with respect to
the obtaining of any waivers, consent or approvals and the making of any
registrations or filings, in each case that is necessary to consummate the
Merger and the other transactions contemplated hereby. In case at any time after
the Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers or directors of Parent and the
Surviving Corporation shall take all such necessary action.
Section 7.7 Proxy and Option Agreement. Concurrently herewith, and
as an essential inducement for Parent's entering into this Agreement, Parent and
Sub are entering into the Proxy and Option Agreement with certain holders of
Company Common Stock with respect to all such shares of Company Common Stock
held by such holders.
Section 7.8 Company Stock Options. To the extent permitted by the
respective terms of the Company Stock Options and the plans under which they
were issued and the respective terms of the Company Stock Warrants, at the
Effective Time, each of the Company Stock Options (and, solely with respect to
such options, the applicable option plans pursuant to which such options were
issued) and each of the Company Warrants which is outstanding immediately prior
to the Effective Time and listed on Schedule 4.2(b) shall be assumed by Parent
on the terms set forth herein and converted automatically into an option or a
warrant, as the case may be, to purchase shares of Parent Common Stock (each, a
"Converted Option" or a "Converted Warrant", as the case may be) in an amount
and at an exercise price determined as provided below:
(a) The number of shares of Parent Common Stock to be subject to a
Converted Option or a Converted Warrant shall be equal to the product of the
number of shares of Company Common Stock remaining subject (as of immediately
prior to the Effective Time) to the original option or warrant and the Exchange
Ratio, provided that any fractional shares of Parent Common Stock resulting from
such multiplication shall be rounded down to the nearest share; and
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(b) The exercise price per share of Parent Common Stock under a
Converted Option or a Converted Warrant shall be equal to the exercise price per
share of Company Common Stock under the original option or warrant divided by
the Exchange Ratio, provided that such exercise price shall be rounded down to
the nearest cent.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be modified to the
extent required to comply with Section 424(a) of the Code and the applicable
Treasury Regulations. After the Effective Time, each Converted Option shall be
exercisable and shall vest upon the same terms and conditions as were applicable
to the related Company Stock Option immediately prior to the Effective Time,
except that all references to the Company shall be deemed to be references to
Parent. Parent shall file with the SEC a registration statement on Form S-8 (or
other appropriate form) and shall take any action required to be taken under
state securities "blue sky" laws for purposes of registering all shares of
Parent Common Stock issuable after the Effective Time upon exercise of the
Converted Options, and use all reasonable efforts to have such registration
statement (or a successor or replacement registration statement) become
effective with respect thereto as promptly as practicable after the Effective
Time and to remain in effect while any of the Converted Options remain
exercisable. Parent shall reserve for issuance in connection with the exercise
of Converted Options such number of shares of Parent Common Stock as shall be
required to be issued upon such exercise.
Section 7.9 Public Announcements. Each of Parent, Sub and the
Company agrees that it will not issue any press release or otherwise make any
public statement with respect to this Agreement (including the Exhibits hereto)
or the transactions contemplated hereby (or thereby) without the prior consent
of the other party, which consent shall not be unreasonably withheld or delayed;
provided, however, that such disclosure can be made without obtaining such prior
consent if (i) the disclosure is required by law or by obligations imposed
pursuant to any listing agreement with any national securities exchange or
quotation system and (ii) the party making such disclosure has first used its
reasonable best efforts to consult with (but not obtain the consent of) the
other party about the form and substance of such disclosure.
Section 7.10 Expenses. Except as otherwise set forth in Section
9.2(b), whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement (including the Exhibits hereto) and
the transactions contemplated hereby (and thereby) shall be paid by the party
incurring such expenses, except that (i) the filing fee in connection with
filings under the HSR Act, (ii) the expenses incurred in connection with
printing the Registration Statement and the Proxy Statement and (iii) the filing
fee with the SEC relating to the Registration Statement or the Proxy Statement
will be shared equally by Parent and the Company.
Section 7.11 Listing Application. Parent will use its reasonable
best efforts to cause the shares of Parent Common Stock to be issued pursuant to
this Agreement in the Merger (as well as the shares of Parent Common Stock
issuable after the Effective Time upon exercise of the Parent Options) to be
listed for quotation and trading on the Nasdaq National Market.
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Section 7.12 Supplemental Disclosure. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause (x) any representation or warranty contained
in this Agreement to be untrue or inaccurate or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied and
(ii) any failure of the Company or Parent, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 7.12 shall not have any effect for the purpose of determining the
satisfaction of the conditions set forth in Article VIII of this Agreement or
otherwise limit or affect the remedies available hereunder to any party.
Section 7.13 Letters of Accountants.
(a) Parent shall use all reasonable efforts to cause to be delivered
to the Company a letter of BDO Seidman, LLP, Parent's independent auditors,
dated a date within two business days before the date on which the Registration
Statement shall become effective and addressed to the Company, in form and
substance reasonably satisfactory to the Company and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement, which letter
shall be brought down to a date within two business days prior to the Effective
Time.
(b) The Company shall use all reasonable best efforts to cause to be
delivered to Parent a letter of Miller, Ellin & Company, the Company's
independent auditors, dated a date within two business days before the date on
which the Registration State shall become effective and addressed to Parent, in
form and substance reasonably satisfactory to Parent and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement, which letter
shall be brought down to a date within two business days prior to the Effective
Time.
Section 7.14 Recruitment. Prior to the Effective Time, and, if this
Agreement is terminated by the Company pursuant to Section 9.1(e)(i) or
9.1(e)(ii), prior to the first anniversary of the date of such termination,
neither Parent nor any of its Subsidiaries shall hire or solicit the employment
of any employee of the Company or any of its Subsidiaries. Prior to the
Effective Time and, if this Agreement is terminated by Parent pursuant to
Section 9.1(d)(i) or 9.1(d)(ii) prior to the first anniversary of such
termination, neither the Company nor any of its Subsidiaries shall hire or
solicit the employment of any employee of Parent or any of its Subsidiaries. If
this Agreement terminates without the Merger being consummated except as
provided in the preceding sentences of this Section 7.14, neither Parent nor its
Subsidiaries, on the one hand, nor the Company nor its Subsidiaries, on the
other, will hire or solicit the employment of any employee of any of the others,
for a period of six months from the date of such termination.
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Section 7.15 Indemnification.
(a) For a period of six years after the Effective Time, Parent
shall, and shall cause the Surviving Corporation to, indemnify, defend and hold
harmless the present and former directors, officers, employees and agents of the
Company and its Subsidiaries (each, an "Indemnified Party") against any and all
losses, costs, damages, claims and liabilities (including reasonable attorneys'
fees) arising out of the Indemnified Party's service or services as a director,
officer, employee or agent of the Company or, if at the Company's request, of
another corporation, partnership, joint venture, trust or other enterprise
occurring at or prior to the Effective Time (including the transactions
contemplated by or related to this Agreement) to the fullest extent permitted
under New York Law and the Company's Articles of Incorporation and Bylaws as in
effect on the date hereof, including provisions relating to advances of expenses
incurred in the defense of any litigation, action, claim or proceeding and
whether or not Parent or Surviving Corporation is insured against any such
matter. Without limiting the foregoing, in any case in which approval by the
Surviving Corporation is required to effectuate any indemnification and subject
to the applicable requirements of the NYBCL, the Surviving Corporation shall
direct, at the election of the Indemnified Party, that the determination of any
such approval shall be made by independent counsel selected by the Surviving
Corporation and reasonably acceptable to the Indemnified Party.
(b) The Surviving Corporation or the Parent shall maintain in effect
(for at least six years from the Effective Time in the case of claims made
policies) directors' and officers' liability insurance policies providing
coverage in an aggregate amount of at least $10,000,000 and with a carrier(s)
having a Best rating at least equal to the Best rating of the current carrier(s)
covering directors and officers of the Company serving as of or after December
1, 1990 with respect to claims arising from occurrences prior to or at the
Effective Time (including the transactions contemplated by or related to this
Agreement).
(c) If Parent or the Surviving Corporation or any successors or
assigns shall transfer all or substantially all of its assets to any person or
entity, then and in each case, proper provision shall be made so that the
assigns of Parent or the Surviving Corporation shall assume the obligations set
forth in this Section 7.15.
(d) The provisions of this Section 7.15 are intended to be for the
benefit of and shall be enforceable by, each Indemnified Party and his or her
respective heirs and representatives.
