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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Sections 13 or 15(d) of the Securities Exchange
Act of 1934.
Date of Report: June 24, 1997
HENRY SCHEIN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-27078 11-3136595
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification Number)
135 Duryea Road
Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
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ITEM 5. OTHER EVENTS
On February 28, 1997, Henry Schein, Inc. (the "Company") acquired all the
common stock of Dentrix Dental Systems, Inc. ("Dentrix") in exchange for
1,070,000 shares of the Company's Common Stock in a business combination
accounted for under the "pooling of interests" method of accounting.
Accordingly, this Form 8-K is being filed to provide restated Selected
Financial Data, Management's Discussion and Analysis of Financial Condition and
Results of Operations and financial statements and related exhibits included in
Form 10-K/A of the Company for the year ended December 28, 1996, which was
previously filed with the Securities and Exchange Commission.
1
SELECTED FINANCIAL DATA................................................................ 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................... 6
FINANCIAL STATEMENTS AND EXHIBITS
Report of Independent Certified Public Accountants................................. 14
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995................... 15
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ................................... 16
Statements of Stockholders' Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994.................. 17
Statements of Cash Flows for the years ended December 28,
1996, December 30, 1995 and December 31, 1994............................... 18
Notes to Consolidated Financial Statements .................................... 19-42
Schedule, years ended December 28, 1996, December 30, 1995 and
December 31, 1994
II-Valuation and Qualifying Accounts ....................................... 43
All other schedules are omitted because the required information
is either inapplicable or is included in the consolidated financial
statements or the notes thereto
Statement re: computation of per share income (loss)
Financial Data Schedules
2
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. The selected financial data and
consolidated financial statements include adjustments to give effect to the
acquisition of Dentrix, effective February 28, 1997, which was accounted for
under the pooling of interests method. The selected financial data presented
below should be read in conjunction with the Consolidated Financial Statements
and related notes thereto in Item 8 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7. The Selected
Operating Data and Net Sales By Market Data presented below have not been
audited.
Years Ended
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December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
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(in thousands, except per share and selected operating data)
Statement of Operations Data:
Net sales ..................... $ 840,122 $ 623,302 $ 490,834 $ 417,838 $ 363,477
Cost of sales ................. 587,013 427,448 344,868 294,954 257,262
--------- --------- --------- --------- ---------
Gross profit .................. 253,109 195,854 145,966 122,884 106,215
Selling, general and
administrative expenses ..... 220,500 174,867 131,009 111,214 96,853
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) ....... 32,609 190 (8,646) 5,613 1,852
Interest income ............... 2,558 552 251 856 1,210
Interest expense .............. (3,421) (5,835) (3,775) (3,228) (2,971)
Other income (expense) - net .. 771 390 542 (634) 255
--------- --------- --------- --------- ---------
Income (loss) before taxes
on income (recovery),
minority interest and
equity in earnings of
affiliates .................. 32,517 (4,703) (11,628) 2,607 346
Taxes on income (recovery) .... 11,343 5,126 (1,630) 1,351 622
Minority interest in net income
(loss) of subsidiaries ..... 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 .......... 22,523 (8,801) (10,065) 2,234 487
Cumulative effect of
accounting change .......... -- -- -- 1,891 --
--------- --------- --------- --------- ---------
Net income (loss) ............. $ 22,523 $ (8,801) $ (10,065) $ 4,125 $ 487
========= ========= ========= ========= =========
3
Years Ended
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December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
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(in thousands, except per share and selected operating data)
Pro Forma Income Data (4):
Pro forma operating income .. $ 32,609 $ 20,987 $ 14,957
Pro forma net income ........ $ 21,326 $ 10,289 $ 7,483
Pro forma net income per
common share ............. $ 0.98 $ 0.71 $ 0.57
Pro forma average shares
outstanding .............. 21,794 14,517 13,197
Selected Operating Data:
Number of orders shipped .... 3,079,000 2,630,000 2,275,000 2,044,000 1,824,000
Average order size .......... $ 273 $ 237 $ 216 $ 204 $ 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) ............... 30,965 33,007 14,909 9,866 6,377
International(8) ............ 146,999 107,703 83,927 59,416 51,041
---------- ---------- ---------- ---------- ----------
$ 840,122 $ 623,302 $ 490,834 $ 417,838 $ 363,477
========== ========== ========== ========== ==========
Balance Sheet Data
(at period end):
Working capital ............. $ 204,575 $ 104,455 $ 76,814 $ 74,167 $ 28,066
Total assets ................ 467,450 299,364 191,373 161,437 138,043
Total debt .................. 39,746 43,049 61,138 56,712 41,526
Redeemable stock (9) ........ -- -- 14,745 -- --
Minority interest ........... 5,289 4,547 1,823 1,051 411
Stockholders' equity ........ 292,016 143,865 40,266 43,896 39,927
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(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 1992, cash payments of $5.3 million
for income taxes resulting from stock grants made to an executive
officer
4
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 Conditions and Results of
Operations - Overview" in Item 7 herein.
(3) Includes special professional fees incurred by the Company in
connection with the Reorganization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview"
in Item 7 herein.
