<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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Commission file number: 01-10920
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Fisher Scientific International Inc.
-------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 02-0451017
----------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Liberty Lane
Hampton, New Hampshire 03842
----------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 926-5911
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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 |_|.
The number of shares of Common Stock outstanding at May 13, 1998 was
36,038,645.
1
<PAGE>
FISHER SCIENTIFIC INTERNATIONAL INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information:
Item 1 - Financial Statements:
Introduction to the Financial Statements....... 3
Income Statements -
Three Months Ended March 31, 1998 and 1997..... 4
Balance Sheets -
March 31, 1998 and December 31, 1997........... 5
Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997..... 6
Notes to Financial Statements.................. 7
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition........ 15
Part II - Other Information:
Item 2 - Changes in Securities and Use of Proceeds ... 21
Item 4 - Submission of Matters to a Vote of Security
Holders...................................... 21
Item 6 - Exhibits and Reports on Form 8-K............. 21
SIGNATURE ............................................... 23
EXHIBIT INDEX............................................ 25
</TABLE>
2
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FISHER SCIENTIFIC INTERNATIONAL INC.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION TO THE FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared by
Fisher Scientific International Inc. ("Fisher" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
December 31, 1997 balance sheet is the balance sheet included in the audited
financial statements as shown in the Company's 1997 Annual report on Form 10-K.
The Company believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
The financial information presented herein reflects all adjustments
(consisting only of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.
3
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FISHER SCIENTIFIC INTERNATIONAL INC.
STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1998 1997
-------- --------
<S> <C> <C>
Sales $ 561.5 $ 526.7
Cost of sales 408.1 380.4
Selling, general and
administrative expense 128.0 121.5
Transaction-related costs 71.0 --
-------- --------
Income (loss) from operations (45.6) 24.8
Interest expense 24.9 6.1
Other (income) expense, net (2.4) (1.6)
-------- --------
Income (loss) before income taxes (68.1) 20.3
Income tax (benefit) provision (26.2) 9.3
-------- --------
Net income (loss) $ (41.9) $ 11.0
-------- --------
-------- --------
Earnings (loss) per common share:
Basic $ (1.05) $ 0.11
-------- --------
-------- --------
Diluted $ (1.05) $ 0.11
-------- --------
-------- --------
</TABLE>
See the accompanying notes to financial statements.
4
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FISHER SCIENTIFIC INTERNATIONAL INC.
BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35.9 $ 18.2
Receivables, net 142.4 297.1
Inventories 218.4 223.8
Other current assets 65.8 53.3
-------- --------
Total current assets 462.5 592.4
Property, plant and equipment, net 227.5 223.6
Goodwill 249.3 251.4
Other assets 155.9 109.1
-------- --------
$1,095.2 $1,176.5
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Short-term debt $ 7.0 $ 19.7
Accounts payable 231.7 199.8
Accrued and other current liabilities 142.1 135.4
-------- --------
Total current liabilities 380.8 354.9
Long-term debt 822.0 267.8
Other liabilities 269.9 206.7
-------- --------
Total liabilities 1,472.7 829.4
-------- --------
Commitments and Contingencies
Stockholders' (deficit) equity:
Preferred stock -- --
Common stock 0.4 0.2
Capital in excess of par value 312.8 278.9
Retained (deficit) earnings (610.2) 96.7
Accumulated other comprehensive income (24.6) (22.6)
Other (55.9) (6.1)
-------- --------
Total stockholders' (deficit) equity (377.5) 347.1
-------- --------
$1,095.2 $1,176.5
-------- --------
-------- --------
</TABLE>
See the accompanying notes to financial statements.
5
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FISHER SCIENTIFIC INTERNATIONAL INC.
STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (41.9) $ 11.0
Adjustments to reconcile net income (loss) to
cash provided (used) by operating activities:
Transaction-related costs, net of cash expended 70.5 --
Depreciation and amortization 13.8 10.6
Deferred income taxes (15.3) 3.4
Changes in working capital:
Receivables, net (15.6) (3.2)
Inventories 5.4 (4.6)
Payables, accrued and other current liabilities 37.1 (29.8)
Other working capital changes (12.0) 3.1
Other assets and liabilities (2.1) (8.3)
------- -------
Cash provided (used) by operating activities 39.9 (17.8)
------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired (0.8) (2.0)
Capital expenditures (12.0) (24.7)
------- -------
Cash used in investing activities (12.8) (26.7)
------- -------
Cash flows from financing activities:
Proceeds from stock options exercised -- 1.8
Dividends paid -- (0.4)
Common stock repurchased and conversion of
stock to cash (955.1) --
Proceeds from common stock sold to FSI 303.0 --
Transaction-related fees and expenses (67.5) --
Proceeds from accounts receivable securitization 170.0 --
Proceeds from long-term debt 694.5 87.3
Payments of long-term debt (154.3) (53.4)
------- -------
Cash (used) provided by financing activities (9.4) 35.3
------- -------
Net change in cash and cash equivalents 17.7 (9.2)
Cash and cash equivalents - beginning of period 18.2 24.7
------- -------
Cash and cash equivalents - end of period $ 35.9 $ 15.5
------- -------
------- -------
</TABLE>
See the accompanying notes to financial statements.