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ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) HSR Approval. Any waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated, and
no action shall have been instituted by the Department of Justice or
Federal Trade Commission challenging or seeking to enjoin the consummation
of this transaction, which action shall have not been withdrawn or
terminated.
(b) Stockholder Approvals. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite
vote (as described in Section 4.18) of the stockholders of the Company, in
accordance with applicable law.
(c) Nasdaq Listing. The shares of Parent Common Stock issuable to
the holders of Company Common Stock pursuant to this Agreement in the
Merger shall have been authorized for listing on the Nasdaq National
Market, upon official notice of issuance.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceeding by the SEC seeking a stop order.
(e) No Order. No Governmental Entity (including a federal or state
court) of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which materially restricts, prevents or
prohibits consummation of the Merger or any transaction contemplated by
this Agreement; provided, however, that the parties shall use their
reasonable best efforts to cause any such decree, judgment, injunction or
other order to be vacated or lifted.
(f) Approvals. Other than the filing of Merger documents in
accordance with the NYBCL, all authorizations, consents, waivers, orders
or approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any Governmental Entity the failure of which
to obtain, make or occur would, individually or in the aggregate, have a
material adverse effect at or after the Effective Time on Parent and its
Subsidiaries including the Surviving Corporation and its Subsidiaries,
shall have been obtained, been filed or have occurred. Parent shall have
received all state securities or "blue sky" permits and other
authorizations necessary to issue the shares of Parent Common Stock
pursuant to this Agreement in the Merger.
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(g) Litigation. No preliminary or permanent injunction or other
order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which enjoins, restrains or prohibits
the transactions contemplated hereby, including the consummation of the
Merger or has the effect of making the Merger illegal and which is in
effect at the Effective Time (each party agreeing to use its best efforts
to have any such injunction or order lifted).
(h) Statutes. No statute, rule, regulation, executive order, decree
or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the
consummation of the Merger or has the effect of making the Merger illegal.
(i) Market Events. There shall not have occurred and be continuing
any general suspension or limitation of trading in Parent Common Stock
(exclusive, however, of any temporary suspension pending an ensuing public
announcement) or in securities generally on Nasdaq.
(j) Tax Opinion. The Company shall have received the opinion of
Cummings & Lockwood, counsel to the Company, which opinion shall be
reasonably satisfactory to Parent, to the effect that the Merger will be
treated for United States federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, which opinion shall be
dated on or about the date that is two business days prior to the date the
Proxy Statement is first mailed to stockholders of the Company and shall
have not have been withdrawn or modified in any material respect. Such
opinion may be based, as to the matters of fact set forth in such
certificates, on certificates of officers of the Company and Parent and of
other appropriate persons that are provided to Parent.
Section 8.2 Conditions to Obligations of Parent and Sub to Effect
the Merger. The obligations of Parent and Sub to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
additional conditions, unless waived in writing by Parent:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of the Company set
forth in this Agreement does not and would not reasonably be expected to
have a Company Material Adverse Effect and (ii) the representations and
warranties of the Company that are qualified with reference to a Company
Material Adverse Effect or materiality shall, subject to such
qualification, be true and correct and the representations and warranties
that are not so qualified shall be true and correct in all material
respects, in each case as of the date hereof, and, except to the extent
such representations and warranties speak as of an earlier date, as of the
Effective Time as though made at and as of the Effective Time, and Parent
shall have received a certificate signed on behalf of the Company by the
chief executive officer or the chief financial officer of the Company to
such effect.
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(b) Performance of Obligations of the Company. Each of the Company
and its Subsidiaries shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or
prior to the Effective Time, and Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer or the
chief financial officer of the Company to such effect.
(c) Affiliate Agreements. Parent shall have received the Affiliate
Agreements from each of the Affiliates of the Company, as contemplated in
Section 7.5.
(d) "Pooling Letter." Parent shall have received from BDO Seidman,
LLP a letter, dated the Closing Date and addressed to Parent, to the
effect that, subject to customary qualifications, the Merger qualifies for
pooling of interests treatment for financial reporting purposes in
accordance with GAAP, and Parent shall have received from the Company,
with the consent of Miller, Ellin & Company, a copy of a letter, dated the
Closing Date, of Miller, Ellin & Company addressed to the Company to the
effect that, subject to customary qualifications, the Merger qualifies for
pooling of interests for financial reporting purposes in accordance with
GAAP.
(e) Letters of Resignation. Parent and Sub shall have received
letters of resignation addressed to the Company from the members of the
Company's board of directors, which resignations shall be effective as of
the Effective Time.
(f) Dissenting Shares. The aggregate number of shares of Company
Common Stock into which all Dissenting Shares are convertible shall not
constitute more than 9% of the number of shares of Company Common Stock
outstanding as of immediately prior to the Effective Time (calculated
assuming no dilution).
(g) Legal Opinion. Parent shall have received opinions, dated the
Closing Date, of Otterbourg, Steindler, Houston & Rosen, P.C. and Lester
Morse, P.C. substantially to the effect set forth in Exhibit C hereto,
subject to assumptions, qualifications and limitations reasonably
satisfactory to Parent, which opinions shall be reasonably satisfactory to
Parent.
(h) The Company's 1996 Directors' Retirement Plan shall have
terminated and neither the Company, Parent nor any of their respective
Subsidiaries shall have any liability or obligation to any person arising
under or in respect of such plan.
Section 8.3 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following additional
conditions:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of Parent set forth in
this Agreement does not and will not have a Parent Material Adverse Effect
and (ii) the representations and warranties of Parent contained in this
Agreement that are qualified with reference to a Parent Material
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Adverse Effect or materiality shall be true and correct and the
representations and warranties that are not so qualified shall be true and
correct in all material respects as of the date hereof, and, except to the
extent such representations and warranties speak as of an earlier date, as
of the Effective Time as though made on and as of the Effective Time, and
the Company shall have received a certificate signed on behalf of Parent
by the chief executive officer or the chief financial officer of Parent to
such effect.
(b) Performance of Obligations of Parent and Sub. Each of Parent and
Sub shall have performed in all material respects all obligations required
to be performed by it under this Agreement at or prior to the Effective
Time, and the Company shall have received a certificate signed on behalf
of Parent by the chief executive officer or the chief financial officer of
Parent to such effect.
(c) Legal Opinion. The Company shall have received an opinion, dated
the Closing Date, of Proskauer Rose Goetz & Mendelsohn LLP, reasonably
satisfactory to the Company, substantially to the effect set forth in
Exhibit D hereto.
ARTICLE IX
TERMINATION
Section 9.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of Parent and the Company;
(b) by either Parent or the Company, if (i) the Merger shall not
have been consummated before September 30, 1997, or (ii) the approval of
the stockholders of the Company required by Section 4.18 shall not have
been obtained at a meeting duly convened therefor or any adjournment
thereof (unless, in the case of any such termination pursuant to this
Section 9.1(b), the failure to so consummate the Merger by such date or to
obtain such stockholder approval shall have been caused by the action or
failure to act of the party (or its Subsidiaries) seeking to terminate
this Agreement, which action or failure to act constitutes a breach of
this Agreement);
(c) by either Parent or the Company, if any permanent injunction or
action by any Governmental Entity of competent jurisdiction preventing the
consummation of the Merger shall have become final and nonappealable;
provided, however, that the party seeking to terminate this Agreement
pursuant to this Section 9.1(c) shall have used all reasonable efforts to
remove such injunction or overturn such action;
(d) by Parent, if (i) there has been a breach of any representations
or warranties of the Company set forth herein the effect of which,
individually or together with all other
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such breaches, is a Company Material Adverse Effect, (ii) there has been a
breach in any material respect of any of the covenants or agreements set
forth in this Agreement on the part of the Company, which breach is not
curable or, if curable, is not cured within 30 days after written notice
of such breach is given by Parent to the Company, (iii) the Board of
Directors of the Company (x) withdraws or amends or modifies in a manner
materially adverse to Parent or Sub its recommendation or approval in
respect of this Agreement or the Merger, (y) makes any recommendation with
respect to an Acquisition Transaction (including making no recommendation
or stating an inability to make a recommendation), other than a
recommendation to reject such Acquisition Transaction, or (z) takes any
action that would be prohibited by Section 7.2, (iv) any corporation,
partnership, person or other entity or group ("Acquiring Person") other
than Parent, or any affiliate or Subsidiary of Parent, shall have become
the beneficial owner of more than 20% of the outstanding voting equity of
the Company (either on a primary or a fully diluted basis); provided,
however that "Acquiring Person" shall not include any corporation,
partnership, person, other entity or group which beneficially owns as of
the date hereof (either on a primary or a fully diluted basis) more than
20% of the outstanding voting equity of the Company (either on a primary
or a fully diluted basis) and which has not after the date hereof
increased such ownership percentage by more than an additional 1% of the
outstanding voting equity of the Company (either on a primary or a fully
diluted basis), or (v) any other Acquisition Transaction shall have
occurred with any Acquiring Person other than Parent, or any affiliate or
Subsidiary of Parent;
(e) by the Company, if (i) there has been a breach of any
representations or warranties of Parent set forth herein the effect of
which, individually or together with all other such breaches, is a Parent
Material Adverse Effect, (ii) there has been a breach in any material
respect of any of the covenants or agreements set forth in this Agreement
on the part of Parent, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given by the
Company to Parent or (iii) such termination is necessary to allow the
Company to enter into an Acquisition Transaction in accordance with
Section 7.2(b); and
(f) by Parent, if the meeting of stockholders of the Company to vote
upon this Agreement is canceled or is otherwise not held prior to August
31, 1997 except as a result of a judgment, injunction, order or decree of
any competent authority or events or circumstances beyond the reasonable
control of the Company.
