<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Sections 13 or 15(d) of the Securities Exchange
Act of 1934.
Date of Report: November 12, 1997
HENRY SCHEIN, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27078 11-3136595
- ------------------------------- ------------ --------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification Number)
135 Duryea Road
Melville, New York 11747
------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
================================================================================
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Item 7 of Henry Schein, Inc.'s ("Schein") Form 8-K dated November 12, 1997
is hereby amended by adding the following financial information:
1. Unaudited pro forma combined condensed financial information pursuant to
Article II of Regulation S-X giving effect to the merger between Henry Schein,
Inc. ("Schein"), Sullivan Dental Products, Inc. ("Sullivan") and HSI Acquisition
Corp. consummated on November 12, 1997.
2. Consolidated balance sheets of Schein 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, restated to give effect to Schein's acquisition of
Micro Bio-Medics, Inc. on August 1, 1997 as described in Note 1 to the
consolidated financial statements.
3. Sullivan's unaudited balance sheets as of September 30, 1997 and
December 31, 1996 and the related unaudited statements of income and cash flow
for the three and nine-month periods ended September 30, 1997 and September 30,
1996.
1
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION
FINANCIAL STATEMENTS AND EXHIBITS
Reports of Independent Certified Public Accountants..........................
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995.............
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 .............................
Statements of Stockholders' Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994...........
Statements of Cash Flows for the years ended December 28,
1996, December 30, 1995 and December 31, 1994........................
Notes to Consolidated Financial Statements ..............................
SULLIVAN FINANCIAL INFORMATION
Balance Sheet as of September 30, 1997 (unaudited) and December 31, 1996
(audited) ...........
Statements of Income for the three and nine months ended September 30,
1997 and 1996........................................................
Statements of cash flow for the three and nine months ended September 30,
1997 and 1996........................................................
2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the Merger using the "pooling of interests" method of accounting,
after giving effect to the pro forma adjustments described in the accompanying
notes. These unaudited pro forma combined condensed financial statements have
been prepared from, and should be read in conjunction with, the historical
consolidated (in the case of Schein) financial statements and notes thereto of
Schein set forth in this Form 8-K/A, which have been restated to give
retroactive effect to the acquisition of MBMI, effective August 1, 1997, which
was accounted for under the pooling of interests method, and Sullivan, which are
incorporated by reference to this Form 8-K/A.
The unaudited pro forma combined condensed statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred had the Merger been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results or financial position of the merged companies.
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the
Merger as if it had occurred on September 27, 1997, combining the balance sheets
of Schein at September 27, 1997 with that of Sullivan as of September 30, 1997.
The Unaudited Pro Forma Combined Condensed Statements of Operations give effect
to the Merger as if it had occurred at the beginning of the earliest period
presented, combining the results of Schein for each year in the three-year
period ended December 28, 1996 and the nine-month period ended September 27,
1997 with those of Sullivan for each year in the three-year period ended
December 31, 1996 and the nine-month period ended September 30, 1997.
As a result of the Merger, the merged companies incurred certain acquisition
related costs in connection with the consummation of the transaction, and will
incur certain transition related costs upon integrating the operations of Schein
and Sullivan. The acquisition and transition related costs consist principally
of compensation arrangement costs (sales force and certain senior management
signing bonuses), professional and registration fees, systems modification costs
and other cost associated with the integration of the two businesses resulting
from the Merger. While the exact timing, nature and amount of these acquisition
and transition related costs are subject to change, Schein anticipates that a
one-time pre-tax charge of approximately $16.0 million for direct incremental
acquisition-related costs will be recorded in the quarter in which the Merger is
consummated. The estimate is comprised of the following amounts:
(in thousands)
Compensation arrangements ................................ $9,000
Professional services .................................... 4,500
Registration and other regulatory costs .................. 1,500
Taxes and other .......................................... 1,000
--------
$16,000
========
The direct incremental acquisition-related costs have been reflected as an
increase in accounts payable and accrued expenses in the Unaudited Pro Forma
Combined Condensed Balance Sheet as of September 27, 1997. The after-tax cost of
this anticipated charge ($13.2 million) has been reflected as a reduction in
retained earnings in the Unaudited Pro Forma Combined Condensed Balance Sheet as
of September 27, 1997.
3
<PAGE>
In addition to the one-time pre-tax charge of approximately $16.0 million
for direct incremental acquisition-related costs, Schein also expects to record
additional special costs associated with systems modifications and other
integration related charges after the Merger. Such pre-tax charges are currently
not estimable, but could be in the range of $6.0 million to $10.0 million. The
ultimate amount of such costs and the periods in which they will be charged to
expense will vary depending on a number of factors, including the timing and
extent of the integration of the businesses.
The unaudited pro forma combined condensed financial statements do not
reflect the special costs associated with systems modifications and other
integration related charges described above incurred during the remainder of
1997 and expected to be incurred thereafter, or any of the anticipated recurring
expense savings.
4
<PAGE>
Unaudited Pro Forma Combined Condensed Balance Sheet
September 27, 1997
(In thousands)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
Schein Sullivan Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,646 $ 221 $ --- $ 16,867
Accounts receivable, net 222,828 41,540 --- 264,368
Inventories 151,832 45,336 --- 197,168
Deferred income taxes 7,546 1,366 --- 8,912
Other 32,198 3,880 --- 36,078
-------- -------- --------- --------
Total current assets 431,050 92,343 --- 523,393
Property and equipment, net 50,242 7,356 --- 57,598
Goodwill and other intangibles, net 93,524 23,667 --- 117,191
Investments and other 29,460 320 --- 29,780
-------- -------- --------- --------
$ 604,276 $123,686 $ --- $727,962
========= ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued expenses $170,932 $ 21,810 $16,000 (2b) $205,942
(2,800) (2c)
Bank credit lines 8,385 7,660 16,045
Current maturities of long-term debt 12,251 --- --- 12,251
-------- -------- --------- --------
Total current liabilities 191,568 29,470 13,200 234,238
Long-term debt 83,976 --- --- 83,976
Other liabilities 4,032 816 --- 4,848
-------- -------- --------- --------
Total liabilities 279,576 30,286 13,200 323,062
-------- -------- ------- --------
Minority interest 1,845 --- --- 1,845
-------- -------- --------- --------
Common stock 275 103 (27) (2a) 351
Additional paid-in capital 273,727 46,138 27 (2a) 319,892
Retained earnings 52,182 47,159 (13,200) (2b)(2c) 86,141
Treasury stock (1,156) --- --- (1,156)
Foreign currency translation adjustment (2,173) --- --- (2,173)
-------- -------- --------- --------
Total stockholders' equity 322,855 93,400 (13,200) 403,055
-------- -------- --------- --------
$604,276 $123,686 $ --- $727,962
======== ======== ========= ========
</TABLE>
5
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Nine Months Ended September 27, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma
