Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file number 0-27078
HENRY SCHEIN, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: [X] NO: [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 21, 1997 was
approximately $369,341,068.
As of March 21, 1997, 23,324,085 shares of registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 28, 1996) are incorporated by reference in Part III hereof.
================================================================================
TABLE OF CONTENTS
Page Number
-----------
PART I
ITEM 1. Business 1
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 15
ITEM 6. Selected Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
ITEM 8. Financial Statements and Supplementary Data 26
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 57
PART III
ITEM 10. Directors and Executive Officers of the Registrant 57
ITEM 11. Executive Compensation 57
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 57
ITEM 13. Certain Relationships and Related Transactions 57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58
Financial Statement Schedules 60
Exhibit Index 73
PART I
ITEM 1. Business
Recent Developments
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million. Additionally, on March 7, 1997, the Company entered
into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
Micro Bio-Medics, Inc. (Nasdaq:MBMI) will merge into a wholly-owned subsidiary
of the Company. As a result of the transaction, which has been approved by the
Boards of Directors of MBMI and the Company, outstanding shares of MBMI's common
stock will be exchanged at a fixed rate of 0.62 of a share of the Company's
Common Stock for each outstanding 1.0 share of MBMI. Each of the members of
MBMI's Board of Directors has granted to the Company a proxy to vote their
shares of MBMI common stock in favor of the Merger Agreement and an option,
exercisable under certain circumstances, to acquire their shares for the
consideration that they would have received under the Merger Agreement in
respect of those shares.
MBMI distributes medical supplies to physicians and hospitals in the New
York metropolitan area, as well as to healthcare professionals in sports
medicine, emergency medicine, school health, industrial safety, government and
laboratory markets nationwide. MBMI had net sales of approximately $150.0
million and earnings of approximately $1.7 million for its fiscal year ended
November 30, 1996. Upon completion of the acquisition, the Company believes that
it will become North America's largest distributor of healthcare products to
office-based healthcare practitioners and a leading provider of healthcare
products and services to the U.S. physician market.
The completion of the transaction is subject to the satisfaction of
customary closing conditions, including, among others, MBMI shareholder
approval, and Hart-Scott-Rodino waiting periods. The transaction is expected to
be completed by mid-1997 although no assurances can be given in this regard. For
a more complete description of the terms of the Merger Agreement and other
related agreements entered into in connection with the Merger Agreement,
reference is made to the Exhibits to this Form 10-K. The Company intends to file
a Registration Statement on Form S-4 with the Securities and Exchange Commission
with respect to the securities to be issued in connection with the Merger
Agreement.
General
The Company is the largest direct marketer of healthcare products and
services to office-based healthcare practitioners in the combined North American
and European markets. The Company has operations in the United States, Canada,
the United Kingdom, the Netherlands, Belgium, Germany, France, the Republic of
Ireland and Spain. The Company sells products and services to over 230,000
customers, primarily dental practices and dental laboratories, as well as
physician practices, veterinary clinics and institutions. In 1996, the Company
sold products to over 65% of the estimated 100,000 dental practices in the
United States. The Company believes that there is strong awareness of the "Henry
Schein" name among
office-based healthcare practitioners due to its more than 60 years of
experience in distributing healthcare products. Through its comprehensive
catalogs and other direct sales and marketing programs, the Company offers its
customers a broad product selection of both branded and private brand products
which include approximately 50,000 stock keeping units ("SKUs") in North
America and approximately 40,000 SKUs in Europe at published prices that the
Company believes are below those of many of its competitors. The Company also
offers various value-added products and services, such as practice management
software. As of December 28, 1996, the Company had sold over 18,000 dental
practice management software systems, more than any of its competitors. On
February 28, 1997, the Company acquired all of the outstanding common stock of
Dentrix Dental Systems, Inc., a leading provider of clinically-based dental
practice management systems, with 1996 net sales of approximately $10.3 million
and a 3,500 installed user base.
During 1996, the Company distributed over 9.0 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 500,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 450 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with over 300 field sales
consultants. The Company utilizes database segmentation techniques to more
effectively market its products and services to customers. In recent years, the
Company has continued to expand its management information systems and has
established strategically located distribution centers in the United States and
Europe to enable it to better serve its customers and increase its operating
efficiency. The Company believes that these investments, coupled with its broad
product offerings, enable the Company to provide its customers with a single
source of supply for substantially all their healthcare product needs and
provide them with convenient ordering and rapid, accurate and complete order
fulfillment. The Company estimates that approximately 99% of all orders in the
United States and Canada received before 7:00 p.m. and 4:00 p.m., respectively,
are shipped on the same day the order is received and approximately 90% of
orders are received by the customer within two days of placing the order. In
addition, the Company estimates that approximately 99% of all items ordered in
the United States and Canada are shipped without back ordering.
Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office-based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into joint ventures with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channelled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. The Company has
entered into or completed seventeen acquisitions during the year ended December
28, 1996. The businesses acquired included 10 dental and three medical
companies, a veterinary supply distributor and three international dental
companies, with aggregate net sales in their last fiscal year ends of
approximately $104.0 million, all of which were accounted for as purchase
transactions. Of these, fifteen were for majority ownership (100% in nine of the
transactions). In 1995, the Company acquired the distribution business of The
Veratex Corporation, a national direct marketer of dental, medical and
veterinary products, and Schein Dental Equipment Corp., a distributor and
manufacturer of large dental equipment. The Company also completed the majority
acquisition of 11 other companies and a 50% acquisition of one other company
during 1995.
2
Corporate Structure Background
The Company was formed on December 23, 1992 as a wholly-owned subsidiary
of Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the
business in which the Company is now engaged and, in addition, owned 100% of the
outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a
company engaged in the manufacture and distribution of multi-source
pharmaceutical products. In December 1992, Holdings separated the Company's
business from Pharmaceutical by transferring to the Company all of the assets
(including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and
distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of
the healthcare distribution business now conducted by the Company. The Company
did not assume any other liabilities of Holdings, including the liabilities
associated with Pharmaceutical's business. In February 1994, the Company,
Holdings and their stockholders entered into a number of reorganization
agreements, and in September 1994, pursuant to such agreements, all of the
Company's common stock, par value $.01 per share ("Common Stock"), held by
Holdings was distributed to certain of the current stockholders of the Company
(the "Reorganization").
On November 8, 1995, the Company completed an initial public offering of
its Common Stock, and on June 21, 1996, the Company completed a follow-on
offering of its Common Stock. Proceeds from these offerings to the Company,
after expenses, were approximately $72.5 million and $124.1 million,
respectively. The proceeds enabled the Company to pay off certain indebtedness,
with the remaining proceeds available for general corporate purposes, including
subsequent acquisitions.
Customers
The Company serves over 230,000 customers worldwide in the dental, medical
and veterinary markets. The Company's dental customers include office-based
dental practices, dental laboratories, universities, institutions, governmental
agencies and large group and corporate accounts; medical customers include
office-based physician practices, podiatrists, renal dialysis centers, surgery
centers, institutions and governmental agencies; and the Company's veterinary
products are sold primarily to office-based veterinarians serving primarily
small animals.
The Company believes that its customers generally order from two or more
suppliers for their healthcare product needs, and often use one supplier as
their primary resource. The Company believes that its customers generally have
larger order sizes and order more frequently from their primary suppliers. The
Company estimates that it serves as a primary supplier to less than 10% of its
total customer base, and believes it has an opportunity to increase sales by
increasing its level of business with those customers for which it serves as a
secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, renal dialysis centers and surgery centers.
More recently, as cost-containment pressures have resulted in increased demand
for low-cost products and value-added services, the Company has targeted
specific groups of practices under common ownership, institutions, and
professional groups. For example, the Company has an exclusive direct marketing
agreement with an American Medical Association ("AMA") sponsored service and a
veterinarian sponsored service, pursuant to which member practitioners have
access to the services' lower priced products. In 1996, the AMA-sponsored
service and the veterinarian-sponsored purchasing service accounted for net
sales of over $27.4 million. These services, government institutions and
agencies, and other large or collective purchasers, require low-cost pricing and
detailed product and usage information and reporting. The Company believes it is
well situated to meet the needs of these customers, given its broad, low-cost
3
product offerings and its management information systems. No single customer
accounted for more than 4.7% of net sales in 1996.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through frequent direct marketing contact,
emphasize the Company's broad product lines, competitive prices and ease of
order placement. In addition, the Company's marketing efforts involve personal
interaction with field sales consultants in certain locations. The key elements
of the Company's program in the United States are:
o Direct Marketing. During 1996, the Company distributed over 9.0
million pieces of direct marketing material, including catalogs, flyers,
order stuffers and other promotional materials to approximately 500,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 300
pages and includes approximately 20,000 SKUs. The number of catalogs and
other material received by each customer depends upon the market they
serve as well as their purchasing history. The Company's catalogs include
detailed descriptions and specifications of both branded and private brand
products and are utilized by healthcare practitioners as a reference
source. By evaluating its customers' purchasing patterns, area of
specialty, past product selections and other criteria, the Company
identifies customers who may respond better to specific promotions or
products. To facilitate its direct marketing activities, the Company
maintains an in-house advertising department which performs many creative
services, which the Company believes streamlines the production process,
provides greater flexibility and creativity in catalog production, and
results in cost savings.
o Telesales. The Company supports its direct marketing with over 450
inbound and outbound telesales representatives who facilitate order
processing and generate new sales through direct and frequent contact with
customers. Inbound telesales representatives are responsible for assisting
customers in purchasing decisions as well as answering product pricing and
availability questions. In addition to assisting customers, inbound
telesales representatives also market complementary or promotional
products. The Company's telesales representatives utilize on-line computer
terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying
history.
The Company utilizes outbound telesales representatives and programs
to better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts. The
Company's U.S. dental outbound telesales representatives accounted for
approximately $101.6 million of the Company's net sales in 1996. The
Company has approximately 100 medical and veterinary telesales
representatives who make outbound calls in addition to handling inbound
telesales. Outbound telesales representatives strive to manage long-term
relationships with these customers through frequent and/or regularly
scheduled phone contact and personalized service.
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic training
sessions and special sales programs and receive incentives, including
monthly commissions.
4
o Field Sales Consultants. In 1992, the Company initiated its field
sales consultant program and now has over 300 field sales consultants
covering certain of its major North American and European markets. The
field sales consultants concentrate on attracting new customers and
increasing sales to customers who do not currently order a high percentage
of their total product needs from the Company. This strategy is designed
to complement the Company's direct marketing and telesales strategies and
to enable the Company to better market, service and support the sale of
more sophisticated products and equipment. Once a field sales consultant
has established a relationship with a customer, the representative
encourages the customer to use the Company's automated ordering process or
its telesales representatives for its day-to-day needs. This simplifies
the ordering process for the customer and increases the effectiveness of
the field sales consultant.
Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
PROTONE(R) (the Company's 24-hour automated phone service) or its computerized
order entry system. The Company has developed an enhanced Windows(R)-based
version of its computerized order entry system, known as ArubA(R), which was
introduced at the end of 1995.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 90% of orders are received within two days of placing
the order. The Company continually monitors its customer service through
customer surveys, focus groups and daily statistical reports. The Company
maintains a liberal return policy to better assure customer satisfaction with
its products.
5
Products
The following chart sets forth the principal categories of products
offered by the Company and certain top selling types of products in each
category, with the percentage of 1996 net sales in parenthesis:
Dental Products (69.5%)
- ---------------------------------------------------------------------------------------------------------------------------
Consumable Dental Products Dental Laboratory
and Small Equipment (57.5%) Products (5.1%) Large Dental Equipment (6.9%)
- ---------------------------------------------------------------------------------------------------------------------------
X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs, Units and Lights; X-Rays;
Handpieces; Preventatives; Impression Acrylics; Articulators; and and Equipment Repair
Materials; Composites; and Anesthetics Abrasives
Value-Added Products
Medical Products (23.4%) Veterinary Products (4.4%) and Services (2.7%)
- ---------------------------------------------------------------------------------------------------------------------------
Branded and Generic Pharmaceuticals; Branded and Generic Software and Related Products;
Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Products; Financial Products; and other value-
Infection Control; and Vitamins and Dental Products added products
The percentage of 1995 and 1994 net sales was as follows: consumable
dental products and small equipment, 59.3% and 61.8%, respectively; dental
laboratory products, 5.8% and 6.6%, respectively; large dental equipment, 2.2%
and 3.6%, respectively; medical products, 23.5% and 20.1%, respectively;
veterinary products, 4.9% and 5.7%, respectively; and value-added products and
services, 4.3% and 2.2%, respectively.
Consumable Supplies and Equipment
The Company offers approximately 50,000 SKUs to its customers in North
America, of which approximately 40,000 SKUs are offered to its dental customers,
approximately 14,000 are offered to its medical customers and approximately
17,000 are offered to its veterinary customers. Over 16% of the Company's
products are offered to all three types of the Company's customers in North
America. The Company offers approximately 40,000 SKUs to its customers in
Europe. Approximately 4,000 of the Company's SKUs accounted for 80% of the
Company's sales in the United States in 1996. Approximately 15% of the Company's
net sales in 1996 were from sales of products offered under the Henry Schein
private brand (i.e., products manufactured by various third parties and HS
Pharmaceutical for distribution by the Company under the Henry Schein(R) brand).
The Company believes that the Henry Schein private brand line of over 5,000 SKUs
offered in the United States and Canada is one of the most extensive in the
industry. The Company also distributes certain generic pharmaceuticals
manufactured by HS Pharmaceutical, a 50%- owned company, and manufactures and
distributes certain large dental equipment through Schein Dental Equipment Corp.
("Schein Dental Equipment"), a distributor and manufacturer of large dental
equipment which was owned 73.7% by Marvin H. Schein, a director and principal
stockholder of the Company prior to its acquisition by the Company. The Company
updates its product offerings regularly to meet its customers' changing needs.
6
Value-Added Products and Services
In an effort to promote customer loyalty, the Company offers certain
value-added products and services. These products and services include the
following:
o Practice Management Software. The Company sells practice
management software systems to its dental and veterinary customers. The
Company has sold over 18,000 of its Easy Dental(R) Plus software systems
as of the end of fiscal 1996, and over 2,400 of its AVImark(R) veterinary
software systems. In December 1995, the Company released its new
Windows(R) version of Easy Dental(R) Plus and has since sold or converted
over 4,800 such systems by the end of 1996. The Company's practice
management software provides practitioners with patient treatment history,
billing and accounts receivable analysis and management, an appointment
calendar, electronic claims processing and word processing programs, and
the Company provides technical support and conversion services from other
software. In addition, the Easy Dental(R) Plus software allows the
customer to connect with the Company's order entry management systems. On
February 28, 1997, the Company acquired all of the outstanding common
stock of Dentrix Dental Systems, Inc., which had net sales for 1996 of
approximately $10.3 million and has an approximate 3,500 installed user
base. The Dentrix system is one of the most comprehensive clinically-based
dental practice management software package in the United States. The
Dentrix premium software product complements Easy Dental (R) Plus , the
Company's high-value practice management system. The Company believes the
combined software products offering enhances its ability to provide its
customers with the widest array of system solutions to help manage their
practices. With this acquisition, the Company now has an installed user
base of approximately 21,000.
o Financial Services. The Company has begun to offer its customers
assistance in managing their practices by providing access to a number of
financial services and products at rates which the Company believes are
lower than what they would be able to secure independently. The patient
financing program provides the Company's customers a method for reducing
receivables and improving cash flow by providing patients access to
financing. The Company facilitates the processing of credit applications,
payments to its customers and electronic bankcard processing and offers
electronic insurance claims submission services for faster, cheaper
processing of patient reimbursements, all through a third-party provider
for a transaction fee. The Company does not assume any financial
obligation to its customers or their patients in these programs.
o Equipment Repair and Installation. The Company offers a repair
service, ProRepair(R), which provides one to two-day turnaround for
handpieces and certain small equipment. The Company also provides
in-office installation and repair services for large equipment in certain
markets in North America and Europe. In accordance with its plan to expand
its repair service business and sales of large dental equipment in
connection with its acquisition of Schein Dental Equipment, in 1996 the
Company opened 15 new equipment sales and service centers in North America
and four in Europe, with a total of 35 centers open at the end of 1996.
7
Information Systems
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. In the United States, the Company is in the
process of expanding and upgrading its order processing information system and,
during February 1997 completed the upgrading of its accounts receivable
information system. Additionally, worldwide, the Company is in the process of
installing an integrated information system for its large dental equipment sales
and service functions. Such a system will centralize the tracking of customers'
equipment orders as well as spare parts inventories and repair services.
