<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3136595
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
135 Duryea Road
Melville, New York 11747
(Address of principal executive offices)
Telephone Number (516) 843-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
-- --
As of May 6, 1999, there were 40,539,192 shares of the Registrant's Common Stock
outstanding.
- --------------------------------------------------------------------------------
<PAGE>
HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 27, 1999 and December 26, 1998................ 3
Consolidated Statements of Operations
Three months ended March 27, 1999 and March 28, 1998 4
Consolidated Statements of Cash Flows
Three months ended March 27, 1999 and March 28, 1998 5
Notes to Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................ 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................... 17
Signature ............................................. 18
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 27, December 26,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 13,326 $ 28,222
Accounts receivable, less reserves of $19,992 and $20,136, respectively 357,260 338,121
Inventories ........................................................... 294,439 270,008
Deferred income taxes ................................................. 16,336 14,532
Prepaid expenses and other ............................................ 54,455 53,646
----------- -----------
Total current assets .............................................. 735,816 704,529
Property and equipment, net of accumulated depreciation and amortization of
$57,485 and $53,756, respectively .................................... 71,316 67,646
Goodwill and other intangibles, net of accumulated amortization of $21,169
and $18,123, respectively ............................................ 285,011 148,428
Investments and other ..................................................... 47,872 41,437
----------- -----------
$ 1,140,015 $ 962,040
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 175,214 $ 169,860
Bank credit lines ..................................................... 38,704 19,372
Accruals:
Salaries and related expenses ...................................... 29,611 29,675
Merger and integration costs ....................................... 10,065 21,992
Other .............................................................. 64,383 50,404
Current maturities of long-term debt .................................. 6,412 9,634
----------- -----------
Total current liabilities ......................................... 324,389 300,937
Long-term debt ............................................................ 323,502 180,445
Other liabilities ......................................................... 12,541 11,720
----------- -----------
Total liabilities ................................................. 660,432 493,102
----------- -----------
Minority interest ......................................................... 6,344 5,904
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000; issued 40,500,906
and 40,250,936, respectively ........................................ 405 402
Additional paid-in capital ............................................ 353,661 348,119
Retained earnings ..................................................... 127,408 119,064
Treasury stock, at cost (62,479 shares) ............................... (1,156) (1,156)
Accumulated comprehensive income ...................................... (5,741) (2,057)
Deferred compensation ................................................. (1,338) (1,338)
----------- -----------
Total stockholders' equity ........................................ 473,239 463,034
----------- -----------
$ 1,140,015 $ 962,040
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 27, March 28,
1999 1998
--------- ----------
(restated)
<S> <C> <C>
Net sales .................................................... $ 536,335 $ 450,342
Cost of sales ................................................ 372,918 313,635
--------- ---------
Gross profit .......................................... 163,417 136,707
Operating expenses:
Selling, general and administrative ....................... 139,769 121,906
Merger and integration costs .............................. 2,203 3,864
--------- ---------
Operating income ...................................... 21,445 10,937
Other income (expense):
Interest income ........................................... 2,333 1,740
Interest expense .......................................... (5,724) (2,785)
Other - net ............................................... (189) 334
--------- ---------
Income before taxes on income, minority interest and
equity in earnings (losses) of affiliates ......... 17,865 10,226
Taxes on income .............................................. 7,127 4,293
Minority interest in net income of subsidiaries .............. 597 1
Equity in earnings (losses) of affiliates .................... (228) 181
--------- ---------
Net income ............................................ $ 9,913 $ 6,113
========= =========
Net income per common share:
Basic ..................................................... $ 0.25 $ 0.16
========= =========
Diluted ................................................... $ 0.24 $ 0.15
========= =========
Pro forma:
Historical net income ..................................... $ 6,113
Pro forma adjustment (provision for taxes on previously
untaxed earnings of an acquisition) .................... (76)
---------
Pro forma net income ......................................... $ 6,037
=========
Pro forma net income per common share:
