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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934
For the fiscal year ended December 26, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27078
HENRY SCHEIN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: X NO: ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
--
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 10, 1999 was
approximately $1,085,000,919.
As of March 10, 1999, 40,560,782 shares of registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 26, 1998) are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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Page Number
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PART I
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ITEM 1. Business 1
ITEM 2. Properties 16
ITEM 3. Legal Proceedings 16
ITEM 4. Submission of Matters to a Vote of Security Holders 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 18
ITEM 6. Selected Financial Data 19
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
ITEM 7A. Market Risks 32
ITEM 8. Financial Statements and Supplementary Data 33
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 67
PART III
ITEM 10. Directors and Executive Officers of the Registrant 67
ITEM 11. Executive Compensation 67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 67
ITEM 13. Certain Relationships and Related Transactions 67
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67
Exhibit Index 72
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PART I
ITEM 1. Business
Recent Developments
Since December 26, 1998, the Company has acquired General Injectibles and
Vaccines, Inc. ("GIV"), through the purchase of all of the outstanding common
stock of Biological & Popular Culture, Inc., and the international dental,
medical and veterinary healthcare distribution businesses of Heiland Holding
GmbH (the "Heiland Group"). GIV, which had 1998 net sales of approximately
$120.0 million, is a leading independent direct marketer of vaccines and other
injectible products to office-based practitioners in the United States. The
Heiland Group, the largest direct marketer of healthcare supplies to
office-based practitioners in Germany, had 1998 net sales of approximately
$130.0 million. These transactions were accounted for under the purchase method
of accounting.
During the year ended December 26, 1998, the Company completed five
acquisitions. The 1998 completed acquisitions included two dental supply
companies, the most significant of which was the H. Meer Dental Supply Co., Inc.
("Meer"), a leading full-service dental distributor serving dentists, dental
laboratories and institutions throughout the United States, with 1997 annual net
sales of approximately $180.0 million. Combined, Meer and the other dental
company had approximately $212.0 million in aggregate net sales for 1997. The
completed acquisitions also included two medical supply companies with aggregate
net sales for 1997 of approximately $37.0 million, and one international dental
distribution business with 1997 net sales of approximately $16.0 million. Of the
five completed acquisitions, four (including Meer) were accounted for under the
pooling of interests method, and the remaining acquisition of a 50.1% interest
was accounted for under the purchase method of accounting. The financial
statements have been restated to give retroactive effect to the Meer
transaction, as the remaining three pooling transactions were not material and
have been included in the consolidated financial statements from the beginning
of the quarter in which the acquisitions occurred. Results of operations of the
business acquisition accounted for under the purchase method of accounting has
been included in the consolidated financial statements commencing with the
acquisition date.
In connection with these acquisitions, and together with certain 1997
transactions, the Company incurred certain merger and integration costs of
approximately $56.7 million and $50.8 million during the years ended December
26, 1998 and December 27, 1997, respectively. Net of taxes, merger and
integration costs were approximately $1.06 and $1.08 per share, on a diluted
basis, for 1998 and 1997, respectively. Merger and integration costs consist
primarily of investment banking, legal, accounting and advisory fees,
compensation, impairment of goodwill arising from acquired businesses integrated
into the Company's recent acquisitions, as well as certain other integration
costs. Excluding merger and integration costs, net of the related tax benefit,
net income and net income per common share, on a pro forma diluted basis, would
have been $57.8 million and $1.39 and $41.0 million and $1.03 for the years
ended December 26, 1998 and December 27, 1997, respectively.
On August 7, 1998, the Company completed the sale of Marus Dental
International ("Marus"), the Company's dental equipment manufacturing operation.
Marus had 1997 net sales of approximately $25.0 million. The operations of Marus
were not material to the Company.
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General
The Company is the largest distributor of healthcare products and services
to office-based healthcare practitioners in the combined North American and
European markets. The Company has operations in the United States, Canada,
Mexico, the United Kingdom, The Netherlands, Belgium, Germany, France, the
Republic of Ireland, Austria, Spain, Australia and New Zealand, and conducts its
business principally through two segments; healthcare distribution and
technology. These segments, which are operated as individual business units,
offer different products and services, albeit to the same customer base. The
healthcare distribution segment consists of the Company's dental, medical,
veterinary and international groups. The international group is comprised of the
Company's healthcare distribtution business units located primarily in Europe
and the Pacific Rim, and offer products and services to dental, medical and
veterinary customers located in their respective geographic regions. The
technology segment consists primarily of the Company's practice management
software business and certain other value-added products and services which are
distributed primarily to healthcare professionals in the North American market.
The Company sells products and services to over 300,000 customers,
primarily dental practices and dental laboratories, as well as physician
practices, veterinary clinics and institutions. In 1998, the Company's
healthcare distribution business sold products to over 75% of the estimated
100,000 dental practices in the United States. The Company believes that there
is strong awareness of the "Henry Schein" name among office-based healthcare
practitioners due to its more than 60 years of experience in distributing
healthcare products. Through its comprehensive catalogs and other direct sales
and marketing programs, the Company offers its customers a broad product
selection of both branded and private brand products which includes in excess of
60,000 stock keeping units ("SKU's") in North America, approximately 55,000
SKU's in Europe and approximately 22,000 SKU's in Australia, at published prices
that the Company believes are below those of many of its competitors. The
Company, through its technology business unit, offers various value-added
products and services such as practice management software. As of December 26,
1998, the Company had sold over 28,000 dental practice management software
systems, more than any of its competitors.
For further information on the Company's operating segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 and Note 12 to the Consolidated Financial Statements.
During 1998, the Company distributed over 12.5 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 600,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 700 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with approximately 1,100 field
sales consultants, including equipment sales specialists. The Company utilizes
database segmentation techniques to more effectively market its products and
services to customers. In recent years, the Company has continued to expand its
management information systems and has established strategically located
distribution centers in the United States, Europe and Australia to enable it to
better serve its customers and increase its operating efficiency. The Company
believes that these investments, coupled with its broad product offerings,
enable the Company to provide its customers with a single source of supply for
substantially all their healthcare product needs and provide them with
convenient ordering and rapid, accurate and complete order fulfillment. The
Company estimates that approximately 99% of all orders in the United States
and Canada received before 7:00 p.m. and 4:00 p.m., respectively, are
shipped on the same day the order is received and approximately 99% of orders
are received by the customer within two
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days of placing the order. In addition, the Company estimates that approximately
99% of all items ordered in the United States and Canada are shipped without
back ordering.
Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into joint ventures with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channeled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. As of December
26, 1998, the Company had five completed and two pending acquisitions, both of
which have since closed. Since December 26, 1998, the Company acquired, in
transactions accounted for under the purchase method of accounting, GIV, which
had 1998 net sales of approximately $120.0 million, and the Heiland Group, which
had 1998 net sales of approximately $130.0 million. The 1998 acquisitions, which
had aggregate net sales for 1997 of approximately $265.0 million, included (a)
two dental supply companies, the most significant of which was Meer; (b) two
medical supply companies and (c) one international dental supply companies. Of
the five completed acquisitions, four were accounted for under the pooling of
interests method, and the remaining acquisition of a 50.1% interest accounted
for under the purchase method of accounting.
During 1997, the Company acquired 24 healthcare distribution businesses.
The 1997 acquisitions, which had aggregate net sales for 1996 of approximately
$558.6 million, included (a) ten dental supply companies, the most significant
of which was Sullivan Dental Products, Inc. ("Sullivan"); (b) four medical
supply companies, the most significant of which was Micro Bio-Medics, Inc.
("MBMI"); (c) two international dental and three international medical supply
companies; (d) three technology and value-added product companies; the most
significant of which was Dentrix Dental Systems, Inc. ("Dentrix"); and (e)
certain assets and the business of IDE Interstate, Inc., a direct
marketer of healthcare products to dentists, doctors and veterinarians. Of the
23 completed acquisitions, six were accounted for under the pooling of
interests method, with the remainder being accounted for under the purchase
method of accounting (fourteen for 100% ownership interest and three for
majority ownership interests).
Corporate Structure Background
The Company was formed on December 23, 1992 as a wholly-owned subsidiary of
Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the
business in which the Company is now engaged and, in addition, owned 100% of the
outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a
company engaged in the manufacture and distribution of multi-source
pharmaceutical products. In December 1992, Holdings separated the Company's
business from Pharmaceutical by transferring to the Company all of the assets
(including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and
distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of
the healthcare distribution business now conducted by the Company. The Company
did not assume any other liabilities of Holdings, including the liabilities
associated with Pharmaceutical's business. In February 1994, the Company,
Holdings and their stockholders entered into a number of reorganization
agreements, and in September 1994, pursuant to such agreements, all of the
Company's Common Stock, par value $.01 per share ("Common
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Stock"), held by Holdings was distributed to certain of the current stockholders
of the Company (the "Reorganization").
On November 8, 1995, the Company completed an initial public offering of
its Common Stock, and on June 21, 1996, the Company completed a follow-on
offering of its Common Stock. Proceeds from these offerings to the Company,
after expenses, were approximately $72.5 million and $124.1 million,
respectively. The proceeds enabled the Company to pay off certain indebtedness,
with the remaining proceeds available for general corporate purposes, including
subsequent acquisitions.
Customers
The Company, through its healthcare distribution and technology businesses,
serves over 300,000 customers worldwide in the dental, medical and veterinary
markets. The Company's dental customers include office-based dental practices,
dental laboratories, universities, institutions, governmental agencies and large
group and corporate accounts; medical customers include office-based physician
practices, podiatrists, surgery centers, institutions, hospitals and
governmental agencies; and the Company's veterinary products are sold primarily
to office-based veterinarians serving primarily small companion animals.
The Company believes that its healthcare distribution customers generally
order from two or more suppliers for their healthcare product needs, and often
use one supplier as their primary resource. The Company believes that its
customers generally place larger orders and order more frequently from their
primary suppliers. The Company estimates that it serves as a primary supplier to
less than 15% of its total customer base and believes it has an opportunity to
increase sales by increasing its level of business with those customers for
which it serves as a secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, hospitals, renal dialysis centers and
surgery centers. More recently, as cost-containment pressures have resulted in
increased demand for low-cost products and value-added services, the Company has
targeted specific groups of practices under common ownership, institutions and
professional groups. For example, the Company has an exclusive direct marketing
agreement with an American Medical Association ("AMA") sponsored service and a
veterinarian-sponsored service, pursuant to which member practitioners have
access to the services' lower priced products. In 1998, the AMA-sponsored
service and the veterinarian-sponsored purchasing service accounted for net
sales of over $37.0 million. These services, government institutions and
agencies, hospitals and other large or collective purchasers, require low-cost
pricing and detailed product and usage information and reporting. The Company
believes it is well situated to meet the needs of these customers, given its
broad, low-cost product offerings and its management information systems. No
single customer accounted for more than 1.0% of net sales in 1998.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through personal visits by field sales
representatives and frequent direct marketing contact, emphasize the Company's
broad product lines, competitive prices and ease of order placement. The key
elements of the Company's program in the United States are:
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o Direct Marketing. During 1998, the Company distributed over 12.5
million pieces of direct marketing material, including catalogs, flyers,
order stuffers and other promotional materials to approximately 600,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 450
pages and includes approximately 28,000 SKU's. The number of catalogs and
other materials received by each customer depends upon the market they
serve as well as their purchasing history. The Company's catalogs include
detailed descriptions and specifications of both branded and private brand
products and are utilized by healthcare practitioners as a reference
source. By evaluating its customers' purchasing patterns, area of
specialty, past product selections and other criteria, the Company
identifies customers who may respond better to specific promotions or
products. To facilitate its direct marketing activities, the Company
maintains an in-house advertising department which performs many creative
services, which the Company believes streamlines the production process,
provides greater flexibility and creativity in catalog production, and
results in cost savings.
o Telesales. The Company supports its direct marketing with
approximately 700 inbound and outbound telesales representatives who
facilitate order processing and generate new sales through direct and
frequent contact with customers. Inbound telesales representatives are
responsible for assisting customers in purchasing decisions as well as
answering product pricing and availability questions. In addition to
assisting customers, inbound telesales representatives also market comple-
mentary or promotional products. The Company's telesales representatives
utilize on-line computer terminals to enter customer orders and to access
information about products, product availability, pricing, promotions and
customer buying history.
The Company utilizes outbound telesales representatives and programs to
better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts. The
Company's U.S. dental outbound telesales representatives accounted for
approximately $198.0 million of the Company's net sales in 1998. The
Company has approximately 200 medical and veterinary telesales
representatives many of which make outbound calls in addition to handling
inbound telesales. Outbound telesales representatives strive to manage
long-term relationships with these customers through frequent and/or
regularly scheduled phone contact and personalized service.
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic training
sessions and special sales programs and receive incentives, including
monthly commissions.
o Field Sales Consultants. In 1992, the Company initiated its field
sales consultant program and, primarily as a result of its acquisitions of
Sullivan and Meer, now has approximately 1,100 field sales consultants,
including equipment sales specialists, covering certain major North
American, European and Pacific Rim markets. The field sales consultants
concentrate on attracting new customers and increasing sales to customers
who do not currently order a high percentage of their total product needs
from the Company. This strategy is designed to complement the Company's
direct marketing and telesales strategies and to enable the Company to
better market, service and support the sale of more sophisticated products
and equipment. Once a field sales consultant has established a relationship
with a customer, the representative encourages the customer to use the
Company's automated ordering process or its telesales representatives for
its day-to-day needs. This simplifies the ordering process for the customer
and increases the effectiveness of the field sales consultant.
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Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
Internet, ArubA(Registered) TouchTone (the Company's 24-hour automated phone
service) or its computerized order entry system. The Company has developed an
enhanced Windows(Registered)-based version of its computerized order entry
system, known as ArubA(Registered), which was introduced at the end of 1995.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 99% of orders are received within two days of placing
the order. The Company continually monitors its customer service through
customer surveys, focus groups and daily statistical reports. The Company
maintains a liberal return policy to better assure customer satisfaction with
its products.
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Products
The following chart sets forth the principal categories of products offered
by the Company's healthcare distribution and technology businesses and certain
top selling types of products in each category, with the percentage of 1998
consolidated net sales in parenthesis:
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Healthcare Distribution (97.5%)
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Dental Products (66.3%)
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Consumable Dental Products Dental Laboratory
and Small Equipment (49.8%) Products (3.6%) Large Dental Equipment (12.9%)
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X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs, Units and Lights; X-Rays;
Handpieces; Preventatives; Impression Acrylics; Articulators; and and Equipment Repair
Materials; Composites; and Anesthetics Abrasives
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Medical Products (28.5%)
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Branded and Generic
Pharmaceuticals; Surgical Products;
Diagnostic Tests; Infection Control;
and Vitamins
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Veterinary Products (2.7%)
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Branded and Generic
Pharmaceuticals; Surgical Products;
and Dental Products
Technological and Value-Added Products and Services (2.5%)
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Software and Related Products; Financial Products;
and other value-added products
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The percentage of 1997 and 1996 net sales was as follows: consumable
dental products and small equipment, 51.1% and 52.3%, respectively; dental
laboratory products, 3.3% and 3.6%, respectively; large dental equipment, 13.6%
and 13.2%, respectively; medical products, 26.7% and 25.7%, respectively;
veterinary products, 2.9% and 2.7%, respectively; and technology and value-added
products and services, 2.4% and 2.5%, respectively.
Consumable Supplies and Equipment
The Company offers in excess of 60,000 SKU's to its customers in North
America, of which approximately 45,000 SKU's are offered to its dental
customers, approximately 19,000 are offered to its medical customers and
approximately 21,000 are offered to its veterinary customers. Over 20% of the
Company's products are offered to all three types of the Company's customers in
North America. The Company offers approximately 55,000 SKU's and 22,000 SKU's to
its customers in Europe and Australia, respectively. Approximately 8.6% of the
Company's net sales in 1998 were from sales of products offered under the Henry
Schein private brand (i.e., products manufactured by various third parties and
HS Pharmaceutical for distribution by the Company under the Henry Schein(R)
brand). The Company believes that the Henry Schein private brand line of over
7,000 SKU's offered in the United States and Canada is one
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of the most extensive in the industry. The Company also distributes certain
generic pharmaceuticals manufactured by HS Pharmaceutical, a 50%-owned
affiliated company. The Company updates its product offerings regularly to meet
its customers' changing needs.
The Company offers a repair service, ProRepair(Registered), which provides
one to two-day turnaround for hand pieces and certain small equipment. The
Company also provides in-office installation and repair services for large
equipment in certain markets in North America, Europe and the Pacific Rim. The
Company had a total of 118 centers open at the end of 1998.
As described above, the Companys' results have been restated retroactively
to include Meer's results for all periods presented as Meer was acquired in a
pooling of interests transaction that was significant. Meer is a leading
full-service dental distributor serving dentists, dental laboratories and
institutions throughout the United States. Meer's net sales included a
proportionately higher percentage of large dental equipment sales then that of
the Company, on a historical basis.
On August 7, 1998, the Company completed the sale of Marus, the Company's
dental equipment manufacturing operation. Marus had 1997 net sales of
approximately $25.0 million.
Technology and Value-Added Products and Services
In an effort to promote customer loyalty, the Company offers certain
technology and value-added products and services. These products and services
include the following:
o Practice Management Software. The Company sells practice management
software systems to its dental and veterinary customers. The Company had sold
over 21,500 and 7,100 units of its Easy Dental(Registered) Plus and Dentrix
software systems, respectively, as of the end of fiscal 1998, and over 3,300 of
its AVImark(Registered) veterinary software systems. The Company's practice
management software products provide practitioners with patient treatment
history, billing and accounts receivable analysis and management, an
appointment calendar, electronic claims processing and word processing
programs, and the Company provides technical support and conversion services
from other software. In addition, the Easy Dental(Registered) Plus and Dentrix
software systems allow customers to connect with the Company's order entry
management systems. The Dentrix system is one of the most comprehensive
clinically-based dental practice management software packages in the United
States. The Dentrix premium software product complements Easy
Dental(Registered) Plus, the Company's high-value practice management
system. During 1997, the Company acquired the rights to distribute the DenTech
practice management system, which is designed to handle the needs of large group
practices. The Company believes the combined software product offerings enhance
its ability to provide its customers with the widest array of system solutions
to help manage their practices.
o Financial Services. In 1997 the Company began to offer its customers
assistance in managing their practices by providing access to a number of
financial services and products at rates which the Company believes are lower
than what they would be able to secure independently. The Company's equipment
leasing programs allow it to fufill a wide variety of practitioner financing
needs. The Company also provides financing and consulting services for all
phases of a physician's practice including practice start-up, practice
acquisition and debt consolidation. The patient financing program provides the
Company's dental and veterinarian customers a method for reducing receivables
and improving cash flow by providing patients access to financing. Through a
partnership with one of the nations largest bank credit card processors, the
Company offers electronic bankcard processing, and offers electronic insurance
claims submission services for faster, cheaper processing of patient
reimbursements, all through a third-party provider for a transaction fee. The
Company does not assume any financial obligation to its customers or their
patients in these programs. The Company also offers practice management
consulting services as well as practice management brokerage services in
selected markets in the United States.
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Information Systems
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. In the United States, the Company is in the
process of expanding and upgrading its order processing information system.
Additionally, worldwide, the Company is in the process of installing an
integrated information system for its large dental equipment sales and service
functions. Such a system will centralize the tracking of customers' equipment
orders as well as spare parts inventories and repair services. (See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation" in Item 7.)
Distribution
The Company distributes its products in the United States primarily
from its strategically located distribution centers in Eastern, Central,
South Western and Western United States. Customers in Canada are serviced from
distribution centers located in Eastern and Western Canada. The Company
maintains significant inventory levels of certain products in order to satisfy
customer demand for prompt delivery and complete order fulfillment of their
product needs. These inventory levels are managed on a daily basis with the aid
of the Company's sophisticated purchasing and stock status management
information systems. Once a customer's order is entered, it is electronically
transmitted to the distribution center nearest the customer's location and a
packing slip for the entire order is printed for order fulfillment. The
Company's automated freight manifesting and laser bar code scanning facilitates
the speed of the order fulfillment. The Company currently ships substantially
all of its orders in the United States by United Parcel Service. In certain
areas of the United States, the Company delivers its orders via contract
carriers. The Company's European and Pacific Rim distribution centers include
locations in the United Kingdom, the Republic of Ireland, France, The
Netherlands, Germany, Spain, Australia and New Zealand.