Distribution
The Company distributes its products in the United States and Canada
primarily from its strategically located distribution centers in the Eastern,
Central, and Western United States. The Company maintains significant inventory
levels of certain products in order to satisfy customer demand for prompt
delivery and complete order fulfillment of their product needs. These inventory
levels are managed on a daily basis with the aid of the Company's sophisticated
purchasing and stock status management information systems. The Company's
European distribution centers include locations in the United Kingdom, France,
The Netherlands, Germany and Spain. Once a customer's order is entered, it is
electronically transmitted to the distribution center nearest the customer's
location and a packing slip for the entire order is printed for order
fulfillment. The Company's automated freight manifesting and laser bar code
scanning facilitates the speed of the order fulfillment. The Company currently
ships almost all of its orders in the United States by United Parcel Service. In
certain areas of the United States, the Company delivers its orders via contract
carriers.
Purchasing
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 1,200
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
distribution centers. In 1996, the Company's top 10 vendors and the Company's
single largest vendor, accounted for approximately 28.2% and 9.7%, respectively,
of the Company's aggregate purchases.
8
Competition
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the products the Company sells are available to
the Company's customers from a number of suppliers. In addition, competitors of
the Company could obtain exclusive rights from manufacturers to market
particular products. Manufacturers could also seek to sell directly to
end-users, and thereby eliminate the role of distributors, such as the Company.
Significant price reductions by the Company's competitors could result in a
similar reduction in the Company's prices as a consequence of its policy of
matching its competitors' lowest advertised prices. Any of these competitive
pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as
well as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products, the
Company's two principal national competitors are Patterson Dental Co. and
Sullivan Dental Products, Inc. In addition, the Company competes against a large
number of other distributors that operate on a national, regional and local
level. The Company's largest competitors in the sale of medical products are
General Medical Corp. and Physician's Sales and Service, Inc., which are
national distributors. In the veterinary product market, the Company's two
principal national competitors include The Butler Company and Burns Veterinary
Supply. The Company also competes against a large number of small local and
regional veterinary distributors, as well as a number of manufacturers that sell
direct to veterinarians whose practices are directed primarily to small animals.
With regard to the Company's practice management software, the Company competes
against a fragmented group of competitors, none of which currently have a
significant share of the market. The Company believes that it competes in Canada
substantially on the same basis as in the United States.
The Company also faces intense competition in its international markets,
where the Company competes on the basis of price and customer service against a
large number of dental product distributors and manufacturers in the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland and
Spain. The Company has several large competitors in these markets, including
ORBIS and the GACD Group.
Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned company, HS
Pharmaceutical, which distributes and manufactures generic pharmaceuticals) were
to receive an adverse report following an inspection by the Food and Drug
Administration (the "FDA") or the Drug Enforcement Administration, or if a
competitor were to receive prior approval of new products from the FDA. A
violation of a law by HS Pharmaceutical could cause its operations to be
suspended. A suspension could have an adverse effect on the Company's equity in
earnings of affiliates and could cause the Company to seek alternative sources
of products manufactured by HS Pharmaceutical, possibly at higher prices than
currently paid by the Company.
9
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well as certain other trademarks. Pursuant to certain agreements executed in
connection with the reorganization of the Company, both the Company and Schein
Pharmaceutical, Inc. are entitled to use the "Schein" name in connection with
their respective businesses, but Schein Pharmaceutical, Inc. is not entitled to
use the name "Henry Schein." The Company intends to protect its trademarks to
the fullest extent practicable.
Employees
As of December 28, 1996, the Company had more than 3,200 full-time
employees in North America and Europe, including approximately 450 telesales
representatives, 300 field sales consultants, 1,000 warehouse employees, 120
computer programmers and technicians, 350 management employees and 980 office,
clerical and administrative employees. None of the Company's employees are
represented by a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
Seasonality
The Company's business has been subject to seasonal and other quarterly
influences. Net sales and operating profits have been generally higher in the
fourth quarter due to the timing of sales of software, year-end promotions and
purchasing patterns of office-based healthcare practitioners and have been
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, the release of software enhancements, timing of purchases, special
promotional campaigns, fluctuations in exchange rates associated with
international operations and adverse weather conditions.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 2, 3, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; and the results of legal
proceedings. The matters referred to in forward looking statements could be
affected by the risks and uncertainties involved in the Company's business.
These risks and uncertainties include, but are not limited to, the effect of
economic and market conditions, the impact of the consolidation of healthcare
practitioners, the impact of healthcare reform, opportunities for acquisitions
and the Company's ability to effectively integrate acquired companies, the
acceptance and quality of software products, acceptance and ability to manage
operations in foreign markets, possible disruptions in the Company's computer
systems or telephone systems, possible increases in shipping rates or
interruptions in shipping service, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and
regulation, as well as certain other risks described above in this Item under
"Competition" and "Government Regulation," and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K.
10
The Company's principal executive offices are located at 135 Duryea Road,
Melville, New York 11747, and its telephone number is 516-843-5500. As used in
this Report, the term the "Company" refers to Henry Schein, Inc., a Delaware
corporation, and its subsidiaries, 50%-owned companies and predecessor, unless
otherwise stated.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Position
- ---------------------- --- -----------------------------------------------------
Corporate
Stanley M. Bergman.... 47 Chairman, Chief Executive Officer and President
James P. Breslawski... 43 Executive Vice President
Gerald A. Benjamin.... 44 Senior Vice President-- Administration and Customer
Satisfaction
Leonard A. David...... 48 Vice President--Human Resources and Special
Counsel
Diane Forrest......... 50 Senior Vice President--Information Services
and Chief Information Officer
Stephen R. LaHood..... 49 Senior Vice President--Distribution Services
Mark E. Mlotek........ 41 Vice President, General Counsel and Secretary
Steven Paladino....... 39 Senior Vice President and Chief Financial
Officer
Business Units
Jeffrey P. Gasparini.. 41 Senior Vice President--Medical Group
Ian G. Rosmarin....... 46 President--Professional Services Group
Larry M. Gibson....... 50 President--Practice Management Technologies Division
James W. Stahly....... 48 President--North American Dental Group
Michael Zack.......... 44 Senior Vice President--International Group
Stanley M. Bergman has been Chairman, Chief Executive Officer, and
President since 1989 and a director of the Company since 1982. Mr. Bergman held
the position of Executive Vice President of the Company and Schein
Pharmaceutical, Inc. from 1985 to 1989 and Vice President of Finance and
Administration of the Company from 1980 to 1985. Mr. Bergman is a certified
public accountant.
James P. Breslawski has been Executive Vice President of the Company since
1990, with primary responsibility for the North American Dental Group, the
Veterinary Group and corporate creative services, and a director of the Company
since 1990. Between 1980 and 1990, Mr. Breslawski held various positions with
the Company, including Chief Financial Officer, Vice President of Finance and
Administration and Controller. Mr. Breslawski is a certified public accountant.
11
Gerald A. Benjamin has been Senior Vice President of Administration and
Customer Satisfaction since 1993, including responsibility for the worldwide
human resource function, and has been a director of the Company since September
1994. Prior to holding his current position, Mr. Benjamin was Vice President of
Distribution Operations of the Company from 1990 to 1992 and Director of
Materials Management of the Company from 1988 to 1990. Before joining the
Company, Mr. Benjamin was employed for 13 years in various management positions
at Estee Lauder, where his last position was Director of Materials Planning and
Control.
Leonard A. David has been Vice President of Human Resources and Special
Counsel since January 1995. Mr. David held the office of Vice President, General
Counsel and Secretary from 1990 to 1995 and practiced corporate and business law
for eight years prior to joining the Company. Mr. David has been a director of
the Company since September 1994.
Diane Forrest joined the Company in 1994 as Senior Vice President of
Information Services and Chief Information Officer. Prior to joining the
Company, Ms. Forrest was employed by Tambrands Inc. as Vice President of
Information Services from 1987 to 1994, KPMG Peat Marwick as Senior Manager in
the management consulting division from 1982 to 1987 and Nabisco Brands, Inc. as
Corporate Manager of Manufacturing Systems from 1978 to 1982.
Stephen R. LaHood joined the Company in 1992 as Senior Vice President of
Distribution Services and is also responsible for purchasing. Prior to joining
the Company, Mr. LaHood was employed by Lex/Schweber Electronics Inc. as Vice
President of Operations and Quality from 1988 to 1991. Mr. LaHood also spent ten
years at Johnson & Johnson Products, Inc., where his last position was Manager
of Corporate Business Planning and thereafter, seven years at Schering-Plough
Corporation where his last position was Senior Director of Manufacturing
Operations.
Mark E. Mlotek joined the Company in December 1994 as Vice President,
General Counsel and Secretary and became a director of the Company in September
1995. Prior to joining the Company, Mr. Mlotek was a partner in the law firm of
Proskauer Rose Goetz & Mendelsohn LLP, counsel to the Company, specializing in
mergers and acquisitions, corporate reorganizations and tax law from 1989 to
1994.
Steven Paladino has been Senior Vice President and Chief Financial Officer
of the Company since 1993 and has been a director of the Company since 1992.
From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from
1987 to 1990 served as Corporate Controller of the Company. Before joining the
Company, Mr. Paladino was employed as a public accountant for seven years and
most recently was with the international accounting firm of BDO Seidman, LLP.
Mr. Paladino is a certified public accountant.
Jeffrey P. Gasparini joined the Company in February 1996 as Senior Vice
President of the Medical Group. Prior to joining the Company, Mr. Gasparini was
employed by General Medical Corp. from 1982 to 1996, where his last position was
Corporate Vice President, Operations and member of the Executive Board.
Ian G. Rosmarin joined the Company in 1992 as General Manager of the
Canadian Division and in 1993 was named to his current position of President of
the Professional Service Group of the Company. Prior to joining the Company, Mr.
Rosmarin was President of Rosmarin Management and Investment Corporation for 13
years. Mr. Rosmarin is a Canadian Chartered Accountant.
12
Larry M. Gibson joined the Company as President of the Practice Management
Technologies Division on February 24, 1997 concurrent with the acquisition of
Dentrix Dental Systems, Inc. Before joining the Company, Mr. Gibson was founder,
Chairman and CEO of Dentrix, started in 1980. Prior to his employment with
Dentrix, Mr. Gibson was employed by Weidner Communication Systems from 1978.
James W. Stahly joined the Company in 1994 as President of the North
American Dental Group of the Company. Before joining the Company, Mr. Stahly was
employed by Fox Meyer Corporation for seven years where his last position was
Senior Vice President -- Hospital and Alternate Care Sales. Prior to his
employment with Fox Meyer, Mr. Stahly spent 16 years at McKesson Drug Company.
Michael Zack has been responsible for the International Group of the
Company since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to 1989
and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to
1984.
ITEM 2. Properties
The Company owns or leases the following properties:
Approximate
Own or Square Lease
Property Location Lease Footage Expiration Date
-------- -------- ------- ----------- ---------------
Corporate
Headquarters......... Eastern United States Lease 100,000 December 2005
Distribution Center.. Eastern United States Own 173,000 N/A
Distribution Center.. Central United States Lease 225,000 December 1999
Distribution Center.. Western United States Lease 115,500 June 2002
Distribution Center.. United Kingdom Lease 85,000 August 2005
Manufacturing
Facilities........... Western United States Own 75,000 N/A
The Company also leases warehouse, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain and the United Kingdom. Two 50%-owned companies
also lease space in the United States and Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business.
The Company has additional operating capacity at its listed facilities.
13
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 28,
1996, the Company was named a defendant in 12 such cases. The Company believes
it is adequately covered by insurance in all these cases, subject to certain
self retention limits, and that none of the currently pending cases should have
a material adverse effect on the Company.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is covered by indemnification from the manufacturer of the product.
There can be no assurance that the coverage maintained by the Company is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost, or that indemnification agreements will provide
adequate protection for the Company.
As part of the Company's effort to expand its field sales force, the
Company frequently hires field sales consultants with experience in the
office-based healthcare practitioner industry. The Company's hiring practices
have from time to time resulted in litigation instituted by former employers of
the field sales consultants hired by the Company. On October 19, 1995, an action
was filed against the Company by H. Meer Dental Supply Co., Inc. ("Meer") in the
United States District Court for the Eastern District of Michigan, Southern
Division. The complaint alleged unfair competition, predatory pricing or
anticompetitive conduct and, through the hiring of Meer sales representatives,
improper interference with Meer's relationships with its employees and customers
and misappropriation of trade secrets. The lawsuit sought unspecified damages
and an injunction against the Company. In November 1996, the Company entered
into a settlement of the action brought by Meer, which contains a limited
provision for mutual non-solicitation but permits employment of the other's
employees consistent with the Company's need to employ experienced sales and
service representatives. The settlement did not involve the payment of any
money. There are two additional litigations that similarly allege improper
interference with employee and customer relationships. The plaintiffs in these
actions seek unspecified damages, and one of the plaintiffs also seeks an
injunction against the Company. The Company intends to vigorously defend these
litigations. The Company believes that neither of these actions will have a
material adverse effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The following table sets forth for the periods indicated the high and low
reported sales prices of the Common Stock on the NASDAQ National Market System
from November 3, 1995, the date of the commencement of the Company's Initial
Public Offering (the "IPO"), through March 21, 1997.
High Low
---- ---
Fiscal 1995:
4th Quarter (from November 3, 1995) $29-1/2 $20-3/8
Fiscal 1996:
1st Quarter $30-3/4 $23-1/2
2nd Quarter $43-1/2 $27-1/2
3rd Quarter $40-1/4 $31-1/4
4th Quarter $41-1/4 $32-3/4
Fiscal 1997:
1st Quarter (through March 21, 1997) $27 $25-1/2
The Company's Common Stock is quoted through the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "HSIC." On March 21, 1997,
there were approximately 136 holders of record of the Common Stock. On March 21,
1997, the last reported sales price was $26-5/8.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
Issuance of Unregistered Securities
On July 10, 1996 and November 1, 1996, the Company completed the 100%
acquisition of two companies and issued, in partial consideration for one
acquisition and in full consideration for another acquisition, 37,197 and
117,986 shares, respectively, of its Common Stock, with an aggregate value of
approximately $5.4 million. These transactions were completed without
registration under the Securities Act in reliance upon exemptions provided by
Section 4(2) of the Securities Act.
15
ITEM 6. Selected Financial Data
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 28, 1996 set forth below has been derived from the
audited consolidated financial statements of the Company. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The Selected Operating Data, Net Sales By Market Data and Balance Sheet
Data presented below have not been audited.
Years Ended
----------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
Statement of Operations Data:
Net sales ................... $ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
Cost of sales ............... 584,738 425,625 343,922 294,693 257,226
--------- --------- --------- --------- ---------
Gross profit ................ 245,224 190,584 142,688 121,017 105,699
Selling, general and
administrative expenses ... 215,561 170,823 128,560 109,574 96,287
Special management
compensation(1) ........... -- 20,797 21,596 617 5,283
Special contingent
consideration(2) .......... -- -- -- 3,216 --
Special professional
fees(3) ................... -- -- 2,007 2,224 2,227
--------- --------- --------- --------- ---------
Operating income (loss) ..... 29,663 (1,036) (9,475) 5,386 1,902
Interest income ............. 2,456 475 251 856 1,210
Interest expense ............ (3,421) (5,833) (3,756) (3,216) (2,953)
Other income (expense) - net 636 276 541 (634) 255
--------- --------- --------- --------- ---------
Income (loss) before taxes
on income (recovery),
minority interest and
equity in earnings of
affiliates ................ 29,334 (6,118) (12,439) 2,392 414
Taxes on income (recovery) .. 11,343 5,126 (1,630) 1,351 622
Minority interest in net
(loss) of subsidiaries
income ................... 246 509 561 318 (249)
Equity in earnings of
affiliates ................ 1,595 1,537 494 1,296 514
--------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change ......... 19,340 (10,216) (10,876) 2,019 555
Cumulative effect of
accounting change ......... -- -- -- 1,891 --
--------- --------- --------- --------- ---------
Net income (loss) ........... $ 19,340 ($ 10,216) ($ 10,876) $ 3,910 $ 555
========= ========= ========= ========= =========
Net income per common share . $ .93
Average shares outstanding .. 20,724
16
Years Ended
------------------------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
Pro Forma Income Data (4):
Pro forma operating income .................... $ 19,761 $ 14,128
Pro forma net income .......................... $ 9,407 $ 6,978
Pro forma net income per
common share ............................... $. 70 $. 58
Pro forma average shares
outstanding ................................ 13,447 12,127
Selected Operating Data:
Number of orders shipped ...................... 3,078,000 2,629,000 2,274,000 2,044,000 1,824,000
Average order size ............................ $ 270 $ 234 $ 214 $ 203 $ 199
Net Sales by Market Data (5):
Dental(6) ..................................... $ 435,643 $ 327,697 $ 274,337 $ 253,223 $ 234,655
Medical ....................................... 191,186 125,565 89,789 71,021 51,923
Veterinary .................................... 35,329 29,330 27,872 24,312 19,481
Technology(7) ................................. 20,805 25,914 10,685 7,738 5,825
International(8) .............................. 146,999 107,703 83,927 59,416 51,041
---------- ---------- ---------- ---------- ----------
$ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
========== ========== ========== ========== ==========
Balance Sheet Data
(at period end):
Working capital ............................... $ 204,755 $ 103,899 $ 76,392 $ 74,125 $ 28,276
Total assets .................................. 463,936 296,867 190,020 160,793 137,957
Total debt .................................... 39,746 43,049 61,138 56,567 41,373
Redeemable stock (9) .......................... -- -- 14,745 -- --
Minority interest ............................. 5,289 4,547 1,823 1,051 411
Stockholders' equity .......................... 291,762 142,851 39,567 43,897 40,117
- ----------
(1) Includes: (a) for 1995, non-cash special management compensation charges
of $17.5 million arising from final mark-to-market adjustments (reflecting
an increase in estimated market value from 1994 to the initial public
offering price of $16.00 per share) for stock grants made to an executive
officer of the Company in 1992 and other stock issuances made to certain
other senior management of the Company (because of certain repurchase
features which expired with the initial public offering), an approximate
$2.8 million non-cash special management compensation charge (also based
on the initial public offering price of $16.00 per share) relating to
compensatory options granted in 1995, and a cash payment of $0.5 million
for additional income taxes resulting from such stock issuances; (b) for
1994, non-cash special management compensation arising from accelerated
amortization of deferred compensation arising from the 1992 stock grants
to an executive officer of the Company of $17.3 million, which included a
1994 mark-to-market adjustment (because of the repurchase features
referred to above) of $9.1 million, due to the resolution, with the
closing of the Reorganization, of certain contingencies surrounding the
issuance of the stock grants, non-cash special management compensation
charges of $1.6 million (net of prior accruals of approximately $1.9
million under an executive incentive plan) arising from stock issuances to
certain other senior management of the Company, valued at $3.5 million,
and cash payments for income taxes of approximately $2.4 million resulting
from these stock issuances and $0.3 million for additional income taxes
resulting from the 1992 stock grants; (c) for 1993, non-cash special
management compensation charges of $0.6 million in amortization of
deferred compensation arising from the 1992 stock grants; and (d) for
17
1992, cash payments of $5.3 million for income taxes resulting from stock
grants made to an executive officer of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Overview" in Item 7 herein.