Section 9.2 Effect of Termination.
(a) In the event of termination of this Agreement pursuant to this
Article IX, the Merger shall be deemed abandoned and this Agreement shall
forthwith become void, without liability on the part of any party hereto, except
as provided in this Section 9.2, Section 7.1, Section 7.10 and Section 7.14.
(b) If (x) Parent shall have terminated this Agreement pursuant to
Sections 9.1(d)(iii), 9.1(d)(iv) or 9.1(d)(v) or (y) either (1) Parent or the
Company shall have terminated
35
<PAGE>
this Agreement pursuant to Section 9.1(b) or (2) Parent shall have terminated
this Agreement pursuant to Section 9.1(d)(i), 9.1(d)(ii) or 9.1(f) and, prior to
or within one (1) year after any termination described in this clause (y), the
Company (or any of its Subsidiaries) shall have directly or indirectly entered
into a definitive agreement for, or shall have consummated, an Acquisition
Transaction or (z) the Company shall have terminated this Agreement pursuant to
Section 9.1(e)(iii), then, in any of such cases, the Company shall pay Parent
(A) a termination fee of five million dollars ($5,000,000), plus (B) an amount
equal to Parent's actual, documented out-of-pocket expenses incurred in
connection with this Agreement and the transactions contemplated hereby,
including, without limitation, legal, professional and service fees and
expenses; provided, however, that any liquidated damage amounts previously paid
by the Company to Parent pursuant to Section 9.2(c) shall be credited against
the termination fee payable under this Section 9.2(b); provided further,
however, that no amounts paid in respect of expenses pursuant to Section 9.2(c)
shall be credited against any additional expenses covered hereunder and not
previously paid under Section 9.2(c). Any fees or amounts payable under this
Section 9.2(b) shall be paid in same day funds no later than: (i) two business
days after a termination described in clause (x) of this Section 9.2(b); (ii)
concurrently with or prior to the entering into of the definitive agreement for,
or the consummation of, such Acquisition Transaction, in the case of a
termination described in clause (y) of this Section 9.2(b); or (iii)
concurrently with or prior to a termination described in clause (z) of this
Section 9.2(b).
(c) If Parent shall have terminated this Agreement pursuant to
Sections 9.1(d)(i), 9.1(d)(ii) or 9.1(f), then, in any of such cases, the
Company shall pay to Parent as liquidated damages and not as a penalty, three
million dollars ($3,000,000). Such liquidated damage amount shall be payable
no later than two business days after such termination.
(d) If the Company shall have terminated this Agreement pursuant
to Section 9.1(e)(i) or 9.1(e)(ii), then, in either such case, Parent shall
pay to the Company as liquidated damages and not as a penalty, three million
dollars ($3,000,000). Such liquidated damage amount shall be payable no later
than two business days after such termination.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Amendment and Modification. At any time prior to the
Effective Time, this Agreement may be amended, modified or supplemented only by
written agreement (referring specifically to this Agreement) of Parent, Sub and
the Company with respect to any of the terms contained herein; provided,
however, that after any approval and adoption of this Agreement by the
stockholders of the Company, no such amendment, modification or supplementation
shall be made which under applicable law requires the approval of such
stockholders, without the further approval of such stockholders.
Section 10.2 Waiver. At any time prior to the Effective Time, Parent
and Sub, on the one hand, and the Company, on the other hand, may (i) extend the
time for the performance
36
<PAGE>
of any of the obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any documents delivered pursuant hereto and (iii) waive compliance by the
other with any of the agreements or conditions contained herein which may
legally be waived. Any such extension or waiver shall be valid only if set forth
in an instrument in writing specifically referring to this Agreement and signed
on behalf of such party.
Section 10.3 Survivability; Investigations. The respective
representations and warranties of Parent and the Company contained herein or in
any certificates or other documents delivered prior to or as of the Effective
Time (i) shall not be deemed waived or otherwise affected by any investigation
made by any party hereto and (ii) shall not survive beyond the Effective Time.
The covenants and agreements of the parties hereto (including the Surviving
Corporation after the Merger) shall survive the Effective Time without
limitation (except for those which, by their terms, contemplate a shorter
survival period).
Section 10.4 Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof. Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(a) If to Parent or Sub, to:
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Fax: (516) 843-5675
Attention: Mark E. Mlotek, Esq.
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Fax: (212) 969-2900
Attention: Robert A. Cantone
(b) if to the Company, to:
Micro Bio-Medics, Inc.
864 Pelham Parkway
Pelham Manor, New York 10803
Fax: (914) 738-9538
37
<PAGE>
Attention: Bruce J. Haber, Esq.
with a copy to:
Otterbourg, Steindler, Houston & Rosen, P.C.
230 Park Avenue
New York, New York 10169
Fax: (212) 682-6104
Attention: Donald N. Gellert, Esq.
Section 10.5 Descriptive Headings; Interpretation. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. References in this
Agreement to Sections, Schedules, Exhibits or Articles mean a Section, Schedule,
Exhibit or Article of this Agreement unless otherwise indicated. The term
"person" shall mean and include an individual, a partnership, a joint venture, a
limited liability company, a corporation, a trust, a Governmental Entity or an
unincorporated organization.
Section 10.6 Entire Agreement; Assignment. This Agreement (including
the Schedules and other documents and instruments referred to herein), together
with the Proxy and Option Agreement and the Confidentiality Agreement,
constitute the entire agreement, and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them, with
respect to the subject matter hereof. This Agreement is not intended to confer
upon any person not a party hereto any rights or remedies hereunder. This
Agreement shall not be assigned by operation of law or otherwise; provided that
Parent or Sub may assign its rights and obligations hereunder to a direct or
indirect subsidiary of Parent, but no such assignment shall relieve Parent or
Sub, as the case may be, of its obligations hereunder.
Section 10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the provisions thereof relating to conflicts of law, except to the
extent relating to matters governed by the General Corporation Law of the State
of Delaware.
Section 10.8 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.
Section 10.9 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement.
38
<PAGE>
IN WITNESS WHEREFORE, each of Parent, Sub and the Company has caused
this Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
HENRY SCHEIN, INC.
By: /s/ Mark Mlotek
----------------------------
Name:
Title:
MICRO BIO-MEDICS, INC.
By: /s/ Bruce Haber
----------------------------
Name:
Title:
HSI ACQUISITION CORP.
By: /s/ Mark Mlotek
----------------------------
Name:
Title:
39
<PAGE>
Exhibit A
AFFILIATE AGREEMENT
AGREEMENT dated March 7, 1997, between Henry Schein, Inc., a Delaware
corporation ("Parent"), and the undersigned stockholder (the "Affiliate") of
Micro Bio- Medics, Inc., a New York corporation (the "Company").
In order to induce Parent to consummate that certain Agreement and
Plan of Merger, dated the date hereof (the "Merger Agreement"), by and among
Parent, Manor Acquisition Corp., a New York corporation and wholly owned
subsidiary of Parent, and the Company, and in consideration of the agreements
contained herein and in the Merger Agreement;
The parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:
"Act" shall mean the Securities Act of 1933, as amended.
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Act.
"Person" shall mean an individual, corporation, partnership, limited
liability company, trust or other entity or organization.
"Transfer" shall mean to transfer, sell, assign, pledge,
hypothecate, convey or otherwise dispose of.