Schein Sullivan Combined
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 911,707 $ 196,260 $1,107,967
Cost of sales 654,711 128,509 783,220
---------- ---------- ----------
Gross profit 256,996 67,751 324,727
Selling, general and administrative expenses 228,499 55,539 284,038
Merger and integration costs 22,071 --- 22,071
---------- ---------- ----------
Operating income 6,426 12,212 18,638
Interest income (expense) - net 721 717 1,438
Other - net 343 (117) 226
---------- ---------- ----------
Income before taxes on income, minority interest 7,490 12,812 20,302
and equity in earnings of affiliates
Taxes on income 10,815 5,125 15,940
Minority interest in net (loss) of subsidiaries (434) --- (434)
Equity in earnings of affiliates 889 --- 889
---------- ---------- ----------
Net income (loss) $ (2,002) $ 7,687 $ 5,685
========== ========== ==========
Net income (loss) per common share (1) $ (0.07) $ 0.71 $ 0.16
========== ========== ==========
Weighted average common and common 28,301 10,761 36,210
========== ========== ==========
equivalent shares outstanding (1)
</TABLE>
6
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 28, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma
Schein Sullivan Combined
---------- ---------- -----------
<S> <C> <C> <C>
Net sales $ 990,265 $ 241,583 $ 1,231,848
Cost of sales 706,219 158,937 865,156
---------- ---------- -----------
Gross profit 284,046 82,646 366,692
Selling, general and administrative expenses 250,393 68,901 319,294
---------- ---------- -----------
Operating income 33,653 13,745 47,398
Interest income (expense) - net 1,159 482 1,641
Other - net 771 214 985
---------- ---------- -----------
Income before taxes on income, minority
interest and equity in earnings of affiliates 35,583 14,441 50,024
Taxes on income 12,664 5,776 18,440
Minority interest in net income of subsidiaries 246 --- 246
Equity in earnings of affiliates 1,595 --- 1,595
---------- ---------- -----------
Net income $ 24,268 $ 8,665 $ 32,933
========== ========== ===========
Pro forma:
Historical net income $24,268 $8,665 $ 32,933
Pro forma adjustment:
Provision for income taxes on previously
untaxed earnings of an acquisition (1,197) --- (1,197)
---------- ---------- -----------
Pro forma net income $ 23,071 $ 8,665 $ 31,736
========== ========== ===========
Pro forma net income per common share (1) $ 0.91 $ 0.91 $ 0.98
========== ========== ===========
Pro forma weighted average common and
common equivalent shares outstanding (1) 25,401 9,523 32,400
========== ========== ===========
</TABLE>
7
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 30, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma
Schein Sullivan Combined
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 743,176 $ 215,568 $ 958,744
Cost of sales 521,755 141,753 663,508
---------- ----------- ----------
Gross profit 221,421 73,815 295,236
Selling, general and administrative expenses 198,487 62,465 260,952
Special charges 20,797 --- 20,797
---------- ---------- ----------
Operating income 2,137 11,350 13,487
Interest income (expense) - net (5,315) 654 (4,661)
Other - net 390 63 453
---------- ---------- ----------
Income (loss) before taxes on income, minority interest
and equity in earnings of affiliates (2,788) 12,067 9,279
Taxes on income 5,932 4,827 10,759
Minority interest in net income of subsidiaries 509 --- 509
Equity in earnings of affiliates 1,537 --- 1,537
---------- ---------- ----------
Net income (loss) $ (7,692) $ 7,240 $ (452)
========== ========== ==========
Pro forma:
Historical net income (loss) $ (7,692) $ 7,240 $ (452)
Pro forma adjustments:
Special management compensation and
professional fees 20,797 --- 20,797
Tax effect of above (1,174) --- (1,174)
Provision for income on previously
untaxed earnings of an acquisition (533) --- (533)
---------- ---------- ----------
Pro forma net income $ 11,398 $ 7,240 $18,638
========== ========== ==========
Pro forma net income per common share (1) $ 0.64 $ 0.77 $ 0.76
========== ========== ==========
Pro forma weighted average common and
common equivalent shares outstanding(1) 17,693 9,405 24,606
========== ========== ==========
</TABLE>
8
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Historical Pro Forma
Schein Sullivan Combined
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 612,438 $ 203,602 $ 816,040
Cost of sales 439,792 133,985 573,777
---------- ---------- ----------
Gross profit 172,646 69,617 242,263
Selling, general and administrative expenses 154,012 57,247 211,259
Special charges 23,603 --- 23,603
---------- ---------- ----------
Operating income (loss) (4,969) 12,370 7,401
Interest income (expense)- net (4,568) 358 (4,210)
Other - net 542 35 577
---------- ---------- ----------
Income (loss) before taxes on income (recovery), minority
interest and equity in earnings of affiliates (8,995) 12,763 3,768
Taxes on income (recovery) (678) 5,086 4,408
Minority interest in net income of subsidiaries 561 --- 561
Equity in earnings of affiliates 494 --- 494
Cumulative effect of accounting change (60) --- (60)
---------- ---------- ----------
Net income (loss) $ (8,444) $ 7,677 $ (767)
========== ========== ==========
Pro forma:
Historical net income (loss) $ (8,444) $ 7,677 $ (767)
Pro forma adjustments:
Special management compensation and
professional fees 23,603 --- 23,603
Tax effect of above (5,749) --- (5,749)
Provision for income taxes on previously
untaxed earnings of an acquisition (306) --- (306)
---------- ---------- ----------
Pro forma net income $ 9,104 $ 7,677 $ 16,781
========== ========== ==========
Pro forma net income per common share (1) $ 0.56 $ 0.82 $ 0.73
========== ========== ==========
Pro forma weighted average common and
common equivalent shares outstanding (1) 16,233 9,409 23,149
========== ========== ==========
</TABLE>
9
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(In thousands)
NOTE 1-- EXCHANGE RATIO
Under the Merger Agreement, each outstanding share of Sullivan Common
Stock was converted into 0.735 shares of Schein Common Stock. This exchange
ratio was used in computing shares and per share amounts in the accompanying
unaudited pro forma combined condensed financial statements.
NOTE 2-- PRO FORMA ADJUSTMENTS
(a) A pro forma adjustment has been made to reflect the issuance of shares
in the exchange ratio stated in Note 1 above in accordance with the
Merger Agreement.
(b) A pro forma adjustment has been made for certain direct incremental
acquisition related costs and expenses including as described in the
fourth paragraph under "Unaudited pro Forma Combined Condensed Financial
Statements".
(c) A pro forma adjustment has been made for the estimated tax effects of
the adjustments discussed in (b) above.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND EXHIBITS
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. These
financial statements are the responsibility of the Company's managment. Our
responsibility is to express an opinion on these financial statments based on
our audits. We did not audit the consolidated financial statements of Micro
Bio-Medics, Inc. and Subsidiaries, which statements reflect total assets of
$60,444,000, $51,136,000, and $54,461,000 as of December 31, 1996, 1995, and
1994, respectively, and total revenues of $150,143,000, $119,874,000, and
$121,604,000 for the years then ended. Those statements were audited by another
auditor whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such subsidiaries, is based solely on the
report of the other auditors.
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, based on our audits and the report of the other auditors, 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 31, 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
March 7, 1997, except for Note 19 which is as of August 1, 1997.
11
<PAGE>
Report of Independent Certified Public Accountants
Micro Bio-Medics, Inc.
Pelham Manor, New York
We have audited the consolidated balance sheets of Micro Bio-Medics, Inc. and
Subsidiaries as of November 30, 1996 and 1995, and the related consolidated
statements of income, cash flows, and changes in stockholders' equity for each
of the three years in the period ended November 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated finanacial
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 Micro Bio-Medics,
Inc. and Subsidiaries as of November 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1996, in conformity with generally accepted accounting principles.