(2) Includes $0.7 million paid in connection with an acquisition and $2.5
million resulting from the buyout of employees' rights to future income
contained in their employment agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7
herein.
(3) Includes special professional fees incurred by the Company in connection
with the Reorganization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 herein.
(4) Reflects the pro forma elimination of special charges incurred in 1995 and
1994 for special management compensation of $20.8 million and $21.6
million, respectively, and special professional fees incurred in 1994 of
$2.0 million, arising from the Reorganization, and the related tax effects
of $1.2 million and $5.8 million for 1995 and 1994, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 herein.
(5) Restated to conform with 1996 presentation.
(6) Dental consists of the Company's dental business in the United States and
Canada.
(7) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(8) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily Europe.
(9) Redeemable stock includes stock issued for compensation which was subject
to repurchase by the Company at fair market value in the event of
termination of employment of the holder of such shares, as well as shares
purchased by the trust for the Company's ESOP and allocable to the ESOP
participants. With the completion of the Company's initial public
offering, the stock issued for compensation and the ESOP Common Stock were
no longer subject to repurchase. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 herein.
18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's consolidated financial
condition and consolidated result of operations should be read in conjunction
with the Company's consolidated financial statements and notes thereto in Item 8
herein.
Overview
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements. The
Company's results of operations in recent years have also been impacted by the
Reorganization.
From 1992 through 1994, the Company was a party to a series of transactions
leading to the Reorganization that resulted in, among other things, the Company
being separated from Holdings and the distribution of shares of the Common Stock
of the Company to its then current stockholders. In December 1992, an executive
officer of the Company received certain stock grants in the Company and Schein
Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6 million,
respectively, and cash of approximately $5.3 million to pay income taxes on the
stock grants received. These stock grants were subject to the occurrence of
certain future events, including the fulfillment of the employment term by the
executive officer. Accordingly, these stock grants, totaling $8.8 million, were
treated as deferred compensation while the cash payments were charged to
earnings as special management compensation in the year ended December 26, 1992.
During 1993, the Company amortized the deferred compensation relating to stock
grants by the Company to the executive officer resulting in a charge to earnings
of $0.6 million. In 1994, the contingencies relating to the stock granted to the
executive officer were eliminated, such that these shares became fully vested.
Accordingly, deferred compensation of $8.8 million, less the 1993 amortization
of $0.6 million, plus a mark-to-market adjustment (because of certain repurchase
features) of approximately $9.1 million, along with a $0.3 million cash payment
for income taxes relating to the 1992 stock grants, was expensed in 1994 as
special management compensation.
In addition, in connection with the Reorganization, certain senior
management of the Company were issued shares of Common Stock of the Company in
1994 and 1995 to extinguish an obligation under a pre-existing long-term
incentive plan and to provide them with an ownership interest in the Company. In
connection with the issuance of the shares, a cash payment for income taxes
relating to such stock issuances of approximately $2.4 million was paid. This
cash bonus, plus $3.5 million, the fair value of the related stock issued, net
of amounts accrued under the long-term incentive plan of approximately $1.9
million, resulted in an additional special management compensation charge to the
Company of approximately $4.0 million in 1994. Charges to earnings for the year
ended 1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.
Additionally, the Company has granted certain employees options for shares
of the Company's Common Stock, which became exercisable upon the Company's
initial public offering on November 3, 1995, at which time substantially all
such options vested. Non-recurring special compensation charges for the options
19
issued to employees recorded in the fourth quarter of 1995 amounted to
approximately $2.8 million. In addition, the Company recorded an approximate
$1.1 million related tax benefit.
Special charges for special management compensation and special professional
fees incurred in connection with the Reorganization aggregated $20.8 million and
$23.6 million for 1995 and 1994, respectively.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales by market of the Company and the percentage change in such items for
the years ended 1996, 1995 and 1994.
Percentage Increase
Percentage of Net Sales (Decrease)
---------------------------------------------------------------------
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994 1995 to 1996 1994 to 1995
---------------------------------------------------------------------
Net Sales by Market (1):
Dental (2) 52.5% 53.2% 56.3% 32.9% 19.5%
Medical 23.0 20.3 18.5 52.3 39.8
Veterinary 4.3 4.8 5.7 20.5 5.2
Technology (3) 2.5 4.2 2.2 (19.7) 142.1
International (4) 17.7 17.5 17.3 36.5 28.4
----- ----- -----
100.0% 100.0% 100.0% 34.7 26.6
(1) Restated to conform to 1996 presentation.
(2) Dental consists of the Company's dental business in the United States and
Canada.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(4) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily in Europe.
1996 Compared to 1995
Net sales increased $213.8 million, or 34.7%, to $830.0 million in 1996
from $616.2 million in 1995. Of the $213.8 million increase, approximately
$107.9 million represented a 32.9% increase in the Company's dental business,
$65.6 million represented a 52.3% increase in its medical business, $39.3
million represented a 36.5% increase in its international business and $6.0
million represented a 20.5% increase in the Company's veterinary business,
offset by a $5.1 million, or 19.7% decrease in its technology business. The
dental net sales increase was primarily the result of the Company's continued
emphasis on its integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), expansion into the U.S. market for large dental equipment and
20
acquisitions. Of the approximately $65.6 million increase in medical net sales,
approximately $20.9 million, or 31.9%, represents incremental net sales to renal
dialysis centers, with the effects of acquisitions and increased outbound
telesales activity primarily accounting for the balance of the increase in
medical net sales. In the international market, the increase in net sales was
due to acquisitions, primarily in France, and increased account penetration in
Germany and the United Kingdom. Unfavorable exchange rate translation
adjustments resulted in a net sales decrease of approximately $4.4 million
dollars. Had net sales for the International market been translated at the same
exchange rates in effect during 1995, net sales would have increased by an
additional 4.1%. In the veterinary market, the increase in net sales was due to
the full year impact of new product lines introduced in the fourth quarter of
1995, increased account penetration and continued volume growth to customers of
a veterinary-sponsored purchasing service. As anticipated, net sales in the
Company's technology group was below last year's sales volume levels due to
unusually high sales volume in the fourth quarter of 1995 related to the
introductory launch, at that time, of the Company's Easy Dental (R) Plus Windows
(R) based product.
Gross profit increased by $54.6 million, or 28.7%, to $245.2 million in
1996, from $190.6 million in 1995, while gross profit margin decreased by 1.4%
to 29.5% from 30.9% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(R) Plus for
Windows (R) products were sold in 1996. Excluding gross profit margin for the
Company's technology group, which was 64.9% for 1996 as compared to 80.7% for
1995, gross profit margins were relatively unchanged at 28.6% for 1996 as
compared to 28.7% for 1995.
Selling, general and administrative expenses increased by $44.8 million, or
26.2%, to $215.6 million in 1996 from $170.8 million in 1995. Selling and
shipping expenses increased by $37.8 million, or 33.6%, to $150.3 million in
1996 from $112.5 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 18.1% in 1996 from 18.3% in 1995. The
decrease in selling and shipping expenses as a percentage of net sales was
primarily due to reductions in sales promotions offered by the Company's
technology group in conjunction with the introductory promotion of Easy
Dental(R) Plus for Windows(R) version which occurred during 1995. These
introductory promotional expenses represented 0.6% of net sales in 1995.
Excluding these expenses from 1995, selling and shipping expenses, as a
percentage of net sales, would have been 0.4% higher than last year. This
increase was due primarily to various promotional programs and incremental field
sales and marketing personnel. General and administrative expenses increased
$7.0 million, or 12.0%, to $65.3 million in 1996 from $58.3 million in 1995,
primarily as a result of acquisitions. As a percentage of net sales, general and
administrative expenses decreased 1.6% to 7.9% in 1996 from 9.5% in 1995 due
primarily to the relatively fixed nature of general and administrative expenses
when compared to the 34.7% increase in sales volume for the same period.
Net interest expenses decreased $4.4 million to $1.0 million in 1996 from
$5.4 million in 1995. This decrease primarily resulted from the use of the
proceeds of the Company's follow-on offering in June 1996 to reduce debt and an
increase in interest income arising from the temporary investment of proceeds in
excess of debt and imputed interest income arising from non-interest bearing
extended payment term sales, offset in part by an increase in average interest
rates.
For 1996, the Company's provision for taxes was $11.3 million, while the
pre-tax income was $29.3 million. The difference between the Company's effective
tax rate of 38.6% and the Federal statutory rate relates primarily to state
income taxes offset by tax-exempt interest on municipal securities. In 1995, the
Company's provision for taxes was $5.1 million, while the pre-tax loss was $6.1
million. The difference between the tax provision and the amount that would have
been recoverable by applying the statutory rate to pre-tax loss was attributable
substantially to the non-deductibility for income tax purposes of the $17.5
21
million appreciation in the value of the stock issued to an executive officer
and other senior management of the Company. On a pro forma basis, excluding
special charges, taxes on income for 1995 were $6.3 million, resulting in an
effective tax rate of 42.9%. The difference between the pro forma effective tax
rate and the Federal statutory rate relates primarily to state income taxes and
currently non-deductible net operating losses of certain foreign subsidiaries,
primarily in France, which are not included in the Company's consolidated tax
return.
1995 Compared to 1994
Net sales increased $129.6 million, or 26.6%, to $616.2 million in 1995 from
$486.6 million in 1994. Of the $129.6 million increase, approximately $53.4
million represented a 19.5% increase in the Company's dental business, $35.8
million represented a 39.8% increase in its medical business, $23.8 million
represented a 28.4% increase in its international business, $15.2 million
represented a 142.1% increase in its technology business and $1.4 million
represented a 5.2% increase in the Company's veterinary business. The dental net
sales increase, after taking into consideration acquisitions, was primarily due
to the Company's increase in field sales consultants and telesales personnel,
database marketing programs and promotional activities. Of the approximately
$35.8 million increase in medical net sales, approximately $17.0 million, or
47.5%, represents incremental net sales to renal dialysis centers, with the
effects of acquisitions and increased telesales personnel accounting for the
other major increase in net sales. In the international market, the increase in
net sales was due to the full year benefit of an acquisition made in France in
July 1994, acquisitions made in 1995, increased unit volume growth and favorable
exchange rate translation adjustments. The increase in net sales for the
Company's technology market was primarily the result of an increase in unit
sales due to the release of the new Windows(R) version of Easy Dental(R) Plus
software in December 1995 and substantial price increases. The increased pricing
on the Easy Dental(R) Plus software product was accompanied by substantial sales
promotions and related expense. In the veterinary market, the Company now earns
a commission on certain products which the manufacturer now sells direct.
Including those sales on a basis similar to 1994, sales to the veterinary market
would have increased by approximately 19.0%
Gross profit increased by $47.9 million, or 33.6%, to $190.6 million in
1995, from $142.7 million in 1994, while gross profit margin increased by 1.6%
to 30.9% from 29.3% for the same period. Of the 1.6% increase in gross profit
margin, approximately 87.5%, or 1.4%, was primarily attributed to increased
sales volume of the Company's Easy Dental(R) Plus software, which carried a
higher gross profit margin than other products sold by the Company. The higher
net sales volume for the Company's technology business, up 142.1% to $25.9
million from $10.7 million for the same period last year, was primarily due to
the release of the new Windows(R) version of Easy Dental(R) Plus software, which
increased unit sales, coupled with substantial price increases. The increased
pricing on the Easy Dental(R) Plus software product was accompanied with
substantial sales promotions. The balance of the change in gross profit margin
was due to changes in product mix.
22
Selling, general and administrative expenses increased by $42.2 million, or
32.8%, to $170.8 million in 1995 from $128.6 million in 1994. Selling and
shipping expenses increased by $34.8 million, or 44.8%, to $112.5 million in
1995 from $77.7 million in 1994. As a percentage of net sales, selling and
shipping expenses increased 2.4% to 18.3% in 1995 from 15.9% in 1994. The
increase in selling and shipping expenses as a percentage of net sales was
primarily due to substantial sales promotions offered by the Company's
technology group in conjunction with the promotion of Easy Dental(R) Plus
software and the new Windows(R) version released in December 1995, which
accounted for approximately 0.9% of the 2.4% increase in selling and shipping
expenses as a percentage of net sales. The balance of the increase was due
primarily to various promotional programs and incremental field sales and
marketing personnel. General and administrative expenses increased $7.4 million,
or 14.5%, to $58.3 million in 1995 from $50.9 million in 1994, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses decreased 1.0% to 9.5% in 1995 from 10.5% in 1994 due primarily to the
relatively fixed nature of general and administrative expenses when compared to
the 26.6% increase in sales volume for the same period.
Interest expense--net increased $1.9 million, or 54.3%, to $5.4 million in
1995 from $3.5 million in 1994. This increase was due to two factors: average
interest rates rose to 8.3% in 1995 from 6.4% in 1994, and the Company's average
borrowings increased by $11.3 million in 1995 as compared to 1994 as a result of
higher working capital requirements and financing of acquisitions.
Equity in earnings of affiliates increased by $1.0 million, or 200.0%, to
$1.5 million in 1995 from $0.5 million in 1994. This increase in equity in
earnings of affiliates was primarily due to an increase in earnings of one
unconsolidated affiliate which was the result of increased sales volume and the
acquisition of another unconsolidated affiliate during the fourth quarter of
1995.
In 1995, the Company's provision for taxes was $5.1 million, while the
pre-tax loss was $6.1 million. The difference between the tax provision and the
amount that would have been recoverable by applying the statutory rate to
pre-tax loss was attributable substantially to the non-deductibility for income
tax purposes of the $17.5 million appreciation in the value of the stock issued
to an executive officer and other senior management of the Company. On a pro
forma basis, to give effect to special charges, taxes on income for 1995 were
$6.3 million, resulting in an effective tax rate of 42.9%. The difference
between the pro forma effective tax rate and the Federal statutory rate relates
primarily to state income taxes and currently non-deductible net operating
losses of certain foreign subsidiaries, primarily in France, which are not
included in the Company's consolidated tax return. In 1994, the income tax
recovery was $1.6 million, while the pre-tax loss was $12.4 million. The
effective tax rate of the Company for 1994 differed from the Federal statutory
rate, primarily due to non-deductible special charges of approximately $9.1
million arising from the appreciation in the value of stock issued to an
executive officer of the Company and currently non-deductible net operating
losses of certain foreign subsidiaries.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Risk Management
The Company has operations in the United States, Canada, the United Kingdom,
The Netherlands, Belgium, Germany, France, the Republic of Ireland and Spain.
Each of the Company's operations endeavors to protect its margins by using
foreign currency forward contracts to hedge the estimated foreign currency
payments to foreign vendors. The total U.S. dollar equivalent of all foreign
currency forward contracts hedging vendor payments was $5.0 million as of the
1996 fiscal year end.
23
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company experienced a negative
translation adjustment of $0.5 million in 1996 and a positive translation
adjustment of $0.3 million in 1995, which adjustments were reflected in the
balance sheet as an adjustment to stockholders' equity. The cumulative
translation adjustment at the end of 1996 showed a net negative translation
adjustment of $0.6 million.