Basic ..................................................... $ 0.16
=========
Diluted ................................................... $ 0.15
=========
Weighted average shares outstanding:
Basic ..................................................... 40,417 38,492
========= =========
Diluted ................................................... 41,806 40,580
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 27, March 28,
1999 1998
---------- ----------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 9,913 $ 6,113
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization ................................. 6,973 4,075
Provision for losses and allowances on accounts receivable ... (1,561) (145)
Benefit for deferred income taxes ............................. (1,404) (99)
Undistributed losses (earnings) of affiliates ................. 228 (181)
Minority interest in net income of subsidiaries ............... 597 1
Other ......................................................... (182) (134)
Changes in assets and liabilities:
Decrease in accounts receivable ............................... 10,157 5,539
Decrease (increase) in inventories ............................ 985 (9,678)
Decrease (increase) in other current assets ................... 9,599 (1,435)
Decrease in accounts payable and accruals ..................... (48,540) (18,488)
--------- ---------
Net cash used in operating activities ............................. (13,235) (14,432)
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................ (8,975) (7,225)
Business acquisitions, net of cash acquired ..................... (119,777) (4,353)
Proceeds from sale of fixed assets .............................. 6,402 --
Other ........................................................... (70) (2,567)
--------- ---------
Net cash used in investing activities ............................. (122,420) (14,145)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ........................ 234 --
Principal payments on long-term debt ............................ (12,256) (2,252)
Proceeds from issuance of stock ................................. 3,643 3,840
Proceeds from borrowings from banks ............................. 137,325 32,279
Payments on borrowings from banks ............................... (4,789) (4,346)
Other ........................................................... (3,398) (356)
--------- ---------
Net cash provided by financing activities ......................... 120,759 29,165
--------- ---------
Net increase (decrease) in cash and cash equivalents .............. (14,896) 588
Cash and cash equivalents, beginning of period .................... 28,222 11,813
--------- ---------
Cash and cash equivalents, end of period .......................... $ 13,326 $ 12,401
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Henry Schein, Inc.
and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
financial statements for the three months ended March 28, 1998 have been
restated and include adjustments to give effect to the acquisition of the H.
Meer Dental Supply Co. ("Meer"), effective August 14, 1998, which was accounted
for under the pooling of interests method. The consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 26, 1998. The Company follows the same
accounting policies in preparation of interim reports. The results of operations
for the three months ended March 27, 1999 are not necessarily indicative of the
results to be expected for the fiscal year ending December 25, 1999 or any other
period.
Note 2. Business Acquisitions
During the three months ended March 27,1999, the Company completed six
acquisitions. The 1999 completed acquisitions included General Injectibles and
Vaccines, Inc., a leading direct marketer of vaccines and other injectibles
serving 32,000 customers throughout the United States, with 1998 net sales of
approximately $120,000 and the Heiland Group GmbH, a leading direct marketer of
healthcare supplies to medical, dental and veterinary office-based
practitioners, headquartered in Hamburg, Germany, with 1998 net sales of
approximately $130,000. Of the six completed acquisitions, five were accounted
for under the purchase method of accounting, and the remaining acquisition was
accounted for under the pooling of interests method of accounting. Results of
operations of the business acquisitions accounted for under the purchase method
of accounting have been included in the consolidated financial statements
commencing with the acquisition date. The pooling transaction was not material
and has been included in the consolidated financial statements from the
beginning of the first quarter of 1999.
The total cash purchase price for the five acquisitions accounted for under the
purchase method of accounting was approximately $142,750. 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 Company issued 231,304
shares of its Common Stock, with an aggregate value of approximately $6,400 in
connection with the pooling transaction.
6
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions (Continued)
In connection with the 1999, 1998, and 1997 acquisitions accounted for under the
pooling of interests method, the Company incurred certain merger and integration
costs during the three months ended March 27, 1999 and March 28, 1998, of
approximately $2,203 and $3,864, respectively. These costs consist primarily of
compensation, rent, and other costs associated with the closure of distribution
centers, as well as other integration costs associated with these mergers. Net
of taxes, for the three months ended March 27, 1999 and March 28, 1998, merger
and integration costs were approximately $0.03 and $0.07 per share,
respectively, on a diluted basis.