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
February 12, 1997,
except for Note 19
which is as of August 1, 1997
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 45,264 $ 11,699
Accounts receivable, less reserves of $8,060 and
$7,065 respectively................................. 172,094 117,487
Inventories.............................................. 140,350 108,961
Deferred income taxes.................................... 6,971 7,382
Other.................................................... 31,027 20,673
--------- ---------
Total current assets.............................. 395,706 266,202
Property and equipment, net................................. 41,329 33,513
Goodwill and other intangibles, net ........................ 61,674 29,379
Investments and other....................................... 29,185 21,406
--------- ---------
$527,894 $350,500
========= =========
LIABILITIES AND STOCKHOLDERS'EQUITY Current liabilities:
Accounts payable......................................... $105,451 $ 75,499
Bank credit lines........................................ 6,716 9,325
Accruals:
Salaries and related expenses......................... 11,041 9,074
Other................................................. 30,917 34,062
Current maturities of long-term debt..................... 8,894 3,822
--------- ---------
Total current liabilities......................... 163,019 131,782
Long-term debt.............................................. 33,283 47,651
Other liabilities........................................... 2,895 1,591
--------- ---------
Total liabilities................................. 199,197 181,024
--------- ---------
Minority interest........................................... 5,289 4,547
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized
60,000,000; issued: 26,480,231 and
21,832,808, respectively.......................... 264 218
Additional paid-in capital............................... 275,272 136,382
Retained earnings ....................................... 49,598 29,273
Treasury stock, at cost, 60,529 and 51,679
shares, respectively ................................. (1,090) (769)
Foreign currency translation adjustment.................. (636) (175)
--------- ---------
Total stockholders' equity........................ 323,408 164,929
--------- ---------
$ 527,894 $ 350,500
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<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...................................... $990,265 $743,176 $612,438
Cost of sales.................................. 706,219 521,755 439,792
---------- ---------- ---------
Gross profit................................ 284,046 221,421 172,646
Operating expenses:
Selling, general and administrative......... 250,393 198,487 154,012
Special management compensation............. --- 20,797 21,596
Special professional fees .................. --- --- 2,007
---------- ---------- ---------
Operating income (loss).................. 33,653 2,137 (4,969)
Other income (expense):
Interest income............................. 5,592 1,932 424
Interest expense ........................... (4,433) (7,247) (4,992)
Other-net................................... 771 390 542
---------- ---------- ---------
Income (loss) before taxes on
income (recovery), minority
interest and equity in earnings of
affiliates........................... 35,583 (2,788) (8,995)
Taxes on income (recovery) .................... 12,664 5,932 (678)
Minority interest in net income of
subsidiaries................................ 246 509 561
Equity in earnings of affiliates............... 1,595 1,537 494
Cumulative effect of accounting change......... --- --- (60)
---------- ---------- ---------
Net income (loss).............................. $24,268 $ (7,692) $ (8,444)
========== ========== =========
Pro forma:
Historical net income (loss)................ $ 24,268 $ (7,692) $ (8,444)
Pro forma adjustments:
Special management compensation
and professional fees................ --- 20,797 23,603
Tax effect of above...................... --- (1,174) (5,749)
Provision for income taxes on
previously untaxed earnings of an
acquisition.............................. (1,197) (533) (306)
---------- ---------- ---------
Pro forma net income........................ $23,071 $ 11,398 $ 9,104
========== ========== =========
Pro forma net income per common
share.................................... $ 0.91 $ 0.64 $ 0.56
========== ========== =========
Pro forma weighted average common
and common equivalent shares
outstanding.............................. 25,401 17,693 16,233
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value
--------------------------- Paid-in Retained
Shares Amount Capital Earnings
----------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Balance, December 25, 1993, as previously reported........ 12,460,544 $ 125 $ 11,221 $ 41,382
Pooling of interests with Micro Bio-Medics, Inc............ 2,191,257 22 10,361 5,811
---------- ---------- ---------- ----------
Balance, December 25, 1993, as restated.................... 14,651,801 147 21,582 47,193
Net loss................................................... --- --- --- (8,444)
Dividends paid and deemed ................................. --- --- --- (684)
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.................... --- --- --- ---
Shares issued for stock options and warrants............... 37,173 --- 251 ---
Other ..................................................... --- --- 22 ---
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1994................................. 13,222,289 132 20,594 38,065
Net loss................................................... --- --- --- (7,692)
Dividends paid............................................. --- --- --- (1,100)
Shares issued for acquisition.............................. 1,260,416 13 6,500 ---
Stock issued in initial public offering.................... 5,090,000 51 72,417 ---
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering......................................... 2,084,398 20 32,180 ---
Issuance of compensatory stock options..................... --- --- 2,805 ---
Purchase of treasury stock (51,679 shares)................. --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
Shares issued for stock options and warrants .............. 59,455 1 497 ---
Shares issued for conversion of debentures ............... 116,250 1 1,389 ---
---------- ---------- ---------- ----------
BALANCE, DECEMBER 30, 1995................................. 21,832,808 218 136,382 29,273
Net income................................................. --- --- --- 24,268
Dividends paid............................................. --- --- --- (3,943)
Shares issued for acquisitions............................. 329,215 4 8,650 ---
Stock issued in follow-on offering......................... 3,734,375 37 124,070 ---
Stock issued to ESOP trust................................. 24,210 --- 820 ---
Purchase of treasury stock (8,850 shares) ............... --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
Shares issued for conversion of debentures................. 116,250 1 1,397 ---
Shares issued for stock options and warrants .............. 443,373 4 3,953 ---
--------- ---------- ---------- ----------
BALANCE, DECEMBER 28, 1996................................. 26,480,231 $ 264 $ 275,272 $ 49,598
========== ========== ========== ==========
<CAPTION>
Foreign
Additional Currency Deferred Total
Treasury Translation Compen- Stockholders'
Stock Adjustment sation Equity
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, December 25, 1993, as previously reported........ $ --- $ (635) $ (8,197) $ 43,896
Pooling of interests with Micro Bio-Medics, Inc............ --- --- --- 16,194
----------- ---------- ---------- ----------
Balance, December 25, 1993, as restated.................... --- (635) (8,197) 60,090
Net loss................................................... --- --- --- (8,444)
Dividends paid and deemed ................................. --- --- --- (684)
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
Shares issued for stock options and warrants............... --- --- --- 251
Other ..................................................... --- --- --- 22
Balance, December 31, 1994................................. --- (458) --- 58,333
Net loss................................................... --- --- --- (7,692)
Dividends paid............................................. --- --- --- (1,100)
Shares issued for acquisition.............................. --- --- --- 6,513
Stock issued in initial public offering.................... --- --- --- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering......................................... --- --- --- 32,200
Issuance of compensatory stock options..................... --- --- --- 2,805
Purchase of treasury stock (51,679 shares)................. (769) --- --- (769)
Foreign currency translation adjustment.................... --- 283 --- 283
Shares issued for stock options and warrants .............. --- --- --- 498
Shares issued for conversion of debentures ............... --- --- --- 1,390
----------- ---------- ---------- ----------
Balance, December 30, 1995................................. (769) (175) --- 164,929
Net income................................................. --- --- --- 24,268
Dividends paid............................................. --- --- --- (3,943)
Shares issued for acquisitions............................. --- --- --- 8,654
Stock issued in follow-on offering......................... --- --- --- 124,107
Stock issued to ESOP trust................................. --- --- --- 820
Purchase of treasury stock (8,850 shares) ............... (321) --- --- (321)
Foreign currency translation adjustment.................... --- (461) --- (461)
Shares issued for conversion of debentures................. --- --- --- 1,398
Shares issued for stock options and warrants .............. --- --- --- 3,957
----------- ---------- ---------- ----------
Balance, December 28, 1996................................. $ (1,090) $ (636) $ --- $ 323,408
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<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).......................................... $ 24,268 $ (7,692) $ (8,444)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Accounting change....................................... --- --- 60
Depreciation and amortization........................... 9,384 7,183 4,819
Provision for losses and allowances on accounts
receivable...................................... 1,139 2,040 1,330
Stock issued to ESOP trust ............................. 820 --- 900
Provision (benefit) for deferred income taxes........... 2,242 (1,002) (3,649)
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................................................... (586) (558) (967)
Changes in assets and liabilities:
Increase in accounts receivable...................... (47,502) (33,790) (14,316)
Increase in inventories.............................. (24,263) (4,240) (8,011)
Increase in other current assets..................... (8,462) (4,786) (3,926)
Increase in accounts payable and accruals............ 18,271 17,751 27,488
--------- ---------- ----------
Net cash provided by (used in) operating activities..... (26,038) (5,833) 14,217
--------- ---------- ----------
Cash flows from investing activities:
Capital expenditures.................................... (12,120) (10,164) (6,883)
Business acquisitions, net of cash acquired............. (32,540) (17,308) (2,718)
Other................................................... (6,481) (5,515) (1,984)
--------- ---------- ----------
Net cash used in investing activities...................... (51,141) (32,987) (11,585)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 1,154 3,698 5,391
Principal payments on long-term debt.................... (5,291) (15,808) (1,576)
Proceeds from issuance of stock......................... 128,064 72,966 252
Proceeds from borrowings from banks..................... 4,449 2,446 3,764
Purchase of treasury stock.............................. (321) (769) ---
Payments on borrowings from banks....................... (13,478) (20,976) (7,425)
Deemed dividend......................................... --- --- (552)
Distributions to stockholders........................... (3,259) (632) (132)
Other................................................... (574) 1,711 444
--------- ---------- ----------
Net cash provided by financing activities.................. 110,744 42,636 166
--------- ---------- ----------
Net increase in cash and cash equivalents.................. 33,565 3,816 2,798
Cash and cash equivalents, beginning of year............... 11,699 7,883 5,085
--------- ---------- ----------
Cash and cash equivalents, end of year..................... $ 45,264 $ 11,699 $ 7,883
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
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. The financial statements
include adjustments to give retroactive effect to the acquisition of Dentrix
Dental Systems, Inc. ("Dentrix"), effective February 28, 1997, and Micro Bio-
Medics, Inc. ("MBMI"), effective August 1, 1997, which were accounted for under
the pooling of interests method.