The Company issues a Canadian catalog once a year with prices stated in
Canadian dollars; however, orders are shipped from the Company's United States
warehouses resulting in U.S. dollar costs for Canadian dollar sales. To minimize
the exposure to fluctuations in foreign currency exchange rates, the Company
enters into foreign currency forward contracts with major international banks
and an unconsolidated 50%- owned company to convert estimated monthly Canadian
dollar receipts into U.S. dollars. The Company usually enters into the forward
contract prior to the issuance of its Canadian catalog and for the expected life
of the catalog. As of December 28, 1996, the Company had 28 forward contracts
outstanding for the forward sale of 5.2 million Canadian dollars. The last of
the contracts expires on October 31, 1997; however, the Company anticipates
entering into new contracts in the normal course of its business.
The Company borrowed money in U.S. dollars under a term loan related to the
Van den Braak acquisition. The Company loaned the proceeds to Henry Schein B.V.
in Netherland Guilders ("NLG") with principal and interest payable in NLGs. To
minimize the resultant exposure to fluctuations in foreign currency exchange
rates between the U.S. dollar and The Netherland Guilder, the Company entered
into a series of foreign currency forward contracts to sell NLGs for U.S.
dollars. As of December 28, 1996, the Company had 5 contracts outstanding for
the forward sale of NLG 7.1 million. The last contract expires on October 31,
1997.
The Company entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in October and November of 2001.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products and special inventory buying opportunities, (b) acquisitions, and (c)
capital expenditures. Since sales have been strongest during the fourth quarter
and special inventory buying opportunities are most prevalent just before the
end of the year, the Company's working capital requirements have been generally
higher from the end of the third quarter to the end of the first quarter of the
following year. The Company has financed its business primarily through its
revolving credit facilities and stock issuances.
Net cash used in operating activities for the year ended December 28, 1996
of $34.5 million resulted primarily from a net increase in working capital of
$63.9 million offset in part by net income, adjusted for non-cash charges
relating primarily to depreciation and amortization and deferred income taxes of
$27.2 million and $2.4 million, respectively. The increase in working capital
was primarily due to (i) $43.1 million increase in accounts receivable resulting
from increased sales and extended payment terms, and a decrease in the
percentage of customers who make payment with their orders, (ii) a $23.0 million
increase in inventories, primarily due to year-end inventory buying
opportunities and (iii) an $8.6 million increase in loans and other receivables
offset in part by an increase in accounts payable and other accrued expenses of
$10.7 million. The Company anticipates future increases in working capital as a
result of its continued sales growth, extended payment terms and special
inventory buying opportunities.
24
Net cash used in investing activities for the year ended December 28, 1996
of $49.1 million resulted primarily from cash used to make acquisitions of $32.5
million and capital expenditures of $11.2 million. During the past three years,
the Company has invested more than $26.3 million in the development of new
computer systems, and expenditures for new operating facilities. The Company
expects that it will continue to invest in excess of $10.0 million per year in
capital projects to modernize and expand its facilities and infrastructure
systems.
Net cash provided by financing activities for the year ended December 28,
1996 of $117.6 million resulted primarily from net cash proceeds from a
follow-on offering of the Company's Common Stock, which was completed on June
21, 1996 amounting to $124.1 million, partially offset by net debt repayments of
approximately $5.6 million.
A balloon payment of approximately $3.5 million is due on October 31, 1997
under a term loan associated with a foreign acquisition. In addition, with
respect to certain acquisitions and joint ventures, holders of minority
interests in the acquired entities or ventures have the right at certain times
to require the Company to acquire their interest at either fair market value or
a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of December 28, 1996 of $41.7
million consist of bank balances and investments in short-term tax exempt
securities rated AAA by Moody's (or an equivalent rating). These investments
have staggered maturity dates, none of which exceed three months, and have a
high degree of liquidity as the securities are actively traded in public
markets.
The Company entered into an amended revolving credit facility on January 31,
1997 that increased its main credit facility from $65.0 million to $100.0
million, extended the facility termination date to January 30, 2002 and reduced
the interest rate on the Company's borrowings under the facility. Borrowings
under the credit facility were $18.0 million at December 28, 1996. Certain of
the Company's subsidiaries have additional credit facilities available which
totaled $13.2 million at December 28, 1996 under which $6.7 million had been
borrowed.
The aggregate purchase price of the acquisitions completed during 1996 was
approximately $38.8 million, payable $32.5 million in cash, $0.9 million in
notes and $5.4 million in stock. The cash portion of the purchase price was
primarily funded by proceeds from the Company's initial public offering,
completed in November 1995, and a follow-on offering, completed in June 1996.
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million. Additionally, on March 7, 1997, the Company entered
into the Merger Agreement pursuant to which MBMI will merge into a wholly-owned
subsidiary of the Company.
The Company believes that its cash and cash equivalents of $41.7 million as
of December 28, 1996, its anticipated cash flow from operations, its ability to
access public debt and equity markets and the availability of funds under its
existing credit agreements will provide it with liquidity sufficient to meet its
currently foreseeable capital needs.
25
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
Report of Independent Certified Public Accountants............................27
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995.............. 28
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ..........................29
Statements of Stockholders' Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 .........30
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ............................31
Notes to Consolidated Financial Statements .............................32-56
Schedule, years ended December 28, 1996,
December 30, 1995 and December 31, 1994
II - Valuation and Qualifying Accounts ...............................72
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or
the notes thereto.
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry Schein,
Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 1996. We have
also audited the financial statement schedule listed in the accompanying index.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedule. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Henry Schein, Inc.
and Subsidiaries at December 28, 1996 and December 30, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
March 7, 1997
27
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 28, December 30,
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 41,673 $ 7,603
Accounts receivable, less reserves of $7,305 and $6,335,
respectively ....................................... 140,197 91,248
Inventories ............................................. 126,632 96,515
Deferred income taxes ................................... 6,189 6,896
Other ................................................... 29,665 19,492
--------- ---------
Total current assets ........................... 344,356 221,754
Property and equipment, net ................................. 37,154 29,713
Goodwill and other intangibles, net ......................... 53,420 24,389
Investments and other ....................................... 29,006 21,011
--------- ---------
$ 463,936 $ 296,867
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 87,988 $ 65,105
Bank credit lines ....................................... 6,716 9,325
Accruals:
Salaries and related expenses ...................... 11,041 9,074
Other .............................................. 25,395 31,008
Current maturities of long-term debt .................... 8,461 3,343
--------- ---------
Total current liabilities ...................... 139,601 117,855
Long-term debt .............................................. 24,569 30,381
Other liabilities ........................................... 2,715 1,233
--------- ---------
Total liabilities .............................. 166,885 149,469
--------- ---------
Minority interest ........................................... 5,289 4,547
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000;
issued: 22,272,441 and 18,358,673, respectively .... 222 183
Additional paid-in capital .............................. 254,180 123,866
Retained earnings ....................................... 39,086 19,746
Treasury stock, at cost, 60,529 and 51,679 shares,
respectively ....................................... (1,090) (769)
Foreign currency translation adjustment ................. (636) (175)
--------- ---------
Total stockholders' equity ..................... 291,762 142,851
--------- ---------
$ 463,936 $ 296,867
========= =========
See accompanying notes to consolidated financial statements.
28
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Net sales ................................................ $ 829,962 $ 616,209 $ 486,610
Cost of sales ............................................ 584,738 425,625 343,922
--------- --------- ---------
Gross profit ......................................... 245,224 190,584 142,688
Operating expenses:
Selling, general and administrative .................. 215,561 170,823 128,560
Special management compensation ...................... -- 20,797 21,596
Special professional fees ............................ -- -- 2,007
--------- --------- ---------
Operating income (loss) ......................... 29,663 (1,036) (9,475)
Other income (expense):
Interest income ...................................... 2,456 475 251
Interest expense ..................................... (3,421) (5,833) (3,756)
Other-net ............................................ 636 276 541
--------- --------- ---------
Income (loss) before taxes on income
(recovery), minority interest and
equity in earnings of affiliates ............ 29,334 (6,118) (12,439)
Taxes on income (recovery) ............................... 11,343 5,126 (1,630)
Minority interest in net income of subsidiaries .......... 246 509 561
Equity in earnings of affiliates ......................... 1,595 1,537 494
--------- --------- ---------
Net income (loss) ........................................ $ 19,340 $ (10,216) $ (10,876)
========= ========= =========
Net income per common share .............................. $ 0.93
=========
Weighted average common and common
equivalent shares outstanding ........................ 20,724
=========
Pro forma:
Historical net loss .................................. $ (10,216) $ (10,876)
Pro forma adjustments:
Special management compensation and
professional fees ........................... 20,797 23,603
Tax effect of above ............................. (1,174) (5,749)
--------- ---------
Pro forma net income ................................. $ 9,407 $ 6,978
========= =========
Pro forma net income per common share ................ $0. 70 $ 0.58
========= =========
Pro forma weighted average common and
common equivalent shares outstanding ............ 13,447 12,127
========= =========
See accompanying notes to consolidated financial statements.
29
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock
$.01 Par Value Additional
--------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------------- ----------- ----------- ------------ --------
Balance, December 25, 1993 .................................... 11,390,544 $ 114 $ 11,225 $ 41,390 $ --
Net loss ...................................................... -- -- -- (10,876) --
Deemed dividend ............................................... -- -- -- (552) --
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent) ................................... -- -- 9,104 -- --
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan ..... 489,456 5 3,460 -- --
Recognition of deferred compensation .......................... -- -- -- -- --
Stock issued to ESOP trust .................................... 128,257 1 899 -- --
Reclassification of redeemable stock issued as special
compensation and to ESOP trust ............................ (2,084,398) (21) (14,724) -- --
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 31, 1994 .................................... 9,923,859 99 9,964 29,962 --
Net loss ...................................................... -- -- -- (10,216) --
Shares issued for acquisition ................................. 1,260,416 13 6,500 -- --
Stock issued in initial public offering ....................... 5,090,000 51 72,417 -- --
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ........................................... 2,084,398 20 32,180 -- --
Issuance of compensatory stock options ........................ -- -- 2,805 -- --
Purchase of treasury stock (51,679 shares) .................... -- -- -- -- (769)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 30, 1995 .................................... 18,358,673 183 123,866 19,746 (769)
Net income .................................................... -- -- -- 19,340 --
Shares issued for acquisitions ................................ 155,183 2 5,424 -- --
Stock issued in follow-on offering ............................ 3,734,375 37 124,070 -- --
Stock issued to ESOP trust .................................... 24,210 -- 820 -- --
Purchase of treasury stock (8,850 shares) ..................... -- -- -- -- (321)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 28, 1996 .................................... 22,272,441 $ 222 $ 254,180 $ 39,086 $ (1,090)
=========== =========== =========== =========== =========
Foreign
Currency Deferred Total
Translation Compen- Stockholders'
Adjustment sation Equity
----------- ------------ -----------
Balance, December 25, 1993 .................................... $ (635) $ (8,197) $ 43,897
Net loss ...................................................... -- -- (10,876)
Deemed dividend ............................................... -- -- (552)
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent) ................................... -- (9,104) --
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan ..... -- -- 3,465
Recognition of deferred compensation .......................... -- 17,301 17,301
Stock issued to ESOP trust .................................... -- -- 900
Reclassification of redeemable stock issued as special
compensation and to ESOP trust ............................ -- -- (14,745)
Foreign currency translation adjustment ....................... 177 -- 177
-------- ----------- -----------
Balance, December 31, 1994 .................................... (458) -- 39,567
Net loss ...................................................... -- -- (10,216)
Shares issued for acquisition ................................. -- -- 6,513
Stock issued in initial public offering ....................... -- -- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ........................................... -- -- 32,200
Issuance of compensatory stock options ........................ -- -- 2,805
Purchase of treasury stock (51,679 shares) .................... -- -- (769)
Foreign currency translation adjustment ....................... 283 -- 283
-------- ----------- -----------
Balance, December 30, 1995 .................................... (175) -- 142,851
Net income .................................................... -- -- 19,340
Shares issued for acquisitions ................................ -- -- 5,426
Stock issued in follow-on offering ............................ -- -- 124,107
Stock issued to ESOP trust .................................... -- -- 820
Purchase of treasury stock (8,850 shares) ..................... -- -- (321)
Foreign currency translation adjustment ....................... (461) -- (461)
-------- ----------- -----------
Balance, December 28, 1996 .................................... $ (636) $ -- $ 291,762
======== =========== ===========
See accompanying notes to consolidated financial statements
30
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
---------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ----------- ------------
Cash flows from operating activities:
Net income (loss) ...................................... $ 19,340 $(10,216) $(10,876)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 7,898 6,037 3,811
Provision for losses and allowances on accounts
receivable ................................... 970 2,016 1,061
Stock issued to ESOP trust ....................... 820 -- 900
Provision (benefit) for deferred income taxes .... 2,397 (1,091) (3,553)
Special management compensation .................. -- 20,289 18,866
Undistributed earnings of affiliates ............. (1,595) (1,537) (494)
Minority interest in net income of subsidiaries 246 509 561
Other ............................................ (619) (558) (965)
Changes in assets and liabilities:
Increase in accounts receivable .............. (43,063) (35,055) (12,809)
Increase in inventories ...................... (22,962) (7,342) (5,412)
Increase in other current assets ............. (8,603) (4,411) (3,571)
Increase in accounts payable and accruals .... 10,683 20,562 18,759
--------- -------- --------
Net cash provided by (used in) operating activities .... (34,488) (10,797) 6,278
--------- -------- --------
Cash flows from investing activities:
Capital expenditures ................................ (11,213) (9,219) (5,919)
Business acquisitions, net of cash acquired ......... (32,540) (16,377) --
Other ............................................... (5,338) (3,893) (1,972)
--------- -------- --------
Net cash used in investing activities .................. (49,091) (29,489) (7,891)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............ 1,154 3,698 5,391
Principal payments on long-term debt ................ (4,688) (15,289) (1,150)
Proceeds from issuance of stock ..................... 124,107 72,468 --
Proceeds from borrowings from banks ................. 4,449 2,446 3,764
Purchase of treasury stock .......................... (321) (769) --
Payments on borrowings from banks ................... (6,478) (20,826) (4,200)
Deemed dividend ..................................... -- -- (552)
Other ............................................... (574) 1,711 445
--------- -------- --------
Net cash provided by financing activities .............. 117,649 43,439 3,698
--------- -------- --------
Net increase in cash and cash equivalents ............. 34,070 3,153 2,085
Cash and cash equivalents, beginning of year ........... 7,603 4,450 2,365
--------- -------- --------
Cash and cash equivalents, end of year ................. $ 41,673 $ 7,603 $ 4,450
========= ======== ========
See accompanying notes to consolidated financial statements.
31
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Henry
Schein, Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates which are 50% or less owned
are accounted for under the equity method. All material intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the
last Saturday of December. Accordingly, fiscal years ended December 28, 1996 and
December 30, 1995 consisted of 52 weeks and the fiscal year ended December 31,
1994 consisted of 53 weeks.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered,
except for the portion of revenues from sales of practice management software
which is attributable to noncontractual postcontract customer support, which is
deferred and recognized ratably over the period in which the support is expected
to be provided.
Inventories
Inventories consist substantially of finished goods and are valued at the
lower of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
32
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
----------
Buildings and improvements 40
Machinery and warehouse equipment 5 - 10
Furniture, fixtures and other 3 - 10
Computer equipment and software 5 - 7
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.
Taxes on Income
The Company filed a consolidated Federal income tax return with Schein
Holdings, Inc. for the period ended September 30, 1994 (see Note 2). For the
balance of 1994 the Company filed a consolidated Federal income tax return with
its 80% or greater owned subsidiaries and expects to continue to do so
thereafter. Income taxes for financial statement presentation were calculated
through the period ending September 30, 1994 as if the Company filed a separate
tax return.
Premium Coupon Program
The Company issues premium coupons to certain customers in conjunction
with sales of its products which are redeemable for gifts. Premium coupon
redemptions are accrued as issued based upon expected redemption rates.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows is not
material.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in earnings, except for certain hedging transactions (see below).
33
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the basis of the transaction when it is
completed.
In order to manage interest rate exposure, the Company has entered into
interest rate swap agreements to exchange variable rate debt based on LIBOR into
fixed rate debt without the exchange of the underlying principal amounts. Net
payments or receipts under the agreements are recorded as adjustments to
interest expense.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for
long-term debt approximates fair value because the underlying instruments are at
variable rates which are repriced frequently.
Acquisitions
The net assets of businesses purchased are recorded at their fair value at
the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 30 years.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through December 28, 1996.
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by Statement of Financial Accounting Standards
("SFAS") 123, "Accounting for Stock-Based Compensation."
