SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 27, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: _X_ NO: ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 23, 1998 was
approximately $1,378,059,189.
As of March 23, 1998, 35,334,851 shares of registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 27, 1997) are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
Page Number
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PART I
ITEM 1. Business 1
ITEM 2. Properties 14
ITEM 3. Legal Proceedings 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 16
ITEM 6. Selected Financial Data 17
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
ITEM 8. Financial Statements and Supplementary Data 29
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant 65
ITEM 11. Executive Compensation 65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 65
ITEM 13. Certain Relationships and Related Transactions 65
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66
Exhibit Index
Financial Statement Schedules
PART I
ITEM 1. Business
Recent Developments
On November 12, 1997, August 1, 1997 and February 28, 1997, the Company
completed the acquisitions of Sullivan Dental Products, Inc. ("Sullivan"), Micro
Bio-Medics, Inc. ("MBMI") and Dentrix Dental Systems, Inc. ("Dentrix"),
respectively, in merger transactions accounted for as poolings of interests.
Pursuant to the respective merger agreements, the Company issued approximately
7,594,900, 3,231,400 and 1,070,000 shares of its Common Stock with aggregate
market values (on their respective closing dates) of approximately $266.8
million, $122.8 million and $29.4 million, respectively and assumed and
exchanged all options to purchase Sullivan and MBMI stock for options to
purchase approximately 1,192,000 and 1,117,000 shares, respectively of the
Company's Common Stock.
Sullivan distributes consumable dental supplies to dentists using a
marketing strategy which combines personal visits with a catalog of
approximately 12,000 competitively priced items. Sullivan also sells, installs
and services dental equipment through 52 sales and service centers located
throughout the United States. Sullivan had net sales of approximately $241.6
million and earnings of $8.7 million in 1996, and net sales of $196.3 million
and earnings of $7.4 million in the first nine months of 1997.
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 $150.1
million and earnings of $1.7 million in 1996, and net sales of $77.8 million and
earnings of $0.7 million for the first six months of their 1997 fiscal year.
Dentrix is a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.2 million, pro
forma earnings, after adjusting for taxes on previously untaxed earnings, of
$2.0 million and an approximate 3,500 installed user base as of December 28,
1996.
In connection with these acquisitions, the Company incurred certain merger
and integration costs of approximately $50.8 million during the year ended
December 27, 1997. Net of taxes, merger and integration costs were approximately
$1.17 per share, on a diluted basis. Merger and integration costs consist
primarily of investment banking, legal, accounting and advisory fees,
compensation, impairment of goodwill arising from acquired businesses integrated
into the Company's recent acquisitions of Sullivan and MBMI, as well as certain
other integration costs associated with these mergers. Excluding the merger and
integration cost, net of the related tax benefit, net income and net income per
common share, on a diluted basis, would have been $41.7 million and $1.14,
respectively, for the year ended December 27, 1997.
General
The Company is the largest distributor of healthcare products and services
to office-based healthcare practitioners in the combined North American and
European markets. The Company has operations in the United States, Canada,
Mexico, the United Kingdom, the Netherlands, Belgium, Germany, France, the
Republic of Ireland, Austria and Spain. The Company sells products and services
to over 250,000 customers, primarily dental practices and dental laboratories,
as well as physician practices, veterinary clinics and institutions. In 1997,
the Company sold products to over 70% of the estimated 100,000 dental practices
in the United States. The Company believes that there is strong awareness of the
"Henry Schein" name among office-based healthcare practitioners due to its more
than 60 years of experience in distributing healthcare products. Through its
comprehensive catalogs and other direct sales and marketing programs, the
Company
offers its customers a broad product selection of both branded and private brand
products which include approximately 55,000 stock keeping units ("SKU's") in
North America and approximately 50,000 SKUs in Europe at published prices that
the Company believes are below those of many of its competitors. The Company
also offers various value-added products and services, such as practice
management software. As of December 27, 1997, the Company has sold over 26,000
dental practice management software systems, more than any of its competitors.
During 1997, the Company distributed over 12.0 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 500,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with over 450 telesales representatives
who facilitate order processing and generate sales through direct and frequent
contact with customers and with approximately 850 field sales consultants. The
Company utilizes database segmentation techniques to more effectively market its
products and services to customers. In recent years, the Company has continued
to expand its management information systems and has established strategically
located distribution centers in the United States and Europe to enable it to
better serve its customers and increase its operating efficiency. The Company
believes that these investments, coupled with its broad product offerings,
enable the Company to provide its customers with a single source of supply for
substantially all their healthcare product needs and provide them with
convenient ordering and rapid, accurate and complete order fulfillment. The
Company estimates that approximately 99% of all orders in the United States and
Canada received before 7:00 p.m. and 4:00 p.m., respectively, are shipped on the
same day the order is received and approximately 92% of orders are received by
the customer within two days of placing the order. In addition, the Company
estimates that approximately 99% of all items ordered in the United States and
Canada are shipped without back ordering.
Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office-based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into joint ventures with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channelled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. The Company has
completed 23 acquisitions during the year ended December 27, 1997. The 1997
acquisitions, which had aggregate net sales for 1996 of approximately $534.7
million, included (a) ten dental supply companies, the most significant of which
was Sullivan; (b) four medical supply companies, the most significant of which
was MBMI; (c) two international dental and three international medical supply
companies; (d) three technology and value-added product companies; and (e)
certain assets and the business of IDE Interstate, Inc., a direct marketer of
healthcare products to dentists, doctors and veterinarians. Of the 23 completed
acquisitions, six were accounted for under the pooling of interests method, with
the remainder being accounted for under the purchase method of accounting
(fourteen for 100% ownership interest and three for majority ownership
interests).
During 1996, the Company acquired 20 healthcare distribution businesses.
The 1996 acquisition included twelve dental and four medical companies, a
veterinary supply distributor and three international dental companies, with
aggregate net sales in their last fiscal year ends of approximately $104.0
million. All of the 1996 acquisitions were accounted for under the purchase
method of accounting. Of these, eighteen were for majority ownership (100% in
twelve of the transactions).
2
Corporate Structure Background
The Company was formed on December 23, 1992 as a wholly-owned subsidiary of
Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the
business in which the Company is now engaged and, in addition, owned 100% of the
outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a
company engaged in the manufacture and distribution of multi-source
pharmaceutical products. In December 1992, Holdings separated the Company's
business from Pharmaceutical by transferring to the Company all of the assets
(including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and
distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of
the healthcare distribution business now conducted by the Company. The Company
did not assume any other liabilities of Holdings, including the liabilities
associated with Pharmaceutical's business. In February 1994, the Company,
Holdings and their stockholders entered into a number of reorganization
agreements, and in September 1994, pursuant to such agreements, all of the
Company's Common Stock, par value $.01 per share ("Common Stock"), held by
Holdings was distributed to certain of the current stockholders of the Company
(the "Reorganization").
On November 8, 1995, the Company completed an initial public offering of
its Common Stock, and on June 21, 1996, the Company completed a follow-on
offering of its Common Stock. Proceeds from these offerings to the Company,
after expenses, were approximately $72.5 million and $124.1 million,
respectively. The proceeds enabled the Company to pay off certain indebtedness,
with the remaining proceeds available for general corporate purposes, including
subsequent acquisitions.