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. The accounts of MBMI, have been consolidated on a
basis with a year ended November 30.
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 post contract 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.
16
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
Buildings and improvements........................ 40
Machinery and warehouse equipment................. 5 - 10
Furniture, fixtures and other..................... 3 - 10
Computer equipment and software................... 5 - 7
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.
Taxes on Income
The Company filed a consolidated Federal income tax return with Schein
Holdings, Inc. for the period ended September 30, 1994 (see Note 2). For the
balance of 1994 the Company filed a consolidated Federal income tax return with
its 80% or greater owned subsidiaries and expects to continue to do so
thereafter. Income taxes for financial statement presentation were calculated
through the period ending September 30, 1994 as if the Company filed a separate
tax return.
Premium Coupon Program
The Company issues premium coupons to certain customers in conjunction with
sales of its products which are redeemable for gifts. Premium coupon redemptions
are accrued as issued based upon expected redemption rates.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows is not
material.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in earnings, except for certain hedging transactions (see below).
17
<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."
18
<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 $0.97. 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.
19
<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.
20
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 2 - REORGANIZATION (Continued)
The shares issued to the executive officer and the senior management of HSI
were subject to repurchase by HSI at fair market value in the event employment
was terminated for any reason or an initial public offering of HSI's stock did
not occur by December 31, 1999. The repurchase feature was eliminated upon the
closing of the initial public offering. Special management compensation for the
year ended December 30, 1995 includes a $17,484 charge to operations to reflect
the appreciation in the market value of stock grants and issuances based on the
initial public offering price of $16.00 per share and a cash payment of
approximately $508 to cover income taxes related to those stock grants and
issuances.
In addition, special management compensation for the year ended December
30, 1995 includes a charge of $2,805 to reflect the excess of the initial public
offering price over the exercise price of Class A options issued to certain
executive management in May 1995 (see Note 14(a)).
Special charges incurred in connection with this reorganization consist of
special management compensation expense of $20,797 and $21,596 for the years
ended 1995 and 1994, respectively, and special professional fees of $2,007 for
1994.
In 1994, the Company incurred special professional fees on behalf of its
stockholders relating to the reorganization in the amount of $552. This amount
was deemed to be a dividend and deducted from retained earnings.
NOTE 3--OTHER CURRENT ASSETS
Other current assets consist of the following:
December 28, December 30,
1996 1995
------------ -----------
Prepaid expenses ........................... $ 6,519 $5,070
Vendor rebates receivable................... 11,798 5,744
Amounts due from affiliates ................ 5,154 2,084
Refundable income taxes..................... 727 2,645
Other....................................... 6,829 5,130
------- -------
$31,027 $20,673
======= =======
21
<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:
December 28, December 30,
1996 1995
----------- ------------
Land......................................... $ 1,539 $ 1,718
Buildings and leasehold
improvements............................... 26,225 24,572
Machinery and warehouse equipment............ 14,937 10,509
Furniture, fixtures and other................ 20,559 18,232
Computer equipment and software.............. 21,253 16,185
------- -------
84,513 71,216
Less accumulated depreciation and
amortization............................... 43,184 37,703
------- -------
Net property and equipment................... $41,329 $33,513
======= =======
Equipment held under capital leases amounted to approximately $2,400 and
$2,249 as of December 28, 1996 and December 30, 1995, respectively (see Note
15(b)).
NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
December 28, December 30,
1996 1995
----------- -----------
Goodwill................................. $59,076 $ 26,265
Other.................................... 7,412 5,970
------- --------
66,488 32,235
Less accumulated
amortization........................... 4,814 2,856
------- --------
$61,674 $ 29,379
======= ========
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of net assets acquired. During 1996, five acquisitions accounted
for $19,187 of the increase in goodwill. Other intangibles include covenants not
to compete, computer programming costs, customer lists and deferred acquisition
costs. Goodwill and other intangibles are amortized on a straight-line basis
over periods not exceeding 30 years.
22
<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:
December 28, December 30,
1996 1995
------------ -----------
Investments in unconsolidated affiliates.... $11,524 $ 9,865
Long-term receivables (see Note 11(b))...... 11,051 8,399
Other....................................... 6,610 3,142
------- -------
$29,185 $21,406
======= =======
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:
December 28, December 30,
1996 1995
----------- ------------
Current assets.............. $38,172 $28,904
Total assets................ 47,103 35,220
Liabilities................. 30,939 22,995
Stockholders' equity........ 16,164 12,225
Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ------------ ------------
Net sales......... $103,169 $55,090 $34,003
Operating income.. 7,044 5,147 3,183
Net income........ 3,775 2,920 1,428
23
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS
The Company acquired 36 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, on January 18, 1996, Stone Medical Supply Corporation
("Stone") in a tax-free merger, 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 $3,760, for 1996, 1995 and 1994, respectively. The Company also
issued 329,215 shares of common stock in 1996 in connection with three 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. In connection with the Stone transaction, MBMI
entered into fifteen year non-compete agreements with two former executives of
Stone. These acquisitions have been accounted for under the purchase method,
except one from an affiliate which involves carryover of predecessor basis with
respect to the affiliate's proportionate share of net assets. Operations of
these businesses have been included in the consolidated financial statements
from their acquisition dates.
Certain acquisitions provide for contingent consideration, primarily cash,
to be paid in the event certain financial performance targets are satisfied over
periods typically not exceeding three years from the date of acquisition. The
Company's policy is to record a liability for such amounts when it becomes clear
that targets will be met. As of December 28, 1996 no liabilities have been
recorded for contingent consideration.
The summarized unaudited pro forma results of operations set forth below
for 1996 and 1995 assume the acquisitions occurred as of the beginning of each
of these periods.
Years Ended
-----------------------------
December 28, December 30,
1996 1995
------------ -------------
Net sales.............................. $ 1,038,228 $889,300
Net income (loss)...................... 24,627 (7,070)
Proforma net income, reflecting
adjustment in 1995 to exclude
special management compensation,
and to provide for provision for
income taxes on previously
untaxed earnings of Dentrix ......... 23,430 12,020
Pro forma net income per common share.. $ 0 .92 $ 0 .69
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.
24
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS (Continued)
On February 28, 1997, the Company acquired all the common stock of Dentrix
in exchange for 1,070,000 shares of the Company's Common Stock. Dentrix is a
leading provider of clinically-based dental practice management systems and had
net sales of approximately $10,200. The Dentrix acquisition was accounted for as
a pooling of interests, and, accordingly, the consolidated financial statements
for the periods presented have been restated to include Dentrix. Prior to its
acquisition by the Company, Dentrix elected to be taxed as an S Corporation
under the Internal Revenue Code. Accordingly, the current taxable income of
Dentrix was taxable to its shareholders who were responsible for payment of
taxes thereon. Upon its acquisition, Dentrix will be taxed as a regular
corporation. Pro forma adjustments have been made to the restated statement of
operations to reflect the income taxes that would have been provided had Dentrix
been subjected to income taxes in prior years. Pursuant to a policy adopted in
1992, as an S Corporation, Dentrix made regular distributions to its
stockholders which included amounts to pay taxes on their allocable corporate
earnings and for other purposes.