34
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Earnings Per Share
(a) Historical
Historical per share information is computed using the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares relating to the stock options issued to executive management in 1995, the
shares issued to senior management in 1994, and the shares contributed to the
ESOP trust in 1994 have been treated as if they were outstanding since the
beginning of 1994. Such ESOP shares and common equivalent shares relating to the
stock options are calculated using the treasury stock method, using the initial
public offering price of $16.00 per share for assumed repurchase. Historical per
share information for 1995 and 1994 is not considered relevant as it would
differ materially from pro forma per share data, given the significance of the
pro forma adjustments.
(b) Pro Forma Net Income Per Share
Pro forma net income per share is computed using pro forma net income and
the pro forma weighted average number of common and common equivalent shares
outstanding, after reflecting a 99-for-1 stock split effected immediately prior
to the initial public offering. The common equivalent shares for pro-forma net
income per share were computed on the same basis as the historical basis.
(c) Supplemental Earnings Per Share
Supplementary net income per share (which is required by APB Opinion No.
15) for the year ended December 28, 1996 was $.93. For this calculation, the
weighted average number of common shares includes the shares assumed to provide
the proceeds, at the follow-on offering price, needed to retire average
revolving credit borrowings and debt for the period from the beginning of the
year (or the date the debt was incurred) to the respective retirement date, and
the pro forma net income was adjusted to exclude the related financing and
interest expenses of the debt.
NOTE 2--REORGANIZATION
On December 26, 1992, Henry Schein, Inc., a New York corporation ("Old
HSI"), reorganized its corporate structure to split into separate healthcare
distribution and pharmaceutical companies (the "Split"). The Split was
accomplished by transferring substantially all of Old HSI's assets and
liabilities relating to the distribution business to Henry Schein USA, Inc., a
newly formed corporation ("New HSI"). Subsequent to the Split, the name of Old
HSI was changed to Schein Holdings, Inc. and the name of New HSI was changed to
Henry Schein, Inc. ("HSI"). As a result of the Split, Schein Holdings, Inc.
("Holdings") became the parent of the Company and Schein Pharmaceutical, Inc.
(the pharmaceutical company, "SPINC").
The accompanying financial statements give retroactive effect to the Split
as described above, and reflect the historical cost bases of the assets and
liabilities of the distribution business.
35
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 2 --REORGANIZATION--(Continued)
On February 16, 1994, the shareholders of Holdings and HSI and certain HSI
management entered into an agreement (the "HSI Agreement") whereby certain
voting and non-voting shares of HSI stock were exchanged for new voting stock of
HSI, a 100-for-1 stock split was effectuated, and certain additional agreements
were entered into between HSI, the shareholders and management. The effect of
the stock exchanges was that Holdings distributed all of its shares in HSI to
certain shareholders of Holdings in exchange for its stock.
The HSI Agreement was subject to approval by the Westchester County
Surrogate Court, which approval was obtained on September 20, 1994. The HSI
Agreement was also subject to the closing of a transaction between the
shareholders of Holdings and Miles, Inc. ("Miles", an unrelated third party)
involving the sale by shareholders of Holdings of 28% of their shares to Miles.
In connection with the reorganization, during 1992 HSI issued 1,466,685
shares of common stock (valued at $6,173) to one of its executive officers and
147,312 shares of common stock (valued at $620) to an executive officer of
SPINC. In addition, SPINC issued shares to one of its executive officers and an
executive officer of HSI. Each company made cash payments to its respective
executive officer to cover the income taxes relating to the stock issuances. The
HSI shares issued to its executive officer originally were to vest after 10
years of employment. The other stock issuances were forfeitable if certain
events did not occur.
The stock issuances to HSI's executive officer were accounted for based on
the estimated fair value at the date of issuance, as deferred compensation,
which was classified as a reduction of stockholders' equity in the financial
statements of the applicable company whose executive officer received the
shares. Accordingly, the fair value of the shares of HSI issued to the executive
officer of SPINC was recorded as a distribution to Holdings. Conversely, the
fair value of the shares issued to HSI's executive officer by SPINC in the
amount of $2,641 was treated as a contribution to HSI's capital. The cash
payment to HSI's executive officer in the amount of $5,283 was charged to
operations in 1992 as a special management compensation charge. In 1994, an
additional cash payment of $258 was paid to HSI's executive officer to pay
certain additional income taxes attributable to the 1992 stock issuance and was
recorded as a special management compensation charge.
As part of the HSI Agreement, the vesting and events of forfeiture were
removed and the stock issued in 1992 became fully vested. Accordingly, the
estimated fair value of the stock issuances to HSI's executive officer were
revalued to reflect the fair values of HSI and SPINC at the time of vesting and
the related deferred compensation, net of amortization, of $17,301 was charged
to earnings as special management compensation in 1994.
Additionally, pursuant to previous commitments, certain senior management
of HSI were issued 489,456 shares including 91,377 shares issued subsequent to
December 31, 1994 and 83,259 shares issued prior to the closing of the initial
public offering in part to extinguish a previously accrued liability under a
pre-existing long-term incentive plan. In connection with the issuance of these
shares, a cash payment of approximately $2,472 was paid to cover the income
taxes relating to this stock issuance and was charged, along with the estimated
fair value of the related stock issued of $3,465, less the related obligations
extinguished of approximately $1,900, as special compensation and is included in
special compensation in 1994.
36
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 2 -- REORGANIZATION --(Continued)
The shares issued to the executive officer and the senior management of
HSI were subject to repurchase by HSI at fair market value in the event
employment was terminated for any reason or an initial public offering of HSI's
stock did not occur by December 31, 1999. The repurchase feature was eliminated
upon the closing of the initial public offering. Special management compensation
for the year ended December 30, 1995 includes a $17,484 charge to operations to
reflect the appreciation in the market value of stock grants and issuances based
on the initial public offering price of $16.00 per share and a cash payment of
approximately $508 to cover income taxes related to those stock grants and
issuances.
In addition, special management compensation for the year ended December
30, 1995 includes a charge of $2,805 to reflect the excess of the initial public
offering price over the exercise price of Class A options issued to certain
executive management in May 1995 (see Note 14(a)).
Special charges incurred in connection with this reorganization consist of
special management compensation expense of $20,797 and $21,596 for the years
ended 1995 and 1994, respectively, and special professional fees of $2,007 for
1994.
In 1994, the Company incurred special professional fees on behalf of its
stockholders relating to the reorganization in the amount of $552. This amount
was deemed to be a dividend and deducted from retained earnings.
NOTE 3--OTHER CURRENT ASSETS
Other current assets consist of the following:
December 28, December 30,
1996 1995
----------- ----------
Prepaid expenses ................. $ 5,314 $ 3,941
Vendor rebates receivable ........ 11,798 5,744
Amounts due from affiliates....... 5,154 2,084
Refundable income taxes .......... 727 2,645
Other ............................ 6,672 5,078
------- -------
$29,665 $19,492
======= =======
37
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 4--PROPERTY AND EQUIPMENT--NET
Major classes of property and equipment consist of the following:
December 28, December 30,
1996 1995
----------- ----------
Land ............................... $ 1,445 $ 1,718
Buildings and leasehold
improvements ..................... 24,726 23,288
Machinery and warehouse equipment .. 14,937 10,509
Furniture, fixtures and other ...... 14,585 12,165
Computer equipment and software .... 20,914 15,937
------- -------
76,607 63,617
Less accumulated depreciation and
amortization ..................... 39,453 33,904
------- -------
Net property and equipment ......... $37,154 $29,713
======= =======
NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
December 28, December 30,
1996 1995
------------ -----------
Goodwill ........................... $52,407 $22,267
Other .............................. 4,672 3,917
------- -------
57,079 26,184
Less accumulated
amortization ..................... 3,659 1,795
------- -------
$53,420 $24,389
======= =======
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of net assets acquired. During 1996, four acquisitions accounted
for $16,887 of the increase in goodwill. Other intangibles include covenants not
to compete, customer lists and deferred acquisition costs. Goodwill and other
intangibles are amortized on a straight-line basis over periods not exceeding 30
years.
38
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 6--INVESTMENTS AND OTHER
Investments and other consist of:
December 28, December 30,
1996 1995
------------ ------------
Investments in unconsolidated affiliates... $11,524 $ 9,865
Long-term receivables (see Note 11(b)) .... 11,051 8,399
Other ..................................... 6,431 2,747
------- -------
$29,006 $21,011
======= =======
The Company's investments are predominately 50% owned unconsolidated
affiliates consisting of various companies involved in the healthcare
distribution business and HS Pharmaceutical, Inc., which manufactures generic
pharmaceuticals. As of December 28, 1996, the Company's investments in
unconsolidated affiliates were $2,859 more than the Company's proportionate
share of the underlying equity of these affiliates. This amount, which has been
treated as goodwill, is being amortized over 30 years and charged to equity in
the operating results of these companies. As of December 28, 1996, approximately
$6,632 of the Company's retained earnings represented undistributed earnings of
affiliates. Combined financial data for substantially all of these companies is
as follows:
December 28, December 30,
1996 1995
----------- -----------
Current assets ............. $38,172 $28,904
Total assets ............... 47,103 35,220
Liabilities ................ 30,939 22,995
Stockholders' equity ....... 16,164 12,225
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- -----------
Net sales ................. $103,169 $55,090 $34,003
Operating income .......... 7,044 5,147 3,183
Net income ................ 3,775 2,920 1,428
39
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS
The Company acquired 34 healthcare distribution businesses between 1994
and 1996, including, on July 7, 1995, the distribution business of The Veratex
Corporation ("Veratex"), a national direct marketer of medical, dental and
veterinary products, and on July 10, 1996, Scientific Supply Company, Inc., a
regional distributor of medical supplies. The total amount of cash paid and
promissory notes issued for these acquisitions was approximately $33,423,
$22,710 and $2,660, for 1996, 1995 and 1994, respectively. The Company also
issued 155,183 shares of common stock in 1996 in connection with two of its
acquisitions and 1,260,416 shares of common stock in connection with one of its
1995 acquisitions, of which approximately 928,700 shares were issued to a
stockholder of the Company. These acquisitions have been accounted for under the
purchase method, except one from an affiliate which involves carryover of
predecessor basis with respect to the affiliate's proportionate share of net
assets. Operations of these businesses have been included in the consolidated
financial statements from their acquisition dates.
Certain acquisitions provide for contingent consideration in the event
certain financial targets are satisfied.
The summarized unaudited pro forma results of operations set forth below
for 1996 and 1995 assume the acquisitions occurred as of the beginning of each
of these periods.
Years Ended
--------------------------
December 28, December 30,
1996 1995
------------ ------------
Net sales ......................................... $877,925 $ 762,333
Net income (loss) ................................. 19,699 (9,594)
Pro forma net income, reflecting adjustment in 1995
to exclude special management compensation...... 19,699 10,029
Pro forma net income per common share ............. $ 0.95 $ 0.75
Pro forma net income per common share, including acquisitions, may not be
indicative of actual results, primarily because the pro forma earnings include
historical results of operations of acquired entities and do not reflect any
cost savings that may result from the Company's integration efforts.
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million.
40
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS--(Continued)
The following summarized pro forma unaudited results of operations
combines the results of the Company and Dentrix assuming the acquisition of
Dentrix occurred on December 26, 1993:
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Net sales .................................... $840,122 $623,302 $ 490,734
Net income (loss) ............................ 21,236 (9,333) (10,371)
Pro forma net income, reflecting adjustment in
1995 and 1994 to exclude special management
compensation and professional fees ......... 21,236 10,290 7,483
Pro forma net income per common share ........ $ 0.98 $ 0.71 $ 0.57
41
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 8--BANK CREDIT LINES
At December 28, 1996, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $13,157, expiring through
December 1997. Borrowings of $6,716 under these credit lines at interest rates
ranging from 3.5% to 7.5% were collateralized by accounts receivable, inventory
and property and equipment of the subsidiaries with an aggregate net book value
of $17,163 at December 28, 1996.
NOTE 9--LONG-TERM DEBT
Long-term debt consists of:
December 28, December 30,
1996 1995
------------ ------------
Borrowings under Revolving Credit Agreement (a) ............ $18,040 $17,000
Notes payable for business acquisitions (b) ................ 3,930 6,783
Notes payable to banks, interest variable (8.0% at December
28, 1996), payable in quarterly installments ranging from
$16 to $34 through 2003, secured by inventory and
accounts receivable in the amount of $21,192 ............ 1,932 2,020
Mortgage payable to bank in quarterly installments of $14,
interest at 5.2% through November 2013, collateralized by
a building with a net book value of $1,606 .............. 987 1,137
Various notes and loans payable with interest, in varying
installments through 2001, uncollateralized ............. 8,141 6,784
------- -------
Total ...................................................... 33,030 33,724
Less current maturities .................................... 8,461 3,343
------- -------
Total long-term debt ....................................... $24,569 $30,381
======= =======
42
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 9--LONG-TERM DEBT--(Continued)
(a) Revolving Credit Agreement
On January 31, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum borrowings to $100
million from $65 million, extended the term of the agreement to January 30, 2002
and reduced the interest rate charged to the Company. The interest rate on any
borrowings under the agreement is based on prime or LIBOR as defined in the
agreement, which were 8.25% and 5.69%, respectively, at December 28, 1996. The
borrowings outstanding at December 28, 1996 were at interest rates ranging from
6.3% to 8.25%. The agreement provides for a sliding scale fee ranging from .1%
to .3%, based upon certain financial ratios, on any unused portion of the
commitment. The agreement also provides, among other things, that HSI will
maintain, on a consolidated basis, as defined, a minimum tangible net worth,
current, cash flow, and interest coverage ratios, a maximum leverage ratio, and
contains restrictions relating to annual dividends in excess of $500, guarantees
of subsidiary debt, investments in subsidiaries, mergers and acquisitions,
liens, capital expenditures, certain changes in ownership and employee and
shareholder loans.
(b) Notes Payable for Business Acquisitions
In November 1993, a subsidiary of the Company entered into a term loan
agreement for $5,290 with a bank. The proceeds of this loan were used to acquire
a dental supply distribution company. Principal is payable in semi-annual
installments of $227 through October 1997, with a final balloon payment of
$3,474 on October 31, 1997. Interest is payable quarterly at a rate of 6.5% per
year. The agreement also provides for the same financial covenants and
restrictions as the revolving credit agreement. In October 1995, the Company
entered into a term loan agreement for $2,400 with a third party. The proceeds
of this loan were used to acquire a medical distribution company. The loan was
repaid in June 1996.
As of December 28, 1996, the aggregate amounts of long-term debt maturing
in each of the next five years are as follows: 1997--$8,461; 1998--$1,670;
1999--$774; 2000--$710, 2001 -- $689.
43
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (RECOVERY)
Taxes on income (recovery) are based on income (loss) before taxes on
income (recovery), minority interest and equity in earnings of affiliates as
follows:
Years Ended
-----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Domestic ............................................. $ 27,091 $ (7,435) $(13,978)
Foreign .............................................. 2,243 1,317 1,539
-------- -------- --------
Total income (loss) before taxes on income
(recovery), minority interest and equity in earnings
of affiliates ...................................... $ 29,334 $ (6,118) $(12,439)
======== ======== ========
The provision for (recovery of) income taxes on income (loss) was as
follows:
Years Ended
-----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
---------- ---------- ----------
Current tax expense (recovery):
U.S. Federal ...................... $ 7,182 $ 4,677 $ 1,528
State and local ................... 1,069 924 459
Foreign ........................... 695 616 (64)
------- ------- -------
Total current ....................... 8,946 6,217 1,923
------- ------- -------
Deferred tax expense (benefit):
U.S. Federal ...................... 1,466 (836) (3,563)
State and local ................... 778 (285) (155)
Foreign ........................... 153 30 165
------- ------- -------
Total deferred ...................... 2,397 (1,091) (3,553)
------- ------- -------
Total provision (recovery) .......... $11,343 $ 5,126 $(1,630)
======= ======= =======
44
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (RECOVERY)--(Continued)
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
December 28, December 30,
1996 1995
------------- ------------
Current deferred tax assets:
Inventory, premium coupon redemptions
and accounts receivable valuation allowances.. $ 2,798 $ 3,592
Uniform capitalization adjustments to
inventories................................... 1,520 1,472
Accrued special professional fees and other
accrued liabilities........................... 1,871 1,832
------- -------
Total current deferred tax asset................... 6,189 6,896
------- -------
Non-current deferred tax assets (liabilities):
Property and equipment.......................... (1,607) (428)
Provision for long-term executive incentive
compensation and other accrued liabilities.... (85) (110)
Net operating losses of foreign subsidiaries.... 1,928 2,403
------- -------
Total non-current deferred tax asset............... 236 1,865
Valuation allowance for non-current deferred
tax assets.................................... (1,928) (2,403)
------- -------
Net non-current deferred tax liabilities........... (1,692) (538)
------- -------
Net deferred tax asset............................. $ 4,497 $ 6,358
======= =======
The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior carryback years to realize the tax benefit for
deductible temporary differences. The non-current deferred liability is included
in Other liabilities on the Consolidated Balance Sheets.