Customers
The Company serves over 250,000 customers worldwide in the dental, medical
and veterinary markets. The Company's dental customers include office-based
dental practices, dental laboratories, universities, institutions, governmental
agencies and large group and corporate accounts; medical customers include
office-based physician practices, podiatrists, surgery centers, institutions,
hospitals and governmental agencies; and the Company's veterinary products are
sold primarily to office-based veterinarians serving primarily small companion
animals.
The Company believes that its customers generally order from two or more
suppliers for their healthcare product needs, and often use one supplier as
their primary resource. The Company believes that its customers generally place
larger orders and order more frequently from their primary suppliers. The
Company estimates that it serves as a primary supplier to less than 15% of its
total customer base and believes it has an opportunity to increase sales by
increasing its level of business with those customers for which it serves as a
secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, hospitals, renal dialysis centers and surgery
centers. More recently, as cost-containment pressures have resulted in increased
demand for low-cost products and value-added services, the Company has targeted
specific groups of practices under common ownership, institutions and
professional groups. For example, the
3
Company has an exclusive direct marketing agreement with an American Medical
Association ("AMA") sponsored service and a veterinarian-sponsored service,
pursuant to which member practitioners have access to the services' lower priced
products. In 1997, the AMA-sponsored service and the veterinarian-sponsored
purchasing service accounted for net sales of over $32.1 million. These
services, government institutions and agencies, hospitals and other large or
collective purchasers, require low-cost pricing and detailed product and usage
information and reporting. The Company believes it is well situated to meet the
needs of these customers, given its broad, low-cost product offerings and its
management information systems. No single customer accounted for more than 3.5%
of net sales in 1997.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through personal visits by field sales
representatives and frequent direct marketing contact, emphasize the Company's
broad product lines, competitive prices and ease of order placement. The key
elements of the Company's program in the United States are:
o Direct Marketing. During 1997, the Company distributed over 12.0
million pieces of direct marketing material, including catalogs, flyers,
order stuffers and other promotional materials to approximately 500,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 400
pages and includes approximately 24,000 SKUs. The number of catalogs and
other material received by each customer depends upon the market they serve
as well as their purchasing history. The Company's catalogs include
detailed descriptions and specifications of both branded and private brand
products and are utilized by healthcare practitioners as a reference
source. By evaluating its customers' purchasing patterns, area of
specialty, past product selections and other criteria, the Company
identifies customers who may respond better to specific promotions or
products. To facilitate its direct marketing activities, the Company
maintains an in-house advertising department which performs many creative
services, which the Company believes streamlines the production process,
provides greater flexibility and creativity in catalog production, and
results in cost savings.
o Telesales. The Company supports its direct marketing with over 450
inbound and outbound telesales representatives who facilitate order
processing and generate new sales through direct and frequent contact with
customers. Inbound telesales representatives are responsible for assisting
customers in purchasing decisions as well as answering product pricing and
availability questions. In addition to assisting customers, inbound
telesales representatives also market comple mentary or promotional
products. The Company's telesales representatives utilize on-line computer
terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying
history.
The Company utilizes outbound telesales representatives and programs
to better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts. The
Company's U.S. dental outbound telesales representatives accounted for
approximately $188.9 million of the Company's net sales in 1997. The
Company has approximately 200 medical and veterinary telesales
representatives many of which make outbound calls in addition to handling
inbound telesales. Outbound telesales representatives strive to manage
long-term relationships with these customers through frequent and/or
regularly scheduled phone contact and personalized service.
4
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic training
sessions and special sales programs and receive incentives, including
monthly commissions.
o Field Sales Consultants. In 1992, the Company initiated its field
sales consultant program and, primarily as a result of its acquisition of
Sullivan, now has approximately 850 field sales consultants covering
certain of its major North American and European markets. The field sales
consultants concentrate on attracting new customers and increasing sales to
customers who do not currently order a high percentage of their total
product needs from the Company. This strategy is designed to complement the
Company's direct marketing and telesales strategies and to enable the
Company to better market, service and support the sale of more
sophisticated products and equipment. Once a field sales consultant has
established a relationship with a customer, the representative encourages
the customer to use the Company's automated ordering process or its
telesales representatives for its day-to-day needs. This simplifies the
ordering process for the customer and increases the effectiveness of the
field sales consultant.
Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
internet, PROTONE(R) (the Company's 24-hour automated phone service) or its
computerized order entry system. The Company has developed an enhanced
Windows(R)-based version of its computerized order entry system, known as
ArubA(R), which was introduced at the end of 1995.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 92% of orders are received within two days of placing
the order. The Company continually monitors its customer service through
customer surveys, focus groups and daily statistical reports. The Company
maintains a liberal return policy to better assure customer satisfaction with
its products.
5
Products
The following chart sets forth the principal categories of products offered
by the Company and certain top selling types of products in each category, with
the percentage of 1997 net sales in parenthesis:
Dental Products (64.4%)
- ------------------------------------------------------------------------------------------------------------------
Consumable Dental Products Dental Laboratory
and Small Equipment (48.8%) Products (3.6%) Large Dental
Equipment (12.0%)
- ------------------------------------------------------------------------------------------------------------------
X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs,
Units and Lights; X-
Handpieces; Preventatives; Impression Acrylics; Articulators; and Rays; and
Equipment Repair
Materials; Composites; and Anesthetics Abrasives
Value-Added
Products
Medical Products (29.9%) Veterinary Products (3.2%) and Services
(2.5%)
- ------------------------------------------------------------------------------------------------------------------
Branded and Generic Pharmaceuticals; Branded and Generic Software and
Related Products;
Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Financial
Products; and other value-
Infection Control; and Vitamins Products; and Dental Products added products
The percentage of 1996 and 1995 net sales was as follows: consumable dental
products and small equipment, 50.3% and 53.3%, respectively; dental laboratory
products, 3.8% and 4.1%, respectively; large dental equipment, 11.7% and 9.3%,
respectively; medical products, 28.6% and 26.6%, respectively; veterinary
products, 3.0% and 3.2%, respectively; and value-added products and services,
2.6% and 3.5%, respectively.
Consumable Supplies and Equipment
The Company offers approximately 55,000 SKUs to its customers in North
America, of which approximately 40,000 SKUs are offered to its dental customers,
approximately 17,000 are offered to its medical customers and approximately
20,000 are offered to its veterinary customers. Over 14% of the Company's
products are offered to all three types of the Company's customers in North
America. The Company offers approximately 50,000 SKUs to its customers in
Europe. Approximately 9.8% of the Company's net sales in 1997 were from sales of
products offered under the Henry Schein private brand (i.e., products
manufactured by various third parties and HS Pharmaceutical for distribution by
the Company under the Henry Schein(R) brand). The Company believes that the
Henry Schein private brand line of over 6,000 SKUs offered in the United States
and Canada is one of the most extensive in the industry. The Company also
distributes certain generic pharmaceuticals manufactured by HS Pharmaceutical, a
50%-owned company, and manufactures and distributes certain large dental
equipment through Schein Dental Equipment Corp. ("Schein Dental Equipment"), a
distributor and manufacturer of large dental equipment which was owned 73.7% by
Marvin H. Schein, a director and principal stockholder of the Company prior to
its acquisition by the Company. The Company updates its product offerings
regularly to meet its customers' changing needs.