On August 1, 1997 the Company acquired MBMI, a distributor of medical supplies
and related products (See Note 19). The MBMI acquisition was accounted for as a
pooling of interests and, accordingly the consolidated financial statements have
been restated to include MBMI.
25
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
26
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS (Continued)
Net sales, net income (loss) and pro forma net income for the Company,
Dentrix , MBMI and on a combined basis for the years ended December 1996, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
HSI $ 829,962 $616,209 $486,610
Dentrix 10,160 7,093 4,224
MBMI 150,143 119,874 121,604
--------- -------- --------
Combined $ 990,265 $743,176 $612,438
========= ======== ========
Net income (loss):
HSI $19,340 $(10,216) $(10,876)
Dentrix 3,183 1,415 811
MBMI 1,745 1,109 1,621
--------- -------- --------
Combined $ 24,268 $ (7,692) $ (8,444)
========= ======== ========
Pro forma net income:
HSI (1) $ 19,340 $ 9,407 $ 6,978
Dentrix (2) 1,986 882 505
MBMI 1,745 1,109 1,621
--------- -------- --------
Combined $ 23,071 $ 11,398 $ 9,104
========= ======== ========
</TABLE>
-------------------------------------------------------------------
(1) Reflects adjustment to exclude special management compensation
in 1995 and special management compensation and professional
fees in 1994, net of applicable tax benefits.
(2) Reflects adjustment for provision for income taxes on previously
untaxed earnings.
27
<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.
28
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
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
Secured Revolving Loan (b)....................................... 7,500 14,500
Notes payable for business acquisitions (c)...................... 4,383 7,106
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
Convertible Subordinated Debentures (d)......................... --- 1,500
Mortgage payable to bank in quarterly installments of $14,
interest at 5.2% through November 2003, 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 2003, uncollateralized .................. 8,141 6,784
Capitalized leases payable in various installments through
fiscal 2001; interest with 6.5% to 9.06% or varies with
prime rate 1,194 1,426
------- -------
Total.......................................................... 42,177 51,473
Less current maturities........................................ 8,894 3,822
------- -------
Total long-term debt........................................... $33,283 $47,651
======= =======
</TABLE>
(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 0.1%
to 0.3%, 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.
29
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9 - LONG TERM DEBT (Continued)
(b) Secured Revolving Loan
A subsidiary of the Company has a $25 million secured revolving loan
agreement with certain banks. The loan agreement expires on February 15, 1999
and bears interest at prime rate plus 0.25%, except for certain portions
utilized for Eurodollar loans. As of December 28, 1996, $4,000 of the $7,500
revolving loan outstanding was utilized for Eurodollar loans at an average
interest rate of approximately 6.625%. The loan is collateralized by accounts
receivable and inventory with a book value of approximately $44,800. In
connection with the loan agreement, the subsidiary has agreed to certain
restrictions relating to its indebtedness and liens, and has agreed to maintain
specified financial ratios and covenants. The loan agreement prohibits the
subsidiary from paying any dividends and restricts capital distributions or
redemptions and purchases or retirements of any of the subsidiary's capital
stock without consent of the banks. Additionally, there are restrictions as to
investments, acquisitions, capital expenditures and payments to related parties.
A commitment fee equal to 1/8% per annum will be charged on the unused portion
of the loan. The loan may be repaid at any time.
(c) 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.
(d) Convertible Subordinated Debentures
In November 1993, a subsidiary of the Company completed a private sale and
issuance of 7% Convertible Subordinated Debentures ("Debentures") due October
30, 2003. The net proceeds from the issuance of the Debentures, which had a face
value of $3,000, was approximately $2,700. The Debentures were immediately
convertible into shares of the Company's Common Stock. On September 28, 1995,
$1,500 of the Debentures were converted into 116,250 equivalent shares of the
Company's Common Stock. As of May 10, 1996, all remaining outstanding Debentures
were converted into equivalent shares of the Company's Common Stock.
As of December 28, 1996, the aggregate amounts of long-term debt maturing in
each of the next five years are as follows: 1997- $8,894; 1998 - $2,105; 1999 -
$8,639; 2000- $988, 2001- $760.
30
<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.......................................... $33,340 $(4,105) $(10,534)
Foreign........................................... 2,243 1,317 1,539
------- ------- ---------
Total income (loss) before taxes on income
(recovery), minority interest and equity in
earnings of affiliates......................... $35,583 $(2,788) $(8,995)
======= ======= =======
</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............................... $ 8,237 $ 5,185 $ 2,273
State and local............................ 1,490 1,133 762
Foreign.................................... 695 616 (64)
--------- ----------- -------------
Total current................................. 10,422 6,934 2,971
-------- --------- ----------
Deferred tax expense (benefit):
U.S. Federal............................... 1,342 (764) (3,640)
State and local............................ 747 (268) (174)
Foreign.................................... 153 30 165
--------- ------------ -----------
Total deferred................................ 2,242 (1,002) (3,649)
-------- ---------- ----------
Total provision (recovery).................... $12,664 $ 5,932 $ (678)
======= ======== =======
</TABLE>
31
<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......... $3,046 $3,875
Uniform capitalization adjustments to
inventories.................................. 2,053 1,661
Accrued special professional fees and other
accrued liabilities.......................... 1,872 1,846
------- -------
Total current deferred tax asset ...................... 6,971 7,382
------- -------
Non-current deferred tax assets (liabilities):
Property and equipment.............................. (2,092) (786)
Provision for long-term executive incentive
compensation and other accrued
liabilities.................................. (85) (110)
Net operating loss carryforward..................... 262 -
Net operating losses of foreign subsidiaries........ 1,928 2,403
Other............................................... 44 -
------- -------
Total non-current deferred tax asset................... 57 1,507
Valuation allowance for non-current deferred
tax assets................................... (1,928) (2,403)
---------- --------
Net non-current deferred tax liabilities............... (1,871) (896)
--------- --------
Net deferred tax asset................................. $5,100 $6,486
====== ======
</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.
32
<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......... $11,309 $(1,490) $(3,459)
State income taxes, net of Federal income tax
effect............................................... 1,783 733 237
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.................................................. (136) 31 (403)
------- ------- -------
Income tax provision (recovery)........................ $12,664 $ 5,932 $(678)
======= ======= ======
</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.
33
<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, HSI had $13,000 outstanding in interest rate
swaps. These 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.
On June 7, 1995, a subsidiary of the Company entered into a zero cost,
three year interest rate swap agreement for $10,000 intented to reduce interest
rate risk. The agreement serves to limit the net interest rate charged on the
subsidiary's first $10,000 of revolving loans to 8.25%. The subsidiary receives
no further interest rate benefit once the applicable interest rate falls below
6.55%.
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.
34
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued)
The Company places its short-term cash investments with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and its
dispersion across different types of healthcare professionals and geographic
areas. The Company maintains an allowance for losses based on the expected
collectability of all receivables. Included in Accounts receivable and Long-term
receivables at December 28, 1996 is $18,355 and $7,785, respectively, related to
Easy Dental(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 inputed interest relating to
these non-interest bearing extended payment term receivables. Imputed interest
relating to these receivables was not material for 1995 and 1994.
NOTE 12--RELATED PARTY TRANSACTIONS
(a) In the ordinary course of business, the Company purchases
pharmaceutical products from certain unconsolidated affiliates. Net purchases
from these affiliates amounted to $15,037, $8,730 and $12,055 in 1996, 1995 and
1994, respectively. Included in Accounts Payable at December 28, 1996 and
December 30, 1995 were $1,523 and $1,591, respectively, for amounts due to these
affiliates for purchases made from them.
(b) The Company also shares certain services with these and other
unconsolidated affiliates which are charged to the affiliates at cost. The
Company charged these affiliates $602, $891 and $1,691 during 1996, 1995 and
1994, respectively, for these services. In addition, sales (at cost) to
unconsolidated affiliates were $5,832, $3,784 and $3,160 in 1996, 1995 and 1994,
respectively.