45
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (RECOVERY)--(Continued)
The tax provisions (recovery) differ from the amount computed using the
Federal statutory income tax rate as follows:
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Provision (recovery) at Federal statutory rate......... $10,267 $(2,141) $(4,354)
State income taxes, net of Federal income tax effect... 1,575 582 53
Net foreign and domestic losses for which no tax
benefits are available............................... -- 574 23
Foreign income taxed at other than the Federal
statutory rate....................................... (55) (25) (214)
Non-deductible appreciation in stock issued as
special management compensation...................... --- 6,109 3,318
Deduction for charitable contributions................. --- -- (180)
Tax exempt interest................................... (237) -- --
Other.................................................. (207) 27 (276)
------- ------- -------
Income tax provision (recovery)........................ $11,343 $ 5,126 $(1,630)
======= ======= =======
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been and
will continue to be reinvested. These earnings could become subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the foreign subsidiaries. It is not practicable to determine the amount
of additional tax, if any, that might be payable on the foreign earnings;
however, the Company believes that foreign tax credits would substantially
offset any U.S. tax. At December 28, 1996, the cumulative amount of reinvested
earnings was approximately $2,078.
46
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
(a) Financial Instruments
To reduce its exposure to fluctuations in foreign currencies and interest
rates, the Company is party to foreign currency forward contracts and interest
rate swaps with major financial institutions.
While the Company is exposed to credit loss in the event of nonperformance
by the counterparties of these contracts, the Company does not anticipate
nonperformance by the counterparties. The Company does not require collateral or
other security to support these financial instruments.
As of December 28, 1996, the Company has outstanding foreign currency
forward contracts aggregating $9,790 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of the
Canadian dollar $3,946, Swiss Franc $707, The Netherland Guilder $4,776,
Deutsche Mark $180, and Japanese Yen $181. The contracts expire at various dates
through October 1997. At December 28, 1996, the Company had net deferred losses
from foreign currency forward contracts of $27.
As of December 28, 1996, interest rate swaps totaling $13,000 were
outstanding. The swaps are used to convert floating rate debt to fixed rate debt
to reduce the Company's exposure to interest rate fluctuations. The net result
was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13,000 of the Company's debt. The swaps expire in
October and November 2001. Under the interest rate environment during the year
ended December 28, 1996, the net fair value of the Company's interest rate swap
agreements resulted in a recognized loss of $299.
In October 1994, a subsidiary of the Company recorded a $509 foreign
currency gain relating to an intercompany loan intended to be repaid. This gain
is reflected in the Other-net section of the Consolidated Statements of
Operations.
(b) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments.
The Company places its short-term cash investments with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and its
dispersion across different types of healthcare professionals and geographic
areas. The Company maintains an allowance for losses based on the expected
collectability of all receivables. Included in Accounts Receivable and LongTerm
Receivables at December 28, 1996 is $18,355 and $7,785, respectively, related to
Easy Dental(R) Plus software sales with non-interest bearing extended payment
terms. Total unamortized discounts at December 28, 1996 amounted to $1,487 based
on an imputed interest rate of 8.25%. Included in interest income for the year
ended December 28, 1996 was approximately $998 of imputed interest relating to
these non-interest bearing extended payment term receivables. Imputed interest
relating to these receivables was not material for 1995 and 1994.
47
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 12--RELATED PARTY TRANSACTIONS
(a) In the ordinary course of business, the Company purchases
pharmaceutical products from certain unconsolidated affiliates. Net purchases
from these affiliates amounted to $15,037, $8,730 and $12,055 in 1996, 1995 and
1994, respectively. Included in Accounts Payable at December 28, 1996 and
December 30, 1995 were $1,523 and $1,591, respectively, for amounts due to these
affiliates for purchases made from them.
(b) The Company also shares certain services with these and other
unconsolidated affiliates which are charged to the affiliates at cost. The
Company charged these affiliates $602, $891 and $1,691 during 1996, 1995 and
1994, respectively, for these services. In addition, sales (at cost) to
unconsolidated affiliates were $5,832, $3,784 and $3,160 in 1996, 1995 and 1994,
respectively.
(c) The Company recorded interest income of $129, $88 and $87, and
interest expense of $32, $26 and $13 in 1996, 1995 and 1994, respectively,
attributable to transactions with unconsolidated affiliates. Included in the
Other section of current assets are amounts due from unconsolidated affiliates
of $5,154 and $2,051 at December 28, 1996 and December 30, 1995, respectively.
(d) A subsidiary of the Company leases its primary operating facility from
an officer of the subsidiary. Rent expense attributed to this facility amounted
to $209 for 1996 and 1995.
(e) During 1994, a subsidiary of the Company entered into a sales service
agreement with an entity ("Salesco") owned by an officer of the subsidiary.
Under the terms of this agreement the subsidiary is required to reimburse
Salesco for all reasonable expenses incurred in connection with the services it
provides to the subsidiary and pay a fee to Salesco based upon a formula applied
to its pre-tax profit. Amounts paid during 1996, 1995 and 1994 under this
agreement were not material.
(f) The Company purchases products from Schein Dental Equipment Corp.
("SDEC"), formerly owned by a stockholder. In September 1995, the Company
acquired SDEC. Net purchases from SDEC prior to the acquisition amounted to
$1,803 and $1,738, in 1995 and 1994, respectively.
48
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 13--SEGMENT AND GEOGRAPHIC DATA
The Company is engaged principally in one line of business, the
distribution of healthcare products to healthcare practitioners and
professionals. The following table presents information about the Company by
geographic area. There were no material amounts of sales or transfers among
geographic areas and there were no material amounts of United States export
sales.
1996 United States Europe Consolidated
- ----------------------- ------------- ------ ------------
Net sales.............. $693,968 $135,994 $829,962
Operating income ...... 26,267 3,396 29,663
Pre-tax income......... 27,091 2,243 29,334
Identifiable assets.... 394,410 69,526 463,936
Depreciation and
amortization........... 5,929 1,969 7,898
Capital expenditures... 9,817 1,396 11,213
1995
- -----------------------
Net sales.............. $516,794 $99,415 $616,209
Operating income (loss) (3,626)* 2,590 (1,036)
Pre-tax income (loss).. (7,435)* 1,317 (6,118)
Identifiable assets.... 243,677 53,190 296,867
Depreciation and 4,704 1,333 6,037
amortization...........
Capital expenditures... 5,523 3,696 9,219
1994
- -----------------------
Net sales.............. $402,683 $83,927 $486,610
Operating income (loss) (11,649)* 2,174 (9,475)
Pre-tax income (loss).. (13,978)* 1,539 (12,439)
Identifiable assets.... 155,772 34,248 190,020
Depreciation and 2,524 1,287 3,811
amortization...........
Capital expenditures... 4,425 1,494 5,919
* Includes special management compensation, special professional fees and
special contingent consideration expense of $20,797 and $23,603 for 1995
and 1994, respectively.
49
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS
(a) Stock Compensation Plan
The Company maintains a 1994 Stock Option Plan for the benefit of certain
employees under which 679,635 shares of common stock may be issued. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and nonqualified stock options may be issued under the Plan.
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the initial
public offering, at which time the $2,805 excess of the initial public offering
price of $16.00 over the exercise price was charged to special management
compensation expense. On November 3, 1995, the Company issued Class B options to
acquire 413,400 shares of common stock to certain employees at an exercise price
of $16.00 per share. During 1996, Class A options totalling 16,500 and Class B
options totalling 10,200 were forfeited, and 48,000 Class B options were issued.
The exercise price of all Class B options equalled the market price on the date
of grant and accordingly no compensation cost is recognized. Substantially all
Class B options become exercisable ratably over three years from the date of
issuance.
The Class A and Class B options are exercisable up to the tenth
anniversary of the date of issuance, subject to acceleration upon termination of
employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1996, 10,000 options were granted to certain non-employee
directors at an exercise price of $29.00 per share which was equal to the market
price on the date of grant.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
weighted average fair value of options granted during 1996 and 1995 was $14.75
and $10.00, respectively. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995; risk-free interest rates of 6%
for both years; volatility factor of the expected market price of the Company's
common stock of 30% for both years; and a weighted-average expected life of the
option of 10 years.
50
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS--(Continued)
Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---- ----
Net income:
As reported, reflecting adjustment in 1995
to exclude special management compensation(1) $19,340 $9,407
Pro forma 18,060 9,227
Net income per common share:
As reported, reflecting adjustment in 1995
to exclude special management compensation(1) $ 0.93 $ 0.70
Pro forma 0.87 0.69
- ----------
(1) Special management compensation in 1995 includes the value of Class A
options which became exercisable upon the closing of the Initial Public
Offering.
A summary of the status of the Company's two fixed stock option plans as
of December 28, 1996 and December 30, 1995, and changes during the years ending
those dates is presented below:
December 28, 1996 December 30, 1995
------------------------------- ---------------------------------
Shares Weighted Average Shares Weighted Average
(000) Exercise Price (000) Exercise Price
----- ---------------- ----- ----------------
Outstanding at beginning of year 651,297 $11.69 -- $ --
Granted 58,000 30.02 651,297 11.69
Exercised (1,000) 16.00 -- --
Forfeited (26,700) 8.71 -- --
--------- -------
Outstanding at end of year 681,597 $13.36 651,297 $11.69
========= =======
Options exercisable at year-end 359,597 $ 8.74 237,897 $ 4.21
Weighted average fair value
of options granted during the year $ 14.75 $10.00
51
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS--(Continued)
The following table summarizes information about stock options outstanding
at December 28, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Range of Weighted-Average Weighted- Weighted-
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------ ----------- ---------------- -------------- ------------ --------------
$ 4.21 221,397 8.8 years $ 4.21 221,397 $ 4.21
16.00 402,200 8.8 16.00 138,200 16.00
29.00 to 36.25 58,000 9.3 30.02 -- --
------- -------
$ 4.21 to 36.25 681,597 8.8 $ 13.36 359,597 8.74
======= =======
(b) Profit Sharing Plans
The Company has qualified noncontributory profit sharing plans for
eligible employees. Contributions to the plans as determined by the Board of
Directors and charged to operations during 1996, 1995 and 1994 amounted to
$3,057, $2,178 and $1,719, respectively.
(c) Employee Stock Ownership Plan (ESOP)
In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplements the
Company's Profit Sharing Plan. Under this plan, the Company issued 24,210 and
128,257 shares of HSI common stock to the trust in 1996 and 1994, at an
estimated fair value of $820 and $900, respectively, which amounts were charged
to operations during 1995 and 1994. For 1996, the Company will contribute 3% of
eligible compensation with shares of the Company's common stock.
(d) Supplemental Executive Retirement Plan
In 1994, the Company instituted a nonqualified supplemental executive
retirement plan for eligible employees. Contributions, as determined by the
Board of Directors and charged to operations, were $84, $68 and $27 for 1996,
1995, and 1994, respectively.
52
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 15--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2009. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 28, 1996 are as follows:
1997........................................... $ 9,704
1998........................................... 8,760
1999........................................... 7,469
2000........................................... 5,968
2001........................................... 4,666
Thereafter..................................... 11,769
-------
Total minimum lease payments................... $48,336
=======
Total rental expense for 1996, 1995 and 1994 was $9,667, $7,324 and
$5,874, respectively.
(b) Litigation
Various claims, suits and complaints, such as those involving government
regulations and product liability, arise in the ordinary course of the Company's
business. In the opinion of the Company, all such pending matters are without
merit, covered by insurance or are of such kind, or involve such amounts, as
would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
(c) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2002 (except for a lifetime consulting agreement with a principal
stockholder which provides for initial compensation of $283 per year, increasing
$25 every fifth year beginning in 2002). The agreements provide for varying base
aggregate annual payments of approximately $4,106 per year which decrease
periodically to approximately $1,366 per year. In addition, some agreements have
provisions for incentive and additional compensation.
53
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes amounted to the following:
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Interest....................... $3,708 $6,124 $3,132
Income taxes................... 8,988 5,540 2,451
In conjunction with business acquisitions, the Company used cash as
follows:
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Fair value of assets acquired,
excluding cash............... $50,970 $59,544 $ 3,525
Less liabilities assumed and
created upon acquisition..... 18,430 43,167 3,525
------- ------- -------
Net cash paid.................. $32,540 $16,377 $ ---
======= ======= =======
In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.
54
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 17--OTHER INCOME (EXPENSE)-NET
Other income (expense)-net consists of the following:
Years Ended
---------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Investment gains................ $ 80 $ --- $ ---
Gain on sale of assets.......... 520 33 100
Net foreign exchange gain ..... 3 43 415
Other non-operating income...... 33 200 26
------------ ------------ ------------
$ 636 $ 276 $ 541
============ ============ ============
NOTE 18--QUARTERLY INFORMATION (Unaudited)
The following table sets forth summary quarterly unaudited financial
information for 1996 and 1995, excluding non-recurring special charges and the
related tax effects:
Quarters Ended
--------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
--------- -------- ------------- ------------
Net sales.............. $185,359 $194,722 $212,529 $237,352
Gross profit........... 54,949 57,930 61,944 70,401
Operating income....... 4,704 6,470 7,621 10,868
Net income............. 2,464 4,214 5,290 7,372
Earnings per share..... $ 0.13 $ 0.22 $ 0.24 $ 0.33
Quarters Ended
------------------------------------------------
April 1, July 1, September 30, December 30,
1995 1995 1995 1995
-------- --------- ------------- ----------
Net sales..................... $136,040 $139,753 $156,667 $183,749
Gross profit.................. 40,315 42,107 48,090 60,072
Pro forma operating income.... 2,986 4,689 5,188 6,898
Pro forma net income.......... 936 2,066 2,093 4,312
Pro forma earnings per share.. $ 0.08 $ 0.17 $ 0.17 $ 0.26
55
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
NOTE 18--QUARTERLY INFORMATION (Unaudited)--(Continued)
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software, year-end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of software
enhancements, timing of purchases, special promotional campaigns, fluctuations
in exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 1996 the Company made adjustments,
primarily relating to changes in estimated accruals. The aggregate effect of
such adjustments increased net income in the fourth quarter by approximately
$2,400.
Earnings per share calculations for each quarter were based on the
weighted average number of shares outstanding for each period, and the sum of
the quarters may not necessarily be equal to the full year earnings per share
amount.
NOTE 19 -- SUBSEQUENT EVENTS
On March 7, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Micro Bio-Medics, Inc. (MBMI) will
merge into a wholly-owned subsidiary of the Company. As a result of the
transaction, which has been approved by the Boards of Directors of MBMI and the
Company, outstanding shares of MBMI's common stock will be exchanged at a fixed
rate of 0.62 of a share of the Company's Common Stock for each outstanding 1.0
share of MBMI. Each of the members of MBMI's board of directors have granted to
the Company a proxy to vote their shares of MBMI common stock in favor of the
Merger Agreement and an option, exercisable under certain circumstances, to
acquire their shares for the consideration that they would have received under
the Merger Agreement in respect of those shares.
MBMI distributes medical supplies to physicians and hospitals in the New
York metropolitan area, as well as to healthcare professionals in sports
medicine, emergency medicine, school health, industrial safety, government and
laboratory markets nationwide. MBMI had net sales of approximately $150.0
million and earnings of approximately $1.7 million for its fiscal year ended
November 30, 1996. The completion of the transaction is subject to the
satisfaction of customary closing conditions, including, among others, MBMI
shareholder approval and Hart-Scott-Rodino waiting periods.
56
ITEM 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 1997
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. Executive Compensation
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
from the Company's definitive 1997 Proxy Statement to be filed pursuant to
Regulation 14A.
57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as
a part of this report are listed on the index on page 26.
2. Financial Statement Schedules
(i) HS PHARMACEUTICAL, INC. AND SUBSIDIARIES Page Number
-----------
Report of Independent Certified Public Accountants....................................... 60
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995...................... 61
Statements of Income and Retained Earnings for the years ended
December 28, 1996, December 30, 1995 and
December 31, 1994 ......................................................... 62
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ................................... 63
Notes to Consolidated Financial Statements ..............................................64-71
(ii) Valuation and Qualifying Accounts .................................................. 72
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
During the fourth quarter of 1996, there were no reports filed on Form
8-K.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Melville, State of New York, on March 28, 1997.
Henry Schein, Inc.