(4) Reflects the pro forma elimination of special charges incurred in 1995
and 1994 for special management compensation of $20.8 million and
$21.6 million, respectively, and special professional fees incurred in
1994 of $2.0 million, arising from the Reorganization, and the related
tax effects of $1.2 million and $5.8 million for 1995 and 1994,
respectively, and provision for income taxes on previously untaxed
earnings of Dentrix as an S Corporation of $1.2 million, $0.5 million
and $0.3 million for 1996, 1995 and 1994, respectively. See
"Management's Discussion and Analysis of Results of Financial
Condition and Results of Operations-Overview and Recent Developments""
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-Overview" in Item 7 herein.
5
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included herein.
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. ("Dentrix"), a leading provider of clinically-based dental
practice management systems with 1996 net sales of approximately $10.2 million,
and (ii) in a purchase transaction, the business of Smith Holden, the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million.
The financial statements include adjustments to give effect to the
acquisition of Dentrix for all periods presented. Prior to its acquisition by
the Company, Dentrix elected to be treated as an S Corporation under the
Internal Revenue Code, and accordingly, its earnings were not subject to
taxation at the corporate level. Pro forma adjustments have been made to
reflect a provision for income taxes on such previously untaxed earnings for
each period presented.
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
6
pre-existing long-term incentive plan and to provide them with an ownership
interest in the Company. In connection with the issuance of the shares, a cash
payment for income taxes relating to such stock issuances of approximately $2.4
million was paid. This cash bonus, plus $3.5 million, the fair value of the
related stock issued, net of amounts accrued under the long-term incentive plan
of approximately $1.9 million, resulted in an additional special management
compensation charge to the Company of approximately $4.0 million in 1994.
Charges to earnings for the year ended 1995 related to a mark-to-market
adjustment (because of certain repurchase features) for stock grants made to an
executive officer of the Company and the stock issuances of the other senior
management of approximately $17.5 million and cash payments of $0.5 million for
income taxes related to the stock issuances.
Additionally, the Company has granted certain employees options for
shares of the Company's Common Stock, which became exercisable upon the
Company's initial public offering on November 3, 1995, at which time
substantially all such options vested. Non-recurring special compensation
charges for the options issued to employees recorded in the fourth quarter of
1995 amounted to approximately $2.8 million. In addition, the Company recorded
an approximate $1.1 million related tax benefit.
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)
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Years Ended
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December 28, December 30, December 31,
1996 1995 1994 1996 to 1995 1995 to 1994
--------------------------------- -----------------------------------------------
Net Sales by Market (1):
Dental (2) 51.8% 52.6% 55.9% 32.9% 19.5%
Medical 22.8 20.1 18.3 52.3 39.8
Veterinary 4.2 4.7 5.7 20.5 5.2
Technology (3) 3.7 5.3 3.0 (6.2) 121.4
International (4) 17.5 17.3 17.1 36.5 28.3
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100.0% 100.0% 100.0% 34.8 27.0
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(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.
7
1996 Compared to 1995
Net sales increased $216.8 million, or 34.8%, to $840.1 million in
1996 from $623.3 million in 1995. Of the $216.8 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 $2.0 million, or 6.2% 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
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 (Registered)
Plus Windows (Registered) based product; offset due to increase in sales of
Dentrix software systems.
Gross profit increased by $57.2 million, or 29.2%, to $253.1 million in
1996, from $195.9 million in 1995, while gross profit margin decreased by 1.3%
to 30.1% from 31.4% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(Registered) Plus
for Windows(Registered) products were sold in 1996. Excluding gross profit
margin for the Company's technology group, which was 69.0% for 1996 as compared
to 79.3% 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 $45.6 million,
or 26.1%, to $220.5 million in 1996 from $174.9 million in 1995. Selling and
shipping expenses increased by $38.2 million, or 33.6%, to $151.8 million in
1996 from $113.6 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.1% to 18.1% in 1996 from 18.2% 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(Registered) Plus for Windows(Registered) 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
$7.4 million, or 12.1%, to $68.7 million in 1996 from $61.3 million in 1995,
primarily as a result of acquisitions. As a percentage of net sales, general and
administrative expenses decreased 1.6% to 8.2% in 1996 from 9.8% in 1995 due
primarily to the relatively fixed nature of general and administrative expenses
when compared to the 34.8% increase in sales volume for the same period.
8
Net interest expenses decreased $4.4 million to $0.9 million in 1996 from
$5.3 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 $32.6 million. On a pro forma basis, adjusting for a
provision for taxes on the previously untaxed earnings of Dentrix included in
1996 results, Schein's effective tax rate would have been 38.6%. The difference
between the Company's effective tax rate and the Federal statutory rate relates
primarily to state income taxes offset by tax-exempt interest on municipal
securities. In 1995, the Company's provision for taxes was $5.1 million, while
the pre-tax loss was $4.7 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, excluding special charges, and adjusting for a provision for taxes
on the previously untaxed earnings of Dentrix included in 1995 results, taxes on
income for 1995 were $6.8 million, resulting in an effective tax rate of 42.5%.
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 the fourth quarter of 1996 the Company made adjustments which
increased net income by approximately $2.4 million. These adjustments, which
related predominately to estimated reserves for premium coupon redemptions,
finance charges receivable, and income taxes, resulted from management's
updated evaluations of historical trends (reflecting changes in business
practices and other factors) and other assumptions underlying such estimates.