Purchasing
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 1,700
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
and Pacific Rim distribution centers. In 1998, the Company's top 10 healthcare
distribution vendors and the Company's single largest vendor, accounted for
approximately 23.0% and 9.2%, respectively, of the Company's aggregate
purchases.
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Competition
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the healthcare distribution products the Company
sells are available to the Company's customers from a number of suppliers. In
addition, competitors of the Company could obtain exclusive rights from
manufacturers to market particular products. Manufacturers could also seek to
sell directly to end-users, and thereby eliminate the role of distributors, such
as the Company. Significant price reductions by the Company's competitors could
result in a similar reduction in the Company's prices as a consequence of its
policy of matching its competitors' lowest advertised prices. Any of these
competitive pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as
well as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products, the
Company's principal national competitor is Patterson Dental Co. In addition, the
Company competes against a large number of other distributors that operate on a
national, regional and local level. The Company's largest competitors in the
sale of medical products are PSS World Med, Inc. and McKesson HBOC, Inc., which
are national distributors. In the veterinary product market, the Company's two
principal national competitors include The Butler Company and Burns Veterinary
Supply. The Company also competes against a large number of small local and
regional medical and veterinary distributors, as well as a number of
manufacturers that sell direct to physicians and veterinarians. With regard to
the Company's practice management software, the Company competes against a
fragmented group of competitors, none of which currently have a significant
share of the market. The Company believes that it competes in Canada
substantially on the same basis as in the United States.
The Company also faces intense competition in its international
markets, where the Company competes on the basis of price and customer service
against a large number of dental product distributors and manufacturers in
Mexico, the United Kingdom, The Netherlands, Belgium, Germany, France, the
Republic of Ireland, Austria, Spain, Australia and New Zealand. The Company has
several large competitors in these markets, including ORBIS, Serona Dental and
the GACD Group.
Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned affiliated
company, HS Pharmaceutical, which distributes and manufactures generic
pharmaceuticals) were to receive an adverse report following an inspection by
the Food and Drug Administration (the "FDA") or the Drug Enforcement
Administration, or if a competitor were to receive prior approval of new
products from the FDA. A violation of a law by HS Pharmaceutical could cause its
operations to be suspended. A suspension could have an adverse effect on the
Company's equity in earnings of affiliates and could cause the Company to seek
alternative sources of products manufactured by HS Pharmaceutical, possibly at
higher prices than currently paid by the Company. In response to a Warning
Letter from the FDA regarding its compliance with current Good Manufacturing
Practices (cGMP's) of its dental anesthetic products, HS Pharmaceutical has
temporarily suspended the manufacture and shipment of these products to the
United States. In each of January and February, 1999, HS Pharmaceutical
instituted a voluntary recall of approximately 240 batches, in the aggregate, of
dental anesthetic products sold in 1997 and 1998 under its name and certain
private labels. The impact on 1998 fourth quarter earnings was approximately
$0.04 per share, on a diluted basis. Management estimates the impact to be $0.02
to $0.04 per share, per quarter, on a diluted basis, through the second quarter
of 1999, and possibly beyond that date in the event HS Pharmaceutical is unable
to resolve the issues that led to the recalls. HS Pharmaceutical is cooperating
fully with the FDA to resolve the issues that led to the recalls, however it is
unable to estimate when manufacturing and shipments of these products to the
United States will recommence.
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes
certain requirements
10
<PAGE>
applicable to the wholesale distribution of prescription drugs, including the
requirement that wholesale drug distributors be registered with the Secretary of
Health and Human Services or licensed by each state in which they conduct
business in accordance with federally established guidelines on storage,
handling and record maintenance. Under the Controlled Substances Act, the
Company, as a distributor of controlled substances, is required to obtain
annually a registration from the Attorney General in accordance with specified
rules and regulations and is subject to inspection by the Drug Enforcement
Administration acting on behalf of the Attorney General. The Company is required
to maintain licenses and permits for the distribution of pharmaceutical products
and medical devices under the laws of the states in which it operates. In
addition, the Company's dentist and physician customers are subject to
significant governmental regulation. There can be no assurance that regulations
that impact dentists' or physicians' practices will not have a material adverse
impact on the Company's business.
The Company believes that it is in substantial compliance with all of
the foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and
logo, as well as certain other trademarks. Pursuant to certain agreements
executed in connection with the reorganization of the Company, both the Company
and Schein Pharmaceutical, Inc. are entitled to use the "Schein" name in
connection with their respective businesses, but Schein Pharmaceutical, Inc. is
not entitled to use the name "Henry Schein." The Company intends to protect its
trademarks to the fullest extent practicable.
Employees
As of December 26, 1998, the Company had over 6,000 full-time employees
in North America, Europe and Australia, including approximately 700 telesales
representatives, 1,100 field sales consultants, including equipment sales
specialists, 1,400 warehouse employees, 200 computer programmers and
technicians, 500 management employees and 2,100 office, clerical and
administrative employees. None of the Company's employees are represented by a
collective bargaining agreement. The Company believes that its relations with
its employees are excellent.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 2, 3, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; competitive product and pricing
pressures and the ability to gain or maintain share of sales in global markets
as a result of actions by competitors; and the results of legal proceedings. The
matters referred to in forward looking statements could be affected by the risks
and uncertainties involved in the Company's business. These risks and
uncertainties include, but are not limited to, the effect of economic and market
conditions, the impact of the consolidation of healthcare practitioners, the
impact of healthcare reform, opportunities for acquisitions and the Company's
ability to effectively integrate acquired companies, the acceptance and quality
of software products, acceptance and ability to manage operations in foreign
markets, the ability to maintain favorable supplier arrangements and
relationships, possible disruptions in
11
<PAGE>
the Company's computer systems or telephone systems, the Company's ability and
its customers' and suppliers' ability to replace, modify or upgrade computer
programs in ways that adequately address the Year 2000 issue, possible increases
in shipping rates or interruptions in shipping service, the level and volatility
of interest rates and currency values, economic and political conditions in
international markets, including civil unrest, government changes and
restriction on the ability to transfer capital across borders, the impact of
current or pending legislation, regulation and changes in accounting standards
and taxation requirements, environmental laws in domestic and foreign
juristictions, as well as certain other risks described above in this Item under
"Competition" and "Government Regulation," and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K. Year 2000 readiness disclosures
contained in this Form 10-K are also subject to certain protection and the Year
2000 Information and Readiness Disclosure Act.
The Company's principal executive offices are located at 135 Duryea
Road, Melville, New York 11747, and its telephone number is 516-843-5500. As
used in this Report, the term the "Company" refers to Henry Schein, Inc., a
Delaware corporation, and its subsidiaries, 50%-owned companies and
predecessor, unless otherwise stated.
12
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- ---------- -----------------------------------------------------
<S> <C> <C>
Stanley M. Bergman...................... 49 Chairman, Chief Executive Officer, President and
Director
Gerald A. Benjamin...................... 46 Senior Vice President--Administration and Customer
Satisfaction and Director
James P. Breslawski..................... 45 Executive Vice President and Director
Leonard A. David........................ 50 Vice President--Human Resources and Special
Counsel and Director
Diane Forrest ......................... 52 Senior Vice President--Information Services
and Chief Information Officer
Larry M. Gibson ........................ 52 President--Practice Management Technologies
Division
Bruce J. Haber ......................... 46 Executive Vice President and President-Medical Group
and Director
Stephen R. LaHood ...................... 51 Senior Vice President--Supply Chain Group
Mark E. Mlotek.......................... 43 Vice President, General Counsel, Secretary and Director
Steven Paladino ........................ 41 Senior Vice President, Chief Financial Officer and
Director
James W. Stahly ........................ 50 President--North American Dental Group
Michael Zack............................ 46 Senior Vice President--International Group
</TABLE>
13
<PAGE>
Stanley M. Bergman has been Chairman, Chief Executive Officer and President
since 1989 and a director of the Company since 1982. Mr. Bergman held the
position of Executive Vice President of the Company and Schein Pharmaceutical,
Inc. from 1985 to 1989 and Vice President of Finance and Administration of the
Company from 1980 to 1985. Mr. Bergman is a certified public accountant.
Gerald A. Benjamin has been Senior Vice President of Administration and Customer
Satisfaction since 1993, including responsibility for the worldwide human
resource function, and has been a director of the Company since September 1994.
Prior to holding his current position, Mr. Benjamin was Vice President of
Distribution Operations of the Company from 1990 to 1992 and Director of
Materials Management of the Company from 1988 to 1990. Before joining the
Company, Mr. Benjamin was employed for 13 years in various management positions
at Estee Lauder, where his last position was Director of Materials Planning and
Control.
James P. Breslawski has been Executive Vice President of the Company since 1990,
with primary responsibility for the North American Dental Group, the Veterinary
Group and corporate creative services, and a director of the Company since 1990.
Between 1980 and 1990, Mr. Breslawski held various positions with the Company,
including Chief Financial Officer, Vice President of Finance and Administration
and Controller. Mr. Breslawski is a certified public accountant.
Leonard A. David has been Vice President of Human Resources and Special Counsel
since January 1995. Mr. David held the office of Vice President, General Counsel
and Secretary from 1990 to 1995 and practiced corporate and business law for
eight years prior to joining the Company. Mr. David has been a director of the
Company since September 1994.
Diane Forrest joined the Company in 1994 as Senior Vice President of Information
Services and Chief Information Officer. Prior to joining the Company, Ms.
Forrest was employed by Tambrands Inc. as Vice President of Information Services
from 1987 to 1994, KPMG Peat Marwick as Senior Manager in the management
consulting division from 1982 to 1987 and Nabisco Brands, Inc. as Corporate
Manager of Manufacturing Systems from 1978 to 1982.
Larry M. Gibson joined the Company as President of the Practice Management
Technologies Division on February 24, 1997, concurrent with the acquisition of
Dentrix. Before joining the Company, Mr. Gibson was founder, Chairman and CEO
of Dentrix, started in 1980. Prior to his employment with Dentrix, Mr. Gibson
was employed by Weidner Communication Systems from 1978.
Bruce J. Haber has been an Executive Vice President of Schein and President of
Schein's Medical Group since August 1, 1997, the date on which Schein acquired
MBMI. Mr. Haber has been a director of the Company since October 1997. Mr. Haber
has been President of MBMI since 1983.
Stephen R. LaHood joined the Company in 1992 as Senior Vice President of
Distribution Services and is also responsible for purchasing. Prior to joining
the Company, Mr. LaHood was employed by Lex/Schweber Electronics Inc. as Vice
President of Operations and Quality from 1988 to 1991. Mr. LaHood also spent ten
years at Johnson & Johnson Products, Inc., where his last position was Manager
of Corporate Business Planning and thereafter, seven years at Schering-Plough
Corporation where his last position was Senior Director of Manufacturing
Operations.
14
<PAGE>
Mark E. Mlotek joined the Company in December 1994 as Vice President, General
Counsel and Secretary, and became a director of the Company in September 1995.
Prior to joining the Company, Mr. Mlotek was a partner in the law firm of
Proskauer Rose LLP, counsel to the Company, specializing in mergers and
acquisitions, corporate reorganizations and tax law from 1989 to 1994.
Steven Paladino has been Senior Vice President and Chief Financial Officer of
the Company since 1993 and has been a director of the Company since 1992. From
1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from 1987
to 1990 served as Corporate Controller of the Company. Before joining the
Company, Mr. Paladino was employed as a public accountant for seven years and
most recently was with the international accounting firm of BDO Seidman, LLP.
Mr. Paladino is a certified public accountant.
James W. Stahly joined the Company in 1994 as President of the North American
Dental Group of the Company. Before joining the Company, Mr. Stahly was employed
by Fox Meyer Corporation for seven years where his last position was Senior Vice
President -- Hospital and Alternate Care Sales. Prior to his employment with Fox
Meyer, Mr. Stahly spent 16 years at McKesson Drug Company.
Michael Zack has been responsible for the International Group of the Company
since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of Bausch
& Lomb) as Vice President of International Operations from 1984 to 1989 and by
Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to 1984.
15
<PAGE>
ITEM 2. Properties
The Company owns or leases the following properties:
<TABLE>
<CAPTION>
Approximate
Own or Square Lease
Property Location Lease Footage Expiration Date
-------- -------- ------ ----------- ---------------
<S> <C> <C> <C> <C>
Corporate
Headquarters................. Eastern United States Lease 172,000 December 2005
Distribution Center ......... Eastern United States Lease 413,000 December 2007
Distribution Center.......... Eastern United States Lease 108,000 July 2007
Distribution Center......... Eastern United States Lease 120,000 April 2001
Distribution Center......... Eastern United States Lease 138,000 November 2008
Distribution Center.......... Central United States Lease 225,000 June 2001
Distribution Center ......... Central United States Lease 171,000 November 2011
Distribution Center ......... South Western United States Lease 132,000 July 2008
Distribution Center.......... Western United States Lease 115,500 June 2002
Distribution Center.......... United Kingdom Lease 85,000 August 2005
</TABLE>
The Company also leases distribution, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain, Australia, New Zealand, Mexico and the United
Kingdom. Two 50%-owned companies also lease space in the United States and
Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business. As a result of the Company's expansion and acquisition
activities, the Company is in the process of consolidating its distribution
facilities.
The Company has additional operating capacity at its listed facilities.
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company involves
a risk of product liability claims, and from time to time the Company is named
as a defendant in products liability cases as a result of its distribution of
pharmaceutical and other healthcare products. As of December 26, 1998, the
Company was named a defendant in thirty-four such cases. Of the thirty-four
product liability claims, twenty-eight involve claims made by healthcare workers
who claim allergic reaction relating to exposure to latex gloves. In each of
these cases, the Company acted as a distributor of both brand name and "Henry
Schein" private brand latex gloves which were manufactured by third parties. To
date, discovery in these cases has generally been limited to product
identification issues. The manufacturers in these cases have withheld
indemnification of the Company pending product identification, however, the
Company is taking steps to implead those manufacturers into each case in which
the Company is a defendant.
16
<PAGE>
In addition, the Company is subject to other claims, suits and complaints,
which arise in the course of the Company's business. In Texas District Court,
Travis County, the Company, and one of its subsidiaries, are defendants in a
matter entitiled Shelly E. Stromboe & Jeanne N. Taylor, on Behalf of Themselves
and All Other Similarly Situated vs. Henry Schein, Inc., Easy Dental Systems,
Inc. and Dentisoft, Inc., Cause No. 98-00886. This complaint, which was filed in
January 1998, requests the court to grant class action certification, alleges,
among other things, negligence and breach of contract involving the sale of
software products under the Easy Dental name.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is provided by indemnification by the manufacturer of the product. There
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will be available in adequate amounts or at a
reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. The Company intends to vigorously defend all such
claims, suits and complaints. In the opinion of the Company, all such pending
matters are 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of fiscal 1998.
17
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth for the periods indicated the high and low
reported sales prices of the Common Stock of the Company as reported on the
NASDAQ National Market System for each quarterly period in fiscal 1997 and 1998
and for the first quarter of fiscal 1999 through March 10, 1999.
High Low
---- ---
Fiscal 1997:
1st Quarter $39 $24-1/2
2nd Quarter $37 $26-7/8
3rd Quarter $40-1/2 $30-1/4
4th Quarter $37-3/4 $31-1/2
Fiscal 1998:
1st Quarter $41 $29-1/4
2nd Quarter $46-1/4 $37
3rd Quarter $51-1/8 $31
4th Quarter $40-3/8 $24-3/4
Fiscal 1999:
1st Quarter (through March 10, 1999) $28-3/4 $26-5/8
The Company's Common Stock is quoted through the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "HSIC." On March 10, 1999, there were
approximately 887 holders of record of the Common Stock. On March 10, 1999,
the last reported sales price was $26-3/4.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future; it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
18
<PAGE>
ITEM 6. Selected Financial Data
The following selected financial data with respect to the Company's financial
position and its results of operations for each of the five years in the period
ended December 26, 1998 set forth below has been derived from the Company's
consolidated financial statements. The selected financial data and consolidated
financial statements have been restated to give retroactive effect to the
acquisition of the H. Meer Dental Supply Co., effective August 14, 1998, which
was accounted for under the pooling of interests method. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The Selected Operating Data and Net Sales By Market Data presented below
have not been audited.
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------------------
December 26, December 27, December 28, December 30, December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................. $1,921,685 $1,698,496 $1,374,343 $1,090,936 $940,354
Cost of sales ............................. 1,319,861 1,188,098 961,588 751,616 655,398
---------- ---------- ---------- ---------- --------
Gross profit ........................... 601,824 510,398 412,755 339,320 284,956
Selling, general and administrative
expenses ............................. 505,628 447,789 369,642 306,347 252,720
Merger and integration costs(1) ........ 56,666 50,779 -- -- --
Special management compensation(2) ..... -- -- -- 20,797 21,596
Special professional fees(3) ........... -- -- -- -- 2,007
---------- ---------- ---------- ---------- --------
Operating income ....................... 39,530 11,830 43,113 12,176 8,633
Interest income ........................ 6,964 7,353 7,139 3,433 2,512
Interest expense ....................... (12,050) (7,643) (5,487) (8,022) (5,546)
Other income - net ..................... 1,570 1,375 1,177 668 729
---------- ---------- ---------- ---------- --------
Income before taxes on income,
minority interest and equity in
earnings of affiliates .............. 36,014 12,915 45,942 8,255 6,328
Taxes on income ........................ 20,325 17,670 18,606 10,823 4,458
Minority interest in net income (loss)
of subsidiaries ...................... 145 (430) 246 509 561
Equity in earnings of affiliates ....... 783 2,141 1,595 1,537 494
---------- ---------- ---------- ---------- --------
Income (loss) beforcumulative effect
of accounting change ................. 16,327 (2,184) 28,685 (1,540) 1,803
Cumlative effect of accounting change .. -- -- -- -- (60)
---------- ---------- ---------- ---------- --------
Net income (loss) ...................... $ 16,327 $ (2,184) $ 28,685 $ (1,540) $ 1,743
========== ========== ========== ========== ========
Net income (loss) per common share:
Basic .................................. $ 0.42 $ (0.06) $ 0.85 $ (0.06) $ 0.07
Diluted ................................ $ 0.39 $ (0.06) $ 0.81 $ (0.06) $ 0.07
Weighted average shares outstanding:
Basic .................................. 39,305 37,531 33,714 25,719 24,235
Diluted ................................ 41,549 37,531 35,202 25,719 25,319
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
December 26, December 27, December 28, December 30, December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Pro Forma Income Data(4):
Pro forma operating income.............. $ 32,973 $ 32,236
Pro forma net income (loss)............ $ 13,748 $ (1,778) $ 29,023 $ 17,936 $ 18,474
Pro forma net income (loss) per
common share:
Basic ............................... $ 0.35 $ (0.05) $ 0.86 $ 0.70 $ 0.76
Diluted ............................. $ 0.33 $ (0.05) $ 0.82 $ 0.66 $ 0.73
Pro forma average shares
outstanding:
Basic .............................. 39,305 37,531 33,714 25,719 24,235
Diluted.............................. 41,549 37,531 35,202 27,005 25,319
Selected Operating Data:
Number of orders shipped................ 6,718,000 6,064,000 5,127,000 4,571,000 4,211,000
Average order size...................... $ 286 $ 280 $ 268 $ 239 $ 223
Net Sales by Market Data:
Healthcare Distribution:
Dental(5)............................ $1,083,994 $ 999,456 $ 819,721 $ 675,457 $ 602,253
Medical.............................. 515,728 441,015 341,329 245,439 211,393
Veterinary........................... 48,307 40,843 35,329 29,330 27,872
International(6)..................... 230,999 181,239 146,999 107,703 83,927
---------- ---------- ---------- ---------- ----------
Total Healthcare Distribution 1,879,028 1,662,553 1,343,378 1,057,929 925,445
Technology(7)........................... 42,657 35,943 30,965 33,007 14,909
---------- ---------- ---------- ---------- ----------
$1,921,685 $1,698,496 $1,374,343 $1,090,936 $ 940,354
========== ========== ========== ========== ==========
Balance Sheet Data (at period end):
Working capital......................... $ 403,592 $ 312,916 $ 290,482 $ 188,303 $ 160,631
Total assets............................ 962,040 803,946 668,239 481,701 359,753
Total debt.............................. 209,451 148,685 59,404 79,498 92,477
Redeemable stock(8)..................... --- -- -- -- 14,745
Minority interest....................... 5,904 2,225 5,289 4,547 1,823
Stockholders' equity.................... 463,034 424,223 408,877 238,041 127,697
</TABLE>
- -----------------
(1) Merger and integration costs consist primarily of investment banking,
legal, accounting and advisory fees, compensation, write-off of
duplicate management information systems, other assets and the
impairment of goodwill arising from acquired businesses integrated into
the Company's medical and dental businesses, as well as certain other
integration costs incurred primarily in connection with the 1998
acquisition of Meer and the 1997 acquisitions of Sullivan, MBMI and
Dentrix, which were accounted for under the pooling of interests method
of accounting. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments" in Item 7
and the Consolidated Financial Statements and related notes thereto in
Item 8.