By: /s/ Stanley M. Bergman
-----------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Stanley M. Bergman Chairman, Chief Executive Officer, and
- ----------------------- President (principal executive officer) March 28, 1997
Stanley M. Bergman
/s/ Steven Paladino Senior Vice President, Chief Financial
- ----------------------- Officer and Director (principal financial and
Steven Paladino accounting officer) March 28, 1997
/s/ James P. Breslawski Director March 28, 1997
- -----------------------
James P. Breslawski
/s/ Gerald A. Benjamin Director March 28, 1997
- -----------------------
Gerald A. Benjamin
/s/ Leonard A. David Director March 28, 1997
- -----------------------
Leonard A. David
/s/ Mark E. Mlotek Director March 28, 1997
- -----------------------
Mark E. Mlotek
/s/ Barry Alperin Director March 28, 1997
- -----------------------
Barry Alperin
/s/ Pamela Joseph Director March 28, 1997
- -----------------------
Pamela Joseph
/s/ Donald J. Kabat Director March 28, 1997
- -----------------------
Donald J. Kabat
/s/ Marvin H. Schein Director March 28, 1997
- -----------------------
Marvin H. Schein
/s/ Irving Shafran Director March 28, 1997
- -----------------------
Irving Shafran
59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
HS Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of HS
Pharmaceutical, Inc. and Subsidiaries as of December 28, 1996 and December 30,
1995 and the related consolidated statements of income and retained earnings and
cash flows for each of the three years in the period ended December 28, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HS Pharmaceutical,
Inc. and Subsidiaries at December 28, 1996 and December 30, 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 28, 1996, in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
New York, New York
February 5, 1997
60
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, December 30,
1996 1995
------------ ------------
ASSETS
Current:
Cash $ 291,738 $ ---
Accounts receivable, less allowance for doubtful
accounts of $172,196 and $95,703................ 9,214,519 7,062,447
Inventories........................................ 5,138,874 4,258,660
Advances to affiliates............................. 668,568 543,925
Prepaid expenses and other......................... 819,254 565,845
---------- -----------
Total current assets 16,132,953 12,430,877
Property and equipment, net........................... 4,200,088 3,539,376
Goodwill and other intangibles, less accumulated
amortization of $300,789 and $201,479 ............. 2,507,055 165,439
Advances and notes to affiliates...................... 1,114,074 1,076,723
Deposits and other assets............................. 67,966 5,786
----------- -----------
$24,022,136 $17,218,201
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................... $1,057,570 $ 324,875
Revolving credit agreement......................... 1,106,000 ---
Accounts payable and accrued expenses.............. 4,865,854 4,266,631
Income taxes payable............................... 543,592 480,684
Current portion of long-term debt.................. 1,536,428 834,700
----------- -----------
Total current liabilities 9,109,444 5,906,890
Long-term debt, less current portion.................. 2,997,788 2,195,980
Deferred income taxes................................. 191,500 152,000
----------- -----------
Total liabilities 12,298,732 8,254,870
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock--no par value, shares authorized 200;
issued and outstanding 20....................... 40,100 40,100
Additional paid-in capital......................... 342,745 342,745
Retained earnings.................................. 11,340,559 8,580,486
----------- -----------
Total stockholders' equity.................. 11,723,404 8,963,331
----------- -----------
$24,022,136 $17,218,201
=========== ===========
See accompanying notes to consolidated financial statements.
61
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
Net sales.............................. $30,305,702 $28,123,977 $24,500,962
Cost of sales.......................... 18,507,815 17,467,680 15,925,685
----------- ----------- -----------
Gross profit........................ 11,797,887 10,656,297 8,575,277
Operating expenses:
Selling, general and administrative. 6,995,028 6,157,515 5,615,183
----------- ----------- -----------
Operating income................. 4,802,859 4,498,782 2,960,094
Other income (expense):
Interest expense, net............... (577,712) (500,293) (395,159)
Foreign exchange remeasurement
gain (loss)...................... (43,599) (10,163) 47,543
Other .............................. 166,431 147,387 ---
---------- ----------- -----------
Income before taxes on income.... 4,347,979 4,135,713 2,612,478
Taxes on income........................ 1,587,906 1,368,131 1,004,000
----------- ----------- -----------
Net income............................. 2,760,073 2,767,582 1,608,478
Retained earnings, beginning of year... 8,580,486 5,812,904 4,204,426
----------- ----------- -----------
Retained earnings, end of year......... $11,340,559 $ 8,580,486 $ 5,812,904
=========== =========== ===========
See accompanying notes to consolidated financial statements.
62
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income................................................. $2,760,073 $2,767,582 $1,608,478
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 597,184 425,861 469,763
Provision for losses on accounts receivable............. 55,682 15,000 38,843
Provision for obsolete inventories...................... 112,677 --- ---
Provision for deferred income taxes..................... 39,500 81,000 16,000
Other .................................................. --- 5,000 25,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............ (1,761,616) 180,067 (1,821,447)
Increase in inventories............................... (323,245) (1,199,165) (33,420)
(Increase) decrease in advances to affiliates......... (161,994) (381,170) 156,123
Increase in prepaid expenses and other................ (239,287) (138,634) (212,711)
(Increase) decrease in deposits and other............. (58,608) 263,270 (258,071)
Increase in accounts payable and accrued expenses.... 178,650 415,386 940,230
Increase (decrease) in income taxes payable........... 62,908 339,870 (1,763,056)
---------- ---------- ----------
Net cash provided by (used in) operating activities.......... 1,261,924 2,774,067 (834,268)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures....................................... (662,725) (369,978) (1,156,332)
Business acquisition, net of cash acquired................. (800,000) --- ---
---------- ---------- ----------
Net cash (used) in investing activities...................... (1,462,725) (369,978) (1,156,332)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank overdraft...................... 131,904 (575,847) (309,837)
Credit line borrowings, net................................ 1,106,000 (1,000,000) 1,000,000
Proceeds from long-term debt............................... 217,816 --- 1,792,020
Principal payments on long-term debt....................... (963,181) (828,242) (491,583)
---------- ---------- ----------
Net cash provided by (used in) financing activities.......... 492,539 (2,404,089) 1,990,600
---------- ---------- ----------
Net increase in cash......................................... 291,738 --- ---
Cash, beginning of year...................................... --- --- ---
---------- ---------- ----------
Cash, end of year............................................ $ 291,738 $ --- $ ---
========== ========== ==========
Supplemental cash flow information:
Interest paid.............................................. $ 802,331 $ 608,216 $ 387,101
Taxes paid................................................. $1,535,744 $ 996,520 $2,836,776
Business acquisitions
Fair value of assets acquired, excluding cash.............. $4,070,265 $ --- ---
Less liabilities assumed and created upon acquisition ..... 3,270,265 --- ---
---------- ---------- ----------
$ 800,000 $ --- $ ---
========== ========== ==========
See accompanying notes to consolidated financial statements.
63
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
Description of Business
HS Pharmaceutical, Inc. and Subsidiaries (the "Company") manufactures and
distributes pharmaceutical products and sells other accessory products to
dental, medical and veterinary distributors worldwide.
Principles of Consolidation
The consolidated financial statements include the accounts of HS
Pharmaceutical, Inc. and all of its wholly-owned subsidiaries. All material
intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the
last Saturday of December. Accordingly, fiscal years ended December 28, 1996 and
December 30, 1995 consisted of 52 weeks and the fiscal year ended December 31,
1994 consisted of 53 weeks.
Inventories
Inventories are valued at the lower of cost or market value. Manufactured
inventories of raw materials, work-in-progress and finished goods are valued
using standard costing methods, which approximate the first-in, first-out
("FIFO") method. The cost of inventory purchased for resale is determined by the
FIFO method.
64
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF ACCOUNTING POLICIES--(Continued)
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
----------
Buildings and improvements........ 40
Machinery and warehouse equipment. 5 - 10
Computer hardware................. 5
Capital lease equipment........... 5 - 10
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful lives of the assets or the lease term.
Goodwill
Goodwill represents the excess of costs over the fair value of assets acquired
and is amortized using the straight-line method over a life of 30 years.
Intangibles
Intangibles consist of costs incurred in connection with obtaining
abbreviated new drug applications, investigational new drug exemptions and
licenses, permits and approvals relating to the manufacture and sale of
pharmaceutical products. These costs are being amortized using the straight-line
method over their estimated useful lives which is expected to be 20 years.
Taxes on Income
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents.
Foreign Currency Remeasurement
Monetary assets and liabilities denominated in foreign currency have been
remeasured into the functional currency (the U.S. dollar) at the year-end rate
of exchange (U.S. $1 = Canadian $1.35, $1.35 and $1.40 at December 28, 1996,
December 30, 1995 and December 31, 1994, respectively). Non-monetary items are
remeasured at historical rates. Revenue and expenses are remeasured based on the
average monthly rate. Foreign exchange remeasurement gains and losses are
included in the determination of net income for the year.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through December 28, 1996.
65
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--INVENTORIES
Inventories consist of the following:
December 28, December 30,
1996 1995
------------ ------------
Raw materials............................. $1,969,239 $1,110,857
Work-in-progress.......................... 38,259 136,062
Finished goods............................ 3,131,376 3,011,741
---------- ----------
$5,138,874 $4,258,660
========== ==========
NOTE 3--PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
December 28, December 30,
1996 1995
------------ ------------
Land.................................. $ 23,474 $ 23,474
Building.............................. 1,335,465 1,331,400
Machinery and equipment............... 7,414,138 5,552,819
Computer hardware..................... 318,481 281,645
Capital lease equipment............... 277,545 359,658
Leasehold improvements................ 261,823 199,519
---------- ----------
9,630,926 7,748,515
Less accumulated depreciation and
amortization...................... 5,430,840 4,209,139
---------- ----------
Net property and equipment............ $4,200,086 $3,539,376
========== ==========
NOTE 4--BANK OVERDRAFT AND REVOLVING CREDIT AGREEMENT
The bank overdraft and revolving credit agreements are due on demand and
bear interest at the U.S. prime rate, the Canadian prime rate and LIBOR plus
3/4%, respectively. These facilities are secured by a general assignment of
accounts receivable, a general security agreement on all machinery and
equipment, a $2,500,000 demand debenture on building and land, a postponement of
claim, and a guarantee bond.
66
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--BUSINESS ACQUISITIONS
On March 15, 1996, the Company acquired substantially all of the net assets
of a manufacturer and distributor of private label dental products. The
acquisition was accounted for as a purchase and, accordingly, the results of the
acquiree are included in the consolidated financial statements from January 1,
1996, the effective date of the agreement. The aggregate purchase price is
estimated at $2,850,000, the maximum contingent amount which is based upon
future revenues attained. The purchase price, which was financed through
available cash resources and a note payable to the seller in the amount of
$1,793,874 (See Note 6), has been allocated to the net assets acquired based
upon their respective fair market values.
The excess of the acquisition costs over the fair value of the identifiable
net assets acquired of $2,440,926 has been recorded as goodwill.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
December 28, December 30,
1996 1995
------------ ------------
Unsecured acquisition note payable over 5 years
with annual payments ranging from $250,000 to
$500,000, including interest at 6%, due March 15,
2000.................................................. $1,793,874 $ ---
Term loans payable in monthly installments
maturing at varying dates from August
1997 through February 2000, with interest at Canadian
prime plus 0.25%..................................... 1,723,462 1,877,901
Notes payable bearing interest at prime, payable in
annual installments of $191,885 principal, plus
interest, due March 31, 2001......................... 959,424 1,151,308
Capital lease obligations .............................. 57,456 1,471
---------- ----------
4,534,216 3,030,680
Less: Current portion................................... 1,536,428 834,700
---------- ----------
$2,997,788 $2,195,980
========== ==========
67
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--LONG-TERM DEBT--(Continued)
Principal payments on long-term debt mature as follows:
Year Amount
---- ------
1997..................................... $1,536,428
1998..................................... 797,684
1999..................................... 873,479
2000..................................... 663,048
2001..................................... 663,577
----------
$4,534,216
==========
NOTE 7--RELATED PARTY TRANSACTIONS
(a) Certain services of a 50% shareholder are provided to the Company at
the shareholder's cost. Total charges from this shareholder were approximately
$160,000 , $83,000 and $109,000 for 1996, 1995 and 1994, respectively. At
December 28, 1996 and December 30, 1995, "Advances to affiliates" includes net
amounts due (to) from this shareholder of approximately $1,113,000 and
($390,000), respectively, and "Accounts payable and accrued expenses" includes
amounts due to this shareholder of approximately $900,000 and $927,000,
respectively.
In March 1991, the Company entered into an agreement with this same
shareholder to supply products at prices and quantities as defined in the
agreement. Sales to this same shareholder (including sales under this agreement)
accounted for approximately 26%, 22% and 24% of the Company's sales for 1996,
1995 and 1994, respectively. Included in "Accounts receivable" at December 28,
1996 and December 30, 1995 were approximately $1,680,000 and $1,356,000,
respectively, for amounts due from this shareholder.
(b) In March 1991, the other 50% shareholder of the Company granted the
Company a ten-year license to use certain of their trademarks. Royalties of
$75,000 annually are required under the terms of the agreement and were paid in
1996, 1995 and 1994.
In the ordinary course of business, the Company sells products to this
same shareholder. Net sales to this shareholder amounted to approximately
$1,090,000, $608,000 and $1,167,000 for 1996, 1995 and 1994, respectively.
Included in "Accounts receivable" at December 28, 1996 and December 30, 1995
were approximately $271,000 and $88,000, respectively, for amounts due from this
shareholder.
In addition, the Company also purchases pharmaceutical products from this
shareholder. Net purchases from this shareholder amounted to approximately
$1,080,000, $4,434,000 and $3,773,000 for 1996, 1995 and 1994, respectively.
Included in "Accounts payable and accrued expenses" at December 28, 1996 were
approximately $5,549,000 and $974,000 respectively, for amounts due to this
shareholder.
(c) Interest expense related to accounts payable and accrued expenses
owing to the above shareholders amounted to approximately $65,000, $51,000 and
$65,000 for 1996, 1995 and 1994, respectively.
68
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--RELATED PARTY TRANSACTIONS--(Continued)
(d) An affiliated company supplies a new product line to the Company.
Included in "Advances to affiliates" are net amounts due from this affiliate of
approximately $1,225,000 and $974,000 at December 28, 1996 and December 30,
1995, respectively. Included in net advances is a note receivable of
approximately $823,000 at December 28, 1996. Principal on this note is due in
various annual installments beginning in 1997 through 2005, with an interest
rate to be determined annually.
NOTE 8--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2005. Total rental expense for 1996, 1995 and 1994 was
approximately $ 416,000 , $163,000 and $153,000, respectively. At December 28,
1996, future minimum annual rental payments under these leases are as follows:
Year Amount
---- ------------
1997..................................... $ 383,135
1998..................................... 378,153
1999..................................... 311,725
2000..................................... 200,554
2001..................................... 198,400
Thereafter............................... 2,929,500
----------
$4,401,467
==========
(b) Litigation
Various claims, suits and complaints, such as those involving government
regulations and product liability, arise in the ordinary course of the Company's
business. In the opinion of the Company, all such pending matters are without
merit, covered by insurance or are of such kind, or involve such amounts, as
would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
NOTE 9 -TAXES ON INCOME
Taxes on income are based on income before taxes as follows:
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Domestic............................ $2,233,668 $2,500,916 $1,193,905
Foreign............................. 2,114,311 1,634,797 1,418,573
---------- ---------- ---------
Total income before taxes on income. $4,347,979 $4,135,713 $2,612,478
========== ========== ==========
69
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES ON INCOME -- (Continued)
The provisions for taxes on income was as follows:
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
-------------- ------------ ------------
Current tax expense:
U.S. Federal............ $ 748,423 $ 764,670 $ 382,000
State and local......... 139,925 26,801 124,000
Foreign................. 660,058 495,660 482,000
---------- ---------- ----------
Total current............. 1,548,406 1,287,131 988,000
Deferred tax expense:
Foreign................. 39,500 81,000 16,000
---------- ---------- ----------
Total provision........... $1,587,906 $1,368,131 $1,004,000
========== ========== ==========
The deferred tax liability arises from temporary differences relating to
depreciation and amortization.
The Company's effective tax rate approximates the U.S. Federal statutory
rate.
NOTE 10--MAJOR CUSTOMERS AND EXPORT SALES
Sales to two unaffiliated customers accounted for approximately 38%, 25%
and 25% of net sales in 1996, 1995 and 1994, respectively.
NOTE 11--EMPLOYEE BENEFIT PLAN
Effective January 1, 1992, the Company adopted a 401(k) profit sharing
plan to provide retirement benefits for eligible employees. Matching
contributions by the Company, which were determined by the board of directors,
were approximately $41,000, $39,000 and $36,000 for 1996, 1995 and 1994,
respectively.
In addition, the Company maintains a defined contribution plan for
eligible employees. Contributions to this plan, which were determined by the
board of directors, were approximately $92,000 , $92,000 and $97,000 for 1996,
1995 and 1994, respectively.
70
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and temporary cash investments. The carrying value of
financial instruments approximated fair value as of December 28, 1996 because of
the short maturity of these instruments.
Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its dispersion across different
geographic areas. The Company maintains an allowance for losses based on the
expected collectability of all receivables.
71
HENRY SCHEIN, INC.