The amounts of such reserves in prior quarters were based on reasonable
estimates reflecting available facts and circumstances.
1995 Compared to 1994
Net sales increased $132.5 million, or 27.0%, to $623.3 million in 1995
from $490.8 million in 1994. Of the $132.5 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 28.3% increase in its international business, $18.1
million represented a 121.4% 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(Registered) version of Easy Dental(Registered) Plus software in December
1995 and substantial price increases. The increased pricing on the Easy
Dental(Registered) Plus software product was accompanied by substantial sales
promotions and related expense; offset by increased Dentrix software sales. 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%
9
Gross profit increased by $49.9 million, or 34.2%, to $195.9 million in
1995, from $146.0 million in 1994, while gross profit margin increased by 1.7%
to 31.4% from 29.7% for the same period. Of the 1.7% increase in gross profit
margin, approximately 82.4%, or 1.4%, was primarily attributed to increased
sales volume of the Company's Easy Dental(Registered) Plus and Dentrix 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
121.4% to $33.0 million from $14.9 million for the same period last year, was
primarily due to the release of the new Windows(Registered) version of Easy
Dental(Registered) Plus software, which increased unit sales, coupled with
substantial price increases. The increased pricing on the Easy
Dental(Registered) 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.
Selling, general and administrative expenses increased by $43.9 million,
or 33.5%, to $174.9 million in 1995 from $131.0 million in 1994. Selling and
shipping expenses increased by $35.3 million, or 45.1`%, to $113.6 million in
1995 from $78.3 million in 1994. As a percentage of net sales, selling and
shipping expenses increased 2.2% to 18.2% in 1995 from 16.0% 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(Registered)
Plus software and the new Windows(Registered) version released in December 1995,
which accounted for approximately 0.9% of the 2.2% 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 $8.6 million,
or 16.3%, to $61.3 million in 1995 from $52.7 million in 1994, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses decreased 0.9% to 9.8% in 1995 from 10.7% in 1994 due primarily to the
relatively fixed nature of general and administrative expenses when compared to
the 27.0% increase in sales volume for the same period.
Interest expense--net increased $1.8 million, or 51.4%, to $5.3 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 $11.6 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 $4.7 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 and adjusting for a provision
for taxes on the previously untaxed earnings of Dentrix included in 1995
results, taxes on income for 1995 were $6.8 million, resulting in an effective
tax rate of 42.5%. 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 $11.6 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.
10
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.
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.
11
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 forward buy-in opportunities, (b)
acquisitions, and (c) capital expenditures. Since sales have been strongest
during the fourth quarter and special inventory forward buy-in opportunities
are most prevalent just before the end of the year, the Company's working
capital requirements have been generally higher from the end of the third
quarter to the end of the first quarter of the following year. The Company has
financed its business primarily through its revolving credit facilities and
stock issuances.
Net cash used in operating activities for the year ended December 28,
1996 of $30.1 million resulted primarily from a net increase in working capital
of $63.0 million offset in part by net income, adjusted for non-cash charges
relating primarily to depreciation and amortization, and deferred income taxes
of $30.5 million and $2.4 million, respectively. The increase in working
capital was primarily due to (i) a $43.1 million increase in accounts
receivable resulting primarily from increased net sales (80.7%) and extended
payment terms (10.9%), and a decrease in the percentage of customers who make
payment with their orders (5.7%), (ii) a $23.1 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 $11.8 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.
Net cash used in investing activities for the year ended December 28,
1996 of $49.4 million resulted primarily from cash used to make acquisitions of
$32.5 million and capital expenditures of $11.5 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 $114.4 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 $43.8
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 since the securities are actively traded in public
markets.
12
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 credit facilities that totaled $13.2 million at
December 28, 1996 under which $6.7 million have 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, a leading provider of clinically-based dental practice management
systems, with 1996 net sales of approximately $10.2 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. ("MBMI") will merge into a wholly-owned
subsidiary of Schein. As a result of the transaction, which has been approved
by the Boards of Directors of MBMI and Schein, each outstanding share of MBMI's
Common Stock will be exchanged at a fixed rate of 0.62 of a share of Schein's
Common Stock. The completion of the transaction is subject to the satisfaction
of customary closing conditions, including, among others, MBMI shareholder
approval. The transaction is expected to be completed by mid-1997 although no
assurances can be given in this regard.
The Company believes that its cash and cash equivalents of $43.8 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 sufficient liquidity to
meet its currently foreseeable short-term and long-term capital needs.