20
<PAGE>
(2) Includes: (a) for 1995, non-cash special management compensation
charges of $17.5 million arising from final mark-to-market adjustments
(reflecting an increase in estimated market value from 1994 to the
initial public offering price of $16.00 per share) for stock grants
made to an executive officer of the Company in 1992 and other stock
issuances made to certain other senior management of the Company
(because of certain repurchase features which expired with the initial
public offering), an approximate $2.8 million non-cash special
management compensation charge (also based on the initial public
offering price of $16.00 per share) relating to compensatory options
granted in 1995, and a cash payment of $0.5 million for additional
income taxes resulting from such stock issuances; and (b) for 1994,
non-cash special management compensation arising from accelerated
amortization of deferred compensation arising from the 1992 stock
grants to an executive officer of the Company of $17.3 million, which
included a 1994 mark-to-market adjustment (because of the repurchase
features referred to above) of $9.1 million, due to the resolution,
with the closing of the Reorganization, of certain contingencies
surrounding the issuance of the stock grants, non-cash special
management compensation charges of $1.6 million (net of prior accruals
of approximately $1.9 million under an executive incentive plan)
arising from stock issuances to certain other senior management of the
Company, valued at $3.5 million, and cash payments for income taxes of
approximately $2.4 million resulting from these stock issuances and
$0.3 million for additional income taxes resulting from the 1992 stock
grants. See "Management's Discussion and Analysis of Financial
Condition And Results of Operations Overview" in Item 7 herein.
(3) Includes special professional fees incurred by the Company in
connection with the Reorganization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview"
in Item 7 herein.
(4) Reflects the pro forma elimination of special charges incurred in 1995
and 1994 for special management compensation of $20.8 million and $21.6
million, respectively, and special professional fees incurred in 1994
of $2.0 million, arising from the Reorganization, and the related tax
effects of $1.2 million and $5.8 million for 1995 and 1994,
respectively, and provision for income taxes on previously untaxed
earnings of Dentrix as an S Corporation of $1.2 million, $0.5 million
and $0.3 million for 1996, 1995 and 1994, respectively, and provision
for income tax (expense) recoveries on previously untaxed earnings of
Meer as an S Corporation of $(0.6) million, $0.4 million, $1.5 million,
$0.3 million and $(0.8) million for 1998, 1997, 1996, 1995 and 1994,
respectively, and the pro forma elimination of a net deferred tax asset
arising from Meer's conversion from an S Corporation to a C Corporation
of $2.0 million in 1998. See "Management's Discussion and Analysis of
Results of Financial Condition and Results of Operations - Overview and
Recent Developments" in Item 7 herein.
(5) Dental consists of the Company's dental business in the United States
and Canada.
(6) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily Europe and
Australia.
(7) Technology consists of the Company's practice management software
business and certain other value-added products and services.
(8) Redeemable stock includes stock issued for compensation which was
subject to repurchase by the Company at fair market value in the event
of termination of employment of the holder of such shares, as well as
shares purchased by the trust for the Company's ESOP and allocable to
the ESOP participants. With the completion of the Company's initial
public offering, the stock issued for compensation and the ESOP Common
Stock were no longer subject to repurchase. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Overview" in Item 7 herein.
21
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations has been restated to
give retroactive effect to the transactions accounted for under the pooling of
interests method of accounting and should be read in conjunction with the
Company's consolidated financial statements and notes thereto included herein.
Recent Developments
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements.
Since December 26, 1998, the Company has acquired General Injectibles and
Vaccines, Inc. ("GIV"), through the purchase of all of the outstanding common
stock of Biological & Popular Culture, Inc., and the international dental,
medical and veterinary healthcare distribution businesses of Heiland Holding
GmbH (the "Heiland Group"). GIV, which had 1998 net sales of approximately
$120.0 million, is a leading independent direct marketer of vaccines and other
injectible products to office-based practitioners in the United States. The
Heiland Group, the largest direct marketer of healthcare supplies to
office-based practitioners in Germany, had 1998 net sales of approximately
$130.0 million. The total cash purchase price for these acquisitions was
approximately $113.5 million. Notes issued in conjunction with one of the
acquisitions, due in six months from the closing date, amounted to approximately
$24.0 million. These transactions were accounted for under the purchase method
of accounting.
During the year ended December 26, 1998, the Company completed five
acquisitions. The 1998 completed acquisitions included two dental supply
companies, the most significant of which was Meer, a leading full-service dental
distributor serving dentists, dental laboratories and institutions throughout
the United States, with 1997 annual net sales of approximately $180.0 million.
Combined, Meer and the other dental company had approximately $212.0 million in
aggregate net sales for 1997. The completed acquisitions also included two
medical supply companies with aggregate net sales for 1997 of approximately
$37.0 million, and one international dental distribution business with 1997 net
sales of approximately $16.0 million. Of the five completed acquisitions, four
(including Meer) were accounted for under the pooling of interests method, and
the remaining acquisition of a 50.1% interest was accounted for under the
purchase method of accounting. The financial statements have been restated to
give retroactive effect to the Meer transaction, as the remaining three pooling
transactions were not material and have been included in the consolidated
financial statements from the beginning of the quarter in which the acquisitions
occurred. Results of operations of the business acquisition accounted for under
the purchase method of accounting has been included in the consolidated
financial statements commencing with the acquisition date.
During 1998, the Company issued 2,973,680 shares, 347,063 shares and
121,000 shares of its Common Stock, with an aggregate value of approximately
$151.1 million in connection with three of the pooling transactions.
Additionally, in connection with one of the dental supply company acquisitions,
the Company issued shares of a subsidiary, with rights equivalent to those of
the Company's Common Stock, which are exchangeable into 603,500 shares of the
Company's Common Stock, at each shareholders' option, and had an aggregate value
of approximately
22
<PAGE>
$24.0 million. The total cash purchase price for the acquisition accounted for
under the purchase method of accounting was approximately $6.8 million. The
excess of the acquisition costs over the fair value of identifiable net assets
acquired will be amortized on a straight-line basis over 30 years.
The financial statements include adjustments to give retroactive effect to
the acquisition of Meer for all periods presented, as well as for the other
pooling acquisitions described below. Prior to its acquisition by the Company,
Meer elected to be treated as an S Corporation under the Internal Revenue Code,
and accordingly, was not subject to taxation at the corporate level. Pro forma
adjustments have been made to reflect a provision for income taxes for each
period presented and the elimination of a deferred tax benefit arising from
Meer's conversion from the S Corporation to a Corporation. None of the other
1998 completed acquisitions were material.
During the year ended December 27, 1997, The Company acquired in pooling of
interests transactions, all of the outstanding common stock of (i) Sullivan
Dental Products, Inc. ("Sullivan"), a distributor of consumable dental supplies
and equipment, (ii) Micro Bio-Medics, Inc. ("MBMI"), a distributor of medical
supplies and (iii) Dentrix Dental Systems, Inc. ("Dentrix"), a leading provider
of clinically-based dental paractice management systems. Prior to its
acquisition of the company, Dentrix elected to be treated as an S corporation
under the Internal Revenue Code, and accordingly, its earnings were not subject
to taxation at the corporate level. Proforma adjustments have been made to
reflect a provision for income taxes on such previously untaxed earnings for
each period presented.
In addition to these three acquisitions, the Company completed 21 other
acquisitions including; three medical and ten dental supply companies with
aggregate net sales for 1996 of approximately $32.0 million and $41.8 million,
respectively; two international dental and three international medical supply
companies with aggregate net sales for 1996 of approximately $5.3 million and
$18.3 million, respectively; two technology and value-added product companies
with aggregate net sales for 1996 of approximately $10.1 million; and certain
assets and the business of IDE Interstate, Inc., a direct marketer of
healthcare products to dentists, doctors and veterinarians with net sales for
1996 of approximately $50.0 million.
Of the twenty four 1997 completed acquisitions, six were accounted for
under the pooling of interests method of accounting, with the remainder being
accounted for under the purchase method of accounting (fifteen for 100%
ownership interests and three for majority ownership interests). The financial
statements were restated to give retroactive effect to three of the pooling
transactions (Sullivan, MBMI and Dentrix) as the remaining three pooling
transactions were not material and were included in the consolidated financial
statements from the beginning of the quarter in which the acquisitions occurred.
Operations of the 1997 completed acquisitions, accounted for under the purchase
method of accounting, were included in the consolidated financial statements
from their respective acquisition dates.
In connection with the 1998 and 1997 acquisitions, the Company incurred
certain merger and integration costs of approximately $56.7 million and $50.8
million, respectively. Net of taxes, merger and integration costs were
approximately $1.06 and $1.08 per share, on a diluted basis, respectively.
Merger and integration costs for the healthcare distribution and technology
segment were $55.7 million and $1.0 million for 1998 and $43.9 million and $6.9
million for 1997, respectively. Merger and integration costs consist primarily
of investment banking, legal, accounting and advisory fees, compensation,
impairment of goodwill arising from acquired businesses integrated into the
Company's medical and dental businesses, as well as certain other integration
costs associated with these mergers.
Excluding the merger and integration costs, and including pro forma
adjustments, pro forma net income and pro forma net income per common share, on
a diluted basis, would have been $57.8 million and $1.39, respectively, for the
year ended December 26, 1998, compared with $41.0 million and $1.03,
respectively, for the year ended December 27, 1997.
During the fourth quarter of 1998, the Company incurred incremental costs
totaling approximately $0.4 million and reduced earnings from an affiliate
totaling approximately $1.3 million, net of taxes due to a voluntary recall of
anesthetic products produced by Novocol Pharmaceutical of Canada, Inc.
("Novocol"). Novocol is an affiliated company which is accounted for under the
equity method. The impact on 1998 fourth quarter earnings was approximately
$0.04 per share, on a diluted basis. Management estimates the impact to be
$0.02 to $0.04 per share, per quarter, on a diluted basis, through the second
quarter of 1999, and possibly beyond that date in the event HS Pharmaceutical is
unable to resolve the issues that led to the recalls. HS Pharmaceutical is
cooperating fully with the FDA to resolve the issues that led to the recalls,
however it is unable to estimate when manufacturing and shipments of these
products to the United State will recommence.
The Company is a party to a number of claims, suits and complaints arising
in the ordinary course of business, as described in "Legal Proceedings". The
Company is currently unable to estimate what effect, if any, this litigation
might have on its results of operations.
23
<PAGE>
Reorganization
From 1992 through 1994, the Company was a party to a series of transactions
leading to the Reorganization that resulted in, among other things, the Company
being separated from Holdings and the distribution of shares of the Common Stock
of the Company to its then current stockholders. In December 1992, an executive
officer of the Company received certain stock grants in the Company and Schein
Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6 million,
respectively, and cash of approximately $5.3 million to pay income taxes on the
stock grants received. These stock grants were subject to the occurrence of
certain future events, including the fulfillment of the employment term by the
executive officer. Accordingly, these stock grants, totaling $8.8 million, were
treated as deferred compensation while the cash payments were charged to
earnings as special management compensation in the year ended December 26, 1992.
During 1993, the Company amortized the deferred compensation relating to stock
grants by the Company to the executive officer resulting in a charge to earnings
of $0.6 million. In 1994, the contingencies relating to the stock granted to the
executive officer were eliminated, such that these shares became fully vested.
Accordingly, deferred compensation of $8.2 million, (net of amortization of $0.6
million,) plus a mark-to-market adjustment (because of certain repurchase
features) of approximately $9.1 million, along with a $0.3 million cash payment
for income taxes relating to the 1992 stock grants, was expensed in 1994 as
special management compensation.
In addition, in connection with the Reorganization, certain senior
management of the Company were issued shares of Common Stock of the Company in
1994 and 1995 to extinguish an obligation under a pre-existing long-term
incentive plan and to provide them with an ownership interest in the Company. In
connection with the issuance of the shares, a cash payment for income taxes
relating to such stock issuances of approximately $2.4 million was paid. This
cash bonus, plus $3.5 million, the fair value of the related stock issued, net
of amounts accrued under the long-term incentive plan of approximately $1.9
million, resulted in an additional special management compensation charge to the
Company of approximately $4.0 million in 1994. Charges to earnings for the year
ended 1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.
Additionally, the Company has granted certain employees options for shares
of the Company's Common Stock, which became exercisable upon the Company's
initial public offering on November 3, 1995, at which time substantially all
such options vested. Non-recurring special compensation charges for the options
issued to employees recorded in the fourth quarter of 1995 amounted to
approximately $2.8 million. In addition, the Company recorded an approximate
$1.1 million related tax benefit.
24
<PAGE>
Special charges for special management compensation and special
professional fees incurred in connection with the Reorganization aggregated
$20.8 million and $23.6 million for 1995 and 1994, respectively.
Results of Operations
The following table sets forth for the periods indicated net sales, gross
profit and adjusted operating profit, excluding merger and integration costs, by
business segment for the years ended 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Net Sales by Segment Data: 1998 1997 1996
---------------------------------------------------------------------------------------
Healthcare distribution: $ % $ % $ %
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dental(1)..................... $1,083,994 56.4% $ 999,456 58.8% $ 819,721 59.6%
Medical....................... 515,728 26.9% 441,015 26.0% 341,329 24.8%
Veterinary.................... 48,307 2.5% 40,843 2.4% 35,329 2.6%
International(2).............. 230,999 12.0% 181,239 10.7% 146,999 10.7%
---------- ------ ---------- ------- ---------- -------
Total healthcare distribution. 1,879,028 97.8% $1,662,553 97.9% $1,343,378 97.7%
Technology(3)................... 42,657 2.2% 35,943 2.1% 30,965 2.3%
---------- ------ ---------- ------- ---------- -------
Total........................... $1,921,685 100.0% $1,698,496 100.00% $1,374,343 100.00%
========== ====== ========== ======= ========== =======
Gross Profit by Segment Data:
Healthcare distribution......... $ 568,071 30.2% $ 484,704 29.2% $ 391,375 29.1%
Technology...................... 33,753 79.1% 25,694 71.5% 21,380 69.1%
---------- ------- ---------- ------- ---------- -------
Total........................... $ 601,824 31.3% $ 510,398 30.1% $ 412,755 30.0%
========== ======= ========== ======= ========== =======
Adjusted Operating Profit (excluding
merger and integration costs) by
Segment Data:
Healthcare distribution(4)...... $ 79,871 4.3% $ 48,881 2.9% $ 43,991 3.3%
Technology(5)................... 16,325 38.3% 13,728 38.2% (878) 2.8%
---------- ------- ---------- ------- ---------- -------
Total........................... $ 96,196 5.0% $ 62,609 3.7% $ 43,113 3.1%
========== ======= ========== ======= ========== =======
</TABLE>
- -----------
(1) Dental consists of the Company's dental business in the United States and
Canada.
(2) International consists of the Company's business (substantially all dental)
outside the United States and Canada, primarily in Europe.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(4) Excludes merger and integration costs of $55.7 and $43.9 million in 1998
and 1997, respectively.
(5) Excludes merger and integration costs of $1.0 and $6.9 million in 1998 and
1997, respectively.
25
<PAGE>
1998 Compared to 1997
Net sales increased $223.2 million, or 13.1%, to $1,921.7 million in 1998
from $1,698.5 million in 1997. Of the $223.2 million increase, approximately
$216.5 million or 97.8% represented a 13.0% increase in the Company's healthcare
distribution business. As part of this increase, approximately $84.5 million
represented a 8.5% increase in the Company's dental business, $74.7 million
represented a 16.9% increase in its medical business, $49.8 million represented
a 27.5% increase in its international business, $7.5 million represented a 18.3%
increase in the Company's veterinary business. The increase in dental net sales
was primarily the result of the continuing favorable impact of the Company's
integrated sales and marketing approach (which coordinates the efforts of its
field sales consultants with its direct marketing and telesales personnel),
continued success in the Company's target marketing programs and purchase
acquisitions, offset in part by a reduction in dental equipment sales resulting
from the Company's disposal of its equipment manufacturing subsidiary, Marus in
August 1998 and estimated sales erosion on the Meer acquisition. The increase in
medical net sales is primarily attributable to sales to hospitals, acquisitions,
and the benefits of a new telesales structure, partially offset by a decline in
sales to renal dialysis centers. In the first quarter of 1998 the Company's
largest renal dialysis customer, Renal Treatment Centers, Inc. ("RTC") acquired
by Total Renal Care, Inc., which is not a customer of the Company. In March of
1998, RTC stopped purchasing Epogen from the Company, but continues to purchase
other products. During fiscal year 1997, the Company's sales of Epogen to RTC
amounted to $38.7 million. In the international market, the increase in net
sales was due to increased account penetration in France, the United Kingdom and
Spain and acquisitions, primarily in Germany, the United Kingdom and The
Netherlands. In the veterinary market, the increase in net sales was primarily
due to increased account penetration with core accounts and veterinary groups.
Excluding net sales of Marus and RTC in both periods, as well as the estimated
sales erosion on the Meer acquisition, healthcare distribution net sales would
have grown by 16.1% in 1998 over 1997. The remaining increase in 1998 net sales
was due to the technology business which increased $6.7 million or 18.7% to
$42.7 million for 1998, from $35.9 million for 1997. The increase in technology
and value-added product sales was primarily due to increased practice management
software sales.
Gross profit increased by $91.4 million, or 17.9%, to $601.8 million in
1998, from $510.4 million in 1997. Gross profit margin increased by 1.2% to
31.3% from 30.1% last year. Healthcare distribution gross profit increased by
$83.4 million or 17.2% to $568.1 million in 1998, from $484.7 million in 1997.
Gross profit margin increased by 1.0% to 30.2% from 29.2% last year primarily
due to sales mix. Technology gross profit increased by $8.1 million or 31.5%
to, $33.8 million in 1998, from $25.7 million in 1997. Gross profit margins
increased by 7.6% to 79.1% from 71.5% last year primarily due to increased
sales volume of software systems.
Selling, general and administrative expenses increased by $57.8 million, or
12.9%, to $505.6 million in 1998 from $447.8 million in 1997. Selling and
shipping expenses increased by $37.1 million, or 11.9%, to $348.4 million in
1998 from $311.3 million in 1997. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 18.1% in 1998 from 18.3% in 1997. This
decrease was primarily due to leveraging of the Company's distribution
infrastructure. General and administrative expenses increased $20.7 million, or
15.2%, to $157.2 million in 1998 from $136.5 million in 1997, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses increased 0.2% in 1998, to 8.2% from 8.0% in 1997.
Other income (expense) - net decreased by $4.6 million, to $(3.5) million
for the year ended December 26, 1998 from $1.1 million for 1997 due to an
increase in interest expense resulting from an increase in average borrowings
and lower imputed interest income on long term accounts receivable balances.
26
<PAGE>
Equity in earnings of affiliates decreased $1.3 million or 61.9% to $0.8
million in 1998 from $2.1 million in 1997. The decline is the result of the
reduced earnings in the fourth quarter of an affiliate due to a voluntary recall
of anesthetic products produced by Novocol.
For 1998 the Company's effective tax rate was 56.4%. Excluding merger and
integration costs, the majority of which are not deductible for income tax
purposes, and including a proforma tax adjustment for Meer on previously untaxed
earnings as an S Corporation, combined with the elimination of a net deferred
tax asset arising from Meer's conversion from an S Corporation to a C
Corporation, the Company's effective tax rate would have been 38.3%. The
difference between the Company's effective tax rate, excluding merger and
integration costs and the Meer tax adjustment, and the Federal statutory rate
relates primarily to state income taxes.