6
<PAGE>
FISHER SCIENTIFIC INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Recapitalization and Merger
Pursuant to the Second Amended and Restated Agreement and Plan of Merger
dated November 14, 1997 (as amended, the "Merger Agreement") between the
Company and FSI Merger Corp. ("FSI"), a Delaware corporation formed by Thomas
H. Lee Company ("THL"), providing for the merger of FSI with and into Fisher
and the recapitalization of Fisher (collectively, "the Transaction"), which
Transaction was consummated on January 21, 1998, approximately 87% of the
fully diluted shares of Common Stock of Fisher, $.01 par value ("Common
Stock"), were converted into the right to receive $48.25 per share in cash
(approximately $955.0 million in the aggregate) pursuant to an election
process that provided stockholders the right to elect for each share of
Fisher Common Stock held, subject to proration, either $48.25 in cash or to
retain one share of stock in the recapitalized company. Pursuant to the
Merger Agreement, vesting of all outstanding options accelerated.
In connection with the Transaction, the Company recorded $71.0 million of
expenses consisting primarily of non-cash compensation expense relating to
the conversion of employee stock options, the implementation of certain
executive employment agreements and the grant of options to certain
executives in accordance with the terms of the Transaction (see Note 6).
On March 9, 1998, Fisher's Board of Directors declared a five-for-one stock
split on the Company's Common Stock. As a result of the stock split four
additional shares of Common Stock were issued for each share of Common Stock
held by the shareholders of record as of the close of business on March 19,
1998. All references in this report to the number of shares and per-share
amounts have been restated as appropriate to give effect to the stock split.
Note 2 - Accounting Policies and Pronouncements
Interest-Rate Swap Agreements - The Company enters into interest-rate swap
agreements in order to manage its exposure to interest-rate fluctuations. The
Company does not hold or issue financial instruments for trading or speculative
purposes. Net-interest differentials to be paid or received are included in
interest expense.
Reclassification - Certain prior year amounts have been reclassified to
conform to their current presentation.
Accounting Pronouncements - During 1997, the Financial Accounting Standards
Board Issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) and Statement of Financial Accounting
7
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Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131). SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements and requires companies to disclose comprehensive income as part of
the basic financial statements. SFAS 130 was adopted this quarter. SFAS No. 131
establishes standards for reporting information on operating segments in
financial statements. The Company is required to adopt SFAS No. 131 in the
fourth quarter of 1998 and is currently reviewing the impact it may have on
additional disclosure, if any, in its financial statements.
Note 3 - Inventories
The following is a summary of inventories by major category (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Raw material $ 16.6 $ 17.5
Work in process 3.4 3.2
Finished products 198.4 203.1
------- -------
$ 218.4 $ 223.8
------- -------
------- -------
</TABLE>
Note 4 - Other Current Assets and Other Assets
At March 31, 1998, the Company had an $8.7 million tax receivable as a
result of the loss reported for the first quarter of 1998 which is included
in other current assets. Other assets at March 31, 1998 includes $34.3
million of deferred financing fees relating to costs incurred in conjunction
with the new debt facilities entered into during the first quarter of 1998
and a deferred tax asset of $52.2 million.
8
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Note 5 - Debt
The following is a summary of debt and other obligations (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
9% Senior Subordinated Notes $ 400.0 $ --
New Credit Facility 254.2 --
Prior Credit Facility -- 100.6
7 1/8% Notes (net of a discount
of $1.0 million at March 31, 1998
and December 31, 1997) 149.0 149.0
Other 25.8 37.9
Less current portion of long-term debt (7.0) (19.7)
-------- --------
$ 822.0 $ 267.8
-------- --------
-------- --------
</TABLE>
On January 21, 1998, in connection with the Transaction, Fisher entered into
new debt financing arrangements, providing for $469.2 million of senior bank
financing (the "New Credit Facility"), a $150 million receivables securitization
facility (the "Receivables Securitization") and $400 million of 9% Senior
Subordinated Notes due 2008 (the "9% Notes"). The full proceeds of the 9% Notes,
together with a portion of the proceeds of the New Credit Facility, were used to
finance the conversion into cash of the shares of Fisher Common Stock then
outstanding that were not retained by existing stockholders and employees, to
refinance $107.8 million of indebtedness outstanding on the date of the
Transaction and to pay related fees and expenses of the Transaction. In
addition, the New Credit Facility will be used to provide for the Company's
working capital requirements and future acquisitions, if any.