On November 12, 1997, the Company completed the acquisition of Sullivan,
which was accounted for under the pooling of interests method of accounting and
accordingly, the Companys' results have been restated retroactively to include
Sullivan's results for all periods presented. Sullivan distributes dental
consumable supplies and equipment to dentists throughout the United States.
Sullivan's net sales included a proportionately higher percentage of large
dental equipment sales then that of the Company, on a historical basis.
6
Value-Added Products and Services
In an effort to promote customer loyalty, the Company offers certain
value-added products and services. These products and services include the
following:
o Practice Management Software. The Company sells practice management
software systems to its dental and veterinary customers. The Company has
sold over 20,000 users of its Easy Dental(R) Plus software systems as of
the end of fiscal 1997, and over 2,800 of its AVImark(R) veterinary
software systems. The Company's practice management software provides
practitioners with patient treatment history, billing and accounts
receivable analysis and management, an appointment calendar, electronic
claims processing and word processing programs, and the Company provides
technical support and conversion services from other software. In addition,
the Easy Dental(R) Plus software allows the customer to connect with the
Company's order entry management systems. On February 28, 1997, the Company
acquired all of the outstanding common stock of Dentrix Dental Systems,
Inc., which had net sales for 1996 of approximately $10.2 million. The
Dentrix system is one of the most comprehensive clinically-based dental
practice management software packages in the United States. The Dentrix
premium software product complements Easy Dental(R) Plus, the Company's
high-value practice management system. The Company has sold over 5,800
Dentrix systems as of December 27, 1997. During 1997, the Company also
acquired the rights to distribute the DenTech practice management system,
which is designed to handle the needs of large group practices. The Company
believes the combined software product offerings enhance its ability to
provide its customers with the widest array of system solutions to help
manage their practices.
o Financial Services. The Company has begun to offer its customers
assistance in managing their practices by providing access to a number of
financial services and products at rates which the Company believes are
lower than what they would be able to secure independently. The patient
financing program provides the Company's customers a method for reducing
receivables and improving cash flow by providing patients access to
financing. The Company facilitates the processing of credit applications,
payments to its customers and electronic bankcard processing and offers
electronic insurance claims submission services for faster, cheaper
processing of patient reimbursements, all through a third-party provider
for a transaction fee. The Company does not assume any financial obligation
to its customers or their patients in these programs. The Company also
offers practice management consulting services as well as practice
management brokerage services in selected markets in the United States.
o Equipment Repair and Installation. The Company offers a repair
service, ProRepair(R), which provides one to two-day turnaround for
handpieces and certain small equipment. The Company also provides in-office
installation and repair services for large equipment in certain markets in
North America and Europe. In accordance with its plan to expand its repair
service business and sales of large dental equipment, the Company has
opened seven new equipment sales and service centers in North America and
two in Europe, and had a total of 101 centers open at the end of 1997.
7
Information Systems
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. In the United States, the Company is in the
process of expanding and upgrading its order processing information system and,
during February 1997 completed the upgrading of its accounts receivable
information system. Additionally, worldwide, the Company is in the process of
installing an integrated information system for its large dental equipment sales
and service functions. Such a system will centralize the tracking of customers'
equipment orders as well as spare parts inventories and repair services.
Distribution
The Company distributes its products in the United States and Canada
primarily from its strategically located distribution centers in the Eastern,
Central, and Western United States. The Company maintains significant inventory
levels of certain products in order to satisfy customer demand for prompt
delivery and complete order fulfillment of their product needs. These inventory
levels are managed on a daily basis with the aid of the Company's sophisticated
purchasing and stock status management information systems. The Company's
European distribution centers include locations in the United Kingdom, France,
The Netherlands, Germany and Spain. Once a customer's order is entered, it is
electronically transmitted to the distribution center nearest the customer's
location and a packing slip for the entire order is printed for order
fulfillment. The Company's automated freight manifesting and laser bar code
scanning facilitates the speed of the order fulfillment. The Company currently
ships substantially all of its orders in the United States by United Parcel
Service. In certain areas of the United States, the Company delivers its orders
via contract carriers.
Purchasing
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 1,400
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
distribution centers. In 1997, the Company's top 10 vendors and the Company's
single largest vendor, accounted for approximately 24.7% and 7.1%, respectively,
of the Company's aggregate purchases.
8
Competition
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the products the Company sells are available to
the Company's customers from a number of suppliers. In addition, competitors of
the Company could obtain exclusive rights from manufacturers to market
particular products. Manufacturers could also seek to sell directly to
end-users, and thereby eliminate the role of distributors, such as the Company.
Significant price reductions by the Company's competitors could result in a
similar reduction in the Company's prices as a consequence of its policy of
matching its competitors' lowest advertised prices. Any of these competitive
pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as well
as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products, the
Company's principal national competitor is Patterson Dental Co. In addition, the
Company competes against a large number of other distributors that operate on a
national, regional and local level. The Company's largest competitors in the
sale of medical products are Physician's Sales and Service, Inc. and
McKesson/General Medical, which are national distributors. In the veterinary
product market, the Company's two principal national competitors include The
Butler Company and Burns Veterinary Supply. The Company also competes against a
large number of small local and regional medical and veterinary distributors, as
well as a number of manufacturers that sell direct to physicians and
veterinarians. With regard to the Company's practice management software, the
Company competes against a fragmented group of competitors, none of which
currently have a significant share of the market. The Company believes that it
competes in Canada substantially on the same basis as in the United States.
The Company also faces intense competition in its international markets,
where the Company competes on the basis of price and customer service against a
large number of dental product distributors and manufacturers in Mexico, the
United Kingdom, The Netherlands, Belgium, Germany, France, the Republic of
Ireland, Austria and Spain. The Company has several large competitors in these
markets, including ORBIS, Serona Dental and the GACD Group.
Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned company, HS
Pharmaceutical, which distributes and manufactures generic pharmaceuticals) were
to receive an adverse report following an inspection by the Food and Drug
Administration (the "FDA") or the Drug Enforcement Administration, or if a
competitor were to receive prior approval of new products from the FDA. A
violation of a law by HS Pharmaceutical could cause its operations to be
suspended. A suspension could have an adverse effect on the Company's equity in
earnings of affiliates and could cause the Company to seek alternative sources
of products manufactured by HS Pharmaceutical, possibly at higher prices than
currently paid by the Company.
9
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well as certain other trademarks. Pursuant to certain agreements executed in
connection with the reorganization of the Company, both the Company and Schein
Pharmaceutical, Inc. are entitled to use the "Schein" name in connection with
their respective businesses, but Schein Pharmaceutical, Inc. is not entitled to
use the name "Henry Schein." The Company intends to protect its trademarks to
the fullest extent practicable.