For 1997 the Company's effective tax rate was 136.8%. On a pro forma basis,
adjusting for assumed tax benefits arising from the losses of Meer as an S
Corporation, and excluding merger and integration costs, the majority of which
are not deductible for income tax purposes, the Company's effective tax rate
would have been 39.7%. The difference between the effective tax rate (excluding
merger and integration costs) and the Federal statutory rate relates primarily
to state income taxes.
1997 Compared to 1996
Net sales increased $324.2 million, or 23.6%, to $1,698.5 million in 1997
from $1,374.3 million in 1996. Of the $324.2 million increase, approximately
$319.2 million or 98.5% represented a 23.8% increase in the healthcare
distribution business. As part of this increase, approximately $179.8 million
represented a 21.9% increase in the Company's dental business, $99.7 million
represented a 29.2% increase in its medical business, $34.2 million represented
a 23.3% increase in its international business and $5.5 million represented a
15.6% increase in the Company's veterinary business. The increase in dental net
sales was primarily the result of the continuing favorable impact of the
Company's integrated sales and marketing approach (which coordinates the efforts
of its field sales consultants with its direct marketing and telesales
personnel), purchase acquisitions, continued success in the Company's target
marketing programs and increased sales in the large dental equipment market. Of
the approximately $99.7 million increase in medical net sales, approximately
$16.9 million, or 17.0%, represents incremental net sales to renal dialysis
centers, with a more focused direct mail strategy, large account flu vaccine
sales and acquisitions primarily accounting for the balance of the increase in
medical net sales. The Company's largest renal dialysis customer, RTC, was
acquired by Total Renal Care, Inc. which is not a customer of the Company. In
the international market, the increase in net sales was due to acquisitions,
primarily in Germany and the United Kingdom, and increased account penetration
in France and Germany. Unfavorable exchange rate translation adjustments
resulted in a net sales decrease of approximately $10.5 million. Had net sales
for the international market been translated at the same exchange rates in
effect during 1996, international net sales would have increased by an
additional 7.7%. In the veterinary market, the increase in net sales was
primarily due to increased account penetration with corporate accounts, improved
participation in select purchasing groups, and targeted emphasis on the equine
race track segment. The remaining increase in 1997 net sales was due to a 16.1%
increase in the technology business, which increased by $5.0 million to $35.9
million for 1997 from $30.9 million for 1996. The increase in technology and
value-added product sales was primarily due to increase in sales of Dentrix
software systems and 1997 acquisitions.
27
<PAGE>
Gross profit increased by $97.6 million, or 23.6%, to $510.4 million in
1997, from $412.8 million in 1996. Gross profit margin increased by only 0.1% to
30.1% from 30.0% last year. Healthcare distribution gross profit increased by
$93.3 million or 23.8% to $484.7 million in 1998, from $391.4 million in 1997.
Gross profit margin increased by 0.1% to 29.2% from 29.1% last year due to
sales mix. Technology gross profit increased by $4.3 million or 20.1% to $25.7
million in 1998, from $21.4 million in 1997. Gross profit margin increased 2.5%
to 71.5% from 69.0% last year due to increased sales volume of higher margin
software products versus lower margin hardware products.
Selling, general and administrative expenses, excluding merger and
integration costs, increased by $78.2 million, or 21.2%, to $447.8 million in
1997 from $369.6 million in 1996. Selling and shipping expenses increased by
$52.7 million, or 20.4% to $311.3 million in 1997 from $258.6 million in 1996.
As a percentage of net sales, selling and shipping expenses decreased 0.5% to
18.3% in 1997 from 18.8% in 1996. This decrease was primarily due to leveraging
of the Company's distribution infrastructure, partially offset by incremental
shipping, payroll and related costs amounting to $1.4 million resulting from the
Teamsters strike against UPS in the third quarter and an increase in selling
expenses. General and administrative expenses increased $25.5 million, or 23.0%,
to $136.5 million in 1997 from $111.0 million in 1996, primarily as a result of
purchase acquisitions. As a percentage of net sales, general and administrative
expenses decreased 0.1% to 8.0% in 1997 from 8.1% in 1996.
Other income (expense) - net decreased by $1.7 million, to $1.1 million for
the year ended December 27, 1997 from $2.8 million for 1996. The decrease in
Other income (expense) - net was primarily due to an increase in interest
expense resulting from an increase in average borrowings partially offset by a
decline in the average cost of borrowing, and a modest increase in interest
income primarily due to an increase in finance charge income and imputed
interest income arising from non-interest bearing extended payment term sales.
Equity in earnings of affiliates increased $0.5 million or 31.3% to $2.1
million in 1997 from $1.6 million in 1996. This increase in earnings of
affiliates was primarily due to increased sales volume and improved margins for
the products sold by an unconsolidated 50%-owned company.
For 1997 the Company's effective tax rate was 136.8%. On a pro forma basis,
adjusting for assumed tax benefits arising from the losses of Meer as an S
Corporation, and excluding merger and integration costs, the majority of which
are not deductible for income tax purposes, the Company's effective tax rate
would have been 39.7%. The difference between the effective tax rate (excluding
merger and integration costs) and the Federal statutory rate relates primarily
to state income taxes. For 1996, the Company's provision for taxes was $18.6
million, while the pre-tax income was $45.9 million. On a pro forma basis,
adjusting for a provision for taxes on the previously untaxed earnings of
Dentrix and the losses of Meer as an S Corporation, the Company's effective tax
rate would have been 39.8%. The difference between the Company's effective tax
rate and the Federal statutory rate relates primarily to state income taxes
offset by tax-exempt interest on municipal securities.
Year 2000
Management continues to conduct a company-wide program to prepare the
Company's computer systems, applications and software products for the year
2000, as well as to assess the readiness for the year 2000 of critical vendors
and other third parties upon which the Company relies to operate its business.
The Year 2000 issue arises from the widespread use of computer programs that
rely on two-digit date codes to perform computations or decision-making
functions. The inability of computer programs worldwide to correctly process
data after December 31, 1999 can have grave consequences to governments,
businesses and consumers alike.
28
<PAGE>
The Company has created a Year 2000 Task Force (the "Task Force") to assess
the business risks associated with all phases of the Company's operations and to
prioritize corrective actions to avoid or mitigate the consequences of each of
the Company's and its critical vendors' and third parties' non-compliant
systems, applications and products so as to minimize potential disruptions to
our business and service to our customers. Consequently, the Task Force's
efforts are divided into three main categories; (i) internal business systems
and services, (ii) critical vendor and other third party businesssystems and
products and services, and (iii) customer business system interfaces.
The Company has completed an inventory of all major business systems and
has made modifications to many of these business critical systems. This process
is expected to continue through the third quarter of 1999 as systems continue to
be modified and tested. At this time all of the Company's software products
currently offered for sale are year 2000 compliant. The Company continues to
work with vendors to remedy products or services considered to be at-risk with
the objective to either correct any potential issues by the end of the third
quarter of 1999, or seek alternative sources. The Company currently ships
substantially all of its orders in the United States by United Parcel Service
("UPS"). UPS has advised the Company that their systems are year 2000
compliant, including those systems used by the Company in its distribution
centers. There can be no assurance that the Company will be able to identify
sufficient alternative supply sources of products and services such that
disruption to the Company's business would not be material.
The Company expects to incur internal payroll costs as well as consulting
costs and other expenses related to customer and vendor relations,
infrastructure, facility enhancements and software upgrades necessary to prepare
the Company's products, services and systems for the year 2000. Management
estimates that the cost of this program will be between $2.0 million and $3.0
million, with approximately $1.5 million representing incremental costs to the
Company. This cost does not include normal upgrading of business and financial
systems that would be year 2000 compliant already. Through December 26, 1998 the
Company has incurred costs on this program of approximately $1.3 million, all
of which have been treated as period costs and expensed as incurred.
The statements contained in this Year 2000 Readiness Disclosure are subject
to certain protection under the Year 2000 Information and Readiness Disclosure
Act.
Euro Conversion
Effective January 1, 1999, 11 of the 15 member countries of the European
Union have adopted the Euro as their common legal currency. On that date, the
participating countries established fixed Euro conversion rates between their
existing sovereign currencies and the Euro. The Euro now trades on currency
exchanges and is available for non-cash transactions. The participating
countries now issue sovereign debt exclusively in Euros, and have re-denominated
outstanding sovereign debt. The authority to direct monetary policy for the
participating countries, including money supply and official interest rates for
the euro, is now exercised by the new European Central Bank.
In 1998 the Company established a Euro Task Force to address its
information system, product and customer concerns. The Company expects to
achieve timely Euro information system and product readiness, so as to
conduct transactions in the Euro, in accordance with implementation
schedules as they are established by the European Commission. The Company does
not anticipate that the costs of the overall effort will have a material adverse
impact on future results.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Effect of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. FAS 133 is effective for transactions
entered into after January 1, 2000. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
the hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its results of
operations and financial position.
29
<PAGE>
Risk Management
The Company has operations in the United States, Canada, Mexico, the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland,
Austria, Spain, Australia and New Zealand. Substantially all of the Company's
operations endeavor to protect its margins by using foreign currency forward
contracts to hedge the estimated foreign currency payments to foreign vendors.
The total U.S. dollar equivalent of all foreign currency forward contracts
hedging vendor payments was $10.0 million as of the 1998 fiscal year end.
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company has experienced negative
translation adjustments of approximately $0.4 million and $1.0 million in 1998
and 1997, respectively, which adjustments were reflected in the balance sheet as
an adjustment to stockholders' equity. The cumulative translation adjustment at
the end of 1998 showed a net negative translation adjustment of $2.1 million.
The Company issues a Canadian catalog once a year with prices stated in
Canadian dollars; however, orders are shipped from the Company's United States
warehouses resulting in U.S. dollar costs for Canadian dollar sales. To minimize
the exposure to fluctuations in foreign currency exchange rates, in February
1999 the Company entered into foreign currency forward contracts with a major
international bank to convert part of the first quarter 1999 estimated monthly
Canadian dollar receipts into U.S. dollars. Under this agreement, the Company
has an obligation to sell 3.0 million Canadian dollars at predetermined fixed
rates. The Company anticipates entering into new contracts in the normal course
of its business.
A balloon payment of approximately $3.4 million due to a bank under a term
loan related to a Dutch acquisition came due in October 1997. The Company
settled this loan by entering into a new Netherlands Guilder (NLG) loan in the
amount of 6.5 million NLG. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary. The new NLG loan calls for periodic payments and a balloon payment
of 4.1 million NLG in January 2002.
The Company had entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.21% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in December 2003 and November 2004.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products, special inventory forward buy-in opportunities and to fund initial
start-up inventory requirements for new distribution centers, (b) acquisitions,
and (c) capital expenditures. Since sales have been strongest during the fourth
quarter and special inventory forward buy-in opportunities are most prevalent
just before the end of the year, the Company's working capital requirements have
been generally higher from the end of the third quarter to the end of the first
quarter of the following year. The Company has financed its business primarily
through its revolving credit facilities, a private placement loan and stock
issuances.
30
<PAGE>
Net cash provided by operating activities for the year ended December 26,
1998 of $2.7 million resulted primarily from net income of $16.3 million,
increased by non-cash charges relating primarily to provision for merger and
integration costs (which includes the write-off and impairment of certain
assets), depreciation and amortization, and allowances on accounts receivable of
$13.5 million, $20.0 million, and $4.4 million, respectively, offset by a net
increase in working capital of $52.4 million . The increase in working capital
was primarily due to (i) a $48.9 million increase in accounts receivable
resulting primarily from increased net sales and extended payment terms and a
decrease in the percentage of customers who make payment with their orders, (ii)
a $34.5 million increase in inventories, primarily due to year-end inventory
forward buy-in opportunities and to fund initial start-up inventory requirements
for new distribution centers, and (iii) a $12.1 million increase in loans and
other receivables, offset in part by an increase in accounts payable and other
accrued expenses of $43.1 million. The Company anticipates future increases in
working capital as a result of its continued sales growth, extended payment
terms and special inventory forward buy-in opportunities.
Net cash used in investing activities for the year ended December 26, 1998
of $48.7 million resulted primarily from cash used to make acquisitions of $13.8
million and capital expenditures of $33.5 million. During the past three years,
the Company has invested more than $71.4 million in the development of new
computer systems, and expenditures for new and existing operating facilities. In
the coming year the Company expects to invest in excess of $20.0 million per
year in capital projects to modernize and expand its facilities and
infrastructure systems and integrate operations.
Net cash provided by financing activities for the year ended December 26,
1998 of $62.4 million resulted primarily from cash proceeds from borrowings of
approximately $242.1 million offset primarily by debt repayments of
approximately $188.7 million.
Certain acquisitions and joint ventures, holders of minority interests in
the acquired entities or ventures have the right at certain times to require the
Company to acquire their interest at either fair market value or a formula price
based on earnings of the entity.
The Company's cash and cash equivalents as of December 26, 1998 of $28.2
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). These investments have staggered maturity
dates, none of which exceed three months, and have a high degree of liquidity
since the securities are actively traded in public markets.
The Company entered into an amended revolving credit facility on August 15,
1997 that increased its main credit facility to $150.0 million and extended the
facility termination date to August 15, 2002. Borrowings under the credit
facility were $69.0 million at December 26, 1998. The Company also has two
uncommitted bank lines totaling $30.0 million under which $0 has been borrowed
at December 26, 1998. On September 25, 1998 the company completed a private
placement transaction under which it issued $100.0 million in Senior Notes, the
proceeds of which were used to pay down amounts owed under its revolving credit
facility. Principal payments totaling $20.0 million are due annually starting
September 25, 2006. The notes bear interest at a rate of 6.66% per annum.
Interest is payable semi-annually. Certain of the Company's subsidiaries have
credit facilities that totaled $29.6 million at December 26, 1998 under which
$19.4 million had been borrowed.
Since December 26, 1998, the Company entered into various short-term
borrowing agreements with three banks, providing a total of $45.0 million of
additional borrowing capacity. The proceeds of these borrowings were used to
fund acquisitions and working capital needs.
31
<PAGE>
The aggregate purchase price of the acquisitions completed during 1998,
including the acquisition of the minority interests of four subsidiaries, was
approximately $21.1 million, payable $13.8 million in cash, $7.3 million in
stock. The cash portion of the purchase price was primarily funded by existing
borrowing lines. The acquisitions of GIV and the Heiland Group, completed
subsequent to the fiscal year end, were payable primarily in cash ($113.5
million) which was funded by the Company's revolving credit agreement and
various short-term borrowings entered into since December 26, 1998.
The Company believes that its cash and cash equivalents of $28.2 million as
of December 26, 1998, its ability to access public debt and equity markets and
the availability of funds under its existing credit agreements will provide it
with sufficient liquidity to meet its currently foreseeable short-term and
long-term capital needs.
ITEM 7A. Market Risks
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in foreign currency exchange
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce these risks by utilizing financial instruments, pursuant to Company
policies.
The value of the U.S. dollar effects the Company's financial results.
Changes in exchange rates may positively or negatively affect the Company's
revenues (as expressed in U.S. dollars), gross margins, operating expenses, and
retained earnings. Where the Company deems it to be prudent, it engages in
hedging programs aimed at limiting in part the impact of currency fluctuations.
Using primarily forward exchange contracts, the Company hedges those
transactions that, when remeasured according to generally accepted accounting
principles, impact the income statement. From time to time, the Company
purchases short-term forward exchange contracts to protect against currency
exchange risks associated with the anticipated revenue of the Company's
international subsidiaries.
As of December 26, 1998, the Company has outstanding foreign currency
forward contracts aggregating $10.0 million related to debt and the purchase and
sale of merchandise. The contracts hedge against currency fluctuations of
Spanish Pesetas ($0.6 million), Deutsch Mark ($0.7 million), British Pounds
($7.7 million) and Australian dollars ($1.0 million). The contracts expire at
various dates through November 1999. At December 26, 1998, the Company had net
deferred gains from foreign currency forward contracts of $0.2 million.
These hedging activities provide only limited protection against currency
exchange risks. Factors that could impact the effectiveness of the Company's
programs include volatility of the currency markets, and availability of hedging
instruments. All currency contracts that are entered into by the Company are
components of hedging programs and are entered into for the sole purpose of
hedging an existing or anticipated currency exposure, not for speculation.
Although the Company maintains these programs to reduce the impact of changes in
currency exchange rates, when the U.S. dollar sustains a strengthening position
against currencies in which the Company sells products and services or a
weakening exchange rate against currencies in which the Company incurs costs,
the Company's revenues or costs are adversely affected.
32
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
-----------
<S> <C>
Reports of Independent Certified Public Accountants...................................... 34
Consolidated Financial Statements:
Balance Sheets as of December 26, 1998 and December 27, 1997.......................... 37
Statements of Operations and Comprehensive Income for the years ended
December 26, 1998, December 27, 1997 and December 28, 1996 ........................ 38
Statements of Stockholders' Equity for the years ended December 26, 1998,
December 27, 1997 and December 28, 1996 ............................................ 39
Statements of Cash Flows for the years ended December 26, 1998,
December 27, 1997 and December 28, 1996 ............................................ 40
Notes to Consolidated Financial Statements ........................................... 41
Schedule, years ended December 26, 1998, December 27, 1997 and December 28, 1996
Report of Independent Certified Public Accountants ...................................... 70
II - Valuation and Qualifying Accounts ............................................... 71
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the notes
thereto.
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry
Schein, Inc. and Subsidiaries as of December 26, 1998 and December 27, 1997, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 26, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1996 consolidated
financial statements of Micro Bio-Medics, Inc., which statements reflect total
revenues of $150,143,000 for the year ended November 30, 1996, or the 1996
financial statements of Sullivan Dental Products, Inc. which statements reflect
total revenues of $241,583,000 for the year ended December 31, 1996. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for such
subsidiaries, is based solely on the reports 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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 26, 1998 and December 27, 1997, and the results of their operations
and comprehensive income and their cash flows for each of the three years in the
period ended December 26, 1998 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
New York, New York
February 26, 1999
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Micro Bio-Medics, Inc.
Pelham Manor, New York
We have audited the consolidated statements of income, cash flows and
changes in stockholders' equity of Micro Bio-Medics, Inc. and Subsidiaries for
the year ended November 30, 1996, not presented separately herein. 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 audit.
We conducted our audit 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 financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Micro Bio-Medics,
Inc. and Subsidiaries referred to above present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended November 30, 1996, in conformity with generally accepted accounting
principles.
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
February 12, 1997
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Sullivan Dental Products, Inc.