In March, the Company paid down $40.0 million of borrowings under the New
Credit Facility funded by $20 million of additional proceeds from the sale of
accounts receivable under the receivables securitization facility discussed
below and $20 million of cash generated by operations. As of March 31, 1998,
the New Credit Facility consisted of (i) a $254.2 million term loan facility
(the "Term Facility") consisting of a (a) $108.0 million tranche A term loan
("Tranche A"), (b) $86.4 million tranche B term loan ("Tranche B") and (c)
$59.8 million tranche C term loan ("Tranche C"); and (ii) a $175.0 million
revolving credit facility (the "Revolving Facility"). Borrowings under the
Term Facility bear interest at a rate equal to, at the Company's option, the
following: Tranche A, LIBOR plus 2.25% or Prime Rate plus 1.25%; Tranche B,
LIBOR plus 2.50% or Prime Rate plus 1.50%; and Tranche C, LIBOR plus 2.75% or
Prime Rate plus 1.75%. Borrowings made under the Revolving Facility bear
interest at a rate equal to, at the Company's option, LIBOR plus 2.25%, or
the Prime Rate plus 1.25%. The Company will also pay to the lenders a
commitment fee equal to .50% per annum of the undrawn portion of each
lender's commitment from time to time. The LIBOR and Prime Rate margins and
the commitment fees are subject to reductions, based on various tests of
Fisher's financial performance. The Term Facilities have the following
maturity periods from the date of inception: Tranche A - 6 years, Tranche B -
7 years and Tranche C - 7.75 years. The Revolving Facility expires six years
from the date of inception. On January 21, 1998, the
9
<PAGE>
Company executed two interest rate swap agreements with a counterparty
exchanging its floating-rate obligation on $120 million notional principal
amount for a fixed-rate payment obligation of 5.6425% per annum through January
23, 2001 and on $250 million notional principal amount for a fixed- rate payment
obligation of 5.7375% per annum through January 23, 2003. In the unlikely event
that the counterparty fails to meet the terms of the interest-rate swap
agreement, the Company's exposure is limited to the interest-rate differential
on the notional amount at each quarterly settlement period over the life of the
agreements. The Company does not anticipate non-performance by the counterparty.
The fair values of interest-rate swap agreements are the estimated amounts that
the Company would receive or pay to terminate the agreements at the reporting
date, taking into account current interest rates, the market expectation for
future interest rates and the current creditworthiness of the counterparty. The
fair value of these interest-rate swap agreements as of March 31, 1998, based
upon quoted market prices, was $2.6 million.
The obligations of Fisher and the subsidiary borrowers under the New Credit
Facility are secured by substantially all assets of the Company and its material
domestic subsidiaries, a pledge of the stock of all domestic subsidiaries, and a
pledge of 65% of the stock of material foreign subsidiaries which are direct
subsidiaries of the Company or one of its material domestic subsidiaries.
Obligations of each foreign subsidiary borrower are secured by a pledge of 100%
of the shares of such borrower. The obligations of Fisher and the subsidiary
borrowers are further guaranteed by Fisher and each material domestic subsidiary
of Fisher.
The New Credit Facility contains covenants of the Company and the subsidiary
borrowers, including, without limitation, restrictions on (i) indebtedness, (ii)
the sale of assets, (iii) mergers, acquisitions and other business combinations,
(iv) restrictions on the payment of cash dividends to shareholders, and (v)
various financial covenants. The financial covenants include requirements to
maintain certain levels of interest coverage, debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and minimum EBITDA and to limit
capital expenditures. Loans under the Term Facility are required to be prepaid
with 50% of excess cash flow (as defined in the New Credit Facility and subject
to certain limits as specified therein) and certain equity issuances of the
Company, and 100% of net-cash proceeds of certain asset sales, certain insurance
and condemnation proceeds and certain debt issuances of the Company. The
mandatory repayment schedule of the Term Facility over the next five years and
thereafter is as follows: $0.0 million in 1998, $5.2 million in 1999, $14.7
million in 2000, $19.0 million in 2001, $32.0 million in 2002 and $183.3 million
in years subsequent to 2002.
The Receivables Securitization relates to the sale, on a revolving basis,
of the accounts receivable of Fisher Scientific Company, L.L.C. ("FSC") to a
bankruptcy remote subsidiary of FSC that entered into an agreement to
transfer, on a revolving basis, an undivided percentage ownership interest in
a designated pool of accounts receivable up to a maximum amount based on a
defined calculated percentage of the outstanding accounts receivable balance.
The facility has a maturity of five years and the effective interest rate is
approximately LIBOR plus 50 basis points.