13
ITEM 8. FINANCIAL STATEMENTS AND EXHIBITS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry Schein,
Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 1996. 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
14
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 ............................ $ 43,750 $ 8,882
Accounts receivable, less reserves of $7,374 and
$6,391 respectively ............................... 140,813 91,830
Inventories .......................................... 126,862 96,642
Deferred income taxes ................................ 6,189 6,896
Other ................................................ 29,822 19,543
--------- ---------
Total current assets .......................... 347,436 223,793
Property and equipment, net ............................. 37,571 30,035
Goodwill and other intangibles, net ..................... 53,420 24,389
Investments and other ................................... 29,023 21,147
--------- ---------
$ 467,450 $ 299,364
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 88,268 $ 65,201
Bank credit lines .................................... 6,716 9,325
Accruals:
Salaries and related expenses ..................... 11,041 9,074
Other ............................................. 28,375 32,395
Current maturities of long-term debt ................. 8,461 3,343
--------- ---------
Total current liabilities ..................... 142,861 119,338
Long-term debt .......................................... 24,569 30,381
Other liabilities ....................................... 2,715 1,233
--------- ---------
Total liabilities ............................. 170,145 150,952
--------- ---------
Minority interest ....................................... 5,289 4,547
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized
60,000,000; issued: 23,342,441 and 19,428,673,
respectively ...................................... 233 194
Additional paid-in capital ........................... 254,198 123,884
Retained earnings .................................... 39,311 20,731
Treasury stock, at cost, 60,529 and 51,679 shares,
respectively ...................................... (1,090) (769)
Foreign currency translation adjustment .............. (636) (175)
--------- ---------
Total stockholders' equity .................... 292,016 143,865
--------- ---------
$ 467,450 $ 299,364
========= =========
See accompanying notes to consolidated financial statements.
15
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 .................................. $ 840,122 $ 623,302 $ 490,834
Cost of sales .............................. 587,013 427,448 344,868
--------- --------- ---------
Gross profit ............................ 253,109 195,854 145,966
Operating expenses:
Selling, general and administrative ..... 220,500 174,867 131,009
Special management compensation ......... -- 20,797 21,596
Special professional fees ............... -- -- 2,007
--------- --------- ---------
Operating income (loss) .............. 32,609 190 (8,646)
Other income (expense):
Interest income ......................... 2,558 552 251
Interest expense ........................ (3,421) (5,835) (3,775)
Other-net ............................... 771 390 542
--------- --------- ---------
Income (loss) before taxes on
income (recovery), minority
interest and equity in earnings of
affiliates ....................... 32,517 (4,703) (11,628)
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) .......................... $ 22,523 $ (8,801) $ (10,065)
========= ========= =========
Pro forma:
Historical net income (loss) ............ $ 22,523 $ (8,801) $ (10,065)
Pro forma adjustments:
Special management compensation
and professional fees ............ -- 20,797 23,603
Tax effect of above .................. -- (1,174) (5,749)
Provision for income taxes on
previously untaxed earnings of an
acquisition .......................... (1,197) (533) (306)
--------- --------- ---------
Pro forma net income .................... $ 21,326 $ 10,289 $ 7,483
========= ========= =========
Pro forma net income per common
share ................................ $ 0.98 $ 0.71 $ 0.57
========= ========= =========
Pro forma weighted average common
and common equivalent shares
outstanding .......................... 21,794 14,517 13,197
========= ========= =========
See accompanying notes to consolidated financial statements.
16
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock
$.01 Par Value Additional
---------------------------- Paid-in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------
Balance, December 25, 1993, as previously reported ............ 11,390,544 $ 114 $ 11,225 $ 41,390
Pooling of interests with Dentrix Dental Systems, Inc. ........ 1,070,000 11 (4) (8)
----------- ----------- ----------- -----------
Balance, December 25, 1993, as restated ....................... 12,460,544 125 11,221 41,382
Net loss ...................................................... -- -- -- (10,065)
Dividends paid and deemed ..................................... -- -- -- (685)
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 ....................... -- -- -- --
Other ......................................................... -- -- 22 --
----------- ----------- ----------- -----------
Balance, December 31, 1994 .................................... 10,993,859 110 9,982 30,632
Net loss ...................................................... -- -- -- (8,801)
Dividends paid ................................................ -- -- -- (1,100)
Shares issued for acquisition ................................. 1,260,416 13 6,500 --
Stock issued in initial public offering ....................... 5,090,000 51 72,417 --
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ............................................ 2,084,398 20 32,180 --
Issuance of compensatory stock options ........................ -- -- 2,805 --
Purchase of treasury stock (51,679 shares) .................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 30, 1995 .................................... 19,428,673 194 123,884 20,731
Net income .................................................... -- -- -- 22,523
Dividends paid ................................................ -- -- -- (3,943)
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) ..................... -- -- -- --
Foreign currency translation adjustment ....................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 28, 1996 .................................... 23,342,441 $ 233 $ 254,198 $ 39,311
=========== =========== =========== ===========
Foreign
Currency Deferred Total
Treasury Translation Compen- Stockholders'
Stock Adjustment sation Equity
----------- ----------- ----------- -----------
Balance, December 25, 1993, as previously reported ............ $ -- $ (635) $ (8,197) $ 43,897
Pooling of interests with Dentrix Dental Systems, Inc. ........ -- -- -- (1)
----------- ----------- ----------- -----------
Balance, December 25, 1993, as restated ....................... -- (635) (8,197) 43,896
Net loss ...................................................... -- -- -- (10,065)
Dividends paid and deemed ..................................... -- -- -- (685)
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
Other ......................................................... -- -- -- 22
----------- ----------- ----------- -----------
Balance, December 31, 1994 .................................... -- (458) -- 40,266