Employees
As of December 27, 1997, the Company had over 5,000 full-time employees in
North America and Europe, including approximately 450 telesales representatives,
850 field sales consultants, including equipment sales specialists, 1,290
warehouse employees, 120 computer programmers and technicians, 470 management
employees and 1,820 office, clerical and administrative employees. None of the
Company's employees are represented by a collective bargaining agreement. The
Company believes that its relations with its employees are excellent.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 2, 3, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; competitive product and pricing
pressures and the ability to gain or maintain share of sales in global markets
as a result of actions by competitors; and the results of legal proceedings. The
matters referred to in forward looking statements could be affected by the risks
and uncertainties involved in the Company's business. These risks and
uncertainties include, but are not limited to, the effect of economic and market
conditions, the impact of the consolidation of healthcare practitioners, the
impact of healthcare reform, opportunities for acquisitions and the Company's
ability to effectively integrate acquired companies, the acceptance and quality
of
10
software products, acceptance and ability to manage operations in foreign
markets, the ability to maintain favorable supplier arrangements and
relationships, possible disruptions in the Company's computer systems or
telephone systems, the Company's ability and its customers' and suppliers'
ability to replace, modify or upgrade computer programs in ways that adequately
address the Year 2000 issue, possible increases in shipping rates or
interruptions in shipping service, the level and volatility of interest rates
and currency values, economic and political conditions in international markets,
including civil unrest, government changes and restrictions on the ability to
transfer capital across borders, the impact of current or pending legislation
and regulation, as well as certain other risks described above in this Item
under "Competition" and "Government Regulation," and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K.
11
The Company's principal executive offices are located at 135 Duryea Road,
Melville, New York 11747, and its telephone number is 516-843-5500. As used in
this Report, the term the "Company" refers to Henry Schein, Inc., a Delaware
corporation, and its subsidiaries, 50%-owned companies and predecessor, unless
otherwise stated.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Position
- ---------------------------------------- ---------- ---------
Stanley M. Bergman...................... 48 Chairman, Chief Executive Officer, President and
Director
Gerald A. Benjamin...................... 45 Senior Vice President--Administration and Customer
Satisfaction and Director
James P. Breslawski..................... 44 Executive Vice President and Director
Leonard A. David........................ 49 Vice President--Human Resources and Special
Counsel and Director
Diane Forrest ......................... 51 Senior Vice President--Information Services
and Chief Information Officer
Larry M. Gibson ........................ 51 President-- Practice Management Technologies
Division
Bruce J. Haber ......................... 45 Executive Vice President and President-Medical Group
and Director
Stephen R. LaHood ...................... 50 Senior Vice President--Distribution Services
Mark E. Mlotek.......................... 42 Vice President, General Counsel, Secretary and
Director
Steven Paladino ........................ 40 Senior Vice President, Chief Financial
Officer and Director
James W. Stahly ........................ 50 President--North American Dental Group
Michael Zack............................ 48 Senior Vice President--International Group
12
Stanley M. Bergman has been Chairman, Chief Executive Officer and President
since 1989 and a director of the Company since 1982. Mr. Bergman held the
position of Executive Vice President of the Company and Schein Pharmaceutical,
Inc. from 1985 to 1989 and Vice President of Finance and Administration of the
Company from 1980 to 1985. Mr. Bergman is a certified public accountant.
Gerald A. Benjamin has been Senior Vice President of Administration and
Customer Satisfaction since 1993, including responsibility for the worldwide
human resource function, and has been a director of the Company since September
1994. Prior to holding his current position, Mr. Benjamin was Vice President of
Distribution Operations of the Company from 1990 to 1992 and Director of
Materials Management of the Company from 1988 to 1990. Before joining the
Company, Mr. Benjamin was employed for 13 years in various management positions
at Estee Lauder, where his last position was Director of Materials Planning and
Control.
James P. Breslawski has been Executive Vice President of the Company since
1990, with primary responsibility for the North American Dental Group, the
Veterinary Group and corporate creative services, and a director of the Company
since 1990. Between 1980 and 1990, Mr. Breslawski held various positions with
the Company, including Chief Financial Officer, Vice President of Finance and
Administration and Controller. Mr. Breslawski is a certified public accountant.
Leonard A. David has been Vice President of Human Resources and Special
Counsel since January 1995. Mr. David held the office of Vice President, General
Counsel and Secretary from 1990 to 1995 and practiced corporate and business law
for eight years prior to joining the Company. Mr. David has been a director of
the Company since September 1994.
Diane Forrest joined the Company in 1994 as Senior Vice President of
Information Services and Chief Information Officer. Prior to joining the
Company, Ms. Forrest was employed by Tambrands Inc. as Vice President of
Information Services from 1987 to 1994, KPMG Peat Marwick as Senior Manager in
the management consulting division from 1982 to 1987 and Nabisco Brands, Inc. as
Corporate Manager of Manufacturing Systems from 1978 to 1982.
Larry M. Gibson joined the Company as President of the Practice Management
Technologies Division on February 24, 1997, concurrent with the acquisition of
Dentrix . Before joining the Company, Mr. Gibson was founder, Chairman and CEO
of Dentrix, started in 1980. Prior to his employment with Dentrix, Mr. Gibson
was employed by Weidner Communication Systems from 1978.
Bruce J. Haber has been an Executive Vice President of Schein and President
of Schein's Medical Group since August 1, 1997, the date on which Schein
acquired MBMI. Mr. Haber has been a director of the Company since October 1997.
Mr. Haber has been President of MBMI since 1983.
Stephen R. LaHood joined the Company in 1992 as Senior Vice President of
Distribution Services and is also responsible for purchasing. Prior to joining
the Company, Mr. LaHood was employed by Lex/Schweber Electronics Inc. as Vice
President of Operations and Quality from 1988 to 1991. Mr. LaHood also spent ten
years at Johnson & Johnson Products, Inc., where his last position was Manager
of Corporate Business Planning and thereafter, seven years at Schering-Plough
Corporation where his last position was Senior Director of Manufacturing
Operations.
13
Mark E. Mlotek joined the Company in December 1994 as Vice President,
General Counsel and Secretary, and became a director of the Company in September
1995. Prior to joining the Company, Mr. Mlotek was a partner in the law firm of
Proskauer Rose LLP, counsel to the Company, specializing in mergers and
acquisitions, corporate reorganizations and tax law from 1989 to 1994.
Steven Paladino has been Senior Vice President and Chief Financial Officer
of the Company since 1993 and has been a director of the Company since 1992.
From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from
1987 to 1990 served as Corporate Controller of the Company. Before joining the
Company, Mr. Paladino was employed as a public accountant for seven years and
most recently was with the international accounting firm of BDO Seidman, LLP.
Mr. Paladino is a certified public accountant.
James W. Stahly joined the Company in 1994 as President of the North
American Dental Group of the Company. Before joining the Company, Mr. Stahly was
employed by Fox Meyer Corporation for seven years where his last position was
Senior Vice President -- Hospital and Alternate Care Sales. Prior to his
employment with Fox Meyer, Mr. Stahly spent 16 years at McKesson Drug Company.
Michael Zack has been responsible for the International Group of the
Company since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to 1989
and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to
1984.
ITEM 2. Properties
The Company owns or leases the following properties:
Approximate
Own or
Square Lease
Property Location Lease
Footage Expiration Date
-------- -------- ------- ----------- ---------------
Corporate
Headquarters................. Eastern United States Lease 100,000 December 2005
Distribution Center.......... Eastern United States Own 173,000 N/A
Distribution Center.......... Central United States Lease 25,000 December 1999
Distribution Center.......... Western United States Lease 115,500 June 2002
Distribution Center.......... United Kingdom Lease 85,000 August 2005
Manufacturing
Facilities................... Western United States Own 75,000 N/A
Distribution Center ......... Eastern United States Lease 413,000 December 2007
Distribution Center.......... Eastern United States Lease 108,000 July 2007
Distribution Center......... Eastern United States Lease 120,000 April 2001
Distribution Center......... Eastern United States Lease 82,000 January 2001
Distribution Center ......... Central United States Lease 171,000 November 2011
14
The Company also leases warehouse, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain and the United Kingdom. Two 50%-owned companies
also lease space in the United States and Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business. As a result of the Company's expansion and acquisition
activities, the Company is in the process of consolidating its distribution
facilities.