10
<PAGE>
The 9% Notes will mature on February 1, 2008 with interest payable
semiannually in arrears on February 1 and August 1 of each year commencing
August 1, 1998. The 9% Notes are unsecured senior subordinated obligations of
the Company, subordinated in right of payment to all existing and future senior
indebtedness and rank pari passu in light of payment with all other existing and
future senior subordinated indebtedness of the Company.
The 9% Notes are redeemable at the option of the Company at any time after
February 1, 2003 at an initial redemption price of 104.5%, declining ratably to
par on or after February 1, 2006. In addition, on or prior to February 1, 2001,
the Company may redeem up to 40% of the original principal amount of the 9%
Notes at a redemption price of 109% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption with the net cash
proceeds of one or more public equity offerings, provided that at least 60% of
the aggregate principal amount of the 9% Notes originally issued remains
outstanding immediately after the occurrence of such redemption. Upon a Change
of Control Triggering Event (as defined in the Indenture under which the 9%
Notes are issued), the Company will be required to make an offer to purchase all
outstanding 9% Notes at 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase.
The Indenture under which the 9% Notes are issued contains covenants that
restrict, among other things, (i) the ability of the Company and its
subsidiaries to incur additional indebtedness, (ii) pay dividends or make
certain other restricted payments, (iii) merge or consolidate with any other
person, and (iv) other various covenants that are customary for transactions of
this type.
Note 6 - Stockholders' (Deficit) Equity
The following is a summary of the changes in stockholders' (deficit)
equity for the period ended March 31, 1998. Total comprehensive income
components included in stockholders' (deficit) equity include any changes in
equity during a period that are not the result of transactions with the
Company's stockholders.
11
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Capital in Shares Other Subtotal -
Common Excess of Retained Held in Comprehensive Comprehensive
Stock Par Value Earnings Trust Income Total Income
----- --------- -------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,1998 $ 0.2 $ 278.9 $ 96.7 $ (6.1) $(22.6) $ 347.1
Comprehensive income:
Net loss (41.9) (41.9) $ (41.9)
Foreign currency translation adjustments (2.0) (2.0) (2.0)
------
Subtotal-comprehensive income $ (43.9)
------
Change in market value of common
shares held in trust (21.0) (21.0)
Five-for-one stock split 0.3 (0.3)
Transaction-related activity:
Common stock repurchased and conversion
of options to cash (0.2) (268.7) (686.2) (955.1)
Shares deposited in trust (28.8) (28.8)
Equity contribution by FSI 0.1 302.9 303.0
Proceeds from stock options 55.7 55.7
Recapitatization fees and expenses -- -- (34.5) -- -- (34.5)
----- ------- ------ ------ ------ -------
Balance, March 31, 1998 $ 0.4 $ 312.8 $ (610.2) $(55.9) $(24.6) $ (377.5)
----- ------- ------ ------ ------ -------
</TABLE>
After the Transaction, the Company's authorized capital stock consists of
45,817,625 shares of Common Stock, par value $.01 per share, 4,182,375 shares
of non-voting Common Stock, par value $.01 per share and 15,000,000 shares of
Preferred Stock, par value $.01 per share, of which 35,988,645 shares of
Common Stock and 4,035,290 shares of non-voting Common Stock shares were
outstanding at January 21, 1998 and March 31, 1998. Of the total 40,023,935
shares of Common Stock, 3,754,505 represents shares owned by employees as a
result of the conversion of stock options and 1,144,285 represents shares
retained by management pursuant to the stock election process. In addition,
warrants to purchase 2,583,315 shares of Common Stock at $9.65 per share were
issued as part of the Transaction.
Pursuant to the Merger Agreement, the vesting of all options accelerated on
the date of the Transaction. Of the 17,570,000 options outstanding at December
31, 1997, approximately 6,720,000 were converted to cash and the remainder were
converted to Fisher Common Stock. When the options were converted, the Company
recorded compensation expense of approximately $56 million to reflect the
"cashless" conversion of the options into cash or common stock having a value on
the date of the Transaction equal to the product of (x) the excess of $9.65 over
the exercise price per share of Fisher Common Stock subject to such option and
(y) the total number of shares of Fisher Common Stock subject to option, subject
to any required tax withholdings. In connection with the Transaction, the
Company adopted the 1998 Equity Incentive Plan ("1998 Plan"), under which up to
10,000,000 shares of Fisher Common Stock are reserved for issuance. Awards under
the 1998 Plan may be made in the form of options (whether incentive or
otherwise), stock appreciation rights, restricted stock, dividend equivalents
and other stock-based awards. Pursuant to the Transaction, the Company granted
options to purchase 3,686,000 shares of Fisher Common Stock having a ten-year
term and vesting on a pro rata basis over 5 years.