Net loss ...................................................... -- -- -- (8,801)
Dividends paid ................................................ -- -- -- (1,100)
Shares issued for acquisition ................................. -- -- -- 6,513
Stock issued in initial public offering ....................... -- -- -- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ............................................ -- -- -- 32,200
Issuance of compensatory stock options ........................ -- -- -- 2,805
Purchase of treasury stock (51,679 shares) .................... (769) -- -- (769)
Foreign currency translation adjustment ....................... -- 283 -- 283
----------- ----------- ----------- -----------
Balance, December 30, 1995 .................................... (769) (175) -- 143,865
Net income .................................................... -- -- -- 22,523
Dividends paid ................................................ -- -- -- (3,943)
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) -- -- (321)
Foreign currency translation adjustment ....................... -- (461) -- (461)
----------- ----------- ----------- -----------
Balance, December 28, 1996 .................................... $ (1,090) $ (636) $ -- $ 292,016
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
17
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) .................................... $ 22,523 $ (8,801) $ (10,065)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 8,013 6,127 3,867
Provision for losses and allowances on accounts
receivable ................................ 1,095 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 ............................................. (586) (558) (967)
Changes in assets and liabilities:
Increase in accounts receivable ................ (43,121) (34,888) (13,261)
Increase in inventories ........................ (23,065) (7,371) (5,504)
Increase in other current assets ............... (8,607) (4,420) (3,645)
Increase in accounts payable and accruals ...... 11,776 21,128 18,790
--------- --------- ---------
Net cash provided by (used in) operating activities (30,104) (8,597) 6,556
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .............................. (11,456) (9,376) (6,170)
Business acquisitions, net of cash acquired ....... (32,540) (16,377) --
Other ............................................. (5,422) (4,026) (1,956)
--------- --------- ---------
Net cash used in investing activities ................ (49,418) (29,779) (8,126)
--------- --------- ---------
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) (15,388) (1,196)
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)
Distributions to stockholders ..................... (3,259) (632) (133)
Other ............................................. (574) 1,711 445
--------- --------- ---------
Net cash provided by financing activities ............ 114,390 42,708 3,519
--------- --------- ---------
Net increase in cash and cash equivalents ........... 34,868 4,332 1,949
Cash and cash equivalents, beginning of year ......... 8,882 4,550 2,601
--------- --------- ---------
Cash and cash equivalents, end of year ............... $ 43,750 $ 8,882 $ 4,550
========= ========= =========
See accompanying notes to consolidated financial statements.
18
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. The financial
statements include adjustments to give effect to the acquisition of Dentrix
Dental Systems, Inc. ("Dentrix"), effective February 28, 1997, which was
accounted for under the pooling of interests method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the
last Saturday of December. Accordingly, fiscal years ended December 28, 1996
and December 30, 1995 consisted of 52 weeks and the fiscal year ended December
31, 1994 consisted of 53 weeks.
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.
19
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).
20
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."
21
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 $.97. For this calculation, the
weighted average number of common shares includes the shares assumed to provide
the proceeds, at the follow-on offering price, needed to retire average
revolving credit borrowings and debt for the period from the beginning of the
year (or the date the debt was incurred) to the respective retirement date, and
the pro forma net income was adjusted to exclude the related financing and
interest expenses of the debt.
NOTE 2--REORGANIZATION
On December 26, 1992, Henry Schein, Inc., a New York corporation ("Old
HSI"), reorganized its corporate structure to split into separate healthcare
distribution and pharmaceutical companies (the "Split"). The Split was
accomplished by transferring substantially all of Old HSI's assets and
liabilities relating to the distribution business to Henry Schein USA, Inc., a
newly formed corporation ("New HSI"). Subsequent to the Split, the name of Old
HSI was changed to Schein Holdings, Inc. and the name of New HSI was changed to
Henry Schein, Inc. ("HSI"). As a result of the Split, Schein Holdings, Inc.
("Holdings") became the parent of the Company and Schein Pharmaceutical, Inc.
(the pharmaceutical company, "SPINC").
The accompanying financial statements give retroactive effect to the Split
as described above, and reflect the historical cost bases of the assets and
liabilities of the distribution business.
22
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.
23
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....................................... 6,829 5,129
------- -------
$29,822 $19,543
======= =======
24
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................ 14,961 12,422
Computer equipment and software.............. 21,253 16,185
------- -------
77,322 64,122
Less accumulated depreciation and
amortization............................... 39,751 34,087
------- -------
Net property and equipment................... $37,571 $30,035
======= =======
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.
25
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........................................... 6,448 2,883
------- -------
$29,023 $21,147
======= =======
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
26
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, primarily cash,
to be paid in the event certain financial performance targets are satisfied
over periods typically not exceeding three years from the date of acquisition.
The Company's policy is to record a liability for such amounts when it becomes
clear that targets will be met. As of December 28, 1996 no liabilities have
been recorded for contingent consideration.
The summarized unaudited pro forma results of operations set forth below
for 1996 and 1995 assume the acquisitions occurred as of the beginning of each
of these periods.
Years Ended
-----------------------------
December 28, December 30,
1996 1995
------------ ------------
Net sales....................................... $888,085 $769,426
Net income (loss)............................... 22,882 (8,179)
Proforma net income, reflecting adjustment in
1995 to exclude special management
compensation, and to provide for provision
for income taxes on previously untaxed
earnings of Dentrix ......................... 21,685 10,911
Pro forma net income per common share........... $ 0.99 $ 0.76
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.