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Add
---------
Balance
at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
----------- --------- ---------- ---------- ---------
Year ended December 31, 1994
Allowance for doubtful
accounts ............... $2,015 $ 246 $ -- $2,261
Other accounts receivable
allowances(1) .......... 1,243 815 -- 2,058
------ ------- ------- ------
$3,258 $ 1,061 $ -- $4,319
====== ======= ======= ======
Year ended December 30, 1995
Allowance for doubtful
accounts ............... $2,261 $ 253 $ -- $2,514
Other accounts receivable
allowances(1) .......... 2,058 1,763 -- 3,821
------ ------- ------- ------
$4,319 $ 2,016 $ -- $6,335
====== ======= ======= ======
Year ended December 28, 1996
Allowance for doubtful
accounts ............... $2,514 $ 1,402 $ -- $3,916
Other accounts receivable
allowances(1) .......... 3,821 -- (432) 3,389
------ ------- ------- ------
$6,335 $ 1,402 $ (432) $7,305
====== ======= ======= ======
- --------------
(1) Primarily allowance for sales returns.
72
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
Unless otherwise indicated, exhibits are incorporated by reference to the
correspondingly numbered exhibits in the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528)
3.1 Form of Amended and Restated Articles of Incorporation
3.2 Form of Bylaws
9.1 Voting Trust Agreement dated September 30, 1994, as
amended, among the Company, the Estate of Jacob M.
Schein, the Trusts under Articles Third and Fourth of
the Will of Jacob M. Schein, the Trust established by
Pamela Joseph under Trust Agreement dated February 9,
1994, the Trust established by Martin Sperber under
Trust Agreement dated September 19, 1994, management
stockholders and Stanley M. Bergman, as voting trustee
9.2 Agreements dated December 27, 1994 among the Company,
various executive officers and Stanley M. Bergman, as
voting trustee
9.3 Agreements dated as of May 1, 1995 among the Company,
various executive officers and Stanley M. Bergman, as
voting trustee
10.1 Amended and Restated HSI Agreement (the "HSI
Agreement"), effective as of February 16, 1994, among
the Company, Marvin H. Schein, the Trust established by
Marvin H. Schein under Trust Agreement dated September
9, 1994, the Charitable Trust established by Marvin H.
Schein under Trust Agreement dated September 12, 1994,
the Estate of Jacob M. Schein, the Trusts established by
Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under
Trust Agreement dated February 9, 1994, the Trust
established by Martin Sperber under Trust Agreement
dated September 19, 1994, the Trust established by
Stanley M. Bergman under Trust Agreement dated September
15, 1994, Pamela Schein, Pamela Joseph, Martin Sperber,
Stanley M. Bergman, Steven Paladino and James P.
Breslawski (collectively, the "HSI Parties")
10.2 HSI Registration Rights Agreement dated September 30,
1994, among the Company, Pamela Schein, the Trust
established by Pamela Joseph under Trust Agreement dated
February 9, 1994, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by Marvin
H. Schein under Trust Agreement dated September 19,
1994, the Charitable Trust established by Marvin H.
Schein under Trust Agreement dated September 12, 1994,
Martin Sperber, the Trust established by Martin Sperber
under Trust Agreement dated September 19, 1994, Stanley
M. Bergman and the Trust established by Stanley M.
Bergman under Trust Agreement dated September 15, 1994
10.3 Letter Agreement dated September 30, 1994 to the Company
from Marvin H. Schein, Pamela Joseph and Pamela Schein
10.4 Release to the HSI Agreement dated September 30, 1994
73
Exhibit No. Description Page No.
- ----------- ----------- --------
10.5 Separation Agreement dated as of September 30, 1994 by
and between the Company, Schein Pharmaceutical, Inc. and
Schein Holdings, Inc.
10.6 Restructuring Agreement dated September 30, 1994
among Schein Holdings, Inc., the Company, the Estate
of Jacob M. Schein, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated
September 9, 1994, the Charitable Trust established
by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, Pamela Joseph, the
Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994; the Trusts under
Articles Third and Fourth of the Will of Jacob M.
Schein; Stanley M. Bergman, the Trust established by
Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Martin Sperber, the Trust
established by Martin Sperber under Trust Agreement
dated December 31, 1993, and the Trust established
by Martin Sperber under Trust Agreement dated
September 19, 1994
10.7 Agreement and Plan of Corporate Separation and
Reorganization dated as of September 30, 1994 among
Schein Holdings, Inc., the Company, the Estate of
Jacob M. Schein, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated
September 9, 1994, the Charitable Trust established
by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, the Trust
established Article Fourth of the Will of Jacob M.
Schein for the benefit of Pamela Schein and her issue
under Trust Agreement dated September 29, 1994,
Pamela Joseph, the Trust established by Pamela Joseph
under Trust Agreement dated February 9, 1994, the
Trust established by Pamela Joseph under Trust
Agreement dated September 28, 1994 and the Trusts
under Articles Third and Fourth of the Will of Jacob
M. Schein
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended
and restated effective as of July 1, 1995**
10.9 Henry Schein, Inc. Amendment and Restatement of the
Supplemental Executive Retirement Plan**
10.10 Henry Schein, Inc. Summary Executive Incentive Plan**
10.11 Consulting Agreement dated September 30, 1994 between
the Company and Marvin H. Schein**
10.12 Employment Agreement dated as of January 1, 1992 between
the Company and Stanley M. Bergman**
10.13 Amended and Restated Stock Issuance Agreement dated as
of December 24, 1992 between the Company and Stanley M.
Bergman**
10.14 Stock Issuance Agreements dated December 27, 1994
between the Company and various executive officers**
10.15 Agreement and Plan of Merger dated as of September 1,
1995, among Henry Schein, Inc., Schein Dental Equipment
Corp., Marvin Schein and others
10.16 Stock Purchase Agreement dated August 25, 1995, by Henry
Schein, Inc., PRN Medical, Inc. and its shareholders,
and Florida Doctor Supply, Inc. and its shareholders
10.17 Restated Standard Indemnity Agreement dated February 8,
1993, as amended January 25, 1993, by and between Showa
Denko America, Inc. and the Company
74
Exhibit No. Description Page No.
- ----------- ----------- --------
10.18 Guaranty Agreement by and between Showa Denko K.K. and
the Company, relating to the Restated Standard Indemnity
Agreement dated February 8, 1993, as amended January 25,
1993, by and between Showa Denko America, Inc. and the
Company
10.19 Stock Issuance Agreements dated as of May 1, 1995
between the Company and executive officers
10.20 Agreement of Purchase and Sale of Assets dated February
28, 1996 by and among the Company, Benton Dental, Inc.
and Modern Dental Concepts, Inc.+
10.21 Credit Agreement dated as of December 8, 1994 between
the Company and The Chase Manhattan Bank, N.A.
10.22 Loan Agreement dated May 5, 1995 by and between the
Company and New York State Urban Development Corporation
10.23 Term Loan Agreement dated as of November 15, 1993
between Henry Schein Europe, Inc. and Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A.
10.24 Corporate Guarantee dated November 15, 1993 by the
Company, Zahn Dental Co., Inc. Zahn Dental (Florida),
Inc., Zahn Dental (Mass), Inc., Tri- State Medical
Supply, Inc. and Zahn Holdings, Inc. with respect to the
Term Loan dated as of November 15, 1993 between Henry
Schein Europe, Inc. and Cooperatieve Centrale
Raiffeisen-Boerenleenbank, B.A.
10.25 Joint and Several Guarantee dated February 7, 1995 by
the Company in favor of Banque Nationale de Paris
10.26 Joint and Several Guarantee dated February 7, 1995 by
the Company in favor of Banque Francaise du Commerce
Exterieur
10.27 Guarantee dated March 1, 1996 by the Company in favor of
Deutsche Bank AG+
10.28 Lease Agreement dated December 22, 1995 by and between
Dugan Realty, L.L.C. and the Company+
10.29 Commercial Guaranty dated August 1, 1994 by the Company
in favor of the Mid-City National Bank
10.30 Discretionary Line of Credit dated August 18, 1995
between PNC Bank, Delaware and one of the Company's 50%
owned companies
10.31 Discretionary Line of Credit Demand Note dated
August 18, 1995 in favor of one of the Company's 50%
owned companies
10.32 Loan Agreement dated March 30, 1992 between the Royal
Bank of Scotland plc, Henry Schein U.K. Holdings Limited
and BDG U.K. Holdings Limited
10.33 Loan Agreement dated January 28, 1994 between the Royal
Bank of Scotland plc, Henry Schein U.K. Holdings Limited
and Dental Express (Supplies) Limited
10.34 Credit Agreement dated June 5, 1995 among Canadian
Imperial Bank of Commerce and one of the Company's 50%
owned companies
10.35 Master Lease Agreement dated as of February 28, 1991
between General Electric Capital Corporation and the
Company
10.36 Master Lease Agreement dated December 2, 1994 between
Chase Equipment Leasing, Inc. and the Company
10.37 Software License Agreement dated as of June 20, 1995
between the Company and XcelleNet, Inc.
10.38 Software License Agreement dated as of October 31, 1994,
as amended, between J.D. Edwards & Company
75
Exhibit No. Description Page No.
- ----------- ----------- --------
10.39 Software Update Agreement dated as of October 31, 1994,
as amended, between J.D. Edwards & Company
10.40 Software Services Agreement dated as of October 31,
1994, as amended, between J.D. Edwards & Company
10.41 Lease dated December 3, 1990 between WRC Properties,
Inc. and the Company
10.42 Lease dated March 2, 1992 between Vista Distribution
Center, Inc. and the Company
10.43 Lease dated as of September 30, 1993, as amended
October 14, 1993 and May 23, 1995, by and between
Broad Hollow Realty Co. and the Company
10.44 Lease dated April 27, 1995 by Lyndean Investments
Limited to Kent Dental Limited and Henry Schein U.K.
Holdings Limited
10.45 Lease dated October 23, 1994 between Georg and Pia
Netzhammer and Henry-Schein Dentina GmbH (English
translation and original version)
10.46 Lease dated January 11, 1995 between Lyndean Investments
Limited, Kent Dental Limited and Henry Schein U.K.
Holdings Limited
10.47 Stock Purchase Agreement dated as of August 18, 1995
among the Company, the Mark Family Partnership and others
10.48 Group Purchasing Program Agreement dated March 31, 1994,
as amended June 26, 1995, by and between AMA Resources,
Inc. and the Company
10.49 Hospital Supply Purchase Agreement dated as of
November 10, 1994 between Veterinary Centers of America,
Inc. and the Company
10.50 Award of Contract to the Company dated April 14, 1995 by
Department of the Army
10.51 Sales Agent Agreement dated March 1, 1995 by and between
Merck & Co., Inc. and the Company
10.52 Supply Agreement dated March 20, 1991
10.53 Shareholders' Agreement dated March 20, 1991
10.54 Non-Negotiable Promissory Note dated March 20, 1991 from
the Company to N-Tech
10.55 Guaranty dated March 20, 1991 by the Company and others
in favor of N-Tech, Inc.
10.56 Demand Debenture dated December 20, 1988 from one of the
Company's 50% owned companies to Canadian Imperial Bank
of Commerce
10.57 Pledge Agreement dated December 20, 1988 of one of the
Company's 50% owned companies to Canadian Imperial Bank
of Commerce
10.58 Shareholders' Agreement dated as of December 1, 1990 by
and among the shareholders of Henry Schein Espana, S.A.
10.59 Shareholders' Agreement dated as of April 1, 1991 between
the shareholders of Schein-Dentina, B.V. (English
translation)
10.60 Put and Call Option Agreement dated August 29, 1991
between Schein International (Europe) Inc. and the
shareholders of Henry Schein U.K. Holdings Limited
10.61 Deed of Guarantee dated August 29, 1991 between Henry
Schein, Inc. and the shareholders of Henry Schein U.K.
Holdings Limited
10.62 Stock Purchase Agreement dated November 1, 1992 among SSN
Healthcare Supply, Inc., the Company, Tri-State Medical
Supply, Inc. and a shareholder
10.63 Stock Purchase and Shareholders' Agreement dated
March 19, 1993 by and among S.A. Hospithera and Henry Schein
Europe, Inc.
76
Exhibit No. Description Page No.
- ----------- ----------- --------
10.64 Agreement dated March 19, 1993 by and among S.A.
Hospithera N.V., Henry Schein Europe Inc., and S.A. Henry
Schein Hospithera N.V.
10.65 Supply Agreement dated as of March 15, 1993 between Henry
Schein B.V. and S.A. Henry Schein Hospithera N.V.
10.66 Put and Call Option Agreement dated July 1, 1993 between
P.W. White Holdings Limited and Henry Schein Europe Inc.
10.67 Shareholders' Agreement dated July 1, 1993 between the
shareholders of Henry Schein UK Holdings Ltd.
10.68 Consortium Agreement dated July 1, 1993 between the
shareholders of Henry Schein UK Holdings Ltd.
10.69 Guarantee dated July 1, 1993 between the Company and P.W.
White Holdings Limited
10.70 Restructuring Agreement dated July 30, 1993 by and among
the Company, Dental Plan, Inc., and certain of its
employees
10.71 Share Purchase Agreement dated as of November 17, 1993 by
and among Henry Schein B.V. and Johannes Cornelis van den
Braak
10.72 Asset Purchase and Business Development Agreement dated
May 23, 1994 among the Company, Chicago Medical Equipment
Company, and its principal stockholder, Universal
Footcare Holdings Corp., Universal Footcare Products,
Inc. and Universal Footcare Sales Co., L.L.C.
10.73 Sales Service Agreement dated as of August 1, 1994
between Universal Footcare Products, Inc. and Universal
Footcare Sales Co., L.L.C.
10.74 Unanimous Shareholders Agreement dated August 4, 1994
among Henry Schein Canada Inc., the Company, 972704
Ontario Inc. and its shareholders, and Consolidated
Dental Ltd.
10.75 Share Purchase Agreement dated June 27, 1994 by and
between the shareholders of Henry Schein France S.A.
10.76 Shareholders Agreement dated January 1, 1995 among SSN
Healthcare Supply, Inc., South Jersey Medical Supply Co.,
Inc., South Jersey Surgical Supply Co., Inc., and its
shareholders
10.77 Shareholders Agreement dated as of January 24, 1995 by
and among the shareholders of Dentisoft, Inc.
10.78 Purchase Agreement dated as of June 14, 1995 among The
Veratex Corporation, the Company and HSI Michigan Corp.
10.79 Form of Henry Schein, Inc. Non-Employee Director Stock
Option Plan +**
10.80 Supply Agreement made as of July 7, 1995 between Tidi
Products, Inc. and the Company
10.81 Agreement Subject to Conditions Precedent dated July 21,
1995 between Henry Schein Europe Inc., Henry Schein
France S.A., Gerard Ifker, Didier Cochet, Frederic Ladet,
Jean-Hugues Lelievre and Christophe Morales (English
Translation)
10.82 Put and Call Option Agreement dated June 9, 1995 between
William Roger Killiner and Henry Schein U.K. Holdings
Limited
10.83 Put and Call Option Agreement dated June 9, 1995 between
Anthony Alan Anderson and Henry Schein U.K. Holdings
Limited.
10.84 Agreement of Purchase and Sale of Assets dated as of
July 1, 1995 by and among Precision Dental Specialties,
Inc. and its shareholders, PDS Acquisition Corp., and the
Company
10.85 Shareholders Agreement dated as of July 1, 1995 by and
among Precision Dental Specialties, Inc. and its
shareholders, PDS Acquisition Corp., and the Company
10.86 Agreement dated January 1, 1995 between Henry Schein (UK)
Holdings Ltd. and The Royal Bank of Scotland plc
77
Exhibit No. Description Page No.
- ----------- ----------- --------
10.87 Agreement dated March 4, 1993 between Henry Schein (UK)
Holdings Ltd. and The Royal Bank of Scotland plc
10.88 Loan Agreement dated November 16, 1993 between Henry
Schein B.V. and others and Crediet-en-Effectenbank N.V.
(English translation and original version)
10.89 Multicurrency Credit Policy between Henry Schein Espana,
S.A. and others and Banco Popular Espanol, S.A. (English
translation and original version)
10.90 Amended and Restated Credit Agreement (the "Amended
Credit Agreement") dated as of July 5, 1995 among the
Company, The Chase Manhattan Bank, N.A., Natwest Bank,
N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank,
B.A. "Rabobank Nederland", New York Branch and European
American Bank (previously Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Commission File No.
33-96528))
10.91 First Amendment to the Amended Credit Agreement dated
December 15, 1995 among the Company, The Chase Manhattan
Bank, N.A., Natwest Bank, N.A., Cooperatieve Centrale
Raiffeisen Boerenleenbank, B.A. "Rabobank Nederland", New
York Branch and European American Bank+
10.92 Agreement and Plan of Merger dated March 7, 1997 between
the Company and Micro Bio-Medics, Inc.
11.1 Statement re: computation of per share income (loss)+
21.1 List of Subsidiaries of the Registrant
23.1 Consent of BDO Seidman, LLP+
27.1 Financial Data Schedules+
- --------------
+ Filed herewith
** Indicates management contract or compensatory plan or arrangement.
78