Additional charges are expected to be recorded in subsequent reporting periods,
as the operations are integrated. Estimated merger and integration costs accrued
at December 26, 1998 were not in excess of actual amounts incurred. Amounts
accrued at March 27, 1999 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 the
three months ended March 28, 1998 assume the acquisitions, completed during 1998
and the first three months of 1999, which were either non-material pooling
transactions included in the consolidated financial statements from the
beginning of the quarter in which the acquisitions occurred, or were accounted
for under the purchase method of accounting, occurred as of the beginning of the
period.
Three Months Ended
------------------
March 28,
1998
----------
Net sales ..................................... $517,938
Net income (1) ................................ $ 6,641
Net income per common share:
Basic ....................................... $ 0.17
Diluted ..................................... $ 0.16
Pro forma net income, reflecting adjustment for
income taxes on previously untaxed earnings
of Meer ................................... $ 6,565
Pro forma net income per common share:
Basic ....................................... $ 0.17
Diluted ..................................... $ 0.16
- ---------------
(1) Includes merger and integration costs of approximately $3,864, and related
tax benefits of $1,037.
7
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions (Continued)
Pro forma adjusted net income per common share, including acquisitions, may not
be indicative of actual results, primarily because 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.
Net sales and net income of the Company and Meer were $403,032 and $5,964, and
$47,310, and $73, respectively, for the three months ended March 28, 1998. The
Meer net income for the three months ended March 28, 1998 includes a pro forma
adjustment of $76. For the period ended August 14, 1998, the effective date of
the Meer acquisition, Meer's net sales and pro forma net income was
approximately $118,073 and $1,646, respectively. The pro forma adjustments are
for taxes on previously untaxed earnings of Meer as an S Corporation.
Note 3. Comprehensive Income
Total comprehensive income for the three months ended March 27, 1999 and March
28, 1998 is as follows:
Three Months Ended
------------------------
March 27, March 28,
1999 1998
--------- ---------
Net income ............................. $ 9,913 $ 6,113
======= =======
Pro forma net income, reflecting the
Meer tax adjustment ................ $ 9,913 $ 6,037
Foreign currency translation adjustments (3,684) (318)
------- -------
Pro forma comprehensive income ......... $ 6,229 $ 5,719
======= =======
8
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 4. Segment Data
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 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 tables presents information about the
Company's business segments:
Three Months Ended
------------------
March 27, March 28,
1999 1998
---- ----
Net Sales:
Healthcare distribution (1):
Dental ......................... $253,253 $262,250
Medical ........................ 158,075 114,495
Veterinary ..................... 12,689 11,823
International (2) .............. 98,318 52,278
-------- --------
Total healthcare distribution 522,335 440,846
Technology (3) ...................... 14,000 9,496
-------- --------
$536,335 $450,342
======== ========
- -----------------------------------------
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, 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.
9
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 4. Segment Data--(Continued)
Three Months Ended
---------------------
March 27, March 28,
1999 1998
--------- ----------
Operating income:
Healthcare distribution (includes merger and
integration costs of $2,203 and
$3,864, respectively) ................... $16,956 $ 9,119
Technology ................................. 4,489 1,818
------- -------
Total ........................................... $21,445 $10,937
======= =======
March 27, March 28,
1999 1998
--------- ----------
Total Assets:
Healthcare distribution ..................... $1,122,120 $814,588
Technology .................................. 40,301 16,111
---------- --------
Total assets for reportable segments ............ 1,162,421 830,699
Receivables due from healthcare distribution
segment ................................ (21,575) (9,478)
Receivables due from technology segment .... (831) (352)
---------- --------
Consolidated total assets ....................... $1,140,015 $820,869
========== ========
Note 5. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows (in thousands):
Three Months Ended
-----------------------
March 27, March 28,
1999 1998
---------- ----------
Basic ........................................... 40,417 38,492
Effect of assumed conversion of
employee stock options ...................... 1,389 2,088
------- -------
Diluted ......................................... 41,806 40,580
======= =======
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the three months ended March 27,1999, the Company completed six
acquisitions. The 1999 completed acquisitions included General Injectibles and
Vaccines, Inc., a leading direct marketer of vaccines and other injectibles
serving 32,000 customers throughout the United States, with 1998 net sales of
approximately $120.0 million and the Heiland Group GmbH, a leading direct
marketer of healthcare supplies to medical, dental and veterinary office-based
practitioners, headquartered in Hamburg, Germany, with 1998 net sales of
approximately$130.0 million. Of the six completed acquisitions, five were
accounted for under the purchase method, and the remaining acquisition was
accounted for under the pooling of interests method of accounting. Results of
operations of the business acquisitions accounted for under the purchase method
of accounting have been included in the consolidated financial statements
commencing with the acquisition date. The pooling transaction was not material
and has been included in the consolidated financial statements from the
beginning of the first quarter of 1999.