On February 28, 1997, the Company acquired all the common stock of Dentrix
in exchange for 1,070,000 shares of the Company's Common Stock. Dentrix is a
leading provider of clinically-based dental practice management systems and had
net sales of approximately $10,200. The Dentrix acquisition was accounted for
as a pooling of interests, and, accordingly, the consolidated financial
statements for the periods presented have been restated to include Dentrix.
Prior to its acquisition by the Company, Dentrix elected to be taxed as an S
Corporation under the Internal Revenue Code. Accordingly, the current taxable
income of Dentrix was taxable to its shareholders who were responsible for
payment of taxes thereon. Upon its acquisition, Dentrix will be taxed as a
regular corporation. Pro forma adjustments have been made to the restated
statement of
27
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS (Continued)
operations to reflect the income taxes that would have been provided had
Dentrix been subjected to income taxes in prior years. Pursuant to a policy
adopted in 1992, as an S Corporation, Dentrix made regular distributions to its
stockholders which included amounts to pay taxes on their allocable corporate
earnings and for other purposes.
In connection with the Dentrix acquisition the Company incurred merger
costs of approximately $2,527, or $0.11 per share, in the first quarter of
1997. Included in the merger costs are investment banking, legal, accounting
and advisory fees and other non recurring costs associated with this
acquisition.
Net sales, net income (loss) and pro forma net income for the Company,
Dentrix and on a combined basis for the years ended December 1996, 1995 and
1994 was as follows:
Years Ended
-----------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
--------- --------- ---------
Net sales:
HSI $ 829,962 $ 616,209 $ 486,610
Dentrix 10,160 7,093 4,224
--------- --------- ---------
Combined 840,122 623,302 490,834
--------- --------- ---------
Net income (loss):
HSI $ 19,340 $ (10,216) $ (10,876)
Dentrix 3,183 1,415 811
--------- --------- ---------
Combined 22,523 (8,801) (10,065)
--------- --------- ---------
Pro forma net income:
HSI (1) $ 19,340 $ 9,407 $ 6,978
Dentrix (2) 1,986 882 505
--------- --------- ---------
Combined 21,326 10,289 7,483
--------- --------- ---------
- -----------------
(1) Reflects adjustment to exclude special management compensation in 1995
and special management compensation and professional fees in 1994, net
of applicable tax benefits.
(2) Reflects adjustment for provision for income taxes on previously
untaxed earnings.
Additionally, since December 28, 1996, the Company has acquired in a
purchase transaction, the business of Smith Holden, Inc. ("Smith Holden").
Smith Holden was the longest operating dental supply company in the United
States and had net sales in 1996 of approximately $14,200.
28
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
======= =======
(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.
29
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 9 - LONG TERM DEBT (Continued)
(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.
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 ..................................... $ 30,274 $ (6,020) $(13,167)
Foreign ...................................... 2,243 1,317 1,539
-------- -------- --------
Total income (loss) before taxes on income
(recovery), minority interest and equity in
earnings of affiliates .................... $ 32,517 $ (4,703) $(11,628)
======== ======== ========
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)
======= ======= =======
30
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.
31
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.
32
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
Long-term receivables at December 28, 1996 is $18,355 and $7,785, respectively,
related to Easy Dental(Registered) Plus software sales with non-interest bearing
extended payment terms. Total unamortized discounts at December 28, 1996
amounted to $1,487 based on an imputed interest rate of 8.25%. Included in
interest income for the year ended December 28, 1996 was approximately $998 of
inputed interest relating to these non-interest bearing extended payment term
receivables. Imputed interest relating to these receivables was not material
for 1995 and 1994.
33
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.
(g) In 1993, the Company entered into a software licensing agreement with a
40% owned Canadian affiliate, whereby the Company receives royalties of 30% on
all products sold in Canada. The royalties, which amounted to $135 and $114 in
1996 and 1995, respectively, are based on the Company's suggested retail
selling prices.
34
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 13--SEGMENT AND GEOGRAPHIC DATA
The Company is engaged principally in one line of business, the
distribution of healthcare products to healthcare practitioners and
professionals. The following table presents information about the Company by
geographic area. There were no material amounts of sales or transfers among
geographic areas and there were no material amounts of United States export
sales. No one European country represents a significant geographic area.
1996 United States Europe Consolidated
- ---- ------------- ------------ ------------
Net sales............................. $704,128 $135,994 $840,122
Operating income ..................... 29,213 3,396 32,609
Pre-tax income........................ 30,274 2,243 32,517
Identifiable assets................... 397,924 69,526 467,450
Depreciation and amortization......... 6,044 1,969 8,013
Capital expenditures.................. 10,060 1,396 11,456
1995
Net sales............................. $523,887 $ 99,415 $623,302
Operating income (loss)............... (2,400)* 2,590 190
Pre-tax income (loss)................. (6,020)* 1,317 (4,703)
Identifiable assets................... 246,174 53,190 299,364
Depreciation and amortization......... 4,794 1,333 6,127
Capital expenditures.................. 5,680 3,696 9,376
1994
Net sales............................. $406,907 $83,927 $490,834
Operating income (loss)............... (10,820)* 2,174 (8,646)
Pre-tax income (loss)................. (13,167)* 1,539 (11,628)
Identifiable assets................... 157,125 34,248 191,373
Depreciation and amortization......... 2,580 1,287 3,867
Capital expenditures.................. 4,676 1,494 6,170
- --------------
* Includes special management compensation and special professional fees of
$20,797 and $23,603 for 1995 and 1994, respectively.