West Allis, Wisconsin
We have audited the statements of income, stockholders' equity and cash
flows of Sullivan Dental Products, Inc. for the year ended December 31, 1996,
not presented separately herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements of Sullivan Dental Products, Inc.
present fairly, in all material respects, the results of its operations and its
cash flows for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 18, 1997
36
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 28,222 $ 11,813
Accounts receivable, less reserves of $20,136 and $14,922
respectively.......................................... 338,121 284,727
Inventories.............................................. 270,008 228,005
Deferred income taxes.................................... 14,532 13,323
Prepaid expenses and other............................... 53,646 41,128
-------- --------
Total current assets.............................. 704,529 578,996
Property and equipment, net................................. 67,646 63,155
Goodwill and other intangibles, net ........................ 148,428 130,847
Investments and other....................................... 41,437 30,948
-------- --------
$962,040 $803,946
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable......................................... $169,860 $137,992
Bank credit lines........................................ 19,372 32,173
Accruals:
Salaries and related expenses......................... 29,675 25,021
Merger and integration costs.......................... 21,992 17,056
Other................................................. 50,404 42,194
Current maturities of long-term debt..................... 9,634 11,644
-------- --------
Total current liabilities......................... 300,937 266,080
Long-term debt.............................................. 180,445 104,868
Other liabilities........................................... 11,720 6,550
-------- --------
Total liabilities................................. 493,102 377,498
-------- --------
Minority interest........................................... 5,904 2,225
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000 and
60,000,000, respectively, issued: 40,250,936 and
38,120,572, respectively.............................. 402 381
Additional paid-in capital............................... 348,119 328,644
Retained earnings ....................................... 119,064 99,588
Treasury stock, at cost, 62,479 shares .................. (1,156) (1,156)
Accumulated comprehensive income................... (2,057) (1,609)
Deferred compensation.................................... (1,338) (1,625)
-------- --------
Total stockholders' equity........................ 463,034 424,223
-------- --------
$962,040 $803,946
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ----------- ------------
(restated) (restated)
<S> <C> <C> <C>
Net sales...................................... $1,921,685 $1,698,496 $1,374,343
Cost of sales.................................. 1,319,861 1,188,098 961,588
---------- ---------- ----------
Gross profit................................ 601,824 510,398 412,755
Operating expenses:
Selling, general and administrative......... 505,628 447,789 369,642
Merger and integration costs................ 56,666 50,779 --
---------- ---------- ----------
Operating income ........................ 39,530 11,830 43,113
Other income (expense):
Interest income............................. 6,964 7,353 7,139
Interest expense ........................... (12,050) (7,643) (5,487)
Other-net................................... 1,570 1,375 1,177
---------- ---------- ----------
Income before taxes on income, minority
interest and equity in earnings of
affiliates........................... 36,014 12,915 45,942
Taxes on income .............................. 20,325 17,670 18,606
Minority interest in net income (loss) of
subsidiaries................................ 145 (430) 246
Equity in earnings of affiliates............... 783 2,141 1,595
---------- ---------- ----------
Net income (loss).............................. $ 16,327 $ (2,184) $ 28,685
========== ========== ==========
Net income (loss).............................. $ 16,327 $ (2,184) $ 28,685
Other comprehensive income (loss):
Foreign currency translation adjustment..... (448) (973) (461)
---------- ---------- ----------
Other comprehensive income (loss).............. $ 15,879 $ (3,157) $ 28,224
========== ========== ==========
Net income (loss) per common share:
Basic ...................................... $ 0.42 $ (0.06) $ 0.85
========== ========== ==========
Diluted..................................... $ 0.39 $ (0.06) $ 0.81
========== ========== ==========
Weighted average common shares outstanding:
Basic....................................... 39,305 37,531 33,714
Diluted..................................... 41,549 37,531 35,202
Pro forma:
Historical net income (loss)................ $ 16,327 $ (2,184) $ 28,685
Pro forma adjustment:
Elimination of deferred tax benefit
arising from conversion of an
acquisition from S Corporation to a
C Corporation.......................... (2,000) -- --
Income tax (expense) benefit related to
acquired S Corporation................. (579) 406 338
---------- ---------- ----------
Pro forma net income (loss)................. $ 13,748 $ (1,778) $ 29,023
========== ========== ==========
Pro forma net income per common share:
Basic.................................... $ 0.35 $ (0.05) $ 0.86
========== ========== ==========
Diluted.................................. $ 0.33 $ (0.05) $ 0.82
========== ========== ==========
Weighted average shares outstanding:
Basic ................................... 39,305 37,531 33,714
Diluted.................................. 41,549 37,531 35,202
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings
--------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 30, 1995, as previously reported ........ 28,673,267 $ 286 $167,437 $ 62,751
Adjustment for pooled company ............................. 2,561,949 26 174 10,643
---------- ------ --------- --------
Balance, December 30, 1995, as restated.................... 31,235,216 312 167,611 73,394
Net income................................................. --- --- --- 28,685
Dividends paid by pooled companies ........................ --- --- --- (5,801)
Shares issued for acquisitions............................. 820,930 10 16,246 ---
Shares issued in follow-on offering........................ 3,734,375 37 124,070 ---
Shares issued to ESOP trust................................ 24,210 --- 820 ---
Purchase of treasury stock (27,455 shares)................. --- --- --- ---
Shares reacquired from a prior year's acquisition
(13,000 shares).......................................... --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
Shares issued by pooled company............................ 240,017 2 2,597 ---
Shares issued for stock options and warrants, including
tax benefit.............................................. 448,518 4 4,030 ---
Shares issued for conversion of debentures................. 116,250 1 1,397 ---
---------- ------ --------- --------
Balance, December 28, 1996................................. 36,619,516 366 316,771 96,278
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in the
aggregate................................................ --- --- --- 5,899
Adjustment to change the fiscal year end of three companies
acquired under the pooling of interests method........... --- --- --- 2,037
Net loss................................................... --- --- --- (2,184)
Dividends paid by pooled companies ........................ --- --- --- (2,442)
Shares issued for acquisitions............................. 906,401 9 2,945 ---
Issuance of restricted stock............................... 44,846 --- --- ---
Treasury shares issued for acquisitions (246,960 shares)... --- --- --- ---
Purchase of treasury stock (30,507 shares)................. --- --- --- ---
Shares reacquired from a prior year's acquisition
(2,339 shares)........................................... --- --- --- ---
Treasury shares retired.................................... (5,644) --- (95) ---
Foreign currency translation adjustment.................... --- --- -- - ---
Shares issued by pooled company............................ 171,714 1 2,875 ---
Shares issued to ESOP trust................................ 44,122 --- 1,150 ---
Shares issued for stock options, including tax benefit..... 339,617 5 4,998 ---
---------- ------ -------- --------
Balance, December 27, 1997................................. 38,120,572 381 328,644 99,588
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in the
aggregate................................................ --- --- --- 5,161
Net income................................................. --- --- --- 16,327
Dividends paid by pooled companies ........................ --- --- --- (2,012)
Shares issued for acquisitions............................. 1,124,469 11 2,110 ---
Shares issued to ESOP trust................................ 34,720 --- 1,311 ---
Amortization of restricted stock........................... --- --- --- ---
Foreign currency translation adjustment.................... --- --- --- ---
Shares issued for stock options and warrants, including tax
benefit................................................... 971,175 10 16,054 ---
---------- ------ -------- --------
Balance, December 26, 1998................................. 40,250,936 $ 402 $348,119 $119,064
========== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulat-
ed Deferred Total
Treasury comprehen- Compen- Stockholders'
Stock sive income sation Equity
----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 30, 1995, as previously reported ........ $(3,101) $ (175) $ --- $227,198
Adjustment for pooled company ............................. --- --- --- 10,843
-------- ------- ------- --------
Balance, December 30, 1995, as restated.................... (3,101) (175) --- 238,041
Net income................................................. --- --- --- 28,685
Dividends paid by pooled companies ........................ --- --- --- (5,801)
Shares issued for acquisitions............................. --- --- --- 16,256
Shares issued in follow-on offering........................ --- --- --- 124,107
Shares issued to ESOP trust............................... --- --- --- 820
Purchase of treasury stock (27,455 shares)................. (628) --- --- (628)
Shares reacquired from a prior year's acquisition
(13,000 shares).......................................... (173) --- --- (173)
Foreign currency translation adjustment.................... --- (461) --- (461)
Shares issued by pooled company............................ --- --- --- 2,599
Shares issued for stock options and warrants, including
tax benefit.............................................. --- --- --- 4,034
Shares issued for conversion of debentures................. --- --- --- 1,398
-------- ------- ------- --------
Balance, December 28, 1996................................. (3,902) (636) --- 408,877
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in the
aggregate................................................ --- --- --- 5,899
Adjustment to change the fiscal year end of three companies
acquired under the pooling of interests method........... --- --- --- 2,037
Net loss................................................... --- --- --- (2,184)
Dividends paid by pooled companies ........................ --- --- --- (2,442)
Shares issued for acquisitions............................. --- --- --- 2,954
Issuance of restricted stock............................... --- --- (1,625) (1,625)
Treasury shares issued for acquisitions (246,960 shares)... 3,303 --- --- 3,303
Purchase of treasury stock (30,507 shares)................. (618) --- --- (618)
Shares reacquired from a prior year's acquisition
(2,339 shares)........................................... (34) --- --- (34)
Treasury shares retired.................................... 95 --- --- ---
Foreign currency translation adjustment.................... --- (973) --- (973)
Shares issued by pooled company............................ --- --- --- 2,876
Shares issued to ESOP trust................................ --- --- --- 1,150
Shares issued for stock options, including tax benefit..... --- --- --- 5,003
-------- ------- ------- --------
Balance, December 27, 1997................................. (1,156) (1,609) (1,625) 424,223
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in the
aggregate................................................ --- --- --- 5,161
Net income................................................. --- --- --- 16,327
Dividends paid by pooled companies ........................ --- --- --- (2,012)
Shares issued for acquisitions............................. --- --- --- 2,121
Shares issued to ESOP trust................................ --- --- --- 1,311
Amortization of restricted stock........................... --- --- 287 287
Foreign currency translation adjustment.................... --- (448) --- (448)
Shares issued for stock options and warrants, including tax
benefit................................................... --- --- --- 16,064
-------- ------- ------- --------
Balance, December 26, 1998................................. $ (1,156) $(2,057) $(1,338) $463,034
======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 16,327 $ (2,184) $ 28,685
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 19,984 15,730 12,644
Provision for losses and allowances on accounts
receivable......................................... 4,379 3,857 2,225
Stock issued to ESOP trust................................. 1,311 1,150 820
Provision (benefit) for deferred income taxes.............. 185 (3,920) 2,884
Write-off of equipment and intangibles..................... 13,500 8,600 --
Undistributed earnings of affiliates....................... (783) (2,141) (1,595)
Minority interest in net income (loss) of subsidiaries..... 145 (430) 246
Other...................................................... 178 221 (614)
Changes in assets and liabilities:
Increase in accounts receivable......................... (48,947) (50,711) (52,680)
Increase in inventories................................. (34,533) (19,939) (18,633)
Increase in other current assets........................ (12,143) (5,241) (7,791)
Increase in accounts payable and accruals............... 43,090 13,139 18,805
---------- ---------- --------
Net cash provided by (used in) operating activities........... 2,693 (41,869) (15,004)
---------- ---------- --------
Cash flows from investing activities:
Capital expenditures....................................... (33,521) (21,862) (15,980)
Business acquisitions, net of cash acquired................ (13,883) (42,267) (32,222)
Proceeds from sale of fixed assets......................... 8,121 -- ---
Other...................................................... (9,416) (6,173) (6,342)
---------- ---------- --------
Net cash used in investing activities......................... (48,699) (70,302) (54,544)
---------- ---------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................... 129,717 19,040 1,154
Principal payments on long-term debt....................... (49,192) (14,795) (5,291)
Proceeds from issuance of stock............................ 10,956 5,306 130,731
Proceeds from borrowings from banks........................ 112,344 73,582 6,060
Purchase of treasury stock................................. -- (618) (628)
Payments on borrowings from banks.......................... (139,503) (1,177) (23,378)
Distributions to stockholders.............................. (2,012) (2,442) (4,632)
Other...................................................... 105 (730) (525)
---------- ---------- --------
Net cash provided by financing activities..................... 62,415 78,166 103,491
---------- ---------- --------
Net increase (decrease) in cash and cash equivalents.......... 16,409 (34,005) 33,943
Cash and cash equivalents, beginning of year.................. 11,813 45,818 11,875
---------- ---------- --------
Cash and cash equivalents, end of year........................ $ 28,222 $ 11,813 $ 45,818
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Henry Schein,
Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates which are greater than 20%
and less than or equal to 50% 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 acquisitions of Dentrix Dental Systems, Inc. ("Dentrix"),
effective February 28, 1997, Micro Bio-Medics, Inc. ("MBMI"), effective August
1, 1997, Sullivan Dental Products, Inc. ("Sullivan"), effective November 12,
1997 and the H. Meer Dental Supply Co. ("Meer"), effective August 14, 1998,
which were accounted for under the pooling of interests method of accounting.
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. Fiscal years ended December 26, 1998, December 27, 1997
and December 28, 1996 all consisted of 52 weeks. The accounts of (i) Meer, (ii)
MBMI and (iii) Sullivan and Dentrix, have been consolidated on a basis with
years-ended of; (i) September 27, (ii) November 30, and (iii) December 31,
respectively, for periods through December 28, 1996. Meer, MBMI and Dentrix
adopted the Company's fiscal year end starting in 1997. Sullivan adopted the
Company's fiscal year end starting in 1998.
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.
41
<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 - 8
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 accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a
consolidated Federal income tax return with its 80% or greater owned
subsidiaries.
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 accumulated other comprehensive income account in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in earnings, except for certain hedging transactions (see below).
42
<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 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 certain of the underlying
instruments are at variable rates which are repriced frequently. The remaining
portion of long-term debt approximates fair value because the interest
approximates current market rates for financial instruments with similar
maturities and terms.
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. Certain acquisitions
provide for contingent consideration, primarily cash, to be paid in the event
certain financial performance targets are satisfied over periods typically not
exceeding three years from the date of acquisition. The Company's policy is to
record a liability for such amounts when it becomes probable that targets will
be met.
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. In
connection with certain recent acquisitions, the Company has determined that
certain long-lived assets have been impaired (see Note 6).
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."
43
<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
Basic earnings per share includes no dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of stock
options.
Comprehensive Income
Comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are excluded from net income as
these amounts are recorded directly as an adjustment to stockholders' equity.
The Company's comprehensive income is comprised of foreign currency translation
adjustments.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. FAS 133 is effective for transactions
entered into after January 1, 2000. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
the hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its results of
operations and financial position.
NOTE 2--EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings per
share follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Basic....................................... 39,305 37,531 33,714
Effect of assumed conversion of
employee stock options.................. 2,244 -- 1,488
------ ------ ------
Diluted ..................................... 41,549 37,531 35,202
====== ====== ======
</TABLE>
Options to purchase approximately 772,000 shares of common stock at
exercise prices ranging from $39.88 to $46.00 per share were outstanding during
a portion of 1998 but were not included in the computation of diluted earnings
per share because they are anti- dilutive. These options expire through 2008.
Options to purchase approximately 4,135,000 shares of common stock at exercise
prices ranging from $4.21 to $36.18 per share were outstanding during portions
of 1997 and were not included in the computation of diluted earnings per share
because they are anti-dilutive.
44
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 3--PROPERTY AND EQUIPMENT--NET
Major classes of property and equipment consist of the following:
December 26, December 27,
1998 1997
------------ ------------
Land......................................... $ 795 $ 1,654
Buildings and leasehold improvements......... 25,626 29,088
Machinery and warehouse equipment............ 26,102 33,657
Furniture, fixtures and other................ 22,362 22,845
Computer equipment and software.............. 46,517 39,218
------- -------
121,402 126,462
Less accumulated depreciation and
amortization............................... 53,756 63,307
------- -------
Net property and equipment................... $67,646 $63,155
======= =======
Equipment held under capital leases amounted to approximately $1,195 and
$2,510 as of December 26, 1998 and December 27, 1997, respectively (see Note
14(b)).
NOTE 4--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
December 26, December 27,
1998 1997
------------ ------------
Goodwill..................................... $155,976 $129,724
Other........................................ 10,575 12,034
-------- --------
166,551 141,758
Less accumulated amortization................ 18,123 10,911
-------- --------
$148,428 $130,847
======== ========
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of identifiable net assets acquired. During 1998, the increase in
goodwill was primarily due to six acquisitions, including the acquisition of the
minority interests of four subsidiaries, which totaled approximately $10,637 and
additional purchase price consideration of approximately $9,152 for five prior
year acquisitions. Other intangibles include covenants not to compete, computer
programming costs, customer lists and deferred acquisition costs. In connection
with certain recent acquisitions, the Company has determined that the goodwill
of certain prior acquisitions has been impaired (see Note 6).
45
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 5--INVESTMENTS AND OTHER
Investments and other consist of:
December 26, December 27,
1998 1997
------------ ------------
Investments in unconsolidated affiliates........ $12,856 $13,048
Long-term receivables (see Note 10 (b))......... 16,599 8,203
Other........................................... 11,982 9,697
------- -------
$41,437 $30,948
======= =======
The Company's investments are predominately 50% owned unconsolidated
affiliates consisting of various companies involved in the health care
distribution business and HS Pharmaceutical, Inc., which manufactures and
distributes generic pharmaceuticals. As of December 26, 1998, the Company's
investments in unconsolidated affiliates were $3,393 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 26, 1998,
approximately $9,556 of the Company's retained earnings represented
undistributed earnings of affiliates. Combined financial data for substantially
all of these companies are as follows:
December 26, December 27,
1998 1997
------------ ------------
Current assets............................ $51,683 $39,688
Total assets.............................. 76,238 56,239
Liabilities............................... 57,356 35,753
Stockholders equity....................... 18,882 20,486
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................. $114,788 $98,954 $103,169
Operating income.......................... 2,589 7,303 7,044
Net income................................ 541 4,841 3,755
</TABLE>
46
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS
The Company has completed the acquisition of 49 healthcare distribution and
technology businesses between 1996 and 1998, the most significant of which were;
the H. Meer Dental Supply Co., Inc, ("Meer") a distributor of consumable dental
supplies and equipment with sales and service centers located throughout the
United States, Sullivan Dental Products, Inc. ("Sullivan"), a distributor of
consumable dental supplies and dental equipment through 52 sales and service
centers located throughout the United States, Micro Bio-Medics, Inc. ("MBMI"), a
distributor of medical supplies to physicians and hospitals as well as to other
healthcare professionals nationwide, and Dentrix Dental Systems, Inc.
("Dentrix"), a leading provider of clinically-based dental practice management
systems, in merger transactions accounted for as poolings of interests. Pursuant
to the respective merger agreements, which were completed on August 14, 1998,
November 12, 1997, August 1, 1997 and February 28, 1997, the Company issued
approximately 2,974,000, 7,594,900, 3,231,400 and 1,070,000 shares of its Common
Stock with aggregate market values (on their respective closing dates) of
approximately $132,700, $266,800, $122,800 and $29,400, respectively and assumed
and exchanged all options to purchase Sullivan and MBMI stock for options to
purchase 1,192,000 and 1,117,000, respectively of the Company's Common Stock.
Meer had net sales and a net loss of approximately $180,000 and $1,200, in 1997,
respectively. Prior to its acquisition by the Company, Meer elected to be taxed
as an S Corporation under the Internal Revenue Code. Accordingly, the current
taxable income or loss of Meer was attributable to its shareholders. Upon its
acquisition, Meer will be taxed as a regular corporation. Pro forma adjustments
have been made to the restated statement of operations to reflect the income tax
provisions and recoveries that would have been provided for had Meer been
subject to income taxes in prior years.
Additionally, during 1998 the Company acquired four other businesses with
aggregate net sales for 1997 of approximately $85,000, three of which were
accounted for under the pooling of interests method, with the remaining
acquisition of a 50.1% ownership interest being accounted for under the purchase
method of accounting. The total amount of cash paid (for the purchased
businesses) and the value of the Company's Common Stock issued in connection
with three of these acquisitions was approximately $6,800 and approximately
$18,400, respectively. In connection with one of the dental supply company
acquisitions, the Company issued shares of a subsidiary, with rights equivalent
to those of the Company's Common Stock, which are exchangeable into 603,500
shares of the Company's Common Stock, at each shareholders' option, and had an
aggregate value of approximately $24,000.
The 1998 financial statements have been restated to give retroactive effect
for the acquisition of Meer and the 1997 financial statements were restated for
three of the 1997 pooling transactions (Sullivan, MBMI and Dentrix). The
remaining pooling transactions entered into during 1998 and 1997 were not
material and have been included in the consolidated financial statements from
the beginning of the quarter in which the acquisitions occurred.
During 1997 the Company acquired 21 other businesses with aggregate net
sales for 1996 of approximately $157,000, three of which were accounted for
under the pooling of interests method, with the remainder being accounted for
under the purchase method of accounting (fifteen for 100% ownership interests
and three for majority ownership interests). The total amount of cash paid and
promissory notes issued, and the value of the Company's Common Stock issued in
connection with these acquisitions was $40,798 and $34,000, respectively.
During 1996, the Company acquired twelve dental and four medical companies,
a veterinary supply distributor and three international dental companies, with
aggregate net sales in their last fiscal year ends of approximately $104,000,
all of which were accounted for under the purchase method of accounting. Of
these, eighteen were for majority ownership (100% in twelve of the
transactions).
47
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS (Continued)
The total amount of cash paid and promissory notes issued for the 1996
acquisitions was approximately $33,105. The Company also issued 818,591 shares
of common stock valued at approximately $16,200 in 1996 in connection with five
of these acquisitions. Operations of these businesses have been included in the
consolidated financial statements from their respective acquisition dates. No
single 1996 acquisition was material.
During 1997, pursuant to a shareholders' agreement, certain minority
shareholders of a subsidiary of the Company exercised their option to sell their
shares in the subsidiary to the Company. The value of the shares put to the
Company was approximately $11,800, of which approximately $3,200 was paid for in
cash, with the remainder payable over two years in equal annual installments.