(c) The Company recorded interest income of $129, $88 and $87, and interest
expense of $32, $26 and $13 in 1996, 1995 and 1994, respectively, attributable
to transactions with unconsolidated affiliates. Included in the Other section of
current assets are amounts due from unconsolidated affiliates of $5,154 and
$2,051 at December 28, 1996 and December 30, 1995, respectively.
(d) A subsidiary of the Company leases its primary operating facility from
an officer of the subsidiary. Rent expense attributed to this facility amounted
to $209 for 1996 and 1995.
(e) During 1994, a subsidiary of the Company entered into a sales service
agreement with an entity ("Salesco") owned by an officer of the subsidiary.
Under the terms of this agreement the subsidiary is required to reimburse
Salesco for all reasonable expenses incurred in connection with the services it
provides to the subsidiary and pay a fee to Salesco based upon a formula applied
to its pre-tax profit. Amounts paid during 1996, 1995 and 1994 under this
agreement were not material.
(f) The Company purchases products from Schein Dental Equipment Corp.
("SDEC"), formerly owned by a stockholder. In September 1995, the Company
acquired SDEC. Net purchases from SDEC prior to the acquisition amounted to
$1,803 and $1,738, in 1995 and 1994, respectively.
35
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 12--RELATED PARTY TRANSACTIONS (Continued)
(g) In 1993, the Company entered into a software licensing agreement with a
40% owned Canadian affiliate, whereby the Company receives royalties of 30% on
all products sold in Canada. The royalties, which amounted to $135 and $114 in
1996 and 1995, respectively, are based on the Company's suggested retail selling
prices.
36
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 13--SEGMENT AND GEOGRAPHIC DATA
The Company is engaged principally in one line of business, the distribution
of healthcare products to healthcare practitioners and professionals. The
following table presents information about the Company by geographic area. There
were no material amounts of sales or transfers among geographic areas and there
were no material amounts of United States export sales. No one European country
represents a significant geographic area.
<TABLE>
<CAPTION>
1996 United States Europe Consolidated
- ---- ------------- ------------ ------------
<S> <C> <C> <C>
Net sales............................. $854,271 $135,994 $990,265
Operating income ..................... 30,257 3,396 33,653
Pre-tax income........................ 33,340 2,243 35,583
Identifiable assets................... 458,368 69,526 527,894
Depreciation and amortization......... 7,415 1,969 9,384
Capital expenditures.................. 10,724 1,396 12,120
1995
Net sales............................. $643,761 $ 99,415 $743,176
Operating income (loss)............... (453) * 2,590 2,137
Pre-tax income (loss)................. (4,105) * 1,317 (2,788)
Identifiable assets................... 297,310 53,190 350,500
Depreciation and amortization......... 5,850 1,333 7,183
Capital expenditures.................. 6,468 3,696 10,164
1994
Net sales............................. $528,511 $83,927 $612,438
Operating income (loss)............... (7,143)* 2,174 (4,969)
Pre-tax income (loss)................. (10,525)* 1,539 (8,995)
Identifiable assets................... 211,587 34,248 245,835
Depreciation and amortization......... 3,532 1,287 4,819
Capital expenditures.................. 5,389 1,494 6,883
</TABLE>
* Includes special management compensation and special professional fees of
$20,797 and $23,603 for 1995 and 1994, respectively.
37
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS
(a) Stock Compensation Plan
The Company maintains a 1994 Stock Option Plan for the benefit of certain
employees under which 679,635 shares of common stock may be issued. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and nonqualified stock options may be issued under the Plan.
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the initial
public offering, at which time the excess of the initial public offering price
of $16.00 over the exercise price ($2,805) was charged to special management
compensation expense. On November 3, 1995, the Company issued Class B options to
acquire 413,400 shares of common stock to certain employees at an exercise price
of $16.00 per share. During 1996, Class A options totalling 16,500 and Class B
options totalling 10,200 were forfeited, and 48,000 Class B options were issued.
The exercise price of all Class B options equalled the market price on the date
of grant and accordingly no compensation cost was recognized. Substantially all
Class B options become exercisable ratably over three years from the date of
issuance.
The Class A and Class B options are exercisable up to the tenth anniversary
of the date of issuance, subject to acceleration upon termination of employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1996, 10,000 options were granted to certain non-employee
directors at an exercise price of $29.00 per share which was equal to the market
price on the date of grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
38
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)
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
----------------------------------------- -------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares 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 $14.75 $10.00
options granted during the year.
</TABLE>
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Weighted-Average Weighted- Weighted-
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.21................. 221,397 8.8 years $ 4.21 221,397 $ 4.21
16.00.................. 402,200 8.8 16.00 138,200 16.00
29.00 to 36.25........ 58,000 9.3 30.02 --- 48.00
------- ---------
$ 4.21 to 36.25.......... 681,597 8.8 $ 13.36 359,597 $ 8.74
======= =========
</TABLE>
39
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(b) Stock Options and Warrants Of An Acquired Subsidiary
Under various plans, of an acquired subsidiary (MBMI), the subsidiary could
grant stock options to directors, officers and employees. The options had to be
granted at exercise prices of not less than fair market value and expire within
ten years from the date of grant. Transactions, on a converted basis, under the
various stock option and incentive plans for the periods indicated were as
follows (on a converted basis to reflect the exchange rates of the Company's
shares for MBMI's):
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year.................. $ 924,772 $ 850,868 $ 771,755
Add (deduct):
Granted........................................ 133,300 128,340 111,910
Terminated..................................... (9,362) (26,454) (13,640)
Exercised ..................................... (34,750) (27,982) (19,157)
---------- --------- ---------
Outstanding at end of year........................ 1,013,960 924,772 850,868
========== ========= =========
426,394 240,332 32,218
========== ========= =========
Remaining shares reserved for issuance............
</TABLE>
MBMI's Options outstanding, on a converted basis, at the years ended 1996,
1995 and 1994 ranged in price on a converted basis from $3.63 to $26.61. Options
exercised ranged in price on a converted basis from $3.63 to $16.53 in 1996,
1995 and 1994.
MBMI's Series 1 warrants, on a converted basis, expired in June 1996 and
almost all were exercised at $9.68 per 0.65 shares on a converted basis. The
total net proceeds from the exercise of all warrants from 1992 (inception)
through June 1996 were approximalely $7,900 with approximately 868,000 shares of
common stock being issued on a converted basis.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company and its acquired
subsidiary 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. This information is
presented for the Company only as MBMI was a November year-end and accordingly
was not required for MBMI under SFAS 123.
40
<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),
and an adjustment for provision for income taxes
on previously untaxed earnings of Dentrix .............. $21,326 $ 10,289
Pro forma ............................................. 20,046 10,109
Net income per common share:
As reported, reflecting adjustment in 1995 to
exclude special management compensation (1),
and an adjustment for provision for income taxes
on previously untaxed earnings of Dentrix............... $ 0.98 $ 0.71
Pro forma .................................................. 0.92 0.70
</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.
(c) Profit Sharing Plans
The Company has qualified contributory and noncontributory profit sharing
and 401(k) 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 $3,150, $2,255 and $1,749, respectively.
(d) 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.
(e) 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 .
41
<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 noncancellable 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 noncancellable leases at
December 28, 1996 are as follows:
1997............................................................ $ 11,133
1998............................................................ 10,157
1999............................................................ 8,892
2000............................................................ 7,330
2001............................................................ 5,628
Thereafter...................................................... 16,419
------
Total minimum lease payments.................................... $ 59,559
=======
Total rental expense for 1996, 1995 and 1994 was $11,395, $8,648 and $7,352
, respectively.
(b) Capital Leases
The Company leases certain equipment under capital leases. The following is
a schedule by years of approximate future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at December 28, 1996.
1997............................................................ $ 516
1998............................................................ 274
1999............................................................ 263
2000............................................................ 255
2001............................................................ 53
--------
Total minimum lease payments ................................... 1,361
Less: Amount representing interest at 6.5% to 9%................ 167
--------
$ 1,194
==========
(c) 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.