The Company has additional operating capacity at its listed facilities.
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company involves
a risk of product liability claims, and from time to time the Company is named
as a defendant in products liability cases as a result of its distribution of
pharmaceutical and other healthcare products. As of December 27, 1997, the
Company was named a defendant in seventeen such cases. Of the seventeen product
liability claims, eleven involve claims made by healthcare workers who claim
allergic reaction relating to exposure to latex gloves. In each of these cases,
the Company acted as a distributor of both brand name and "Henry Schein" private
brand latex gloves which were manufactured by third parties. To date, discovery
in these cases has been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification, however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company believes it is adequately covered by insurance in all these cases,
subject to certain self retention limits, and that none of the currently pending
cases should have a material adverse effect on the Company.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is covered by indemnification from the manufacturer of the product.
There can be no assurance that the coverage maintained by the Company is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost, or that indemnification agreements will provide
adequate protection for the Company.
From time to time, as part of the Company's effort to expand its field
sales force, the Company frequently hires field sales consultants with
experience in the office-based healthcare practitioner industry. The Company's
hiring practices have from time to time resulted in litigation instituted by
former employers of the field sales consultants hired by the Company. The
Company intends to vigorously defend these litigations. The Company believes
that these actions will not have a material adverse effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
At a special meeting of stockholders held on November 12, 1997, the
Company's stockholders approved (i) the issuance of shares of Common Stock in
connection with the Company's acquisition of Sullivan and (ii) adopted
amendments to the Company's Amended and Restated Certificate of Incorporation
(x) authorizing the Company's Board of Directors to establish from time to
time the number of directors constituting the entire Board and enable the
Board to amend or repeal any By-law except By-laws adopted by the Company's
stockholders from and after the 1997 Annual Meeting of Stockholders and (y)
reducing from 80% to 66 2/3% the supermajority voting requirement for
amendments to Article V of the Amended and Restated Certificate of
Incorporation, relating to the Board of Directors.
15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table sets forth for the periods indicated the high and low
reported sales prices of the Common Stock of the Company as reported on the
NASDAQ National Market System since December 31, 1995 through March 23, 1998.
High Low
---- ---
Fiscal 1996:
1st Quarter $30-3/4 $23-1/2
2nd Quarter $43-1/2 $27-1/2
3rd Quarter $40-1/4 $31-1/4
4th Quarter $41-1/4 $33
Fiscal 1997:
1st Quarter $39 $24-1/2
2nd Quarter $37 $26-7/8
3rd Quarter $40-1/2 $30-1/4
4th Quarter $37-3/4 $31-1/2
Fiscal 1998:
1st Quarter (through March 23, 1998) $41 $29-1/4
The Company's Common Stock is quoted through the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "HSIC." On March 23, 1998,
there were approximately 1,039 holders of record of the Common Stock. On March
23, 1998, the last reported sales price was $39.00.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
Issuance of Unregistered Securities
In 1997, the Company completed the 100% acquisition of four companies by
issuing 1,916,866 shares of unregistered Common Stock, with an aggregate value
of approximately $55.9 million at the respective closing dates. These
transactions were completed without registration under the Securities Act in
reliance upon exemptions provided by Section 4(2) of the Securities Act.
16
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 27, 1997 set forth below has been derived from the
Company's consolidated financial statements. The selected financial data and
consolidated financial statements have been restated to give effect to the
acquisitions of Sullivan, MBMI and Dentrix, effective November 12, 1997, August
1, 1997 and February 28, 1997, respectively, which were 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
-----------------------------------------------------------------------
December 27, December 28, December 30, December 31, December 25,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(in thousands, except per share and selected
operating data)
Statement of Operations Data:
Net sales ............................... $ 1,518,123 $ 1,231,848 $ 958,744 $816,040 $ 660,789
Cost of sales ........................... 1,067,299 865,156 663,508 573,777 462,831
----------- ----------- ----------- ----------- -----------
Gross profit ............................ 450,824 366,692 295,236 242,263 197,958
Selling, general and administrative
expenses ............................. 388,394 319,294 260,952 212,313 173,623
Merger and integration costs(1) ......... 50,779 -- -- -- --
Special management compensation(2) ...... -- -- 20,797 21,596 617
Special contingent consideration(3) ..... -- -- -- -- 3,216
Special professional fees(4) ........... -- -- -- 2,007 2,224
----------- ----------- ----------- ----------- -----------
Operating income ........................ 11,651 47,398 13,487 6,347 18,278
Interest income ......................... 7,242 6,353 2,680 1,842 951
Interest expense ........................ (5,541) (4,712) (7,341) (4,998) (3,758)
Other income (expense) - net ............ 577 985 453 577 (634)
----------- ----------- ----------- ----------- -----------
Income before taxes on income,
minority interest and equity in
earnings of affiliates .............. 13,929 50,024 9,279 3,768 14,837
Taxes on income ......................... 17,512 18,606 10,823 4,458 6,248
Minority interest in net income (loss) of
subsidiaries ......................... (430) 246 509 561 318
Equity in earnings of affiliates ........ 2,141 1,595 1,537 494 1,296
----------- ----------- ----------- ----------- -----------
Income (loss) beforcumulative effect
of accounting change ................. (1,012) 32,767 (516) (757) 9,567
Cumulative effect of
accounting change .................... -- -- -- (60) 1,891
----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $ (1,012) $ 32,767 $ (516) $ (817) $ 11,458
=========== =========== =========== =========== ===========
Net income (loss) per common share:
Basic ................................ $ (0.03) $ 1.06 $ (0.02) $ (0.04)
Diluted .............................. $ (0.03) $ 1.01 $ (0.02) $ (0.04)
Weighted average shares outstanding: ....