The Company has incurred certain direct costs in connection with the
aforementioned acquisitions accounted for under the pooling of interests method
and the integration of these and certain other acquired businesses into the
Company's infrastructure. These costs, which have been classified as merger and
integration costs are as follows:
<TABLE>
<CAPTION>
Years ended
------------------------------------------
December 26, December 27,
1998 1997
----------------- -----------------
<S> <C> <C>
Direct transaction costs (1).................... $7,100 $13,300
------ -------
Integration costs:
Costs associated with the closure
of distribution centers (2).............. 15,400 7,100
Long-lived asset write-off and
impairment (3)........................... 13,500 8,600
Severance and other direct costs........... 12,366 9,879
Signing bonuses (4)........................ 8,300 11,900
------- -------
Total integration costs................ 49,566 37,479
------- -------
Total merger and integration costs.............. $56,666 $50,779
======= =======
</TABLE>
- ------------------
1. Primarily investment banking and professional fees.
2. Primarily rent and consulting fees.
3. Consists of write-offs of duplicate management information systems, other
assets and goodwill of $3,724 in 1998 (primarily associated with the
consolidation of the dental business under one national infrastructure)
and $4,000 in 1997 (primarily associated with the consolidation of the
medical business under one national infrastructure).
4. Signing bonuses and stay pay packages to sales force and certain senior
management directly related to the mergers.
48
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
Note 6--Business Acquisitions (Condtinued)
Additional charges are expected to be recorded in subsequent reporting
periods, as the operations are integrated. Estimated merger and integration
costs accrued at December 27, 1997 were not in excess of actual amounts
incurred. Amounts accrued at December 26, 1998 consist primarily of
severance, stay-bonuses and rent, which will be paid during 1999.
The summarized unaudited pro forma results of operations set forth below
for 1998 and 1997 assume the acquisitions, which were accounted for under the
purchase method of accounting, occurred as of the beginning of each of these
periods.
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
December 26, December 27,
1998 1997
---------------- -----------------
<S> <C> <C>
Net sales....................................................... $1,954,574 $1,836,641
Net income (loss) (1)........................................... $ 16,264 $ (1,984)
Net income (loss) per common share:
Basic ..................................................... $ 0.41 $ (0.05)
Diluted ................................................... $ 0.39 $ (0.05)
Pro forma net income (loss), reflecting adjustment for income
tax expense (recovered) on previously untaxed earnings
(losses) of Meer ............................................. $ 13,685 $ (1,516)
Pro forma net income (loss) per common share:
Basic...................................................... $ 0.35 $ (0.04)
Diluted ................................................... $ 0.33 $ (0.04)
</TABLE>
- ------------
(1) Includes merger and integration costs of approximately $56,666 and the
related tax benefit of $12,591 in 1998 and $50,779 and related tax
benefit of $8,021 in 1997, respectively.
Pro forma adjusted 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 or potential sales erosion that may result from the Company's
integration efforts.
49
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS (Continued)
Net sales, net income (loss) and pro forma net income for the Company and
Meer and on a combined basis for the years ended 1997 and 1996 were as follows:
Years Ended
------------------------------
December 27, December 28,
1997 1996
------------ -----------
Net sales:
HSI, as previously reported $1,518,123 $1,231,848
Meer 180,373 142,495
---------- ----------
Combined $1,698,496 $1,374,343
========== ==========
Net income (loss):
HSI, as previously reported $(1,012) $32,767
Meer (1,172) (4,082)
------- -------
Combined $(2,184) $28,685
======= =======
Pro forma net income(loss):
HSI, as previously reported $(1,012) $31,570
Meer(1) (766) (2,547)
------- -------
Combined $(1,778) $29,023
======= =======
- -----------
(1) Reflects adjustment for benefit arising from previously untaxed losses of an
S Corporation.
Additionally on December 28, 1998 and on December 31, 1998, the Company
acquired (a) the Heiland Holding, GmbH, (the "Heiland Group") a leading direct
marketer of healthcare supplies, headquartered in Hamburg, Germany for
approximately $84,000, and (b) General Injectibles and Vaccines, Inc. ("GIV"), a
leading independent direct marketer of vaccines and other injectibles to office
based practitioners in the United States for approximately $53,500, both of
which will be accounted for under the purchase method of accounting. In 1998,
Heiland and GIV had net sales of approximately $130,000 and $120,000,
respectively.
50
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BANK CREDIT LINES
At December 26, 1998, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $28,107 expiring through
November 1999. Borrowings of $19,372 under these credit lines at interest rates
ranging from 4.1% to 8.2% were collateralized by accounts receivable, inventory
and property and equipment of the subsidiaries with an aggregate net book value
of $35,172 at December 26, 1998. Since December 26, 1998, the Company entered
into various short-term borrowing agreements with three banks, providing a
total of $45,000 of additional borrowing capacity. The proceeds of these
borrowings were used to fund acquisitions and working capital needs.
NOTE 8--LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Private Placement Loan (a)..................................... $100,000 $ --
Borrowings under Revolving Credit Agreement (b) 68,969 76,152
Notes payable for business acquisitions (c).................... 6,937 11,552
Notes payable to banks, interest variable (8.25% at
December 26, 1998), payable in quarterly installments
ranging from $16 to $34 through 2004, secured by
inventory and accounts receivable in the amount of
$31,065..................................................... 4,050 3,925
Note payable to bank (d)....................................... -- 12,825
Mortgage payable to bank in quarterly installments of $13,
interest at 5.0% through November 2013, collateralized by
a building with a net book value of $1,383.................. 806 814
Various notes and loans payable with interest, in varying
installments through 2006, uncollateralized................. 6,886 9,378
Capital lease obligations in various installments through
fiscal 2006; interest at 6.5% to 10.5% or varies with
prime rate.................................................. 2,431 1,866
-------- --------
Total.......................................................... 190,079 116,512
Less current maturities........................................ 9,634 11,644
-------- --------
Total long-term debt........................................... $180,445 $104,868
======== ========
</TABLE>
(a) Private Placement Loan
On September 25, 1998 the Company completed a private placement transaction
under which it issued $100,000 in Senior Notes, the proceeds of which were used
to pay down amounts owed under its revolving credit facility. Principal payments
totaling $20,000 are due annually starting September 25, 2006. The notes bear
interest at a rate of 6.66% per annum. Interest is payable semi-annually.
(b) Revolving Credit Agreement
On August 15, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum available borrowings
to $150,000 from $100,000 and extended the term of the agreement to August 15,
2002. The interest rate on any borrowings under the agreement is based on prime
or LIBOR or Pound Sterling LIBOR as defined in the agreement, which were 7.75%,
7.44%, and 5.25%, respectively, at December 26, 1998. The borrowings outstanding
at December 26, 1998 were at
51
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 8--LONG-TERM DEBT (Continued)
interest rates ranging from 4.1% to 7.8%. 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.
(c) Notes Payable for Business Acquisitions
In May 1997, a subsidiary of the Company entered into a term loan for
$8,299 to acquire the remaining minority interests of a foreign subsidiary. In
1998, the company repaid $4,478 and the remainder is payable upon demand. The
loan is denominated in British Pounds, and interest is payable quarterly at
5.5%.
A balloon payment of approximately $3,400 due to a bank under a term loan
related to a Dutch acquisition came due in October 1997. The Company settled
this loan by entering into a new Netherlands Guilder (NLG) loan in the amount of
6,500 NLG. Principal is payable in semi-annual installments of 300 NLG through
January 2002, with a final balloon payment of 4,100 NLG on January 31, 2002.
Interest is payable quarterly at a rate of 5.28% per annum, plus a margin. The
agreement also provides for the same financial covenants and restrictions as the
revolving credit agreement. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary.
(d) Notes payable to bank
On October 6, 1997 a subsidiary of the Company entered into an unsecured
line-of-credit agreement which allowed the subsidiary to borrow up to $25,000
through October 2002. Any borrowings bore interest at prime or the
Eurodollar-based rate, elected at the time of each advance. This note was repaid
in full in August, 1998.
As of December 26, 1998, the aggregate amounts of long-term debt maturing
in each of the next five years are as follows: 1999 - $9,634; 2000 - $3,058;
2001 - $2,364; 2002 - $73,468; 2003 - $451.
52
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9--TAXES ON INCOME
Taxes on income are based on income before taxes on income, minority
interest and equity in earnings of affiliates as follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Domestic....................................... $31,959 $10,785 $43,699
Foreign........................................ 4,055 2,130 2,243
------- ------- -------
Total.......................................... $36,014 $12,915 $45,942
======= ======= =======
</TABLE>
The provision for taxes on income was as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense:
U.S. Federal........................... $15,339 $18,019 $12,476
State and local........................ 31,959 2,455 2,551
Foreign................................ 4,055 1,116 695
------- ------- -------
Total current............................. 20,140 21,590 15,722
------- ------- -------
Deferred tax expense (benefit):
U.S. Federal........................... 657 (3,954) 1,984
State and local........................ 304 (78) 747
Foreign................................ (776) 112 153
------- ------- -------
Total deferred............................ 185 (3,920) 2,884
------- ------- -------
Total provision........................... $20,325 $17,670 $18,606
======= ======= =======
</TABLE>
53
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9--TAXES ON INCOME (Continued)
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
December 26, December 27,
1998 1997
------------ ------------
Current deferred tax assets:
Inventory, premium coupon redemptions
and accounts receivable valuation
allowances.............................. $ 6,645 $ 4,145
Uniform capitalization adjustments to
inventories.............................. 2,613 2,838
Other accrued liabilities....................... 5,274 6,340
------- -------
Total current deferred tax asset .................. 14,532 13,323
------- -------
Non-current deferred tax asset (liability):
Property and equipment.......................... (3,581) (2,591)
Provision for other long-term liabilities....... (2,721) (1,573)
Net operating loss carryforward................. 91 175
Net operating losses of foreign subsidiaries.... 2,482 2,375
------- -------
Total non-current deferred tax liability........... (3,729) (1,614)
Valuation allowance for non-current deferred
tax assets............................... (2,549) (2,421)
------- -------
Net non-current deferred tax liabilities........... (6,278) (4,035)
------- -------
Net deferred tax asset............................. $ 8,254 $ 9,288
======= =======
The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior 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.
At December 26, 1998, the Company has net operating loss carryforwards for
Federal income tax purposes of $229 which are available to offset future
Federal taxable income through 2009. Foreign net operating losses totaled
$7,700 at December 26, 1998. Such losses can be utilized against future
foreign income. The losses expire between 1999 and 2003, with $2,000 expiring
in 1999.
54
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9--TAXES ON INCOME (Continued)
The tax provisions differ from the amount computed using the Federal
statutory income tax rate as follows:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Provision at Federal statutory rate................ $12,741 $ 4,877 $17,508
State income taxes, net of Federal income tax
effect........................................... 1,109 1,630 2,555
Net foreign and domestic losses for which no
tax benefits are available....................... 386 167 ---
Foreign income taxed at other than the Federal
statutory rate................................... 17 (2) (55)
Deferred tax benefit arising from termination of S
Corporation election of an acquired company...... (2,000)
Tax effect of S Corporation........................ (579) 406 303
Non-deductible merger and integration costs........ 8,814 10,752 ---
Tax exempt interest................................ --- --- (237)
Other.............................................. (163) (160) (1,468)
------- ------- -------
Income tax provision .............................. $20,325 $17,670 $18,606
======= ======= =======
</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 26, 1998, the cumulative amount of reinvested
earnings was approximately $6,317.
55
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10--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 counter parties of these contracts, the Company does not anticipate
nonperformance by the counter parties. The Company does not require collateral
or other security to support these financial instruments.
As of December 26, 1998, the Company has outstanding foreign currency
forward contracts aggregating $10,028 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of Spanish
Pesetas ($630), Deutsche Mark ($673), British Pounds ($7,712), Italian Lira
($14) and Australian dollars ($999). The contracts expire at various dates
through November 1999. At December 26, 1998, the Company had net deferred gains
from foreign currency forward contracts of $181.
As of December 26, 1998, HSI had $13,000 outstanding in interest rate
swaps. These swaps are used to convert floating rate debt relating to the
Company's Revolving Credit Agreement, 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 7.2% for the variable LIBOR rate on
$13,000 of the Company's debt. The swaps expire in December 2003 and November
2004. Under the interest rate environment during the year ended December 26,
1998, the net fair value of the Company's interest rate swap agreements resulted
in a recognized loss of $232.
(b) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments. The Company places its
short-term cash investments with high credit quality financial institutions and,
by policy, limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its dispersion across different types
of healthcare professionals and geographic areas. The Company maintains an
allowance for losses based on the expected collectability of all receivables.
Included in Accounts receivable and Long-term receivables at December 26, 1998
and December 27, 1997 is $10,791 and $10,967, and $0 and $18,355, respectively,
related to Easy Dental(Registered) Plus software sales with non-interest
bearing extended payment terms. Total unamortized discounts at December 26, 1998
and December 27, 1997 amounted to $293 and $843 based on an imputed interest
rate of 7.75% and 8.5%, respectively. Included in interest income for the years
ended December 26, 1998, December 27, 1997 and December 28, 1996 was
approximately $737, $1,216 and $998, respectively, of imputed interest relating
to these non-interest bearing extended payment term receivables.
56
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11--SEGMENT AND GEOGRAPHIC DATA
During 1998, The Company adopted Statement of Financial Accounting
Standards No. 131 ("FAS 131"), Disclosures about Segments of an Enterprise and
Related Information. FAS 131 supersedes FAS 14, Financial Reporting for Segments
of a Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments.
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment which is comprised of the
Company's dental, medical, veterinary and international business groups,
distributes healthcare products (primarily consumable) and services to office
based healthcare practitioners and professionals in the combined North American,
European and the Pacific Rim markets. The technology segment consists primarily
of the Company's practice management software business and certain other
value-added products and services which are distributed primarily to healthcare
professionals in the North American market.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on operating income.
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained. The following table presents information about the
Company's business segments:
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Net Sales:
Healthcare distribution(1):
Dental $1,083,994 $999,456 $819,721
Medical 515,728 441,015 341,329
Veterinary 48,307 40,843 35,329
International(2) 230,999 181,239 146,999
---------- ---------- ----------
Total healthcare distribution 1,879,028 1,662,553 1,343,378
Technology(3) 42,657 35,943 30,965
---------- ---------- ----------
$1,921,685 $1,698,496 $1,374,343
========== ========== ==========
- --------------------------------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products diagnostic test, infection control and vitamins.
(2) Consists of products sold in Dental, Medical and Veterinary groups in the
European and Pacific Rim markets.
(3) Consists of practice management software, financial products and other
value added products.
57
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11--SEGMENT AND GEOGRAPHIC DATA (Continued)
<TABLE>
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating income:
Healthcare distribution (includes merger and
integration costs of $55,688, $43,911 and $0,
respectively) ................................... $ 24,183 $ 4,970 $ 43,991
Technology (includes merger and integration costs of
$978, $6,868 and $0, respectively). ............. 15,347 6,860 (878)
-------- -------- --------
Total ................................................... $ 39,530 $ 11,830 $ 43,113
======== ======== ========
Interest Income:
Healthcare distribution ............................ $ 6,157 $ 6,011 $ 5,923
Technology ......................................... 1,373 1,417 1,216
-------- -------- --------
Total .................................................. $ 7,530 $ 7,428 $ 7,139
======== ======== ========
Interest Expense:
Healthcare distribution ............................ $ 12,585 $ 7,632 $ 5,359
Technology ......................................... 72 86 128
-------- -------- --------
Total .................................................. $ 12,657 $ 7,718 $ 5,487
======== ======== ========
Total Assets:
Healthcare distribution ............................ $935,573 $769,258 $647,290
Technology ......................................... 42,371 41,844 21,258
-------- -------- --------
Total .................................................. $977,944 $811,102 $668,548
======== ======== ========
Depreciation and Amortization:
Healthcare distribution ............................ $ 19,341 $ 15,071 $ 10,633
Technology ......................................... 643 659 2,011
-------- -------- --------
Total .................................................. $ 19,984 $ 15,730 $ 12,644
======== ======== ========
Capital Expenditures:
Healthcare distribution ............................ $ 32,664 $ 21,514 $ 14,927
Technology ......................................... 857 348 1,053
-------- -------- --------
Total .................................................. $ 33,521 $ 21,862 $ 15,980
======== ======== ========
<CAPTION>
The following table reconciles segment totals to consolidated totals:
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total Assets:
Total assets for reportable segments ............... $977,944 $811,102 $668,548
Receivables due from healthcare
distribution segment ............................. (15,904) (7,156) (309)
-------- -------- --------
Consolidated total assets .......................... $962,040 $803,946 $668,239
======== ======== ========
</TABLE>
58
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11--SEGMENT AND GEOGRAPHIC DATA (Continued)
<TABLE>
<S> <C> <C> <C>
Interest Income
Total interest income for reportable segments..... $ 7,530 $ 7,428 $ 7,139
Interest on receivables due from healthcare
distribution segment.......................... (566) (75) --
-------- -------- --------
Total consolidated interest income................. $ 6,964 $ 7,353 $ 7,139
======== ======== ========
Interest Expense
Total interest expense for reportable segments.... $ 12,657 $ 7,718 $ 5,487
Interest on payables due from healthcare
distribution segment.......................... (41) -- --
Interest on payable due to technology segment..... (566) (75) --
-------- -------- --------
Total consolidated interest expense............... $ 12,050 $ 7,643 $ 5,487
======== ======== ========
</TABLE>
The following table presents information about the Company by
geographic area. There were no material amounts of sales or transfers among
geographic areas and there were no material amounts of United States export
sales.
<TABLE>
<CAPTION>
December 26, 1998 December 27, 1997 December 28, 1996
--------------------------- --------------------------- --------------------------
Net Long-Lived Net Long-Lived Net Long-Lived
Sales Assets Sales Assets Sales Assets
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
North America.............. $1,710,968 $174,917 $1,533,096 $163,418 $1,238,349 $115,382
Europe..................... 200,066 34,021 165,400 30,584 135,994 14,579
Pacific Rim................ 10,651 7,136 -- -- -- --
---------- -------- ---------- -------- ---------- --------
TOTAL $1,921,685 $216,074 $1,698,496 $194,002 $1,374,343 $129,961
========== ======== ========== ======== ========== ========
</TABLE>
59
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 12--EMPLOYEE BENEFIT PLANS
(a) Stock Compensation Plan
The Company established the 1994 Stock Option Plan for the benefit of
certain employees. As amended in May 1998, pursuant to this plan the Company may
issue up to approximately 3,930,000 shares of its Common Stock. 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 non-qualified 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. The exercise price of all Class B options issued has been equal
to the market price on the date of grant and accordingly no compensation cost
has been 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 1998, 1997 and 1996, 3,000, 2,000 and 10,000 options, respectively
were granted to certain non-employee directors at exercise prices which were
equal to the market price on the date of grant.
Additionally, in 1997 as a result of the Company's acquisition of Sullivan
and MBMI, the Company assumed their respective stock option plans (the "Assumed
Plans"). Options granted under the Assumed Plans are exercisable for up to ten
years from the date of grant at prices not less than the fair market value of
the respective acquirees' common stock at the date of grant, on a converted
basis.
60
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 12--EMPLOYEE BENEFIT PLANS (Continued)
A summary of the status of the Company's two fixed stock option plans and
the Assumed Plans, and the related transactions for the years ended December 26,
1998, December 27, 1997 and December 28, 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 4,134,577 $18.19 2,713,255 $11.68 2,394,582 $10.44
Granted............................... 1,339,362 39.01 1,758,918 27.45 409,595 18.58
Exercised............................. (971,175) 10.95 (279,363) 12.60 (40,895) 8.72
Forfeited............................. (68,591) 30,80 (58,233) 23.25 (50,027) 11.31
-------- --------- ---------
Outstanding at end of year............ 4,434,173 $25.89 4,134,577 $18.19 2,713,255 $11.68
========= ========= =========
Options exercisable at year-end....... 2,725,828 $19.63 2,755,010 $13.24 2,248,505 $ 7.06
Weighted-average fair value of options
granted during the year........... $17.17 $17.68 $12.64
</TABLE>
The following table summarizes information about stock options outstanding
at December 26, 1998:
<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 to 16.00.......... 1,339,898 5.4 $11.19 1,331,462 $11.19
$16.13 to 27.50.......... 1,091,416 7.9 22.44 829,013 21.78
$29.00 to 46.00.......... 2,002,859 8.8 37.62 565,353 36.38
--------- ---------
4,434,173 7.2 $25.89 2,725,828 $19.63
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company and its acquired
subsidiaries had accounted for its employee stock options under the fair value
method of SFAS 123. The weighted average fair value of options granted during
1998, 1997 and 1996 was $17.17, $17.68 and $12.64, 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,
risk-free interest rates of 6%; volatility factor of the expected market price
of the Company's Common Stock of 30%; and a weighted-average expected life of
the option of 10 years. The same assumptions were used for 1998 and 1997 except
for the risk-free interest rate, which was assumed to be 5.5%.