42
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 15--COMMITMENTS AND CONTINGENCIES (Continued)
(d) 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 $5,062 per year which decrease
periodically to approximately $1,766 per year. In addition, some agreements have
provisions for incentive and additional compensation.
43
<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....................... $4,694 $7,548 $4,391
Income taxes................... 10,138 5,488 3,665
</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 $ 60,475 $ 24,650
Less liabilities assumed and
created upon acquisition.......... 18,430 43,167 21,932
-------- -------- ---------
Net cash paid....................... $32,540 $ 17,308 $ 2,718
======= ========= =========
</TABLE>
In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.
45
<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.......... 168 314 27
---- ----- -----
$771 $ 390 $ 542
==== ===== =====
</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, and provision for taxes on previously untaxed earnings of
Dentrix:
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales...................... $217,226 $233,597 $259,160 $280,282
Gross profit................... 62,802 67,466 73,296 80,482
Operating income............... 5,038 7,562 9,737 11,316
Pro forma net income........... 2,692 4,923 6,852 8,604
Pro forma earnings per share... $ 0.12 $ 0.21 $ 0.25 $ 0.32
<CAPTION>
Quarters Ended
------------------------------------------------------------------
April 1, July 1, September 30, December 30,
1995 1995 1995 1995
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.................... $162,033 $169,827 $194,849 $216,467
Gross profit................. 46,222 49,348 57,189 68,662
Pro forma operating income... 2,763 7,280 7,106 5,785
Pro forma net income......... 711 2,363 3,254 5,070
Pro forma earnings per share. $ 0.05 $ 0.17 $ 0.20 $0.21
</TABLE>
45
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 18 - QUARTERLY INFORMATION (Unaudited) (Continued)
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software, year-end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of software
enhancements, timing of purchases, special promotional campaigns, fluctuations
in exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 1996 the Company made adjustments which
increased net income by approximately $2,400. These adjustments, which related
predominately to estimated reserves for premium coupon redemptions, finance
charges receivable, and taxes, resulted from management's updated evaluations of
historical trends (reflecting changes in business practices and other factors)
and other assumptions underlying such estimates. The amounts of such reserves in
prior quarters were based on reasonable estimates reflecting available facts and
circumstances.
Earnings per share calculations for each quarter were based on the weighted
average number of shares outstanding for each period, and the sum of the
quarters may not necessarily be equal to the full year earnings per share
amount.
NOTE 19 -- SUBSEQUENT EVENTS
On March 7, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which MBMI merged into a wholly-owned
subsidiary of the Company. As a result of the transaction, the outstanding
shares of MBMI's common stock were 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.
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 $150,000
and earnings of approximately $1,700 for its fiscal year ended November
30, 1996.
This transaction closed and the merger between MBMI and a subsidiary of the
Company became effective August 1, 1997.
46
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
BALANCE SHEETS
--------------
September 30, December 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 221,437 $ 50,217
Commercial paper -- cash equivalent - 500,000
Accounts receivable:
Trade, less allowance for uncollectible
accounts 41,539,947 35,093,051
Other 724,583 180,617
Inventory 45,336,100 40,399,951
Prepaid expenses and income taxes 4,521,436 1,752,373
------------ ------------
Total current assets 92,343,503 77,976,209
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Warehouse and office equipment 8,820,163 7,794,591
Transportation equipment 3,518,819 3,106,327
Leasehold improvements 1,593,380 1,367,264
------------ ------------
13,932,362 12,268,182
Less accumulated depreciation and amortization 6,576,596 5,577,684
------------ ------------
Net equipment and leasehold improvements 7,355,766 6,690,498
OTHER ASSETS:
Goodwill 23,667,095 16,043,511
Other 319,570 340,068
------------ ------------
$123,685,934 $101,050,286
============ ============
See notes to financial statements.
-1-
<PAGE>
September 30, December 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 7,660,000 $ -
Accounts payable 15,200,726 15,241,950
Accrued expenses:
Salaries, commissions and benefits 1,733,939 3,105,005
Other 4,875,297 4,944,268
Dividends payable - 484,113
------------ ------------
Total current liabilities 29,469,962 23,775,336
DEFERRED INCOME TAXES 816,000 816,000
STOCKHOLDERS' EQUITY:
Preferred stock--$.01 par value; 500,000 shares
authorized, none issued - -
Common stock--$.01 par value; 30,000,000 shares
authorized, 10,299,718 and 9,982,747 shares
issued in 1997 and 1996, respectively 102,997 99,827
Paid-in capital 46,138,348 38,702,016
Retained earnings 47,158,627 40,469,320
------------ ------------
Total 93,399,972 79,271,163
Less treasury stock at cost (300,496
shares in 1996) - (2,812,213)
------------ ------------
Total stockholders' equity 93,399,972 76,458,950
------------ ------------
$123,685,934 $101,050,286
============ ============
See notes to financial statements.
-2-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 67,868,037 $ 59,914,201 $ 196,259,782 $172,871,316
Cost of sales 44,358,823 39,543,373 128,508,231 113,982,112
--------------- ---------------- -------------- ------------
Gross profit 23,509,214 20,370,828 67,751,551 58,889,204
Operating expenses 18,578,530 16,808,551 55,539,151 50,157,346
--------------- ---------------- -------------- ------------
Operating income 4,930,684 3,562,277 12,212,400 8,731,858
Interest expense (99,304) (42,353) (113,827) (248,491)
Other income, principally interest 296,831 184,343 714,010 602,460
--------------- ---------------- -------------- ------------
Income before provision for income taxes 5,128,211 3,704,267 12,812,583 9,085,827
Provision for income taxes 2,051,000 1,481,000 5,125,000 3,634,000
--------------- ---------------- -------------- ------------
Net income $ 3,077,211 $ 2,223,267 $ 7,687,583 $ 5,451,827
=============== ================ ============== ============
Net income per common and common
equivalent share $ 0.28 $ 0.24 $ 0.71 $ 0.58
Weighted average common shares 11,106,000 9,372,000 10,761,000 9,362,000
</TABLE>
See notes to financial statements.
-3-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,077,211 $ 2,223,267 $ 7,687,583 $ 5,451,827
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 785,228 545,351 2,130,908 1,562,929
Loss (gain) on sale of equipment 13,374 9,856 45,329 (9,742)
Provision for losses on accounts receivable 69,000 60,000 219,000 270,000
Changes in assets and liabilities, net of acquired businesses:
(Increase) decrease in accounts receivable--trade (3,651,745) (992,088) (6,025,410) 323,499
(Increase) in accounts receivable--other (240,851) (2,660,234) (382,078) (1,645,884)
(Increase) decrease in inventory (2,892,951) 1,299,269 (4,143,368) 6,449,901
(Increase) decrease in prepaid expenses and income taxes (1,829,821) 492,435 (2,375,863) 33,078
(Increase) in other assets (7,003) (76,776) (10,968) (148,924)
(Decrease) in accounts payable (3,101,968) (40,792) (3,266,402) (3,197,079)
(Decrease) in accrued expenses-- salaries,
commissions and benefits (1,119,884) (405,857) (1,371,066) (378,533)
(Decrease) increase in accrued expenses--other 252,259 (843,230) (68,971) 617,474
Increase in income taxes payable - 76,795 - 76,795
-------------- -------------- -------------- ------------
Net cash (used in) provided by operating activities (8,647,151) (312,004) (7,561,306) 9,405,341
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of assets, net of cash received 35,818 - 35,985 -
Purchase of equipment and leasehold improvements (683,000) (253,852) (1,802,920) (1,256,739)
Proceeds from sale of equipment 49,021 14,974 66,248 91,740
-------------- -------------- -------------- ------------
Net cash (used in) investing activities (598,161) (238,878) (1,700,687) (1,164,999)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable to banks 7,660,000 975,000 7,660,000 (7,200,000)
Purchase of treasury stock - - (552,503) (307,503)
Dividends paid (500,585) (450,313) (1,482,383) (902,125)
Proceeds from stock options exercised 1,437,590 - 2,421,160 -
Tax benefit of stock options exercised 682,212 - 886,939 -
-------------- -------------- -------------- ------------
Net cash provided by (used in) financing activities 9,279,217 524,687 8,933,213 (8,409,628)
-------------- -------------- -------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 33,905 (26,195) (328,780) (169,286)
CASH AND CASH EQUIVALENTS, beginning of period 187,532 29,391 550,217 172,482
-------------- -------------- -------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 221,437 $ 3,196 $ 221,437 $ 3,196
============== ============== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 99,304 $ 33,532 $ 113,827 $ 270,302
Income taxes 2,042,900 1,213,582 5,057,737 3,108,884
</TABLE>
See notes to financial statements.