2. Rule 145. The Affiliate shall hold the Parent Common Stock (as
such term is defined in the Merger Agreement) that he or she receives pursuant
to the Merger Agreement subject to all applicable provisions of the Act and the
rules and regulations promulgated by the Commission thereunder and shall not
make an illegal "distribution" (within the meaning of the Act and Rule 145
promulgated thereunder) of such Parent Common Stock. Without limiting the
generality of the foregoing, the Affiliate:
(a) shall not sell any Parent Common Stock until after the
publication of financial statements reflecting the combined operating
results of Parent and the Company for a period of not less than 30 days
from and after the Effective Time (as such term is defined in the Merger
Agreement);
(b) shall not transfer any Parent Common Stock unless (i) the
transfer is being made in accordance with the provisions of Rule 145 (as
it
<PAGE>
may be amended from time to time) and such Affiliate shall have delivered
written notice to Parent substantially in the forms annexed hereto and
made a part hereof as Annex A and Annex B, (subject to any appropriate
amendments thereto as a result of any amendments to Rule 145), (ii) Parent
shall have been furnished with an opinion of counsel, in form and
substance reasonably satisfactory to Parent's counsel, that registration
under the Act is not required in respect of such transfer or (iii) a
registration statement covering the shares proposed to be transferred and
the proposed transfer thereof has been filed by Parent with the Commission
and has become effective under the Act; and
(c) shall consent to the imposition of a legend on the Parent Common
Stock to be received by such Affiliate in connection with the merger
contemplated by the Merger Agreement to the effect that such Parent Common
Stock may not be sold except in compliance with the Act.
3. Successors and Assigns; Assignment. This Agreement shall inure to
the benefit of and be binding upon the parties and their respective heirs,
personal representatives, successors and permitted assigns. Except as otherwise
herein provided, no party shall assign such party's rights or obligations
hereunder without the other party's prior written consent.
4. Notices. All notices and other communications hereunder shall be
in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof. Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(a) If to Parent, to:
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Attention: Mark E. Mlotek
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Robert A. Cantone, Esq.
2
<PAGE>
(b) if to the Affiliate, to:
___________________________
___________________________
___________________________
5. Injunctive Relief; Remedies Cumulative. (a) Parent, on the one
hand, and the Affiliate, on the other hand, acknowledge that the other party
will be irreparably harmed and that there will be no adequate remedy at law for
a violation of any of the covenants or agreements of such party that are
contained in this Agreement. It is accordingly agreed that, in addition to any
other remedies that may be available to the non-breaching party upon the breach
by any other party of such covenants and agreements, the non-breaching party
shall have the right to obtain injunctive relief to restrain any breach or
threatened breach of such covenants or agreements or otherwise to obtain
specific performance of any of such covenants or agreements.
(b) No remedy conferred upon or reserved to any party herein is
intended to be exclusive of any other remedy, and every remedy shall be
cumulative and in addition to every other remedy herein or now or hereafter
existing at law, in equity or by statute.
6. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without giving effect to
the provisions thereof relating to conflicts of law.
7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
8. Effect of Partial Invalidity. Whenever possible, each provision
of this Agreement shall be construed in such a manner as to be effective and
valid under applicable law. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any respect
against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
as of the date first above written.
3
<PAGE>
HENRY SCHEIN, INC.
By:_________________________________
Name:
Title:
AFFILIATE:
____________________________________
____________________________________
[Please Print Name]
4
<PAGE>
ANNEX A
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Attention: Mark E. Mlotek, Esq.
Ladies and Gentlemen:
I propose to sell ____________ shares (the "Shares") of Parent
Common Stock that I received in connection with the business combination of
Parent and MBM. I propose to effect such sale through _____________, my broker,
in accordance with the requirements relating to sales by "affiliates" under Rule
145 under the Securities Act of 1933, as amended.
To induce you to remove the restrictive legend from the stock
certificate(s) representing such Shares, I hereby represent and warrant as
follows:
1. It is my bona fide intention to sell the Shares within 90 days
from the date hereof. If for some reason all of the Shares have not been sold
within such 90 day period, I will send to Parent the stock certificate
evidencing the balance of the Shares which were not sold in order that a
restrictive legend may be placed thereon. The Shares are presently evidenced by
stock certificate no.(s) _____, which stock certificate (s) represent(s) an
aggregate of _____ shares of Parent Common Stock. I understand that to the
extent such certificate(s) represent(s) a greater number of shares of Parent
Common Stock than those proposed to be sold, a new stock certificate for the
balance of such shares of Parent Common Stock will be sent to me with the same
restrictive legend as is presently affixed to my certificate(s).
2. As of the date of this letter and as of the time of any sale of
the Shares for my account, the aggregate number of shares of Parent Common Stock
sold during the preceding three months for my account and for the account of any
person whose sales are required by Rule 144 under the Securities Act of 1933, as
amended, to be aggregated with my sales have not and will not exceed the greater
of: (a) 1% of the outstanding Parent Common Stock, or (b) the average weekly
reported volume of trading in Parent Common Stock on all securities exchanges or
quotation systems during the four calendar weeks preceding the date of sale of
such Shares.
3. During the past three months I have not and during the next three
months I will not, alone or in conjunction with others, sell any Parent Common
Stock
A-1
<PAGE>
under circumstances which could jeopardize the exemption from registration
available under Rule 145 and Rule 144.
4. I have not solicited or arranged for the solicitation of, and I
will not solicit or arrange for the solicitation of, orders to buy the Shares in
anticipation of or in connection with such proposed sale.
5. I have not made, and will not make, any payment in connection
with the offering or sale of the Shares to any person other than the payment of
the usual and customary broker's commission to ____________________.
Very truly yours,
A-2
<PAGE>
ANNEX B
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Attention: Mark E. Mlotek, Esq.
Ladies and Gentlemen:
We have been asked to sell ________ shares (the "Shares") of Parent
Common Stock owned by _______________ ("Seller"). We understand that the Seller
is an "affiliate" within the meaning of Rule 145 promulgated under the
Securities Act of 1933, as amended, and that sales by him of the Shares must
comply with certain provisions of Rule 144 under such Act.
To induce you to remove the restrictive legend from the stock
certificate evidencing the Shares so that they may be transferred pursuant to
Rules 144 and 145, we hereby represent and warrant as follows:
1. We have made reasonable inquiry as required by paragraph (g)(3)
of Rule 144 and, based upon such inquiry, we are not aware of circumstances
indicating that the Seller is an underwriter with respect to the Shares or that
the transaction is part of a distribution of the Shares.
2. The Shares for which we are acting as broker will be sold by us
in "brokers' transactions" as defined in paragraph (g) of Rule 144.
3. Neither the Seller nor we have solicited or arranged nor will we
solicit or arrange for the solicitation of orders to buy the Shares (except as
permitted by Rule 144) nor have we received nor will we receive any payment in
connection with the sale of the Shares other than usual and customary brokerage
commissions.
Very truly yours,
B-1
<PAGE>
EXHIBIT B
OPTION AND PROXY AGREEMENT
OPTION AND PROXY AGREEMENT dated as of March 7, 1997, by and among
Henry Schein, Inc., a Delaware corporation ("Parent"), and the persons listed on
Schedule A hereto (collectively, the "Shareholders" and each a "Shareholder"),
each a shareholder of Micro Bio-Medics, Inc. a New York corporation (the
"Company").
Contemporaneously with the execution of this Agreement, the Company,
Parent and HSI Acquisition Corp., a New York corporation and wholly-owned
subsidiary of Parent ("Sub"), are entering into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which it is contemplated that Sub will be
merged with and into the Company (the "Merger") and the holders of the Company's
Common Stock, par value $.03 per share (the "Company Common Stock"), will be
entitled to receive shares of Parent's Common Stock, par value $.01 per share
("Parent Common Stock"), for such shares of Company Common Stock.
Parent, as a condition to its willingness to enter into the Merger
Agreement, has required the Shareholders to grant Parent an option and an
irrevocable proxy with respect to all of the shares of Company Common Stock
owned by the Shareholders (except as expressly noted below), together with any
additional shares of Company Common Stock hereafter acquired by the Shareholders
(pursuant to Section 10, by exercise of options or warrants, by conversion of
debentures or otherwise and including any Additional Shares (as defined below)
acquired by such Shareholder) (such specified number of shares, and any
additional shares when and if acquired, being referred to as the "Shares") on
the terms and conditions hereinafter set forth.