The total cash purchase price for the five acquisitions accounted for under the
purchase method of accounting was approximately $142.8 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 Company issued
231,304 shares of its Common Stock, with an aggregate value of approximately
$6.4 million, in connection with the pooling transaction.
In connection with the 1999, 1998, and 1997 acquisitions accounted for under the
pooling of interests method, the Company incurred certain merger and integration
costs during the three months ended March 27, 1999 and March 28, 1998, of
approximately $2.2 million and $3.9 million, respectively. These costs consist
primarily of compensation, rent, and other costs associated with the closure of
distribution centers, as well as other integration costs associated with these
mergers. Net of taxes, for the three months ended March 27, 1999 and March 28,
1998, merger and integration costs were approximately $0.03 and $0.07 per share,
respectively, on a diluted basis.
Excluding the merger and integration costs, net of taxes, pro forma net income
and pro forma net income per diluted common share would have been $11.2 million
and $0.27, and $8.9 million and $0.22, respectively, for the three months ended
March 27, 1999 and March 28, 1998.
RESULTS OF OPERATIONS
Three Months Ended March 27, 1999 compared to Three Months Ended March 28, 1998
Net sales increased $86.0 million, or 19.1%, to $536.3 million for the three
months ended March 27, 1999 from $450.3 million for the three months ended March
28, 1998. Of the $86.0 million increase, approximately $81.5 million, or 94.8%,
represented a 18.5% increase in the company's healthcare distribution business.
As part of this increase approximately, $43.6 million represented a 38.1%
increase in the Company's medical business, $46.0 million represented a 88.1%
increase in its international business, $0.9
11
<PAGE>
million represented a 7.3% increase in its veterinary business, and $(9.0)
million represented a 3.4% decrease in its dental business. 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 the Company's largest renal dialysis customer, Renal Treatment Centers,
Inc., ("RTC"). In the international market, the increase in net sales was
primarily due to an acquisition in Germany and increased account penetration in
France, Belgium, and the United Kingdom. In the veterinary market, the increase
in net sales was primarily due to increased account penetration with core
accounts and veterinary groups. The decrease in dental net sales was primarily
due to sales erosion on the Meer acquisition and a reduction in dental equipment
sales resulting from the Company's disposal of its equipment manufacturing
subsidiary, Marus Dental International ("Marus") in August 1998. 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
26.7% in 1999 over 1998. The remaining increase in first quarter 1999 net sales
was due to the technology business which increased $4.5 million, or 47.4%, to
$14.0 for the three months ended March 27, 1999, from $9.5 million for the three
months ended March 28, 1998. The increase in technology and value-added product
net sales was primarily due to increased practice management software sales and
an acquisition.
Gross profit increased by $26.7 million, or 19.5%, to $163.4 million for the
three months ended March 27, 1999, from $136.7 million for the three months
ended March 28, 1998. Gross profit margin increased by 0.1% to 30.5% from 30.4%
last year. Healthcare distribution gross profit increased by $23.7 million, or
18.2%, to $153.9 million for the three months ended March 27, 1999, from $130.2
for the three months ended March 28, 1998. Healthcare distribution gross profit
margin increased by 0.1% to 29.6% for the three months ended March 27, 1999,
from 29.5% for the three months ended March 28, 1998, primarily due to sales
mix. Technology gross profit increased by $3.0 million or 46.2% to $9.5 million
for the three months ended March 27, 1999 from $6.5 million for the three months
ended March 28, 1998. Technology gross profit margins decreased by 0.2% to 67.7%
for three months ended March 27, 1999 from 67.9% for the three months ended
March 28, 1998, which was primarily due to sales mix.