12
<PAGE>
The options have an exercise price equal to $9.65, the fair market value of a
share of Fisher Common Stock on the date of grant. The Company also granted
options to purchase 1,788,000 shares of Fisher Common Stock having a ten-year
term and vesting nine years from the date of grant, unless sooner vested upon
the achievement of certain performance targets and other factors. These
options have an exercise price equal to $19.30 per share. In addition, the
Company granted to certain executives, options to purchase 517,000 shares
of Fisher Common Stock having a ten-year term and vesting nine years from the
date of grant, unless sooner vested upon the achievement of certain
performance targets or unless "put" to the Company by the executive or
"called" by the Company in accordance with their terms. The total "put" /
"call" right is limited to $10 million (plus interest) and was issued in
exchange for a three-year non-compete agreement pursuant to which the
executives agree not to participate in the scientific-instrument or
clinical-research-laboratory business in the United States. The Company
recorded $10 million of compensation expense related to this "put" / "call"
right in January 1998.
Note 7 - Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for the three months ended
March 31, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
1998 1997
------- -------
<S> <C> <C>
Basic Earnings Per Share:
Net Income (Loss) (41.9) 11.0
Average Shares of Common Stock Outstanding 40.0 101.0
------- -------
Basic Earnings (Loss) Per Share $ (1.05) $ 0.11
------- -------
------- -------
Diluted Earnings Per Share:
Net Income (Loss) (41.9) 11.0
Average Shares of Common Stock Outstanding 40.0 101.0
Common Stock Equivalents (a) -- 3.0
------- -------
Total Shares Used in Diluted Earnings Per Share
Calculation 40.0 104.0
------- -------
Diluted Earnings (Loss) Per Share $ (1.05) $ 0.11
------- -------
------- -------
</TABLE>
(a) As of March 31, 1998, the Company had options and warrants outstanding
to purchase 6.6 million shares that could potentially dilute basic
earnings per share that were excluded from the diluted earnings per share
computation as the Company had a net loss for the period.
Earnings (loss) per share and weighted average common shares outstanding for
the three months ended March 31, 1998 are based on the Company's recapitalized
structure and reflect the five-for-one stock split declared on March 9, 1998.
Earnings (loss) per share for the three months ended March 31, 1997 are based on
the Company's capital structure at that time (prior to the recapitalization) and
have been restated to reflect the aforementioned stock split.
13
<PAGE>
Note 8 - Related Parties
The Company paid a one-time transaction fee of $20 million and will pay an
annual management fee of $1 million to THL. In exchange for the transaction
fee, THL and its affiliates provided equity commitments for the Transaction,
arranged additional equity financing, arranged the Transaction debt financing
and structured and negotiated the Transaction. In return for the annual
management fee, THL will provide consulting and management advisory services.
Additionally, in connection with the Transaction and the related debt
financings, the Company paid its other equity investors (excluding management)
one-time fees aggregating approximately $35 million.
One of the Company's equity investors is a financial institution which
provides financing to the Company at terms which are considered to be
arm's-length.
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include those factors discussed in the section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Cautionary Factors Regarding Forward-Looking Statements" contained
in the Company's Form 10-K for the year ended December 31, 1997.
Recapitalization and Merger
Pursuant to the Second Amended and Restated Agreement and Plan of Merger
dated November 14, 1997 (as amended, the "Merger Agreement") between the Company
and FSI Merger Corp. ("FSI"), a Delaware corporation formed by Thomas H. Lee
Company ("THL"), providing for the merger of FSI with and into Fisher and the
recapitalization of Fisher (collectively, "the Transaction"), which Transaction
was consummated on January 21, 1998, approximately 87% of the fully diluted
shares of Common Stock of Fisher, $.01 par value ("Common Stock"), were
converted into the right to receive $48.25 per share in cash (approximately
$955.0 million in the aggregate) pursuant to an election process that
provided stockholders the right to elect for each share of Fisher Common
Stock held, subject to proration, either $48.25 in cash or to retain one
share of stock in the recapitalized company. Pursuant to the Merger
Agreement, vesting of all outstanding options accelerated.
On March 9, 1998, Fisher's Board of Directors declared a five-for-one
stock split on the Company's Common Stock. As a result of the stock split
four additional shares of Common Stock were issued for each share of Common
Stock held by the shareholders of record as of the close of business on March
19, 1998. All references in this report to the number of shares and per share
amounts have been restated as appropriate to give effect to the stock split.
Results of Operations
Sales
Sales for the three months ended March 31, 1998 increased 6.6% to $561.5
million from $526.7 million for the comparable period in 1997, primarily due to
growth in domestic operations.