The parties hereto agree as follows:
1. Grant of Option.
(a) Each Shareholder hereby grants to Parent an option
(collectively, the "Options") to purchase all but not less than all of that
Shareholder's Shares (exclusive of those Shares beneficially owned by Deane
Reade that are currently held in pension plans and approximately 20,000 shares
currently held in Deane Reade margin accounts subject to the terms thereof (the
"Excluded Reade Shares"). Except as otherwise provided in Section 1(b), the
consideration for the purchase of such Shareholder's Shares shall be the
issuance to such Shareholder of the number of shares of Parent Common Stock that
such Shareholder would have been entitled to receive by virtue of the Merger had
the Effective Time (as defined in the Merger Agreement) occurred at the time of
the exercise of the Options.
(b) Each Shareholder hereby agrees to exercise all options,
warrants or other rights to acquire any Shares, and to convert or exchange any
securities or other rights that are convertible into or exchangeable for Shares,
whether now owned or hereafter acquired by
<PAGE>
such Shareholder (collectively, "Rights"), in connection with any exercise by
Parent of the Options in order to permit the acquisition by Parent of the Shares
receivable upon such exercise, conversion or exchange (the "Additional Shares")
pursuant to the exercise of the Options. To the extent that a Shareholder is
obligated to pay any consideration in connection with the exercise, conversion
or exchange of such Shareholder's Rights (the "Rights Consideration"), such
Rights Consideration shall be paid in such form as is permitted under the Rights
as Parent shall direct. If payment of the Rights Consideration is to be made in
cash, Parent shall fund such payment; if payment of a Shareholder's Rights
Consideration may be made by delivery of shares of Company Common Stock, at
Parent's direction such Shareholder shall deliver that number of shares owned by
him or her in payment (or partial payment, as the case may be) of the Rights. If
any Right is to be exercised by means of a "cashless exercise," the Shareholder
exercising such Right shall cause the net number of shares from such cashless
exercise to be issued and delivered to Parent. In the event that Parent funds
any Rights Consideration payment on behalf of any Shareholder (i) the number of
shares of Parent Common Stock to be issued by Parent in respect of the
Additional Shares that were acquired pursuant to the payment of such Rights
Consideration shall be reduced by that number of shares (rounded to the nearest
whole share) as is equal to the quotient obtained by dividing the aggregate
amount of Rights Consideration so paid by Parent by the closing sales prices of
the Parent Common Stock on the last trading date prior to the exercise of the
Options; and (ii) if the funding of the Rights Consideration payment on behalf
of such Shareholder subjects such Shareholder to income tax in respect of such
payment, the Parent shall pay to such Shareholder the amount of such income tax,
provided such Shareholder shall cooperate with Parent (at Parent's expense) in
disputing the imposition of such income tax; and provided further, that if
Parent determines in good faith that there is a basis for disputing all or any
amount of the income tax imposed, Parent shall be entitled to direct any such
dispute, but shall indemnify the Executive against any additional income tax for
which he or she may become liable as a result.
(c) Each Shareholder agrees not to acquire any Right that
provides, whether contingent or otherwise, for any reduction in the amount of
the Rights Consideration payable upon the exercise, conversion or exchange of
such Right, whether or not such reduction is contingent or fixed as to
occurrence or amount, and shall immediately decline in writing any such Right
that may be granted to him or her.
2. Exercise of Option. The Options, in each case, shall be
exercisable, in whole, but not in part, by Parent as follows:
(a) If the Merger Agreement is terminated by Parent pursuant
to Sections 9.1(d)(iii), 9.1(d)(iv) or 9.1(d)(v) of the Merger Agreement, or by
the Company pursuant to Section 9.1(e)(iii) of the Merger Agreement, then Parent
may exercise the Options at any time during the six month period beginning on
the date of such termination, provided, however, that if the Company is the
terminating party, Parent's right to exercise the Options shall commence on the
earlier of Parent's receipt of notice of such termination and such time as
knowledge of such termination becomes publicly available.
-2-
<PAGE>
(b) If (i) the Merger Agreement is terminated by Parent
pursuant to Sections 9.1(d)(i), 9.1(d)(ii) or 9.1(f) of the Merger Agreement, or
by either Parent or the Company pursuant to Section 9.1(b), and the Company (or
any of its Subsidiaries shall have, directly or indirectly, entered into a
definitive agreement for, or shall have consummated, an Acquisition Transaction,
as that term is defined in the Merger Agreement, within one year of such
termination, then Parent may exercise the Options during the period beginning on
the earlier of the date on which Parent first receives notice of the occurrence
of the event triggering HSI's right to exercise the Options and the date on
which such event becomes publicly known and (except as otherwise provided below)
ending on the date three business days after the date that the Acquisition
Transaction (or any successive Acquisition Transaction or any other Acquisition
Transaction made in response thereto) occurs.
At any time when Parent wishes to exercise the Options, Parent shall give
written notice (the "Notice") to the Shareholders specifying a place and a date
not less than two nor more than 20 business days from the date of the Notice for
the closing of such purchase (the "Closing"); provided, however, that such date
may be extended to the extent necessary to comply with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and applicable
regulations thereunder. The date on which the Parent gives the Notice shall be
deemed to be the date on which the Options are exercised. Each Shareholder
agrees to the use his or her reasonable best efforts (subject to any applicable
fiduciary duties) to give Parent at least five business days prior written
notice of the occurrence of any event triggering Parent's right to exercise the
Options.
3. Payment and delivery of Certificate(s). At the Closing hereunder:
(a) Parent will deliver to the Shareholders the shares of
Parent Common Stock to be issued in consideration for the Shares being purchased
upon exercise of the Options as provided in Section 1; and
(b) the Shareholders will deliver to Parent against receipt of
the shares of Parent Common Stock as provided in Section 3(a), a certificate or
certificates representing the number of Shares so purchased by Parent duly
endorsed or with executed blank stock powers attached, in either event with
signature guaranteed such that registered ownership of the Shares may be
registered for transfer on the books of the Company.
4. Irrevocable Proxy. Each Shareholder hereby irrevocably
constitutes and appoints Parent or any designee of Parent the lawful agent,
attorney and proxy of such Shareholder during the term of this Agreement, to
vote all of his, her or its Shares (excluding the Excluded Reade Shares") and
Additional Shares and, in the case of Bruce Haber, all shares of Company Common
Stock owned by Andrew D. Stone that he has an irrevocable proxy to vote (the
"Stone Shares") at any meeting or in connection with any written consent of the
Company's shareholders (a) in favor of the Merger, (b) in favor of the Merger
Agreement, as such may be modified or amended from time to time, (c) against any
Acquisition Transaction (other than the Merger) or other merger, sale, or other
business combination between the Company and any
-3-
<PAGE>
other person or entity or any other action which would make it impractical for
Parent to effect a merger or other business combination of the Company with
Parent or Sub, and (d) against any other action or agreement that would result
in a breach of any covenant, representation or warranty or any other obligation
or agreement of the Company under the Merger Agreement or which would result in
any of the Company's obligations under the Merger Agreement not being fulfilled.
This proxy shall not authorize Parent to vote the Shares of the Stone Shares on
any matters other than those specified above which may be presented to the
Company's shareholders at any meeting or in connection with any written consent
of the Company's shareholders. This power of attorney is irrevocable, is granted
in consideration of Parent entering into the Merger Agreement and is coupled
with an interest sufficient in law to support an irrevocable power. This
appointment shall revoke all prior attorneys and proxies appointed by any
Shareholder at any time with respect to the Shares or the Stone Shares and the
matters set forth in clauses (a) through (d) above and no subsequent attorneys
or proxies will be appointed by such Shareholder, or be effective, with respect
thereto.
5. Representations and Warranties of the Shareholders. Each
Shareholder represents and warrants to Parent as follows:
(a) Ownership of Shares and Rights. That Shareholder is the
sole beneficial owner of the number of Rights set forth as being granted to that
Shareholder on Schedule A. The Rights set forth opposite that Shareholder's name
on Schedule A constitute all the Rights owned beneficially or of record by that
Shareholder. The Shares owned by that Shareholder are validly issued, fully paid
and nonassessable and such Shares (excluding the Excluded Reade Shares) and/or
the Rights set forth opposite that Shareholder's name on Schedule A, are held by
that Shareholder, or by a nominee or custodian for the benefit of that
Shareholder, free and clear of all liens, claims, security interests, agreements
and other encumbrances, except for encumbrances arising under this Agreement.