Basic ................................ 34,557 30,912 23,157 21,673
Diluted .............................. 34,557 32,400 23,157 21,673
17
Years Ended
------------------------------------------------------------------------------------
December 27, December 28, December 30, December 31, December 25,
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- -----------
(in thousands, except per share and selected operating data)
Pro Forma Income Data (5):
Pro forma operating income............ $ 34,284 $ 31,004
Pro forma net income................. $ 31,570 $ 18,574 $ 16,731
Pro forma net income per
common share:
Basic ............................. $ 1.02 $ 0.80 $ 0.77
Diluted ........................... $ 0.97 $ 0.76 $ 0.74
Pro forma average shares outstanding:
Basic ............................ 30,912 23,157 21,673
Diluted............................ 32,400 24,443 22,757
Selected Operating Data:
Number of orders shipped ................. 5,213,000 4,445,000 3,864,000 3,505,000 3,146,000
Average order size ....................... $ 291 $ 277 $ 248 $ 233 $ 210
Net Sales by Market Data:
Dental(6) ................................ $ 819,083 $ 677,226 $ 543,265 $ 477,939 $ 422,223
Medical .................................. 441,015 341,329 245,439 211,393 144,972
Veterinary ............................... 40,843 35,329 29,330 27,872 24,312
Technology(7) ............................ 35,943 30,965 33,007 14,909 9,866
International(8) ......................... 181,239 146,999 107,703 83,927 59,416
---------- ---------- ---------- ---------- ----------
$1,518,123 $1,231,848 $ 958,744 $ 816,040 $ 660,789
========== ========== ========== ========== ==========
Balance Sheet Data (at period end):
Working capital .......................... $ 307,027 $ 286,354 $ 181,080 $ 152,252 $ 132,570
Total assets ............................. 741,194 628,944 447,415 326,939 262,825
Total debt ............................... 114,535 48,893 70,698 80,957 59,322
Redeemable stock (9) ..................... -- -- -- 14,745 --
Minority interest ........................ 2,225 5,289 4,547 1,823 1,051
Stockholders' equity ..................... 411,198 399,517 227,198 115,831 109,294
- -----------------
(1) Merger and integration costs consist primarily of investment banking,
legal, accounting and advisory fees, compensation, impairment of goodwill
arising from acquired businesses integrated into the Company's medical and
dental businesses, as well as certain other integration costs incurred in
connection with the 1997 acquisitions of Sullivan, MBMI and Dentrix, which
were accounted for under the pooling of interests method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" in Item 7 and the Consolidated Financial
Statements and related notes thereto in Item 8.
(2) Includes: (a) for 1995, non-cash special management compensation charges of
$17.5 million arising from final mark-to-market adjustments (reflecting an
increase in estimated market value from 1994 to the initial public offering
price of $16.00
18
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;
and (c) for 1993, non-cash special management compensation charges of $0.6
million in amortization of deferred compensation arising from the 1992
stock grants. See "Management's Discussion and Analysis of Financial
Condition And Results of Operations - Overview" in Item 7 herein.
(3) Includes $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.
(4) 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.
(5) 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.
(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.
19
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations has been restated to
give retroactive effect to the transactions accounted for under the pooling of
interests method of accounting and should be read in conjunction with the
Company's consolidated financial statements and notes thereto included herein.
Recent Developments
During the year ended December 27, 1997, the Company acquired in pooling of
interests transactions, all of the outstanding common stock of (i) Sullivan, a
distributor of consumable dental supplies and equipment, with 1996 net sales of
approximately $241.6 million, (ii) MBMI a distributor of medical supplies with
1996 net sales of approximately $150.1 million, and (iii) Dentrix, a leading
provider of clinically-based dental practice management systems with 1996 net
sales of approximately $10.2 million. 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.
In connection with these acquisitions, the Company incurred certain merger
and integrations costs of approximately $50.8 million during the year ended
December 27, 1997. Net of taxes, merger and integration costs were approximately
$1.17 per share, on a diluted basis. Merger and integration costs consist
primarily of investment banking, legal, accounting and advisory fees,
compensation, impairment of goodwill arising from acquired businesses integrated
into the Company's medical and dental businesses, as well as certain other
integration costs associated with these mergers. Excluding the merger and
integration costs, net income and net income per common share, on a diluted
basis, would have been $41.7 million and $1.14, respectively, for the year ended
December 27, 1997.
In addition to these three acquisitions, the Company completed 20 other
acquisitions including; three medical and nine dental supply companies with
aggregate net sales for 1996 of approximately $32.0 million and $17.1 million,
respectively; two international dental and three international medical supply
companies with aggregate net sales for 1996 of approximately $5.3 million and
$18.3 million, respectively; two technology and value-added product companies
with aggregate net sales for 1996 of approximately $10.1 million; and certain
assets and the business of IDE Interstate, Inc., a direct marketer of healthcare
products to dentists, doctors and veterinarians with net sales for 1996 of
approximately $50.0 million.
Of the 23 completed acquisitions, six were accounted for under the pooling
of interests method of accounting, with the remainder being accounted for under
the purchase method of accounting (fourteen for 100% ownership interests and
three for majority ownership interests). The financial statements have been
restated to give retroactive effect to three of the pooling transactions
(Sullivan, MBMI and Dentrix) as the remaining three pooling transactions were
not material and have been included in the consolidated financial statements
from the beginning of the quarter in which the acquisitions occurred. Operations
of the 1997 completed acquisitions, accounted for under the purchase method of
accounting, have been included in the consolidated financial statements from
their respective acquisition dates.
20
Overview
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements. The
Company's results of operations in recent years have also been impacted by the
Reorganization.
From 1992 through 1994, the Company was a party to a series of transactions
leading to the Reorganization that resulted in, among other things, the Company
being separated from Holdings and the distribution of shares of the Common Stock
of the Company to its then current stockholders. In December 1992, an executive
officer of the Company received certain stock grants in the Company and Schein
Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6 million,
respectively, and cash of approximately $5.3 million to pay income taxes on the
stock grants received. These stock grants were subject to the occurrence of
certain future events, including the fulfillment of the employment term by the
executive officer. Accordingly, these stock grants, totaling $8.8 million, were
treated as deferred compensation while the cash payments were charged to
earnings as special management compensation in the year ended December 26, 1992.
During 1993, the Company amortized the deferred compensation relating to stock
grants by the Company to the executive officer resulting in a charge to earnings
of $0.6 million. In 1994, the contingencies relating to the stock granted to the
executive officer were eliminated, such that these shares became fully vested.
Accordingly, deferred compensation of $8.8 million, less the 1993 amortization
of $0.6 million, plus a mark-to-market adjustment (because of certain repurchase
features) of approximately $9.1 million, along with a $0.3 million cash payment
for income taxes relating to the 1992 stock grants, was expensed in 1994 as
special management compensation.
In addition, in connection with the Reorganization, certain senior
management of the Company were issued shares of Common Stock of the Company in
1994 and 1995 to extinguish an obligation under a pre-existing long-term
incentive plan and to provide them with an ownership interest in the Company. In
connection with the issuance of the shares, a cash payment for income taxes
relating to such stock issuances of approximately $2.4 million was paid. This
cash bonus, plus $3.5 million, the fair value of the related stock issued, net
of amounts accrued under the long-term incentive plan of approximately $1.9
million, resulted in an additional special management compensation charge to the
Company of approximately $4.0 million in 1994. Charges to earnings for the year
ended 1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.
Additionally, the Company has granted certain employees options for shares
of the Company's Common Stock, which became exercisable upon the Company's
initial public offering on November 3, 1995, at which time substantially all
such options vested. Non-recurring special compensation charges for the options
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.
21
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 1997, 1996 and 1995.
Percentage Increase
Percentage of Net Sales (Decrease)
------------------------------------------------------------------------------------
Years Ended
---------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995 1997 to 1996 1996 to 1995
------------------------------------------------------------------------------------
Net Sales by Market:
Dental(1) 54.0% 55.0% 56.7% 20.9% 24.6%
Medical 29.0 27.7 25.6 29.2 39.1
Veterinary 2.7 2.9 3.1 15.6 20.5
Technology(2) 2.4 2.5 3.4 16.1 (6.2)
International(3) 11.9 11.9 11.2 23.3 36.5
----- ----- -----
100.0% 100.0% 100.0% 23.2 28.5
- -----------
(1) Dental consists of the Company's dental business in the United States and
Canada.