15
<PAGE>
Gross Profit
Fisher's gross profit increased 4.9% to $153.4 million for the first three
months of 1998 from $146.3 million for the comparable period in 1997,
primarily as a result of increased volume. Gross profit as a percent of sales
decreased to 27.3% for the three months ended March 31, 1998 from 27.8% for
the same period in 1997. The decrease largely reflects the residual impact of
the strike by employees of United Parcel Service ("UPS") who are members of
the International Brotherhood of Teamsters (the "UPS Strike"). The Company
expects margins to remain at current levels or to improve throughout the
remainder of the year.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three months ended March
31, 1998 increased 5% to $128.0 million from $121.5 million for the comparable
period in 1997 primarily as a result of increased sales volume. Selling, general
and administrative expense in both periods includes nonrecurring costs
associated with the implementation of the restructuring plan that began in the
third quarter of 1995 as well as costs to integrate Curtin Matheson Scientific
("CMS"), acquired in October 1995, into Fisher. Additionally, the three month
period ended March 31, 1998 includes nonrecurring costs associated with the
implementation of the 1997 Restructuring Plan. Certain costs resulting from the
temporary duplication of operations, relocation of inventories and employees,
hiring and training new employees, and other one-time and redundant costs, which
will be eliminated as the restructuring plans are completed, are recognized as
incurred. For the three months ended March 31, 1998, $1.8 million of such costs
were included in selling, general and administrative expense compared with $1.9
million for the corresponding period in 1997. Excluding such costs, selling,
general and administrative expense as a percentage of sales was 22.5% for the
three months ended March 31, 1998 compared with 22.7% for the same period in
1997.
Operations outside of the United States continue to have significantly higher
selling, general and administrative expense as a percentage of sales as compared
with that of Fisher's domestic operations. These higher costs are being incurred
as part of a plan to develop an integrated worldwide supply capability, the
benefit of which has not been fully realized.
16
<PAGE>
Transaction-Related Costs
In connection with the Transaction, the Company recorded $71.0 million of
expenses consisting primarily of non-cash compensation expense relating to
the conversion of employee stock options, the implementation of certain
executive severance agreements and the grant of options to certain executives
in accordance with the terms of the Transaction.
Income (loss) from Operations
Income (loss) from operations decreased to a loss of $45.6 million for the
three months ended March 31, 1998, compared with income of $24.8 million for the
corresponding period in 1997. Income (loss) from operations, excluding
Transaction-related costs and the aforementioned nonrecurring costs, as a
percent of sales decreased to 4.8% for the three months ended March 31, 1998,
compared with 5.1% for the same period in 1997, due to the factors described
above.
Interest Expense
Interest expense increased to $24.9 million for the three months ended March
31, 1998 from $6.1 million for the comparable period in 1997. The increase is
the result of additional indebtedness resulting from the Transaction as well as
$6.9 million of charges related to the consummation of the Transaction including
one-time bank commitment fees, the write-off of unamortized financing costs
related to long-term debt refinanced and the loss on the sale of accounts
receivable (discussed below).
Income Tax (Benefit) Provision
As a result of the loss incurred during the first three months of 1998, the
Company recorded a tax benefit of $26.2 million compared to a tax provision of
$9.3 million for the same period in 1997. The effective income tax rate for the
three months ended March 31, 1998 was a 38.5% tax benefit compared with a 45.8%
tax charge for the corresponding period in 1997. Excluding the $71.0 million of
Transaction-related costs, the effective income tax rate for the three months
ended March 31, 1998 was 53.1% versus 45.8% for the corresponding period in
1997. The increase in the effective tax rate is primarily related to the
reduction in domestic pretax income due to the additional interest expense
incurred as a result of the Transaction and foreign losses for which no benefit
is recorded.
Net Income (loss)
Net income (loss) for the three months ended March 31, 1998 decreased to a
loss of $41.9 million from income of $11.0 million for the comparable period in
1997 as a result of the factors discussed above.
17
<PAGE>
Liquidity and Capital Resources
During the three months ended March 31, 1998, the Company's operations
generated $39.9 million of cash compared with using $17.8 million for the same
period in 1997. This increase in cash provided by operating activities primarily
reflects an increase in cash flows from changes in working capital. The increase
in cash flows from changes in working capital is due to an increase in cash
provided by payables and accruals, partially offset by an increase in cash used
by receivables. The payables and accruals change is primarily due to the timing
of accounts payable payments and reduced payments of accrued compensation
amounts.
The Company's operating working capital (defined as receivables plus
inventories less accounts payable and accrued liabilities) decreased to ($13.0)
million at March 31, 1998 from $185.7 million at December 31, 1997. This
decrease is due principally to decreases in accounts receivable and inventories
and increases in accounts payable and accrued liabilities. The decrease in
accounts receivable is primarily the result of the sale of receivables under a
receivable securitization discussed below. The increases in accounts payable and
accrued liabilities are principally attributable to timing of payments.