(b) Power; Binding Agreement. That Shareholder has the legal
capacity to enter into and perform all of that Shareholder's obligations under
this Agreement. The execution, delivery and performance of this Agreement by
that Shareholder will not violate any other agreement to which that Shareholder
is a party, including, without limitation, any voting agreement, shareholders
agreement or voting trust. This Agreement has been duly and validly executed and
delivered by that Shareholder and constitutes a valid and binding obligation of
that Shareholder, enforceable against that Shareholder in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and subject to
general principles of equity. If that Shareholder is married and that
Shareholder's Shares constitute community property, this Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and binding
obligation of, that Shareholder's spouse, enforceable against that spouse in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and subject to general principles of equity.
-4-
<PAGE>
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by that Shareholder nor the
consummation of the transactions contemplated by this Agreement will: (i)
require any consent, approval, authorization or permit of, or filing with or
notification to, any person or entity or any governmental or regulatory
authority, except in connection with the HSR Act or pursuant to the Securities
Exchange Act of 1934; (ii) conflict with, result in a breach of, or result in a
default (or give rise to a right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, agreement
or other instrument or obligation to which that Shareholder is a party or by
which that Shareholder or any of that Shareholder's assets may be bound; or
(iii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to that Shareholder or by which any of that Shareholder's assets are
bound.
(d) Brokers. No broker, finder or other investment banker is
entitled to any broker's, finder's or other similar fee or commission in
connection with this Agreement or the transactions contemplated by this
Agreement based upon agreements made by or on behalf of that Shareholder.
6. Representations and Warranties of Parent. Parent represents and
warrants to each Shareholder that:
(a) Power; Binding Agreement. Parent has the corporate power
and authority to enter into and perform all its obligations under this
Agreement. The execution, delivery and performance of this Agreement by Parent
will not violate any other agreement to which Parent is a party. This Agreement
has been duly and validly authorized, executed and delivered by Parent and
constitutes a valid and binding obligation of Parent, enforceable against Parent
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject to general principles of equity.
(b) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by Parent nor the consummation by
Parent of the transactions contemplated by this Agreement will: (i) require any
consent, approval, authorization or permit of, or filing with or notification
to, any person or entity or any governmental or regulatory authority, except in
connection with the HSR Act or pursuant to the Securities Exchange Act of 1934;
(ii) conflict with, result in a breach of, or result in a default (or give rise
to a right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, license, agreement or other instrument or
obligation to which Parent is a party or by which Parent or any of its assets
may be bound; or (iii) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Parent or by which any of its assets are bound.
(c) Brokers. No broker, finder or other investment banker is
entitled to any broker's, finder's or other similar fee or commission in
connection with this Agreement or the transactions contemplated by this
Agreement based upon agreements made by or on behalf of Parent.
-5-
<PAGE>
7. Additional Covenants of the Shareholders. Each Shareholder hereby
covenants and agrees that:
(a) that Shareholder will not enter into any transaction, take
any action, or by inaction permit any event to occur that would (i) result in
any of the representations or warranties of such Shareholder herein contained
not being true and correct at and as of the time immediately after the
occurrence of such transaction, action or event; or (ii) have the effect of
preventing or disabling that Shareholder from performing that Shareholder's
obligations under this Agreement;
(b) that Shareholder will not grant any proxies or powers of
attorney with respect to any shares, deposit any Shares into a voting trust or
enter into a voting agreement with respect to such Shares; provided, however,
that the Shareholders may grant proxies to third parties provided that such
proxies are expressly made subject to the terms of this Agreement;
(c) until the termination of this Agreement, such Shareholder
will at all times use his, her or its best efforts in his, her or its capacity
as a shareholder of the Company to prevent the Company from taking any action in
violation of the Merger Agreement;
(d) from and after the date hereof until the termination of
this Agreement, other than under the circumstances contemplated by Section 10
hereof, the Shares will not be sold, transferred, pledged, hypothecated,
transferred by gift, or otherwise disposed of in any manner whatsoever without
notifying Parent in advance and obtaining and delivering to Parent any evidence
that Parent may reasonably request to evidence the transferee's agreement to be
bound by this Agreement; provided, however, that in the event of such
Shareholder's death during the term of this Agreement, the Shares and Rights may
be transferred in accordance with the Shareholder's last will and testament, or
if none, in accordance with the applicable laws of intestate succession, in
either of which cases, the Shares shall remain subject in all respects to the
terms of this Agreement; and
(e) the Shareholder will execute and deliver any additional
documents reasonably necessary or desirable, in the opinion of Parent's or the
Company's counsel, to evidence the irrevocable proxy granted in Section 4 with
respect to the Shares or otherwise implement and effect the provisions of this
Agreement.
8. No Solicitation. No Shareholder shall, in that Shareholder's
capacity as such, directly or indirectly, (a) solicit, initiate, facilitate or
encourage (including by way of furnishing or disclosing non-public information)
any inquiries or the making of any proposal with respect to any Acquisition
Transaction, (b) negotiate, explore or otherwise engage in discussion with any
person (other than Parent and its representatives) with respect to any
Acquisition Transaction, (c) agree to or endorse an Acquisition Transaction with
any person (other than Parent or Sub) or any agreement, arrangement or
understanding with respect to any such Acquisition Transaction or which would
require the Company to abandon, terminate or fail to consummate the Merger or
any other transaction contemplated by this Agreement, or (d)
-6-
<PAGE>
authorize or permit any person or entity acting on behalf of that Shareholder to
do any of the foregoing. If any Shareholder receives any inquiry or proposal
regarding any Acquisition Transaction, that Shareholder shall promptly inform
Parent of that inquiry or proposal.
9. Legending of Certificates; Nominee Shares. Each Shareholder
agrees to submit to Parent contemporaneously with or promptly following
execution of this Agreement (or promptly following receipt of any additional
certificates representing any additional Shares) all certificates representing
the Shares so that Parent may note thereon a legend referring to the option and
proxy granted to it by this Agreement. If any of the Shares beneficially owned
by a Shareholder are held of record by a brokerage firm in "street name" or in
the name of any other nominee (a "Nominee," and, as to such Shares, "Nominee
Shares"), the Shareholder agrees that, upon written notice by Parent requesting
it, such Shareholder will within five days of the giving of such notice execute
and deliver to Parent a limited power of attorney in such form as shall be
reasonably satisfactory to Parent enabling Parent to require the Nominee to
grant to Parent an option and irrevocable proxy to the same effect as Sections
1, 2 and 4 hereof with respect to the Nominee Shares held by such Nominee and to
submit to Parent the certificates representing such Nominee Shares for notation
of the above-referenced legend thereon.
10. Adjustments to Prevent Dilution, Etc. In the event of a stock
dividend or distribution, or any change in Company Common Stock by reason of any
stock dividend, split-up, recapitalization, combination, exchange of shares or
the like, the term "Shares" shall be deemed to refer to and include the Shares
as well as all such stock dividends and distributions and any shares into which
or for which any or all of the Shares may be changed or exchanged.
11. Shareholder Capacity. No person executing this Agreement who is
or becomes during the term of this Agreement a director of the Company makes any
agreement in his or her capacity as a director. Each Shareholder is executing
and delivering this Agreement solely in that Shareholder's capacity as the
record and beneficial owner of that Shareholder's Shares. Notwithstanding
anything to the contrary in this Agreement, no action or inaction by a
Shareholder in his capacity as a director, officer, or employee of the Company
shall be deemed to contravene Section 8, as long as the action or inaction does
not contravene Section 7.2 of the Merger Agreement.
12. Termination. This Agreement shall terminate on the earlier of
(i) the Effective Time of the Merger, (ii) the termination of the last period of
time during which Parent could have exercised the Options pursuant to Section 2;
provided, however, that the appointment of Parent or any designee of Parent as
agent, attorney and proxy pursuant to Section 4 hereof, and any proxy or other
instrument executed pursuant thereto, shall in any event automatically terminate
upon the termination of the Merger Agreement. Notwithstanding the foregoing, in
the event that Parent is at any time prohibited from exercising the Options as a
result of any actions by the Federal Trade Commission or the Department of
Justice in connection with the HSR Act, then this Agreement shall not terminate
until (i) the earlier of 30 days from the date such prohibition is removed by
the Federal Trade Commission or the Department of Justice, or (ii) six months
after the date Parent's right to exercise the Options would otherwise have
terminated.
-7-
<PAGE>
13. Miscellaneous.
(a) No Waiver. The failure of any party to exercise any right,
power or remedy under this Agreement or otherwise available in respect of this
Agreement at law or in equity, or to insist upon compliance by any other party
with that party's obligations under this Agreement, shall not constitute a
waiver of any right to exercise any such or other right, power or remedy or to
demand such compliance.