35
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14--EMPLOYEE BENEFIT PLANS
(a) Stock Compensation Plan
The Company maintains a 1994 Stock Option Plan for the benefit of certain
employees under which 679,635 shares of common stock may be issued. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and nonqualified stock options may be issued under the Plan.
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the initial
public offering, at which time the excess of the initial public offering price
of $16.00 over the exercise price ($2,805) was charged to special management
compensation expense. On November 3, 1995, the Company issued Class B options
to acquire 413,400 shares of common stock to certain employees at an exercise
price of $16.00 per share. During 1996, Class A options totalling 16,500 and
Class B options totalling 10,200 were forfeited, and 48,000 Class B options
were issued. The exercise price of all Class B options equalled the market
price on the date of grant and accordingly no compensation cost was recognized.
Substantially all Class B options become exercisable ratably over three years
from the date of issuance.
The Class A and Class B options are exercisable up to the tenth anniversary
of the date of issuance, subject to acceleration upon termination of
employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to
50,000 shares of the Company's Common Stock. The exercise price and term, not
to exceed 10 years, of each option is determined by the plan committee at the
time of the grant. During 1996, 10,000 options were granted to certain
non-employee directors at an exercise price of $29.00 per share which was equal
to the market price on the date of grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
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.
36
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), and an
adjustment for provision for income taxes on
previously untaxed earnings of Dentrix ................ $21,326 $10,289
Pro forma .................................................. 20,046 10,109
Net income per common share:
As reported, reflecting adjustment in 1995 to
exclude special management compensation (1),
and an adjustment for provision for income taxes
on previously untaxed earnings of Dentrix............... $ 0.98 $ 0.71
Pro forma .................................................. 0.92 0.70
(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..... 359,957 $ 8.74 237,897 $ 4.21
Weighted-average fair value of $14.75 $ 10.00
options granted during the year.
37
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
-------------------------------------- ----------------------------------
Weighted-Average Weighted- Weighted-
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------------- ----------- ---------------- -------------- ----------- --------------
$ 4.21..................... 221,397 8.8 years $ 4.21 1,107,000 $ 4.21
16.00.................... 402,200 8.8 16.00 138,000 16.00
29.00 to 36.25........... 58,000 9.3 30.02 1,326,000 48.00
------- ---------
$ 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 $3,072, $2,193
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 .
38
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......................................................... $ 9,750
1998......................................................... 8,765
1999......................................................... 7,469
2000......................................................... 5,968
2001......................................................... 4,666
Thereafter................................................... 11,769
-------
Total minimum lease payments................................. $48,387
=======
Total rental expense for 1996, 1995 and 1994 was $9,731, $7,389 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.
39
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 $3,174
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.
40
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 ......... 168 314 27
---- ---- ----
$771 $390 $542
==== ==== ====
NOTE 18--QUARTERLY INFORMATION (Unaudited)
The following table sets forth summary quarterly unaudited financial
information for 1996 and 1995, excluding non-recurring special charges and the
related tax effects, and provision for taxes on previously untaxed earnings of
Dentrix:
Quarters Ended
----------------------------------------------------
March 30 June 29, September 28, December 28,
1996 1996 1996 1996
-------- -------- ------------- ------------
Net sales .......................................... $187,339 $197,256 $215,067 $240,460
Gross profit ....................................... 56,506 59,920 64,102 72,581
Operating income ................................... 5,110 7,176 8,388 11,935
Pro forma net income ............................... 2,884 4,936 6,077 8,626
Pro forma earnings per share ....................... $ 0.15 $ 0.24 $ 0.26 $ 0.36
Quarters Ended
--------------------------------------------------------
April 1, July 1, September 30, December 30,
1995 1995 1995 1995
-------- ------- ------------- ------------
Net sales ...................................... $137,164 $141,738 $158,222 $186,178
Gross profit ................................... 41,058 43,447 49,228 62,121
Pro forma operating income ..................... 2,983 5,165 5,413 7,426
Pro forma net income ........................... 934 2,362 2,238 4,755
Pro forma earnings per share ................... $ 0.07 $ 0.18 $ 0.17 $ 0.27
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
41
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 18 - QUARTERLY INFORMATION (Unaudited) (Continued)
associated with international operations and adverse weather conditions. In the
fourth quarter of 1996 the Company made adjustments which increased net income
by approximately $2,400. These adjustments, which related predominately to
estimated reserves for premium coupon redemptions, finance charges receivable,
and taxes, resulted from management's updated evaluations of historical trends
(reflecting changes in business practices and other factors) and other
assumptions underlying such estimates. The amounts of such reserves in prior
quarters were based on reasonable estimates reflecting available facts and
circumstances.
Earnings per share calculations for each quarter were based on the weighted
average number of shares outstanding for each period, and the sum of the
quarters may not necessarily be equal to the full year earnings per share
amount.
NOTE 19 -- SUBSEQUENT EVENTS
On March 7, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which 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 $150,000
million and earnings of approximately $1,700 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.