Excluding the effect, if any, of future acquisitions and anticipated
temporary inventory duplications as the Company completes the consolidation and
relocation of its logistical facilities in North America, the Company's
operating working capital requirements are not anticipated to increase
throughout the remainder of 1998.
During the three months ended March 31, 1998, the Company used $12.8 million
of cash for investing activities compared with $26.7 million for the same period
in 1997. The decrease in cash used for investing activities is primarily due to
decreases in capital expenditures. For the three months ended March 31, 1998 and
1997, the Company had capital expenditures of $12.0 million and $24.7 million,
respectively. This decrease is primarily due to timing. The Company anticipates
its 1998 annual capital expenditures will meet or exceed total 1997 expenditures
as it continues its consolidation and relocation of logistics facilities in
North America and its project to upgrade global computer systems.
During the three months ended March 31, 1998, the Company's financing
activities used $9.4 million compared with generating $35.3 million for the
same period in 1997. This change is primarily due to an increase of $676.3
million in net long-term debt proceeds, including proceeds from the
Receivables Securitization (discussed below), in the first quarter of 1998
attributable to the Transaction. In connection with the Transaction,
effective January 21, 1998, Fisher entered into new debt financing
arrangements, providing for $469.2 million of senior bank financing (the "New
Credit Facility"), a $150 million receivables securitization facility (the
"Receivables Securitization") and $400 million of 9% Senior Subordinated
Notes due 2008 (the "9% Notes"). The full proceeds of the 9% Notes, together
with a portion of the proceeds of the New Credit Facility, were used to
finance the conversion into cash of the shares of Fisher Common Stock then
outstanding that were not retained by existing stockholders and employees, to
refinance $107.8
18
<PAGE>
million of indebtedness of the Company outstanding on the date of the
Transaction and to pay related fees and expenses of the Transaction. In
addition, the New Credit Facility will be used to provide for the Company's
working capital requirements and future acquisitions if any. The interest rates
and maturity dates of the New Credit Facility, the Receivables Securitization
and the 9% Notes are described in Note 5 to Financial Statements.
On January 21, 1998, the Company executed two interest rate swap agreements
exchanging its floating-rate obligation on $120 million notional principal
amount for a fixed-rate payment obligation of 5.6425% per annum through January
23, 2001 and $250 million notional principal amount for a fixed- rate payment
obligation of 5.7375% per annum through January 23, 2003. The fair value of
these interest-rate swap agreements as of March 31, 1998, based upon quoted
market prices, was $2.6 million.
The New Credit Facility contains covenants of the Company and the subsidiary
borrowers, including, without limitation, restrictions on (i) indebtedness, (ii)
the sale of assets, (iii) mergers, acquisitions and other business combination,
(iv) restrictions on the payment of cash dividends to shareholders, and (v)
various financial covenants. The financial covenants include requirements to
maintain certain levels of interest coverage, debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and minimum EBITDA and
limitations on capital expenditures. In addition to the mandatory repayment
schedule discussed in Note 5 to Financial Statements, loans under the Term
Facility are required to be prepaid with 50% of excess cash flow (as defined in
the New Credit Facility and subject to certain limits as specified therein) and
certain equity issuances of the Company, and 100% of net-cash proceeds of
certain asset sales, certain insurance and condemnation proceeds and certain
debt issuances of the Company.
The Receivable Securitization relates to the sale, on a revolving basis, of
certain of FSC's accounts receivable to a bankruptcy remote subsidiary of FSC
that entered into an agreement to transfer, on a revolving basis, an undivided
percentage ownership interest in a designated pool of accounts receivable up to
a maximum amount based on a defined calculated percentage of the outstanding
accounts receivable balance.
The 9% Notes are redeemable at the option of the Company at any time after
February 1, 2003 at an initial redemption price of 104.5%, declining ratably to
par on or after February 1, 2006. In addition, on or prior to February 1, 2001,
the Company may redeem up to 40% of the original principal amount of the 9%
Notes at a redemption price of 109% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption with the net cash
proceeds of one or more public equity offerings, provided that at least 60% of
the aggregate principal amount of the 9% Notes originally issued remains
outstanding immediately after the occurrence of such redemption. Upon a Change
of Control Triggering Event (as defined in the Indenture under which the 9%
Notes are issued), the Company will be required to make an offer to purchase all
19
<PAGE>
outstanding 9% Notes at 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase.
The Indenture under which the 9% Notes are issued contains covenants that
restrict, among other things, (i) the ability of the Company and its
subsidiaries to incur additional indebtedness, (ii) pay dividends or make
certain other restricted payments, (iii) merge or consolidate with any other
person, and (iv) other various covenants which are customary for transactions of
this type.