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(i) If to Parent, to:
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Attn: Mark E. Mlotek, Esq.
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Robert A. Cantone, Esq.
-8-
<PAGE>
(ii) if to a Shareholder, to:
c/o Bruce Haber
Micro Bio-Medics
846 Pelham Manor
New York, NY 10803
with a copy to:
Otterbourg, Steindler, Houston & Rosen
230 Park Avenue
New York, New York 10169
Fax: (212) 682-6104
Attention: Donald N. Gellert, Esq.
(c) Descriptive Headings; Interpretation. The headings
contained in this Agreement are for reference purposes only and shall not affect
in way the meaning or interpretation of this Agreement. References in this
Agreement to Sections and Schedules mean a Section or Schedule of this Agreement
unless otherwise indicated. The terms "beneficially own" and "beneficial owner"
with respect to any securities shall have the same meaning as in, and shall be
determined in accordance with, Rule 13d-3 under the Securities Exchange Act of
1934.
(d) Entire Agreement; Assignment. This Agreement (including
the schedule and other documents and instruments referred to herein), together
with the Merger Agreement, constitute the entire agreement and supersede all
other prior agreements and understandings, both written and oral, among the
parties or any of them, with respect to the subject matter hereof. Except as
otherwise expressly provided herein, this Agreement is not intended to confer
upon any person not a party hereto any rights or remedies hereunder. Except as
otherwise expressly provided herein, this Agreement shall not be assigned by
operation of law or otherwise; provided that Parent or Sub may assign its rights
and obligations hereunder to a direct or indirect subsidiary of Parent, but no
such assignment shall relieve Parent or Sub, as the case may be, of its
obligations hereunder.
(e) Liability After Transfer. Each Shareholder agrees that,
notwithstanding any transfer of that Shareholder's Shares in accordance with
Section 7(d), that Shareholder shall remain liable for his or her performance of
all obligations under this Agreement.
(f) Injunctive Relief; Remedies Cumulative.
(i) Parent, on the one hand, and the Shareholders, on
the other hand, acknowledge that the other party will be irreparably harmed and
that there will be no
-9-
<PAGE>
adequate remedy at law for a violation of any of the covenants or agreements of
such party that are contained in this Agreement. It is accordingly agreed that,
in addition to any other remedies that may be available to the non-breaching
party upon the breach by any other party of such covenants and agreements, the
non-breaching party shall have the right to obtain injunctive relief to restrain
any breach or threatened breach of such covenants or agreements or otherwise to
obtain specific performance of any of such covenants or agreements.
(ii) No remedy conferred upon or reserved to any party
herein is intended to be exclusive of any other remedy and every remedy shall be
cumulative and in addition to every other remedy herein or now or hereafter
existing at law, in equity or by statute.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the provisions thereof relating to conflicts of laws.
(h) Effect of Partial Invalidity. Whenever possible, each
provision of this Agreement shall be construed in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement or
the application thereof to any party or circumstance shall be prohibited by or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition without invalidating the remainder of such provision or any
other provisions of this Agreement or the application of such provision to the
other party or other circumstances.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
as of the date first above written.
THE SHAREHOLDERS:
______________________________
BRUCE HABER
______________________________
MARVIN CALIGOR
______________________________
RENEE STEINBERG
-10-
<PAGE>
______________________________
DEANE READE
HENRY SCHEIN, INC.
By:___________________________
Authorized Officer
-11-
<PAGE>
Exhibit C
[Form of Opinion of counsel to the Company]
1. The Company is a corporation validly existing and in good
standing under the laws of the State of New York. Each Subsidiary of the Company
set forth on Schedule A hereto is a corporation validly existing and in good
standing under the laws of its jurisdiction of incorporation.
2. The authorized capital stock of the Company consists of
20,000,000 shares of Company Common Stock and 1,000,000 shares of Company
Preferred Stock. As of the date hereof, (i) ________ shares of Company Common
Stock are issued and outstanding, (ii) no shares of Company Preferred Stock are
issued and outstanding, (iii) to our knowledge, Company Stock Options to acquire
________ shares of Company Common Stock are outstanding under all stock option
plans of the Company or otherwise, (iv) to our knowledge, Company Warrants to
acquire __________ shares of Company Common Stock are outstanding, and (v) to
our knowledge, ________ shares of Company Common Stock are reserved for issuance
pursuant to the Company Stock Options, the Company Warrants and all other Rights
to purchase or otherwise receive capital stock or other securities of the
Company. All of the issued and outstanding shares of Company Common Stock are
validly issued, fully paid and nonassessable. All of the issued and outstanding
shares of capital stock of the Subsidiaries of the Company are validly issued,
fully paid and nonassessable and are owned by the Company or a Subsidiary of the
Company.
3. The Company and each Subsidiary of the Company has all requisite
corporate power and authority to own, lease and operate its respective
properties and to carry on its respective businesses as now being conducted.
4. The Company is duly qualified or licensed to do business and is
in good standing as a foreign corporation in the States of [ ]. Each Subsidiary
of the Company is duly qualified or licensed to do business and is in good
standing as a foreign corporation in the respective jurisdictions set forth
opposite such Subsidiary's name on Schedule A hereto.
<PAGE>
5. The Company has all necessary corporate power and authority to
execute and deliver the Agreement, to perform its obligations thereunder, and to
consummate the transactions contemplated thereby. The execution, delivery and
performance of the Agreement and the consummation by the Company of the
transactions contemplated thereby have been authorized by all necessary
corporate action on the part of the Company. Upon the filing of the Certificate
of Merger with the Department of State of New York, all steps required to be
taken by the Company under the laws of the State of New York to effect the
Merger of SUB with and into the Company shall have been duly and properly taken.
6. The Agreement has been duly executed and delivered by the Company
and constitutes the valid and binding obligation of the Company enforceable in
accordance with its terms, except to the extent that enforceability may be
subject to applicable bankruptcy, insolvency, fraudulent conveyance, fraudulent
transfer, reorganization, moratorium and similar laws presently or hereafter in
effect affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether enforcement is sought in a
proceeding in law or in equity).
7. The execution, delivery and performance of the Agreement by the
Company and the consummation by the Company of the transactions contemplated
thereby will not result in a violation by the Company of any provision of the
Company's certificate of incorporation, as amended, or by-laws.
8. Except for the filing of the Certificate of Merger in New York,
we have no knowledge of any consent or approvals by New York or Federal
governmental authorities which are required in connection with the consummation
by the Company of the transactions contemplated by the Agreement which have not
been obtained.
9. We have no knowledge of any action, suit, proceeding or
investigation which is pending or threatened which questions the validity of the
Agreement or any action taken or to be taken by the Company in connection with
the Agreement.
We have participated in the preparation of the Proxy Statement and
the Registration Statement and meetings with members of management of the
Company and its independent certified public accountants relating to the
disclosure contained in the Proxy Statement and the Registration Statement as it
pertains to the Company. Although we are not passing upon and do not assume any
responsibility for the accuracy, completeness or fullness of the information
relating to the Company contained in the Proxy Statement the Registration
Statement, nothing has come to our attention that has caused us to believe that
at the date such materials were mailed to the shareholders of the Company and/or
filed with the Commission, as applicable, and at the Closing Date, the
information relating to the Company in the Proxy Statement or the Registration
Statement contained any misstatement of a material fact or omission of
2
<PAGE>
a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (except that no
statement is made with respect to any financial statements or schedules, or
other financial or statistical data contained therein).
The opinions set forth herein are limited to the matters set forth
in this letter, and no other opinion should be inferred beyond the opinions
expressly stated.
Very truly yours,
By:____________________________________
A Member of the Firm
3
<PAGE>
Exhibit D
[Form of Opinion of counsel to the Parent]
1. Parent is a corporation validly existing and in good standing
under the laws of the State of Delaware. Sub is a corporation duly formed,
validly existing and in good standing under the laws of the State of New York.