42
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 $ 331 $ -- $2,346
Other accounts receivable
allowances(1) .................................. 1,243 815 -- 2,058
------ ------- ------- ------
$3,258 $ 1,146 $ -- $4,404
====== ======= ======= ======
Year ended December 30, 1995
Allowance for doubtful
accounts ....................................... $2,346 $ 253 $ (29) $2,570
Other accounts receivable
allowances(1) .................................. 2,058 1,763 -- 3,821
------ ------- ------- ------
$4,404 $ 2,016 $ (29) $6,391
====== ======= ======= ======
Year ended December 28, 1996
Allowance for doubtful
accounts ....................................... $2,570 $ 1,415 $ -- $3,985
Other accounts receivable
allowances(1) .................................. 3,821 -- (432) 3,389
------ ------- ------- ------
$6,391 $ 1,415 $ (432) $7,374
====== ======= ======= ======
- --------------
(1) Primarily allowance for sales returns.
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
HENRY SCHEIN, INC.
DATE: JUNE 24, 1997
By: /s/ Stanley M. Bergman
-----------------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and President
44
EXHIBIT 11.1
HENRY SCHEIN, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
Three Months Ended Twelve Months Ended
----------------------------- -----------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Pro forma net income per consolidated statements of
operations (in thousands) ................................... $ 8,626 $ 4,755 $ 21,326 $ 10,289
============ ============ ============ ============
Pro forma weighted average common shares outstanding:
Shares outstanding at December 25, 1993 ..................... 12,460,544 12,460,544 12,460,544 12,460,544
1994 issuances:
Shares issued, in part, to extinguish liability under long-
term executive incentive compensation plan .............. 489,456 489,456 489,456 489,456
Shares issued to ESOP trust in 12/94 ...................... 128,257 128,257 128,257 128,257
Stock options granted and to be granted in 1995 at an
exercise price of $4.21 per share (1) ................... 221,397 237,897 221,397 237,897
IPO Options (Class B) ..................................... 408,400 263,486 408,400 65,871
1995 issuances:
IPO Shares ................................................ 5,090,000 3,244,176 5,090,000 811,044
Shares issued as of September 1, 1995 in connection
with one of the Acquisitions ............................ 1,260,416 1,227,478 1,260,416 410,749
------------ ------------ ------------ ------------
20,058,470 18,051,294 20,058,470 14,603,818
Less: Treasury stock ...................................... (59,275) -- (55,401) --
------------ ------------ ------------ ------------
19,999,195 18,051,294 20,003,069 14,603,818
1996 issuances:
Secondary Offering Shares ................................. 3,734,375 -- 1,959,521 --
Shares issued to ESOP trust on August 9, 1996 ............. 24,210 -- 9,378 --
Shares issued on July 10, 1996 in connection with one
of the Acquisitions ..................................... 37,197 -- 17,577 --
Additional Class B Options ................................ 42,800 -- 42,800 --
Stock options granted pursuant to the 1996 Non-
Employee Director Stock Option Plan ..................... 10,000 -- 7,802 --
Shares issued on November 1, 1996 in connection with
one of the Acquisitions ................................. 75,200 -- 18,800 --
------------ ------------ ------------ ------------
23,922,977 18,051,294 22,058,957 14,603,818
Less assumed repurchase of shares under treasury stock
method based on an average price of $34.129 per share
(2):
Stock options--221,397 shares
x $4.21
-------
$932,081/$34.129 ........................... (24,820)(4) (42,313)(3) (27,311)(5) (42,313)(3)
Non-Employee Stock Options--10,000 shares
x $29.00
--------
$290,000/$34.129 .............. (7,722)(4) -- (6,630)(5) --
IPO options--403,200 shares
x $16.00
--------
$6,451,200/$34.129 ........................... (171,785)(4) (178,106) (189,024)(5) (44,526)
New Options--35,000 shares
x $29.50
--------
$1,032,500/$34.129 ........................... (27,494)(4) -- (30,253)(5) --
New Options--10,000 shares
x $31.00
--------
$310,000/$34.129 ............................. (8,255)(4) -- (9,083)(5) --
New Options--3,000 shares
x $36.25
--------
$108,750/$34.129 ............................. (3,000)(4) -- (3,000)(5) --
------------ ------------ ------------ ------------
Pro forma weighted average common shares outstanding .......... 23,679,907 17,830,875 21,793,646 14,516,979
============ ============ ============ ============
Pro forma net income per common share ......................... $ 0.36 $ 0.27 $ 0.98 $ 0.71
============ ============ ============ ============
HENRY SCHEIN, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA EARNINGS PER SHARE (Continued)
- -------------------
(1) Considered "cheap stock" and treated outstanding since January 1, 1995.
(2) The treasury stock method was not used for the shares issued to settle the
long-term incentive plan liability and the conpensatory portion of the
stock options granted because the related special compensation charges have
been/will be excluded from pro forma net income and, therefore, were not
assumed to be proceeds.
(3) Computed using IPO value per share of $16.00 for 237,897 stock options.
(4) Computed using the average closing value per share for the three months
ended December 28, 1996 of $37,554.
(5) Computed using the average closing value per share for the twelve months
ended December 28, 1996 of $34,129.