Fisher expects that cash flows from operations, together with cash and cash
equivalents on hand and funds available under existing credit facilities, will
be sufficient to meet ongoing operating and capital expenditure requirements.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 21, 1998 and in connection with the Merger, the Company issued
and sold pursuant to a private placement exempt from registration under the
Securities Act of 1933, warrants (the "Warrants") to purchase up to 2,583,315
shares of Common Stock to (i) Thomas H. Lee Equity Fund III, L.P., certain
individuals associated with THL, THL-CCI Limited Partnership, THL Foreign
Fund III, L.P., and THL FSI Equity Investors, L.P., (ii) DLJ Merchant Banking
Partners II, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified
Partners,L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A,
L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ
Millennium Partners-A, L.P., UK Investment Plan 1997 Partners, DLJ EAB
Partners, L.P., DLJ ESC II, L.P. and DLJ First ESC, L.P., (iii) Chase Equity
Associates, L.P. and (iv) Merrill Lynch KECALP L.P. 1997, KECALP Inc., and ML
IBK Positions, Inc. The Warrants have an exercise price of $9.65 per share
and are exercisable at any time prior to the expiration of the warrants 10
years from the date of grant. No underwriter discounts or commissions were
involved in the issuance and sale of the Warrants.
On January 21, 1998 and in connection with the Merger, the Company issued
and sold Pursuant to an offering under Regulation S promulgated under the
Securities Act of 1933, $400 million principal amount of 9% senior
subordinated notes due February 1, 2008 (the "Notes"). Interest is payable on
the Notes semi-annually on August 1 and February 1 of each year commencing
August 1, 1998. The Notes are unsecured senior subordinated obligations of
the Company, subordinated in right of payment to all existing and future
senior indebtedness of the Company, including the Company's credit facility.
The discount to the initial purchasers of the Notes was 3 percent.
On or after five years from the date of issue, the Company may redeem the
Notes in whole or in part pursuant to the terms thereof. At any time on or
before three years from the date of issue, the Company may redeem up to 40%
of the original aggregate principal amount of the Notes at an initial
redemption price of 109% of the principal amount thereof, provided that at
least 60% of Notes remain outstanding immediately after the occurrence of
such redemption. Upon a Change of Control (as defined in the Indenture
pursuant to which the Notes were issued (the "Indenture")), the Company will
be required to make an offer to purchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid interest ("Change of Control
Offer").
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Indenture restricts, among other things, the ability of the Company
and its subsidiaries to incur additional indebtedness, pay dividends or make
certain other restricted payments, incur liens, engage in any sale and
leaseback transaction, sell stock of subsidiaries, apply net proceeds from
certain asset sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of
the assets of the Company or enter into certain transactions with affiliates.
In connection with the purchase and sale of the Notes, the Company entered
into a Registration Rights Agreement dated as of January 21, 1998 pursuant to
which the Company agreed to exchange the Notes for a like principal amount of
new notes (the "New Notes") which have been registered under the Securities
Act, which exchange was consummated on May 8, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
(a) A special meeting of stockholders of the Company was held on
January 16, 1998 to consider and vote on the merger of FSI
with and into Fisher.
(b) The results of the voting on the proposal considered at the
special meeting of stockholders are as follows:
1. Approval and adoption of the Merger Agreement.
<TABLE>
<CAPTION>
Abstaining
Votes For Votes Against From Vote
--------- ------------- ----------
<S> <C> <C>
12,426,719 21,409 12,633
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
21
<PAGE>
(b) Reports on Form 8-K:
The Company filed the following Current Reports on Form 8-K during
the period covered by this report:
1. Current Report on Form 8-K dated January 21, 1998 reporting Item
1 - Changes in Control of Registrant, filed with the
Securities and Exchange Commission on February 5, 1998.
22
<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.
FISHER SCIENTIFIC INTERNATIONAL INC.
Date: May 14, 1998 /S/ PAUL M. MEISTER
----------------- -----------------------------
PAUL M. MEISTER
Vice Chairman of the Board,
Executive Vice President -
Chief Financial Officer
23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FISHER SCIENTIFIC INTERNATIONAL INC.
EXHIBITS
TO
FORM 10-Q
for the quarter ended March 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ------------------------------- ----------
27 Financial Data Schedule 26
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1998 AND THE INCOME STATEMENT FOR THE THREE MONTHS ENDED
MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 142
<ALLOWANCES> 0
<INVENTORY> 218
<CURRENT-ASSETS> 463
<PP&E> 228
<DEPRECIATION> 0
<TOTAL-ASSETS> 1095
<CURRENT-LIABILITIES> 381
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (378)
<TOTAL-LIABILITY-AND-EQUITY> 1095
<SALES> 562
<TOTAL-REVENUES> 562
<CGS> 408
<TOTAL-COSTS> 408
<OTHER-EXPENSES> 128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (68)
<INCOME-TAX> (26)
<INCOME-CONTINUING> (42)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