(2) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(3) International consists of the Company's business (substantially all dental)
outside the United States and Canada, primarily in Europe.
1997 Compared to 1996
Net sales increased $286.3 million, or 23.2%, to $1,518.1 million in 1997
from $1,231.8 million in 1996. Of the $286.3 million increase, approximately
$141.9 million represented a 20.9% increase in the Company's dental business,
$99.7 million represented a 29.2% increase in its medical business, $34.2
million represented a 23.3% increase in its international business, $5.5 million
represented a 15.6% increase in the Company's veterinary business, and $5.0
million, represented a 16.1% increase in its technology business. The increase
in dental net sales was primarily the result of the continuing favorable impact
of the Company's integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), purchase acquisitions, continued success in the Company's target
marketing programs and increased sales in the large dental equipment market. Of
the approximately $99.7 million increase in medical net sales, approximately
$16.9 million, or 17.0%, represents incremental net sales to renal dialysis
centers, with a more focused direct mail strategy, large account flu vaccine
sales and acquisitions primarily accounting for the balance of the increase in
medical net sales. The Company's largest renal dialysis customer (Renal
Treatment Centers, Inc.) was recently acquired by Total Renal Care, Inc. who
currently is not a customer of the Company. In the international market, the
increase in net sales was due to acquisitions, primarily in Germany and the
United Kingdom, and increased account penetration in France and Germany.
Unfavorable exchange rate translation adjustments resulted in a net sales
decrease of approximately $10.5 million. Had net sales for the international
market been translated at the same exchange rates in effect during 1996, net
sales would have increased by an additional 7.7%. In the veterinary market, the
increase in net sales was primarily due to increased account penetration with
corporate accounts, improved participation in select purchasing groups, and
targeted emphasis on the equine race track segment.
22
The increase in technology and value-added product sales was primarily due to
increase in sales of Dentrix software systems and 1997 acquisitions.
Gross profit increased by $84.1 million, or 22.9%, to $450.8 million in
1997, from $366.7 million in 1996, substantially following the changes in sales.
Gross profit margin decreased by only 0.1% to 29.7% from 29.8% last year, with
slight improvements in technology, international and medical margins offset by
nominal declines in veterinary and dental margins.
Selling, general and administrative expenses, excluding merger and
integration costs, increased by $69.1 million, or 21.6%, to $388.4 million in
1997 from $319.3 million in 1996. Selling and shipping expenses increased by
$45.7 million, or 20.8%, to $265.6 million in 1997 from $219.9 million in 1996.
As a percentage of net sales, selling and shipping expenses decreased 0.4% to
17.5% in 1997 from 17.9% in 1996. This decrease was primarily due to leveraging
of the Company's distribution infrastructure, partially offset by incremental
shipping, payroll and related costs amounting to $1.3 million resulting from the
Teamsters strike against UPS in the third quarter and an increase in selling
expenses. General and administrative expenses increased $23.4 million, or 23.5%,
to $122.8 million in 1997 from $99.4 million in 1996, primarily as a result of
purchase acquisitions. As a percentage of net sales, general and administrative
expenses remained unchanged at 8.1% in 1997 and 1996.
Other income (expense) - net decreased by $0.3 million, to $2.3 million for
the year ended December 27, 1997 from $2.6 million for 1996. Interest expense
increased due principally to an increase in average borrowings partially offset
by a decline in the average cost of borrowing. Interest income increased
primarily due to an increase in finance charge income and imputed interest
income arising form non-interest bearing extended payment term sales.
Equity in earnings of affiliates increased $0.5 million or 31.3% to $2.1
million in 1997 from $1.6 million in 1996. This increase in earnings of
affiliates was primarily due to increased sales volume and improved margins for
the products sold by an unconsolidated 50%-owned company.
For 1997 the Company's effective tax rate was 125.7%. Excluding merger and
integration costs, the majority of which are not deductible for income tax
purposes, the Company's effective tax rate would have been 39.5%. The difference
between the effective tax rate ( excluding merger and integration costs) and the
Federal statutory rate relates primarily to state income taxes. For 1996, the
Company's provision for taxes was $18.6 million, while the pre-tax income was
$50.0 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 39.6%. 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.
1996 Compared to 1995
Net sales increased $273.1 million, or 28.5%, to $1,231.8 million in 1996
from $958.7 million in 1995. Of the $273.1 million increase, approximately
$133.9 million represented a 24.6% increase in the Company's dental business,
$95.9 million represented a 39.1% 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
23
marketing and telesales personnel), expansion into the U.S. market for large
dental equipment, which helped increase sales to existing customers and allowed
for greater market penetration and acquisitions. Of the approximately $95.9
million increase in medical net sales, approximately $20.9 million, or 21.8%,
represents incremental net sales to renal dialysis centers, with the effects of
acquisitions, increased sales to hospitals, increased outbound telesales
activity and the addition of new customers 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 group. Net sales in the Company's technology
group was below last year's sales volume levels due to unusually high sales
volume in the fourth quarter of 1995 related to the introductory launch, at that
time, of the Company's Easy Dental (R) Plus Windows (R) based product; offset
due to increase in sales of Dentrix software systems.
Gross profit increased by $71.5 million, or 24.2%, to $366.7 million in
1996, from $295.2 million in 1995, while gross profit margin decreased by 1.0%
to 29.8% from 30.8% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(R) Plus for
Windows(R) products were sold in 1996 coupled with lower margin hospital sales.
Excluding the 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 decreased by
0.4% from 29.1% for 1995 to 28.7% for 1996.
Selling, general and administrative expenses increased by $58.3 million, or
22.3%, to $319.3 million in 1996 from $261.0 million in 1995. Selling and
shipping expenses increased by $45.0 million, or 25.7%, to $219.9 million in
1996 from $174.9 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.3% to 17.9% 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(R) Plus for Windows(R) version which occurred during 1995. These
introductory promotional expenses represented 0.6% of net sales in 1995.
Excluding these expenses from 1995, selling and shipping expenses, as a
percentage of net sales, would have been 0.3% higher than last year. This
increase was due primarily to increased commissions as a result of increased
sales, various promotional programs and incremental field sales and marketing
personnel. General and administrative expenses increased $13.3 million, or
15.4%, to $99.4 million in 1996 from $86.1 million in 1995, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses decreased 0.9% to 8.1% in 1996 from 9.0% in 1995 due primarily to the
relatively fixed nature of general and administrative expenses when compared to
the 28.5% increase in sales volume for the same period.
Interest-net increased $6.3 million to a net interest income of $1.7
million in 1996 from a net interest expense of $4.6 million in 1995. This
decrease primarily resulted from the use of the proceeds of the Company's
follow-on offering in June 1996 and from the conversion of outstanding warrants
to reduce debt, 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.
24
For 1996, the Company's provision for taxes was $18.6 million, while the
pre-tax income was $50.0 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 39.6%. 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 $10.8 million, while
the pre-tax income was $9.3 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 $12.6 million, resulting in an effective tax rate
of 41.9%. The difference between the pro forma effective tax rate and the
Federal statutory rate relates primarily to state income taxes and currently
non-deductible net operating losses of certain foreign subsidiaries, primarily
in France, which are not included in the Company's consolidated tax return.
In 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.