61
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 12--EMPLOYEE BENEFIT PLANS (Continued)
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and earnings (loss) per share for the years ended December 26,
1998, December 27, 1997 and December 28, 1996 would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------ --------- -------
<S> <C> <C> <C>
Net income (loss)..................................................... $9,615 $(15,014) $26,019
Net income (loss) per common share:
Basic......................................................... $ 0.24 $ (0.40) $ 0.77
Diluted....................................................... $ 0.23 $ (0.40) $ 0.74
Net income (loss), reflecting special adjustments(1) $7,036 $(14,608) $26,357
Net income (loss) per common share to reflect special adjustments(1):
Basic ........................................................ $ 0.18 $ (0.39) $ 0.78
Diluted ...................................................... $ 0.17 $ (0.39) $ 0.75
</TABLE>
(1) Special adjustments include adjustments for income tax provisions and
benefits on previously untaxed operating results of Dentrix and losses of
Meer.
(b) Profit Sharing Plans
Prior to April 1, 1998, the Company had qualified contributory and
noncontributory 401(k) and profit sharing plans, respectively, for eligible
employees. Contributions to the plans were determined by the Board of Directors
and charged to operations during 1998, 1997 and 1996 amounted to $6,033, $5,300
and $4,024, respectively. As of April 1, 1998 the Company's profit sharing plan
was merged into its 401(k) plan. Assets of the profit sharing plan are now held
in self-directed accounts within the 401(k) plan.
(c) Employee Stock Ownership Plan (ESOP)
In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplemented the
Company's Profit Sharing Plan. Charges to operations related to this plan were
$1,400, $1,226 and $1,151 for 1998, 1997 and 1996, respectively. Under this
plan, the Company issued 34,720 and 44,122 shares of the Company's Common Stock
to the trust in 1998 and 1997 to satisfy the 1997 and 1996 contribution. The
Company expects to fund the 1998 contribution in 1999 with shares of the
Company's Common Stock. As of April 1, 1998 the Company's ESOP was mergered into
its 401(k) plan. Shares of the Company's Common Stock are held in trust by the
401(k) plan.
(d) Supplemental Executive Retirement Plan
In 1994, the Company instituted a non-qualified supplemental executive
retirement plan for eligible employees. Contributions, as determined by the
Board of Directors and charged to operations, were $283, $112 and $84 for 1998,
1997 and 1996, respectively.
62
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 13--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2011. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 26, 1998 are as follows:
1999........................................ $ 19,403
2000........................................ 17,253
2001........................................ 14,209
2002........................................ 12,091
2003........................................ 10,875
Thereafter.................................. 42,176
--------
Total minimum lease payments................ $116,007
========
Total rental expense for 1998, 1997 and 1996 was $19,130, $19,537, and
$16,472, 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 26, 1998.
1999................................................... $1,188
2000................................................... 723
2001................................................... 317
2002................................................... 109
2003................................................... 102
Thereafter............................................. 212
------
Total minimum lease payments .......................... 2,651
Less: Amount representing interest at 6.5% to 9%....... 220
------
$2,431
======
(c) Litigation
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 26,
1998, the Company was named a defendant in thirty-four such cases. Of the
thirty-four product liability claims, twenty-eight involve claims made by
healthcare workers who claim allergic reaction relating to exposure to latex
gloves. In each of these cases, the Company acted as a distributor of both brand
name and "Henry Schein" private brand latex gloves which were manufactured by
third parties. To date, discovery in these cases has generally been limited to
product identification issues. The manufacturers in these cases have
63
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 13--COMMITMENTS AND CONTINGENCIES (Continued)
withheld indemnification of the Company pending product identification, however,
the Company is taking steps to implead those manufacturers into each case in
which the Company is a defendant.
In addition, the Company is subject to other claims, suits and complaints,
which arise in the course of the Company's business. The Company, and two of
its subsidiaries, are defendants in a complaint which requests the court to
grant class action certification, alleges, among other things, negligence and
breach of contract involving the sale of software products under the Easy
Dental(Registered) name.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is provided by indemnification by the manufacturer of the product. There
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will be available in adequate amounts or at a
reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. The Company intends to vigorously defend all such
claims, suits and complaints. In the opinion of the Company, all such pending
matters are 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.
(d) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2004 (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 $9,503 per year which decrease
periodically to approximately $2,546 per year. In addition, some agreements have
provisions for incentive and additional compensation.
64
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes amounted to the following:
Years Ended
-------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Interest.......................... $10,047 $ 8,354 $ 5,710
Income taxes...................... $15,420 $13,055 $14,791
In conjunction with business acquisitions, the Company used cash as
follows:
Years Ended
-------------------------------------------
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Fair value of assets acquired,
excluding cash.................. $22,725 $74,035 $62,149
Less liabilities assumed and
created upon acquisition........ 8,842 31,768 29,927
------- ------- -------
Net cash paid..................... $13,883 $42,267 $32,222
======= ======= =======
65
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 15--QUARTERLY INFORMATION (Unaudited)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during 1998 and 1997 in the
Company's Quarterly Reports on Form 10-Q as a result of the restatement of the
financial statements to give retroactive effect to the results of the companies
acquired during 1998 and 1997 in business combinations accounted for under the
pooling of interests method of accounting and includes pro forma tax adjustments
relating to Meer.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------
March 28 June 27, September 26, December 26,
1998 1998 1998 1998
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.............................. $450,342 $475,992 $492,631 $502,717
Gross profit........................... 136,707 149,583 153,698 161,835
Operating income ...................... 10,937 14,312 4,828 9,453
Net income (loss)...................... 6,113 7,822 2,306 86
Net income (loss) per share:
Basic ............................ $ 0.16 $ 0.20 $ 0.06 $ 0.00
Diluted ........................... $ 0.15 $ 0.19 $ 0.06 $ 0.00
<CAPTION>
Quarters Ended
--------------------------------------------------------------------
March 29, June 28, September 27, December 27,
1997 1997 1997 1997
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales.............................. $381,681 $419,440 $439,309 $458,066
Gross profit........................... 114,674 125,068 128,878 141,778
Operating income (loss)................ 6,901 13,815 (2,587) (6,299)
Net income (loss)...................... 3,064 8,448 (7,636) (6,060)
Net income (loss) per share:
Basic ............................ $ 0.08 $ 0.23 $ (0.20) $ (0.16)
Diluted ........................... $ 0.08 $ 0.22 $ (0.20) $ (0.16)
</TABLE>
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. Diluted earnings per share calculations for each quarter include the
effect of stock options, when dilutive to the quarter's 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.
During the fourth quarter of 1998, the Company incurred incremental costs
totaling approximately $400 and reduced earnings from an affiliate totaling
approximately $1,300, net of taxes, due to a voluntary recall of anesthetic
products produced by an affiliated company which is accounted for under the
equity method.
66
<PAGE>
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 1999
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. Executive Compensation
The information required by this item is hereby incorporated by reference
from the Company's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference
from the Company's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
from the Company's definitive 1999 Proxy Statement to be filed pursuant to
Regulation 14A.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as a part of
this report are listed on the index on page 34.
2. Financial Statement Schedules
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
During the fourth quarter of 1998, the Company filed the following two
Current reports on Form 8-K:
67
<PAGE>
Current Report on Form 8-K dated November 24, 1998 relating to the
Company's acquisition of all of the common stock of Meer in a transaction
accounted for under the pooling of interest method of accounting. The report
filed restated Selected Financial Data, Management's Discussion and analysis of
Financial Condition and Results of Operations and financial statements and
related exhibits included in the Company's Amended Annual Report on Form 10-K/A
for the fiscal year ended December 27, 1997.
Current Report on Form 8-K dated November 30, 1998 reporting the Company's
issuance of rights to purchase one-tenth of a share of common stock for each
outstanding share of common stock, payable to the holders of record on December
14, 1998, pursuant to the Rights Agreement dated as of November 30, 1998 between
the Company and Continental Stock Transfer & Trust Company, as rights agent.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Melville, State of New York, on March 16, 1999.
Henry Schein, Inc.
By: /s/ Stanley M. Bergman
-----------------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ STANLEY M. BERGMAN Chairman, Chief Executive Officer, and March 16, 1999
- ---------------------------- President (principal executive officer)
Stanley M. Bergman
/s/ STEVEN PALADINO Senior Vice President, Chief Financial March 16, 1999
- ---------------------------- Officer and Director (principal financial
Steven Paladino and accounting officer)
/s/ JAMES P. BRESLAWSKI Director March 16, 1999
- ----------------------------
James P. Breslawski
/s/ GERALD A. BENJAMIN Director March 16, 1999
- ----------------------------
Gerald A. Benjamin
/s/ LEONARD A. DAVID Director March 16, 1999
- ----------------------------
Leonard A. David
/s/ MARK E. MLOTEK Director March 16, 1999
- ----------------------------
Mark E. Mlotek
/s/ BARRY ALPERIN Director March 16, 1999
- ----------------------------
Barry Alperin
/s/ PAMELA JOSEPH Director March 16, 1999
- ----------------------------
Pamela Joseph
/s/ DONALD J. KABAT Director March 16, 1999
- ----------------------------
Donald J. Kabat
/s/ MARVIN SCHEIN Director March 16, 1999
- ----------------------------
Marvin H. Schein
/s/ IRVING SHAFRAN Director March 16, 1999
- ----------------------------
Irving Shafran
/s/ BRUCE J. HABER Director March 16, 1999
- ----------------------------
Bruce J. Haber
</TABLE>
69
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
The audits referred to in our report dated February 26, 1999 relating to the
consolidated financial statements of Henry Schein, Inc. and subsidiaries, which
is contained in Item 8 of the Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based upon our
audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
February 26, 1999
New York, New York
70
<PAGE>
HENRY SCHEIN, INC.
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Add
Balance --------
at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 27, 1997
Allowance for doubtful
accounts........................... $ 6,692 $4,321 $(1,544) $ 9,469
Other accounts receivable
allowances(1)...................... 3,443 2,010 --- 5,453
------- ------ ------- -------
$10,135 $6,331 $(1,544) $14,922
======= ====== ======= =======
Year ended December 26, 1998
Allowance for doubtful
accounts........................... $ 9,469 $4,326 $ (588) $13,207
Other accounts receivable
allowances(1)...................... 5,453 2,955 (1,479) 6,929
------- ------ ------- -------
$14,922 $7,281 $(2,067) $20,136
======= ====== ======= =======
</TABLE>
- --------------
(1) Primarily allowance for sales returns.
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
Unless otherwise indicated, exhibits are incorporated by reference to the correspondingly numbered exhibits
in the Company's Registration Statement on Form S-1 (Commission File No. 33-96528)
<S> <C> <C>
3.1 Form of Amended and Restated Articles of Incorporation
3.2 Form of Amended and Restated By-laws.
3.3 Amendment dated November 12, 1997 to Amended and Restated Articles
of Incorporation.
3.4 Amendments to Amended and Restated By-laws adopted July 15, 1997
(filed as Exhibit 3.2 to the Company's Registration Statement on Form
S-4, Commission File No. 333-3601).
9.1 Voting Trust Agreement dated September 30, 1994, as amended, among the
Company, the Estate of Jacob M. Schein, the Trusts under Articles Third
and Fourth of the Will of Jacob M. Schein, the Trust established by Pamela
Joseph under Trust Agreement dated February 9, 1994, the Trust
established by Martin Sperber under Trust Agreement dated September 19,
1994, management stockholders and Stanley M. Bergman, as voting trustee
9.2 Agreements dated December 27, 1994 among the Company, various
executive officers and Stanley M. Bergman, as voting trustee
9.3 Agreements dated as of May 1, 1995 among the Company, various
executive officers and Stanley M. Bergman, as voting trustee
10.1 Amended and Restated HSI Agreement (the "HSI Agreement"), effective
as of February 16, 1994, among the Company, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement dated September
9, 1994, the Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, the Estate of Jacob M. Schein, the
Trusts established by Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under Trust Agreement
dated February 9, 1994, the Trust established by Martin Sperber under
Trust Agreement dated September 19, 1994, the Trust established by
Stanley M. Bergman under Trust Agreement dated September 15, 1994,
Pamela Schein, Pamela Joseph, Martin Sperber, Stanley M. Bergman,
Steven Paladino and James P. Breslawski (collectively, the "HSI Parties")
10.2 HSI Registration Rights Agreement dated September 30, 1994, among the
Company, Pamela Schein, the Trust established by Pamela Joseph under
Trust Agreement dated February 9, 1994, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement dated December
31, 1993, the Trust established by Marvin H. Schein under Trust
Agreement dated September 19, 1994, the Charitable Trust established by
Marvin H. Schein under Trust Agreement dated September 12, 1994,
Martin Sperber, the Trust established by Martin Sperber under Trust
Agreement dated September 19, 1994, Stanley M. Bergman and the Trust
established by Stanley M. Bergman under Trust Agreement dated
September 15, 1994
10.3 Letter Agreement dated September 30, 1994 to the Company from Marvin
H. Schein, Pamela Joseph and Pamela Schein
10.4 Release to the HSI Agreement dated September 30, 1994
72
<PAGE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.5 Separation Agreement dated as of September 30, 1994 by and between the
Company, Schein Pharmaceutical, Inc. and Schein Holdings, Inc.
10.6 Restructuring Agreement dated September 30, 1994 among Schein
Holdings, Inc., the Company, the Estate of Jacob M. Schein, Marvin H.
Schein, the Trust established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by Marvin H. Schein under
Trust Agreement dated September 9, 1994, the Charitable Trust established
by Marvin H. Schein under Trust Agreement dated September 12, 1994,
Pamela Schein, Pamela Joseph, the Trust established by Pamela Joseph
under Trust Agreement dated February 9, 1994; the Trusts under Articles
Third and Fourth of the Will of Jacob M. Schein; Stanley M. Bergman, the
Trust established by Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Martin Sperber, the Trust established by Martin
Sperber under Trust Agreement dated December 31, 1993, and the Trust
established by Martin Sperber under Trust Agreement dated September 19,
1994
10.7 Agreement and Plan of Corporate Separation and Reorganization dated as
of September 30, 1994 among Schein Holdings, Inc., the Company, the
Estate of Jacob M. Schein, Marvin H. Schein, the Trust established by
Marvin H. Schein under Trust Agreement dated December 31, 1993, the
Trust established by Marvin H. Schein under Trust Agreement dated
September 9, 1994, the Charitable Trust established by Marvin H. Schein
under Trust Agreement dated September 12, 1994, Pamela Schein, the
Trust established Article Fourth of the Will of Jacob M. Schein for the
benefit of Pamela Schein and her issue under Trust Agreement dated
September 29, 1994, Pamela Joseph, the Trust established by Pamela
Joseph under Trust Agreement dated February 9, 1994, the Trust
established by Pamela Joseph under Trust Agreement dated September 28,
1994 and the Trusts under Articles Third and Fourth of the Will of Jacob
M. Schein
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended and restated
effective as of July 1, 1995**
10.9 Henry Schein, Inc. Amendment and Restatement of the Supplemental
Executive Retirement Plan**
10.11 Consulting Agreement dated September 30, 1994 between the Company
and Marvin H. Schein**
10.12 Employment Agreement dated as of January 1, 1992 between the Company
and Stanley M. Bergman**
10.13 Amended and Restated Stock Issuance Agreement dated as of December
24, 1992 between the Company and Stanley M. Bergman**
10.14 Stock Issuance Agreements dated December 27, 1994 between the
Company and various executive officers**
73
<PAGE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.79 Form of Henry Schein, Inc. Non-Employee Director Stock Option Plan**
10.94 Agreement and the Plan of Merger, dated as of August 3, 1997 by and among the
Company, HSI Acquisition Corp and Sullivan Dental Products, Inc. (Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (Commission File No. 333-3601)).
10.95 Amendments to the Company's 1994 Stock Option Plan effective as of July 15, 1997+.
10.96 Revolving Credit Agreement (the "Credit Agreement") dated as of January 31, 1997 among
the Company, The Chase Manhattan Bank, Fleet Bank, N.A., Cooperatieve Centrale
Raiffeisen Boerenleenbank, B.A., "Rabobank Nederland", New York Branch and European
American Bank (previously Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528)).
10.97 Employment Agreement, dated March 7, 1997, between Bruce J. Haber and the Company
(Incorporated by reference to the Company's Registration Statemetn on Form S-4
(Regitration No. 333-30615)).
10.98 Termination of Employment Agreement, dated March 7, 1997, as revised, between Bruce
J. Haber and the Company (filed as Exhibit 10.92 to the Company's Registration Statement
on Form S-4 (Registration No. 333-30615)).
10.99 Agreement and Plan of Merger among the Company, HS Acquisition, Inc., Roane-Barker,
Inc. and Ralph L. Falls, Jr. dated as of May 23, 1997, as amended by letters dated June 24,
1997 and June 25, 1997 (filed as Exhibit 10.94 to the Company's Registration Statement on
Form S-4 (Registration No. 333-30615)).
10.100 Employment Agreement, dated as of August 3, 1997, by and between Robert J. Sullivan and
the Company (filed as Exhibit 10.96 to the Company's Registration Statement on Form S-4
(Commission File No. 333-36081)).
10.101 Amendment No. 2 and Supplement to Revolving Credit Agreement, dated August 15, 1997
(filed as Exhibit 10.104 to the Company's Registration Statement on Form S-4
(Commission File No. 333-36081)).
10.102 Amendment dated as of June 30, 1997 to Credit Agreement (filed as Exhibit 10.103 to the
Company's Registration Statement on Form S-4 (Commission File No. 333-36081)).
10.103 Lease Agreement dated December 23, 1997, between First Industrial Pennsylvania, L.P. and
the Company +.
10.104 Amendment dated as of June 30, 1997 to Credit Agreement (filed as Exhibit 10.103 to the
Company's Registration Statement on Form S-4 (Commission File No. 333-36081)).
10.105 Henry Schein, Inc. Senior Executive Group 1998 Performance Incentive Plan Summary+**
10.106 Stock Purchase Agreement by and among the Company, New River Management Company, L.L.C.,
Chiron Corporation and Biological & Popular Culture, Inc., dated as of December 8, 1998
(filed as Exhibit 2.1 to the Company's current report on Form 8-K dated December 31, 1998).
10.107 Amendment No. 1, dated as of December 30, 1998, to the Stock Purchase Agreement by and
among the Company, New River Management Company, L.L.C., Chiron Corporation and Biological
& Popular Culture, Inc., dated as of December 30, 1998.
10.108 Form of Employment Agreement/Change in Control Agreement executed by Stanley M. Bergman,
Steven Paladino, James P. Breslawski, Gerald A. Benjamin, Leonard A. David, Mark E.
Mlotek, Michael Zack and James W. Stahly.+**
10.109 Rights Agreement, dated as of November 30, 1998, between Henry Schein, Inc. and Continental
Stock Transfer and Trust Co. (filed as the exhibit to the Company's Current Report on Form
8-K, dated November 30, 1998).
27.1 Financial Data Schedules - Year-ended December 26, 1998+
</TABLE>
+ Filed herewith
** Indicates management contract or compensatory plan or arrangement.
74
<PAGE>
HENRY SCHEIN, INC.
SENIOR EXECUTIVE GROUP
1998 PERFORMANCE INCENTIVE PLAN
PLAN SUMMARY
<PAGE>
1. Introduction
The Performance Incentive Plan (PIP) is Henry Schein's incentive-based annual
cash compensation program for the Senior Executive Group (SEG). The Plan is
designed to:
o Provide each participating SEG member ("Executive") with an annual cash
bonus opportunity so as to
o Foster achievement of specific corporate, business unit and individual
performance ("Goals"), and
o Recognize and reward Executives for individual and SEG Team
achievements.
The PIP, in conjunction with executive base compensation, is intended to provide
Executives with competitive total annual cash compensation that is at or above
the median for comparable positions at companies in our industry and at other
organizations of our size.