Selling, general and administrative expenses increased by $17.9 million, or
14.7%, to $139.8 million for the three months ended March 27, 1999 from $121.9
million for the three months ended March 28, 1998. Selling and shipping expenses
increased by $12.1 million, or 14.6%, to $94.8 million for the three months
ended March 27, 1999 from $82.7 million for the three months ended March 28,
1998. As a percentage of net sales, selling and shipping expenses decreased 0.7%
to 17.7% for the three months ended March 27, 1999, from 18.4% for the three
months ended March 28, 1998. The decrease was primarily due to improvements of
the Company's distribution efficiencies. General and administrative expenses
increased $5.8 million, or 14.8%, to $45.0 million for the three months ended
March 27, 1999, from $39.2 million for the three months ended March 28, 1998,
primarily due to leveraging of the Company's distribution infrastructure. As a
percentage of net sales, general and administrative expenses decreased 0.3% to
8.4% for the three months ended March 27, 1999, from 8.7% for the three months
ended March 28, 1998.
Other income (expense) - net decreased by $2.9 million, to $(3.6) million for
the three months ended March 27, 1999, compared to $(0.7) million for the three
months ended March 28, 1998, due to an increase in interest expense resulting
from an increase in average borrowings, offset by higher interest income on
notes receivable and accounts receivable balances.
Equity in earnings of affiliates decreased $0.4 million to $(0.2) million for
the three months ended March
12
<PAGE>
27, 1999 from $0.2 million for the three months ended March 28, 1998. The
decline was due to reduced earnings in the first quarter resulting from
temporary suspension of manufacturing operations in connection with a voluntary
recall of anesthetic products sold by an affiliate.
For the three months ended March 27, 1999 the Company's effective tax rate was
39.9%. The difference between the Company's effective tax rate and the Federal
statutory rate relates primarily to state income taxes and non-deductible
goodwill associated with certain stock acquisitions. For the three months ended
March 28, 1998, the Company's effective tax rate was 42.0%. Excluding merger and
integration costs and including a pro forma adjustment for assumed tax expenses
arising from the previously untaxed earnings of Meer, the Company's effective
tax rate for the three months ended March 28, 1998 would have been 38.3%. The
difference between the Company's effective tax rate, excluding certain
non-deductible merger and integration costs and the Meer tax adjustment, and the
Federal statutory rate relates primarily to state income taxes.
Year 2000
Management continued 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 for governments,
businesses and consumers alike.
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 products and services, (ii) critical vendor and other third party business
systems 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. 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 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.
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
13
<PAGE>
$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.
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.
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 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 revolving credit facilities, a private placement loan, and stock
issuances.
Net cash used in operating activities for the three months ended March 27, 1999
of $13.2 million resulted primarily from net income of $9.9 million, adjusted
for non-cash charges of $4.7 million, offset by an increase in operating items
of working capital of $27.8 million. The increase in working capital was
primarily due to a decrease in accounts payable and other accrued expenses of
$48.5 million primarily due to payments made to vendors for year-end inventory
buy-ins, offset by a decrease of $10.2 million in accounts receivable, a $9.6
million decrease in other current assets, and a $1.0 million decrease in
inventory. The Company anticipates future increases in working capital
requirements 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 three months ended March 27, 1999
of $122.4 million resulted primarily from cash used to make acquisitions of
$119.8 million and capital expenditures of $9.0 million, offset by the sale of
certain equipment at one of the Company's distribution facilities that was
subsequently
14
<PAGE>
leased back. The Company expects that it will invest in excess of $25.0 million
during the year ending December 25, 1999, in capital projects to modernize and
expand its facilities and infrastructure systems and integrate operations.
Net cash provided by financing activities for the three months ended March 27,
1999 of $120.8 million resulted primarily from borrowings under the Company's
revolving credit facilities of approximately $137.6, offset by debt repayments
of $17.0 million.
Certain holders of minority interests in 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 March 27, 1999, of $13.3 million
consist of bank balances and money market funds.