2. The authorized capital stock of Parent consists of 60,000,000
shares of Parent Common Stock and 1,000,000 shares of Parent Preferred Stock. As
of the date hereof, (i) ________ shares of Parent Common Stock are issued and
outstanding, (ii) no shares of Parent Preferred Stock are issued and
outstanding, (iii) to our knowledge, options to acquire ________ shares of
Parent Common Stock (the "Parent stock Options") are outstanding under all stock
option plans of Parent, and (iv) to our knowledge, ________ shares of Parent
Common Stock are reserved for issuance pursuant to the Parent Stock Options and
all other Rights to purchase or otherwise receive capital stock or other
securities of Parent. All of the outstanding shares of Parent Common Stock are
duly authorized, validly issued, fully paid and nonassessable and all of the
shares of Parent Common Stock to be issued upon consummation of the Merger (the
"Merger Shares") are duly authorized and, when issued in accordance with the
Agreement, will be validly issued, fully paid and nonassessable.
3. The authorized capital stock of Sub consists of 1,000 shares of
Sub Common Stock, of which 1,000 shares, as of the date hereof, are issued and
outstanding. All of such outstanding shares are owned of record and, to our
knowledge, beneficially by Parent, and are validly issued, fully paid and
nonassessable.
4. The Parent has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted.
5. The issuance of the Merger Shares in accordance with the Merger
Agreement has been registered under the Securities Act of 1933 and is either
registered or exempt from registration under all applicable state securities or
blue sky laws.
<PAGE>
6. Each of Parent and Sub has all necessary corporate power and
authority to execute and deliver the Agreement, to perform its obligations
thereunder, and to consummate the transactions contemplated thereby. The
execution, delivery and performance of the Agreement and the consummation by
Parent and Sub of the transactions contemplated thereby have been authorized by
all necessary corporate action on the part of each of Parent and Sub. Upon the
filing of the Certificate of Merger with the Department of State of New York,
all steps required to be taken by Parent and Sub under the laws of the State of
New York to effect the Merger of SUB with and into the Company shall have been
duly and properly taken.
7. The Agreement has been duly executed and delivered by each of
Parent and Sub and constitutes the valid and binding obligation of each of
Parent and Sub enforceable in accordance with its terms, except to the extent
that enforceability may be subject to applicable bankruptcy, insolvency,
fraudulent conveyance, fraudulent transfer, reorganization, moratorium and
similar laws presently or hereafter in effect affecting the enforcement of
creditors' rights generally and by general equitable principles (regardless of
whether enforcement is sought in a proceeding in law or in equity).
8. The execution, delivery and performance of the Agreement by each
of Parent and Sub and the consummation by each of Parent and Sub of the
transactions contemplated thereby will not result in a violation of any
provision of their respective certificates of incorporation (as amended, in the
case of Parent) or by-laws.
9. Except for the filing of the Certificate of Merger in New York,
we have no knowledge of any consent or approval which is required in connection
with the consummation by Parent and Sub of the transactions contemplated by the
Agreement which have not been obtained.
10. We have no knowledge of any action, suit, proceeding or
investigation which is pending or threatened which questions the validity of the
Agreement or any action taken or to be taken by Parent or Sub in connection with
the Agreement.
We have participated in the preparation of the Proxy Statement and
the Registration Statement and meetings with members of management of Parent and
its independent certified public accountants relating to the disclosure
contained in the Proxy Statement and the Registration Statement as it pertains
to Parent or Sub. Although we are not passing upon and do not assume any
responsibility for the accuracy, completeness or fullness of the information
relating to Parent or Sub contained in the Proxy Statement or the Registration
Statement, nothing has come to our attention that has caused us to believe that
at the date such materials were mailed to the shareholders of the Company,
and/or filed with the Commission, as applicable, and at the Closing Date, the
information relating to Parent or Sub in the Proxy Statement or the Registration
Statement contained any misstatement of a material fact or omission of
2
<PAGE>
a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (except that no
statement is made with respect to any financial statements or schedules, or
other financial or statistical data contained therein).
3
EXHIBIT 11.1
HENRY SCHEIN, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
----------------------------------- ---------------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Pro forma net income per consolidated statements
of operations (in thousands) $ 7,372 $ 4,312 $ 19,340 $ 9,407
================= =============== =============== ===============
Pro forma weighted average common shares
outstanding:
Shares outstanding at December 25, 1993 11,390,544 11,390,544 11,390,544 11,390,544
1994 issuances:
Shares issued, in part, to extinguish liability
under long-term executive incentive
compensation plan 489,456 489,456 489,456 489,456
Shares issued to ESOP trust in 12/94 128,257 128,257 128,257 128,257
Stock options granted and to be granted in 1995
at an exercise price of $4.21 per share (1) 221,397 237,897 221,397 237,897
IPO Options (Class B) 408,400 263,486 408,400 65,871
1995 issuances:
IPO Shares 5,090,000 3,244,176 5,090,000 811,044
Shares issued as of September 1, 1995 in
connection with one of the Acquisitions 1,260,416 1,227,478 1,260,416 410,749
--------------- -------------- -------------- --------------
18,988,470 16,981,294 18,988,470 13,533,818
Less: Treasury stock (59,275) ---- (55,401) ----
--------------- -------------- -------------- --------------
18,929,195 16,981,294 18,933,069 13,533,818
1996 issuances:
Secondary Offering Shares 3,734,375 ---- 1,959,521 ----
Shares issued to ESOP trust on August 9, 1996 24,210 ---- 9,378 ----
Shares issued on July 10, 1996 in
connection with one of the Acquisitions 37,197 ---- 17,577 ----
Additional Class B Options 42,800 ---- 42,800 ----
Stock options granted pursuant to the
1996 Non-Employee Director Stock Option Plan 10,000 ---- 7,802 ----
Shares issued on November 1, 1996 in
connection with one of the Acquisitions 75,200 ---- 18,800 ----
--------------- -------------- -------------- --------------
22,852,977 16,981,294 20,988,947 13,533,818
Less assumed repurchase of shares under treasury
stock method based on an average price of
$34.129 per share (2):
Stock options----221,397 shares
x $4.21
$932,081 / $34.129 (24,820)(4) (42,313)(3) (27,311)(5) (42,313)(3)
Non-Employee Stock options----10,000 shares
x $29.00
$290,000 / $34.129 (7,722)(4) ---- (6,630)(5) ----
IPO options----403,200 shares
x $16.00
________
$6,451,200 / $34.129 (171,785)(4) (178,106) (189,024)(5) (44,526)
New options----35,000 shares
x $29.50
________
$1,032,500 / $34.129 (27,494)(4) ---- (30,253)(5) ----
New options----10,000 shares
x $31.00
________
$310,000 / $34.129 (8,255)(4) ---- (9,083)(5) ----
New options----3,000 shares
x $36.25
________
$108,750 / $34.129 (3,000)(4) ---- (3,000)(5) ----
--------------- -------------- -------------- --------------
Pro forma weighted average common shares
outstanding 22,609,901 16,760,875 20,723,646 13,446,979
=============== ============== ============== ==============
Pro forma net income per common share $ 0.33 $ 0.26 $ 0.93 $ 0.70
=============== ============== ============== ==============
</TABLE>
- --------
(1) Considered "cheap stock" and treated outstanding since January 1, 1995.
(2) The treasury stock method was not used for the shares issued to settle the
long-term incentive plan liability and the compensatory portion of the
stock options granted because the related special compensation charges
have been/will be excluded from pro forma net income and, therefore, were
not assumed to be proceeds.
(3) Computed using IPO value per share of $16.00 for 237,897 stock options.
(4) Computed using the average closing value per share for the three months
ended December 28, 1996 of $37.554
(5) Computed using the average closing value per share for the twelve months
ended December 28, 1996 of $34.129
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 for the year ended December 28, 1996.
BDO Seidman, LLP
New York, New York
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 41,673
<SECURITIES> 0
<RECEIVABLES> 140,197
<ALLOWANCES> (3,916)<F1>
<INVENTORY> 126,632
<CURRENT-ASSETS> 344,356
<PP&E> 76,607
<DEPRECIATION> 39,453
<TOTAL-ASSETS> 463,936
<CURRENT-LIABILITIES> 139,601
<BONDS> 27,284<F2>
0
0
<COMMON> 222
<OTHER-SE> 291,540
<TOTAL-LIABILITY-AND-EQUITY> 463,936
<SALES> 829,962
<TOTAL-REVENUES> 829,962
<CGS> 584,738
<TOTAL-COSTS> 584,738
<OTHER-EXPENSES> 215,561
<LOSS-PROVISION> 1,402
<INTEREST-EXPENSE> 3,421
<INCOME-PRETAX> 29,334
<INCOME-TAX> 11,343
<INCOME-CONTINUING> 19,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,340
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
<FN>
<F1>(varies from B/S (B/S has all allowances)
<F2>includes current maturities
</FN>
</TABLE>