2. Eligibility
The Chief Executive Officer (CEO) annually determines eligibility for
participation in the Plan. Participation is intended to be ongoing. However,
changes in assignments may result in an Executive being ineligible to
participate in the Plan. Executives currently participating in the Plan are set
forth on Exhibit A. Executives will be notified at the beginning of each year
regarding their eligibility in the Plan.
3. PIP Awards
PIP awards are based on:
o The Company's annual profitability,
o The Company's achievement of other annual corporate financial and
operating Goals, and
o Each Executive's achievement of his or her individual Goals.
Page 1
<PAGE>
Individual Performance Goals
An Executive's individual performance goals are classified into three
categories:
o Functional area Financial performance,
o Company Financial Performance, and
o MBO performance.
The CEO and the person to whom the Executive reports ("Manager") will determine
the Executive's Goals at the start of each year. A review of these goals will be
an ongoing process. Any changes must be approved by the CEO. Each Executive will
have a mid-year performance evaluation to monitor progress and, if necessary, to
modify Goals for the second half of the year.
The following table illustrates performance Goals for different types of
executive positions:
- --------------------------------------------------------------------------------
Performance Goals Based on Position and Role
- --------------------------------------------------------------------------------
| Range of Performance Goal Categories
----------------------------------------------------
Executive Segment |
| Functional Company
| Financial Financial MBO Performance
| Performance Performance (See Exhibit D)
|(See Exhibit B) (See Exhibit C)
|
- --------------------------------------------------------------------------------
Corporate | 10 - 40% 10 - 30% 20 - 40%
Management Executives |
- --------------------------------------------------------------------------------
Major Business | 60 - 70% 10 - 20% 10 - 20%
Unit Executives |
- --------------------------------------------------------------------------------
Supporting Corporate | 10 - 20% 10 - 20% 40 - 60%
Function Executives |
- --------------------------------------------------------------------------------
Note: This schedule is intended to provide guidelines for development of a
specific performance plan for each Executive. Final weighting of performance
Goals for each Executive will be determined by the CEO.
Functional Area Financial Performance Goals
For Executives with P&L responsibilities, these Goals are based on the business
unit's financial performance measured against each year's financial budgets, in
the following areas:
o Divisional contribution dollars.
o Group/Divisional Pre-Tax income after "service charges".
o Pre-Tax Income of operating subsidiaries -- sales, gross profit and
operating income Goals.
Page 2
<PAGE>
For Executives with infrastructure or supporting responsibilities, these Goals
are based on expense performance relative to the budget (after adjustment for
volume of business, if appropriate).
Company Financial Performance Goals
Company net income goals will be set for the entire SEG Team.
MBO Performance Goals
Specific MBO Performance Goals will be developed encompassing:
o Customer service commitment goals that support the Company's three-year
Strategic Plan, and
o Team Schein Goals, focused on the professional growth and development
of Team Schein Members, and supporting and promoting the Company's
cultural cornerstone values.
Acquisitions, New Business Ventures
Goals will be adjusted for acquisitions and new business ventures that are not
initially included in the original Company budget. 1998 Financial Performance
goals will be subsequently adjusted where appropriate.
Page 3
<PAGE>
5. Plan Awards
At the end of each year, individual performance is evaluated relative to Goals,
and PIP awards are determined for each performance category. An Executive's PIP
award will equal the sum of the awards earned in each category (See Exhibits B,
C and D).
In order to receive any PIP award, Executives must be actively employed on March
15 of the year the PIP award is to be paid out. A prorated PIP award may be
available, at the discretion of the CEO, if an Executive in the Plan dies,
becomes permanently disabled, or retires at the normal retirement age during the
Plan year.
PIP awards, less applicable withholdings, will be generally made by March 15 of
each year.
6. The PIP Fund
The annual PIP Fund, consists of the total monies earned each year for
Executive's awards for Goal achievement in the three (3) performance categories.
This summary is a general description of the Henry Schein, Inc. Performance
Incentive Plan for the Senior Executive Group as of January 1, 1998. This
summary is not intended to, nor does it, constitute a contract or guarantee of
continued employment. The Company reserves the right to change or terminate the
Plan at any time without notice.
Page 4
<PAGE>
1998 PERFORMANCE CATEGORY WEIGHTING
SENIOR EXECUTIVE GROUP
Functional Company
1998 PIP Plan Financial Financial MBO
Participants Performance Performance Performance
- --------------- ----------- ----------- -----------
G. Benjamin 15 40 45
J. Breslawski 45 40 15
D. Forrest 20 30 50
S. LaHood 40 30 30
S. Paladino 10 60 30
J. Stahly 65 20 15
M. Zack 65 20 15
L. David 15 20 65
M. Mlotek 20 30 50
L. Gibson 70 20 10
B. Haber 70 20 10
Page 5
<PAGE>
EXHIBIT A
Henry Schein Inc.
Senior Executive Group
Performance Incentive Plan
Plan Participants - 1998
I Corporate Management Executives
"General Managers" of the G. Benjamin
Corporation and Senior Executives for J. Breslawski
Major Support Units. D. Forrest
S. LaHood
S. Paladino
II Major Business Unit Executives
Senior Executives of HSI Product L. Gibson
Line/Marketplace Business Units B. Haber
J. Stahly
M. Zack
III Supporting Corporate Function
Executives
Leaders of Key Corporate-Wide L. David
Support Functions M. Mlotek
Page 6
<PAGE>
EXHIBIT B
Henry Schein Inc.
Senior Executive Group
Performance Incentive Plan
1998 Award Levels for Achievement of
Functional Financial Goals and Overhead Expense
for Infrastructure Groups
<TABLE>
<CAPTION>
Less 100%
Size of Than @95% Incentive Extra-
Functional Financial Goal Plan of Plan Award Expected Outstanding ordinary
- --------------------------------------- -------------------------------------------- --------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
(>250mm)
Performance Achievement 90% 95% 98% 100% 115% 130%
Incentive Award Payout* 50% 75% 100.0% 120% 135% 165%
(75mm-250mm)
Performance Achievement 90% 95% 98% 100% 140% 170%
Incentive Award Payout* 50% 75% 100.0% 120% 135% 165%
(<75mm)
Performance Achievement 85% 95% 98% 100% 170% 200%
Incentive Award Payout* 50% 75% 100.0% 120% 135% 165%
<CAPTION>
Less 100%
Size of Overhead Budget Than @95 - 98% Incentive Over
Plan of Plan Expected Award Budget
- --------------------------------------- -------------------------------------------- --------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Large Overhead Budget (>30mm)
Performance Achievement 95% 98% 100% 102% 105%
Incentive Award Payout* 120% 115% 110% 100.0% 50%
Small / Medium Overhead Budget
(0-30mm)
Performance Achievement 90% 95% 100% 102% 108%
Incentive Award Payout* 120% 115% 110% 100.0% 50%
</TABLE>
Achievement or lack of achievement of goals beyond the ranges stated are
discretionary.
* There will be a proration of awards that fall between the levels
listed.
Page 7
<PAGE>
EXHIBIT C
Henry Schein Inc.
Senior Executive Group
Performance Incentive Plan
1998 Award Levels for Achievement of Company Financial Goals
An Executive's PIP Fund Account award for achievement of Company Performance
Financial Goals is based on HSI's actual Earnings Per Share (EPS) measured
against the targeted level.
The 1998 EPS target is $1.48 as of March 16, 1998. This target will be adjusted
for acquisitions and new business ventures that are not initially included in
the original company budget.
1998 Company Financial Goals and Resulting PIP Awards
-----------------------------------------------------
% of Incentive Award Payout
EPS Achieved by Executive
$1.58 and above 180%
$1.57 170%
$1.56 160%
$1.55 150%
$1.54 140%
$1.53 130%
$1.52 124%
$1.51 118%
$1.50 112%
$1.49 106%
$1.48 100%
$1.47 75%
$1.46 73%
$1.45 71%
$1.44 70%
$1.43 68%
$1.42 66%
$1.41 65%
$1.40 60%
$1.39 52%
$1.38 50%
Below $1.38 0%
Achievement or lack of achievement of goals beyond the ranges stated are
discretionary.
Page 8
<PAGE>
EXHIBIT D
Henry Schein Inc.
Senior Executive Group
Performance Incentive Plan
1998 Award Levels for Achievement of
MBO Performance Goals and Team Performance Goals
MBO Goals % of MBO
Achievement Level Award Earned by Executive*
70% 50%
80% 75%
90% 95%
95% 100%
100% 115%
Achievement or lack of achievement of goals beyond the ranges stated are
discretionary.
* There will be a proration of awards that fall between the levels
listed.
Page 9
<PAGE>
As of August 1, 1995
Dear ____,
We are pleased to confirm the terms of your ongoing employment with Henry
Schein, Inc. (the "Company") as ______________.
1. The Company will employ you as_____________ for the period from the date of
this Agreement and continuing until 10 days after either you or the Company
gives written notice to the other that you or it does not wish to continue your
employment hereunder (a "Non-Continuation Notice"). You accept such employment,
and will devote your full time and best efforts to the business and affairs of
the Company, with such duties consistent with your position as may be assigned
to you from time to time by the Chairman (or such other officer to whom you
report) of the Company. By counter-signing below, you agree to accept the
employment described herein and agree to devote your full business time and
effort thereto, and to perform all those duties normally attributable to the
position for which you are employed hereunder. You agree that you will not,
without the prior written consent of the Company, be engaged in any other
business activity, however this shall not prevent you from making and
supervising strictly personal investments, provided that they will not require
any substantial services on your part in the operation of the affairs of the
companies in which such investments are made and will not unduly interfere with
the performance of your duties hereunder.
2. (a) In consideration of all services rendered by you during your
employment hereunder, the Company will pay you a base salary at the annual rate
of $____ payable in accordance with the Company's payroll practices from time
to time in effect. The Company will review your salary at least once each year
and may, in its discretion, increase your salary, and may, in its discretion,
award you incentive compensation and/or other short or long-term incentive
awards.
(b) The Company will promptly reimburse you upon submission of an
expense report for all expenses reasonably incurred by you in performance of
your duties in accordance with the Company's general policies and practices for
senior executive officers in effect from time to time.
(c) During each full calendar year that you are employed, you shall be
entitled to four(4) weeks of vacation and such other number of personal days
generally afforded to senior executive
<PAGE>
officers of the Company.
3. For as long as you are employed by the Company plus the severance period
provided in Sections 5 or 6, as the case may be, you will be entitled to
participate in all bonus, incentive, retirement, profit-sharing, life, medical,
disability and other benefit plans and programs of the company as are from time
to time generally available to other executives of the Company with comparable
responsibilities, subject to the provisions of those programs and to the terms
of this Agreement.
4. Your employment by the Company: (a) shall terminate upon your death, (b)
shall terminate 10 days after a Non-Continuation Notice is given (or the date
of your leaving the Company's employ, if you fail to give proper notice); (c)
may be immediately terminated by the Company for cause at any time; (d) may be
terminated by the Company if you fail to render the services provided for in
this Agreement for a continuous period of six months by reason of physical or
mental illness or disability; and (e) may be terminated by you after 60 days'
notice (a "voluntary termination for good reason") if the Company significantly
and materially reduces your duties and/or responsibilities or if the Company
reduces your base salary by more than 10%.
For purposes of this Agreement, "cause" means (i) your willful and
continued failure substantially to perform your duties with the Company; (ii)
fraud, misappropriation or intentional material damage to the property or
business of the Company, or (iii) commission of a felony or a crime involving
moral turpitude.
5. If your employment is terminated (a) by the Company's giving a
Non-Continuation Notice as provided in Section 1 hereof, or (b) by you after
giving notice of your voluntary termination for good reason (the giving of
either such notice being a "Termination Event") at any time other than within
two years after a Significant Date (as such term is defined in Schedule A
attached hereto), the Company will pay you (the "Termination Payment"), in full
satisfaction of all its obligations hereunder (except for its obligations under
paragraphs 6 and 9 hereof), severance pay equal to one month's base salary
(plus your monthly automobile allowance) for the period immediately preceding
the date of termination (not including incentive compensation or any non-cash
compensation) for every full month you had been employed (or rendered
consulting services to the Company) prior to your termination, with a minimum
severance pay equal to six months' base salary (plus six months' automobile
allowance) and a maximum severance pay equal to twelve months' base salary
(plus twelve months' automobile allowance),(the "Severance Period").
<PAGE>
The Company shall provide you, at your option but at no cost to you, with
out-placement services with a reputable organization that the Company shall
select.
The Termination Payment payable pursuant to this Section 5 will be subject
to offset on account of any remuneration paid or payable to you for any
subsequent employment you may obtain, however, you shall have no obligation
whatsoever to seek any subsequent employment. Should your subsequent employment
provide for base salary at a rate lower than the rate you were earning
immediately prior to the Termination Event, then the Company shall pay you the
difference for the Severance Period; provided, further, that should you accept
employment from any of the Company's material competitors in any of its
material lines of businesses, then any and all Termination Payments, including
the payment of the difference in base salaries provided in this paragraph,
shall thereafter immediately cease.
6. If the Termination Event occurs at any time within two years after a
Significant Date, the Termination Payment will be increased to three times the
amount of severance pay provided in paragraph 5 above, plus three times the
amount of cash incentive bonus paid to you for the full fiscal year preceding
the date of termination (excluding any amounts payable in connection with the
issuance to you of stock, including a payment of taxes on your behalf in
connection with any such stock grant); provided, however, that the maximum
amount payable under this Section 6 shall be limited to the amount which when
added to all other payments (or the value of all other benefits) that are
received by you from the Company and which are "contingent upon a change in
control" as such term is defined in the Internal Revenue Code of 1986 (the
"Code") would not constitute a "parachute payment" (as such term is defined on
the date hereof by the Code, i.e. the aggregate present value of the payments
in the nature of compensation to such individual which are contingent on such
change would be less than three (3) times the "base amount" as such term is
defined on the date hereof by the Code).
The Termination Payment payable pursuant to this Section 6 will not be
subject to offset on account of any remuneration paid or payable to you for any
subsequent employment you may obtain, whether during or after the period during
which the Termination Payment is made and you shall have no obligation
whatsoever to seek any subsequent employment; provided, however, that should
you accept employment from any of the Company's material competitors in any of
its material lines of businesses, then the Termination Payment shall thereafter
immediately cease.
The Company shall provide you, at your option but at no cost to you, with
out-placement services with a reputable organization that the Company shall
select.
<PAGE>
7. In all events, the Termination Payment will be paid in accordance with the
Company's normal payroll practices and will be subject to any applicable
payroll or other taxes required to be withheld.
8. For purposes of this Agreement, a "Significant Date" shall have the meaning
ascribed to it in Schedule A attached hereto.
9. For the Severance Period, the Company will also provide you with all
benefits accorded senior executive officers of the Company, including, life,
medical, disability, retirement and profit sharing benefits, etc. (but not for
purposes of this Section 9 including bonus, incentive or other short or
long-term incentive programs) on the same terms that such benefits are provided
to all senior executive officers of the Company as of the date of your
termination of employment, and you shall, to the extent permitted by law, for
purposes of such benefit plans, be considered to be an employee through the end
of the Severance Period. If the Termination Event occurs at any time within two
years after a Significant Date, the Company will provide the benefits described
in the preceding sentence until the third anniversary of the Termination Event,
and you shall, to the extent permitted by law, for purposes of such benefit
plans, be considered to be an employee of the Company through the end of such
third anniversary of the Termination Event. Each of these benefits will cease
immediately upon your obtaining other full-time employment. If the Company is
unable to provide any of the foregoing benefits under then existing plans
without costs it considers excessive or is unable because of law to provide
such benefits, the Company will be entitled to satisfy any such obligation by
making a payment to you equal to the cost to the Company of providing such
benefits to you.
10. The Company will reimburse you for reasonable attorneys fees and expenses
incurred by you if you are employed hereunder on a Significant Date and prevail
against the Company with respect to a claim hereunder arising on or after such
date.
11. You confirm the provisions of the confidentiality agreement which you have
previously executed which, among other things, requires you to return to the
Company all Company owned property and which requires you to maintain the
confidentiality of, among other things, trade secrets and non-public
information.
12. You will execute a general release in favor of the Company, and any of its
affiliates and subsidiaries, on the date of your termination, as a condition to
obtaining any of the benefits provided herein.
<PAGE>
13. This Agreement shall be binding upon and inure to the benefit of you and
your legal representatives and the Company and any assignee or successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business or assets of the Company.
14. This Agreement contains the entire agreement between the parties with
respect to the subject matter hereof, may not be modified or terminated orally,
and shall be construed and governed in accordance with the laws of the State of
New York.
If the foregoing is acceptable to you, please execute the enclosed copy of
this Agreement and return it to the undersigned.
Very truly yours,
HENRY SCHEIN, INC.
By:
------------------------
Authorized Officer
Agreed to and accepted:
- ----------------------------
Executive
<PAGE>
SCHEDULE A
A "Significant Date" shall be deemed to have occurred if after the date hereof:
(i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d)
thereof), excluding (A) the Company, (B) any "Subsidiary" thereof, (C) any
employee benefit plan sponsored or maintained by the Company, or any Subsidiary
thereof (including any trustee of any such plan acting in his or her capacity
as trustee) and (D) any person who (or group which includes a person who) is
the beneficial owner (as defined in Rule 13(d)-3 under the Exchange Act) as of
January 1, 1995 of at least fifteen percent (15%) of the common stock of the
Company, becomes the beneficial owner (as defined in Rule 13(d)-3 under the
Exchange Act) of shares of the Company having at least thirty percent (30%) of
the total number of votes that may be cast for the election of directors of the
Company; (ii) the shareholders of the company shall approve any merger or other
business combination of the Company, sale of all or substantially all of the
Company's assets or combination of the foregoing transactions (a
"Transaction"), other than a Transaction involving only the Company and one or
more of its Subsidiaries, or a Transaction immediately following which the
shareholders of the Company immediately prior to the Transaction continue to
have a majority of the voting power in the resulting entity (excluding for this
purpose any shareholder owning directly or indirectly more than ten percent
{10%} of the shares of the other company involved in the Transaction if such
shareholder is not as of January 1, 1994, the beneficial owner {as defined in
Rule 13(d)-3 under the Exchange Act} of at least fifteen percent {15%} of the
common stock of the Company); (iii) within any twenty-four (24) month period
beginning on or after the date hereof, the persons who were directors of the
Company immediately before the beginning of such period (the "Incumbent
Directors") shall cease (for any reason other than death) to constitute at
least a majority of the board of directors of the Company or the board of
directors of any successor to the Company (the "Board"), provided that, any
director who was not a director as of the date hereof shall be deemed to be an
Incumbent Director if such director was elected to the Board by, or on the
recommendation of or with the approval of, at least two-thirds of the directors
who then qualified as Incumbent Directors either actually or by prior operation
of the foregoing unless such election, recommendation or approval was the
result of an actual or threatened election contest of the type contemplated by
Regulation 14a-11 promulgated under the Exchange Act or any successor
provision; or (iv) a Voting Trust Termination Date, as such term is defined in
the Voting Trust Agreement dated as of September 30, 1994 among the Company,
Stanley Bergman, as voting trustee and others. Notwithstanding the foregoing,
no Significant Date shall be deemed to have occurred for purposes of this
Agreement by reason
<PAGE>
of any Transaction which shall have been approved by Stanley M. Bergman.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> DEC-26-1998
<CASH> 28,222
<SECURITIES> 0
<RECEIVABLES> 358,257
<ALLOWANCES> (20,136)
<INVENTORY> 270,008
<CURRENT-ASSETS> 704,529
<PP&E> 121,402
<DEPRECIATION> (53,756)
<TOTAL-ASSETS> 962,040
<CURRENT-LIABILITIES> 300,937
<BONDS> 190,079
0
0
<COMMON> 402
<OTHER-SE> 462,632
<TOTAL-LIABILITY-AND-EQUITY> 962,040
<SALES> 1,921,685
<TOTAL-REVENUES> 1,921,685
<CGS> 1,319,861
<TOTAL-COSTS> 1,319,861
<OTHER-EXPENSES> 562,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,050
<INCOME-PRETAX> 36,014
<INCOME-TAX> 20,325
<INCOME-CONTINUING> 16,327
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<CHANGES> 0
<NET-INCOME> 16,327
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.39
</TABLE>