The Company has a $150.0 million revolving credit facility which has a
termination date of August 15, 2002. Borrowings under the credit facility were
$141.8 million at March 27, 1999. The Company also has four uncommitted bank
lines totaling $60.0 million under which $59.1 million has been borrowed at
March 27, 1999. Certain of the Company's subsidiaries have revolving credit
facilities that total approximately $47.7 million at March 27, 1999 under which
$38.7 million has been borrowed.
Subsequent to March 27, 1999, the Company entered into private placement
negotiations, in which, if successful, the Company will obtain approximately
$130.0 million in longer term financing (financing with an average life of
approximately ten years). The Company intends to use the proceeds of the
financing, if consummated, to pay down amounts owed under its Revolving Credit
and other short-term facilities, and for general corporate purposes.
The Company believes that its cash and cash equivalents, its anticipated cash
flow from operations, its ability to access private and public debt and equity
markets, and the availability of funds under its existing credit agreements will
provide it with liquidity sufficient to meet its short and long-term capital
needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures made in our report 10-K for
the year ended December 26, 1998, on this matter.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. Certain information in this Form 10-Q contains
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 health care practitioners, the impact of health care
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 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 (see "Year 2000"),
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 restrictions 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 jurisdictions, as well as certain other risks described in this Form
10-Q. Subsequent written and oral forward looking statements attributable to the
Company or persons
15
<PAGE>
acting on its behalf are expressly qualified in their entirety by the cautionary
statements in this paragraph and elsewhere described in this Form 10-Q.
16
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On February 23, 1999 the Company issued an aggregate of 231,304 shares
of its Common Stock in connection with an acquisition (see Note 2 to the
financial statements included in this quarterly report), without registration
under the Securities Act of 1933 in reliance upon the exemption provided in
Section 4 (c)(2).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
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 (filed
as Exhibit 10.107 to the Company's current report on Form
10-K dated December 26, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended March 27, 1999, the Company filed the
following Current Reports on Form 8-K and 8-K/A:
Report dated December 30, 1998, announcing the issuance of a press
release announcing the Company's intention to acquire all the common
stock of Biological & Popular Culture, Inc. ("Bio-Pop").
Report dated January 11, 1999, announcing a press release with respect
to the receipt by its unconsolidated affiliate, Novocol Pharmaceutical
of Canada, Inc., of a warning letter from the United States Food and
Drug Administration.
Report dated January 15, 1999, announcing that pursuant to the Stock
Purchase Agreement By and Among Henry Schein, Inc. a Delaware
corporation ("Schein"), New River Management Company, L.L.P., Chiron
Corporation and Bio-Pop, dated December 8,1998, as amended, Schein
acquired all of the common stock of Bio-Pop.
Report Dated February 4, 1999 announcing a press release with respect
to a voluntary recall of dental anesthetic products by its
unconsolidated affiliate, Novocol Pharmaceutical of Canada, Inc.
Report dated March 17, 1999, stating that the financial statements
that the original Current Report dated January 15, 1999 stated
would be filed by amendment are not required.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
By: /s/ Steven Paladino
-------------------------------------------
STEVEN PALADINO
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: May 11, 1999
18
<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> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> MAR-27-1999
<CASH> 13,326
<SECURITIES> 0
<RECEIVABLES> 357,260
<ALLOWANCES> (15,569)
<INVENTORY> 294,439
<CURRENT-ASSETS> 735,816
<PP&E> 128,801
<DEPRECIATION> (57,485)
<TOTAL-ASSETS> 1,140,015
<CURRENT-LIABILITIES> 324,389
<BONDS> 329,914
0
0
<COMMON> 405
<OTHER-SE> 472,834
<TOTAL-LIABILITY-AND-EQUITY> 1,140,015
<SALES> 536,335
<TOTAL-REVENUES> 536,335
<CGS> 372,918
<TOTAL-COSTS> 372,918
<OTHER-EXPENSES> 141,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,724
<INCOME-PRETAX> 17,865
<INCOME-TAX> 7,127
<INCOME-CONTINUING> 9,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,913
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