-4-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
Note A - Summary of Significant Accounting Policies
Basis of Presentation:
Except for the December 31, 1996 balance sheet, the financial statements have
been prepared by the Company, without audit by
independent certified public accountants, in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations since the Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's 1996 Annual Report on Form 10-K.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of September 30, 1997, as well as the results of operations and the
cash flows for the three and nine months ended September 30, 1997 and 1996, have
been included.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
Inventory:
The Company measures inventory and cost of sales for interim financial
statements by use of a historically developed gross profit percentage. Annually,
the Company adjusts the inventory to reflect the results of a physical count.
Net Income Per Share:
Net income per share and the dilutive effect on net income per share of
potentially dilutive stock options are computed by the treasury stock method.
Common stock equivalents result from the assumed issuance of shares under stock
option plans.
Cash Flows:
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The changes in assets and liabilities in the operating section
of the statements of cash flows for the three and nine months ended September
30, 1997, are reflected net of the effects of the acquisitions consummated.
-5-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
Note B - Acquisitions
On February 14, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of Omega Professional Services, Inc. (OMEGA), a Utah
based equipment leasing company, in exchange for 200,000 shares of common stock
of the Company valued at $2,800,000. The excess of cost over the fair value of
assets acquired (goodwill) was approximately $2,814,000 and is being amortized
over twenty years on a straight-line basis.
On February 21, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of S. B. Service, a Connecticut based sterilization
equipment repair company, in exchange for 65,000 shares of common stock of the
Company valued at $910,000. The excess of cost over the fair value of assets
acquired (goodwill) was approximately $934,000 and is being amortized over
twenty years on a straight-line basis.
On August 19, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of Twenty-First Century Corporation (Twenty-First
Century), a Fort Wayne, Indiana based dental supply, equipment and service
company, in exchange for 81,000 shares of common stock of the Company valued at
$2,030,063. The excess of cost over the fair value of assets acquired (goodwill)
was approximately $2,211,000 and is being amortized over twenty years on a
straight-line basis.
On August 20, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of G.A.L.T., Inc. (G.A.L.T.), a Fort Wayne, Indiana
based dental equipment and service company, in exchange for 6,000 shares of
common stock of the Company valued at $151,880. The excess of cost over the fair
value of assets acquired (goodwill) was approximately $300,000 and is being
amortized over twenty years on a straight-line basis.
On August 26, 1997, the Company purchased substantially all of the assets and
assumed certain liabilities of Jennifer de St. Georges & Associates, Inc.
(Jennifer de St. Georges), a San Jose, California based practice management
company in exchange for 65,000 shares of common stock of the Company valued at
$1,637,188. The excess of cost over the fair value of assets acquired (goodwill)
was approximately $1,753,000 and is being amortized over twenty years on a
straight-line basis.
On September 15, 1997, the Company purchased certain assets of Professional
Practice Transitions, L.L.C., a Green Bay, Wisconsin based dental practice
brokerage company, in exchange for $253,900. The excess of cost over the fair
value of assets acquired (goodwill) was approximately $292,000 and is being
amortized over twenty years on a straight-line basis.
These acquisitions were accounted for under the purchase method of accounting.
The accompanying statements of income for 1997 include the operations of the
acquired companies since the dates of acquisition. The effect of these
acquisitions on the Company's results of operations on a pro forma basis was not
material. Four of these acquisitions were purchased with treasury stock.
-6-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
Note B - Acquisitions (Continued)
The effect on common stock, paid-in capital and treasury stock as of September
30, 1997, of these acquisitions, certain stock options exercised and certain
treasury stock transactions (Note C) is as follows:
Common Paid-In Treasury
Stock Capital Stock
----------- ---------- -----------
Balance, January 1, 1997 $ 99,827 $38,702,016 $(2,812,213)
Shares issued in connection
with the OMEGA acquisition - 1,025,000 1,775,000
Shares issued in connection
with the S. B. Service acquisition - 253,126 656,875
Shares issued in connection with the
Twenty-First Century acquisition 810 2,029,253 -
Shares issued in connection with
the G.A.L.T. acquisition - 73,889 77,991
Shares issued in connection with the
Jennifer de St. Georges acquisition - 844,734 792,454
Shares issued in connection
with stock options exercised 2,437 2,418,723 -
Tax benefit of stock options exercised - 886,939 -
Shares repurchased (Note C) - - (552,503)
Shares reacquired from a prior
year acquisition (Note C) - - (33,013)
Shares cancelled (Note C) (77) (95,332) 95,409
----------- ----------- -----------
Balance, September 30, 1997 $102,997 $46,138,348 $ -
=========== =========== ===========
Note C - Treasury Stock
During February, 1997, the Company repurchased 20,000 shares of its own common
stock in the open market for $275,000. During April, 1997, the Company also
repurchased 20,000 shares of its own common stock in the open market for
$277,503.
During September, 1997, an acquisition from a prior year was revalued and 3,182
shares valued at $33,013 were returned to the Company and recorded as treasury
stock. After this transaction was completed, the 7,679 remaining shares in
treasury valued at $95,409 were cancelled.
-7-
<PAGE>
SULLIVAN DENTAL PRODUCTS, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
Note D - Dividends
On March 20, 1997, the Company declared a cash dividend of $.05 per share
payable April 21, 1997, to stockholders of record on April 10, 1997. On June 20,
1997, the Company declared a cash dividend of $.05 per share payable July 21,
1997, to stockholders of record on July 10, 1997. Total dividends are $998,270.
Note E - Merger
On August 4, 1997 the Company announced that it had entered into a merger
agreement with Henry Schein, Inc. (Henry Schein), an international distributor
of dental, medical and veterinary products. Under the terms of the agreement,
Henry Schein will acquire the Company in a stock-for-stock merger. The
outstanding shares of the Company will be exchanged at a fixed rate exchange
ratio of .735 of a share of Henry Schein for each share of the Company. The
merger is expected to close in the fourth quarter of 1997 and is subject to each
company's shareholder approval, various filings with the Securities and Exchange
Commission and other provisions as defined in the contract. The merger will be
accounted for as a pooling of interest and is expected to be tax-free to the
Company's shareholders.
Merger costs of approximately $1,275,000 are recorded in prepaid expenses and
will be expensed at the time of the closing.
-8-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
HENRY SCHEIN, INC.
DATE: JANUARY 26, 1998
By: /s/ Steven Paladino
--------------------------------------
Steven Paladino
Senior Vice President & Chief Financial Officer
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains 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-27-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> DEC-27-1997
<CASH> 45,264
<SECURITIES> 0
<RECEIVABLES> 172,094
<ALLOWANCES> 0
<INVENTORY> 140,350
<CURRENT-ASSETS> 395,706
<PP&E> 41,329
<DEPRECIATION> 43,184
<TOTAL-ASSETS> 527,894
<CURRENT-LIABILITIES> 163,019
<BONDS> 0
0
0
<COMMON> 264
<OTHER-SE> 323,144
<TOTAL-LIABILITY-AND-EQUITY> 527,894
<SALES> 990,265
<TOTAL-REVENUES> 990,265
<CGS> 706,219
<TOTAL-COSTS> 706,219
<OTHER-EXPENSES> 250,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,433
<INCOME-PRETAX> 35,583
<INCOME-TAX> 12,664
<INCOME-CONTINUING> 24,268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,268
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>
Varies from B/S (B/S has all allowances)
<F2>
Includes current maturities
</TABLE>