Year 2000
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000, as well as identify
critical third parties which the Company relies upon to operate its business to
assess their readiness for the year 2000. The Year 2000 issue arises from the
widespread use of computer programs that rely on two-digit date codes to perform
computations or decision-making functions. The Company expects to incur internal
payroll costs as well as consulting costs and other expenses related to
infrastructure and facilities enhancements necessary to prepare for the
Company's systems for the year 2000. Management estimates that the cost of this
program will be between $2.0 million and $3.0 million, with approximately $1.5
million representing incremental costs to the Company. There can be no assurance
that the systems of other companies which the Company's systems rely upon will
be timely converted, or that such failure to convert by another company would
not have a material adverse effect on the Company's systems and results of
operations.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS 131)
which supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the relatively recent issuance of this standard, management
has been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
Risk Management
The Company has operations in the United States, Canada, Mexico, the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland,
Austria and Spain. Substantially all 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
$3.4 million as of the 1997 fiscal year end.
25
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company has experienced negative
translation adjustments of approximately $1.0 million and $0.5 million in 1997
and 1996, respectively, which adjustments were reflected in the balance sheet as
an adjustment to stockholders' equity. The cumulative translation adjustment at
the end of 1997 showed a net negative translation adjustment of $1.6 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, in January 1998
the Company entered into a foreign currency forward option with a major
international bank to convert estimated monthly Canadian dollar receipts into
U.S. dollars. Under this agreement, the Company has an option to sell 6.0
million Canadian dollars at predetermined fixed rates. The option expires on
August 28, 1998, however the Company anticipates entering into new options and
contracts in the normal course of its business.
A balloon payment of approximately $3.4 million due to a bank under a term
loan related to a Dutch acquisition came due in October 1997. The Company
settled this loan by entering into a new Netherlands Guilder (NLG) loan in the
amount of 6.5 million NLG. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary. The new NLG loan has a balloon payment of 4.1 million NLG due in
January 2002.
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. The Company entered into an
interest rate collar agreement with a major bank for $10.0 million. The
agreement limits the net interest rate charged to 8.25%. The Company receives no
further interest rate benefit once the applicable interest rate falls below
6.55%. This agreement matures in June 1998.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products, special inventory forward buy-in opportunities and to fund initial
start-up inventory requirements for new distribution centers, (b) acquisitions,
and (c) capital expenditures. Since sales have been strongest during the fourth
quarter and special inventory forward buy-in opportunities are most prevalent
just before the end of the year, the Company's working capital requirements have
been generally higher from the end of the third quarter to the end of the first
quarter of the following year. In addition, a subsidiary of the Company had a
stock repurchase plan under which 205,800 shares of common stock, on a converted
basis, were repurchased from the public over the last two years at an
approximate cost of $2.5 million. The Company has financed its business
primarily through its revolving credit facilities and stock issuances.
26
Net cash used in operating activities for the year ended December 27, 1997
of $37.2 million resulted primarily from a net increase in working capital of
$65.5 million offset in part by non-cash charges relating primarily to provision
for merger and integration costs, depreciation and amortization and allowances
on accounts receivable of $17.1 million, $14.4 million and $3.1 million,
respectively. The increase in working capital was primarily due to (i) a $45.3
million increase in accounts receivable resulting primarily from increased net
sales and extended payment terms and a decrease in the percentage of customers
who make payment with their orders , (ii) a $24.1 million increase in
inventories, primarily due to year-end inventory forward buy-in opportunities
and to fund initial start-up inventory requirements for new distribution
centers, and (iii) a $4.9 million increase in loans and other receivables,
offset in part by an increase in accounts payable and other accrued expenses of
$8.7 million. The Company anticipates future increases in working capital as a
result of its continued sales growth, extended payment terms and special
inventory forward buy-in opportunities.
Net cash used in investing activities for the year ended December 27, 1997
of $55.1 million resulted primarily from cash used to make acquisitions of $32.9
million and capital expenditures of $16.5 million. During the past three years,
the Company has invested more than $43.0 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 $30.0 million during the
year-ending December 26, 1998, including approximately $10.0 million to $12.0
million relating to the consolidation and integration of facilities and systems
as a result of recent acquisitions. Thereafter, the Company expects to invest in
excess of $20.0 million per year in capital projects to modernize and expand its
facilities and infrastructure systems and integrate operations.
Net cash provided by financing activities for the year ended December 27,
1997 of $54.3 million resulted primarily from cash proceeds from bank borrowings
of approximately $69.9 million offset by debt repayments of approximately $16.0
million.
Certain acquisitions and joint ventures, holders of minority interests in
the acquired entities or ventures have the right at certain times to require the
Company to acquire their interest at either fair market value or a formula price
based on earnings of the entity.
The Company's cash and cash equivalents as of December 27, 1997 of $7.8
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). These investments have staggered maturity
dates, none of which exceed three months, and have a high degree of liquidity
since the securities are actively traded in public markets.
The Company entered into an amended revolving credit facility on August 15,
1997 that increased its main credit facility to $150.0 million and extended the
facility termination date to August 15, 2002. Borrowings under the credit
facility were $76.2 million at December 27, 1997. Certain of the Company's
subsidiaries have credit facilities that totaled $35.3 million at December 27,
1997 under which $12.0 million had been borrowed.
The aggregate purchase price of the acquisitions completed during 1997,
including the acquisition of the minority interests of a subsidiary, was
approximately $494.7 million, payable $33.1 million in cash, $8.6 million in
notes and $453.0 million in stock. The cash portion of the purchase price was
primarily funded by proceeds from the Company's follow-on offering, completed in
June 1996.
The Company believes that its cash and cash equivalents of $7.8 million as
of December 27, 1997, its ability to access public debt and equity markets and
the availability of funds under its existing credit
27
agreements will provide it with sufficient liquidity to meet its currently
foreseeable short-term and long-term capital needs.
28
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
- ----------------------------------- -----------
Reports of Independent Certified Public Accountants...................................... 30
Consolidated Financial Statements:
Balance Sheets as of December 27, 1997 and December 28, 1996.......................... 33
Statements of Operations for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 .......................................... 34
Statements of Stockholders' Equity for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 ............................................ 35
Statements of Cash Flows for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 ............................................ 36
Notes to Consolidated Financial Statements ........................................... 37
Schedule, years ended December 27, 1997, December 28, 1996 and December 30, 1995
II - Valuation and Qualifying Accounts ............................................... 87
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.
29
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 27, 1997 and December 28, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 and 1995 consolidated financial statements
of Micro Bio-Medics, Inc., which statements reflect total assets of $60,444,000
as of November 30, 1996, and total revenues of $150,143,000 and $119,874,000,
for the years ended November 30, 1996 and 1995, respectively, or the 1996 and
1995 financial statements of Sullivan Dental Products, Inc. which statements
reflect total assets of $101,050,000 as of December 31, 1996 and total revenues
of $241,583,000 and $215,568,000 for the years ended December 31, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such subsidiaries, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Henry Schein, Inc. and Subsidiaries
at December 27, 1997 and December 28, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
27, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
February 27, 1998
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Micro Bio-Medics, Inc.
Pelham Manor, New York
We have audited the consolidated balance sheets of Micro Bio-Medics, Inc. and
Subsidiaries as of November 30, 1996 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for each of the two years
in the period ended November 30, 1996, not presented seperately herein. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro Bio-Medics,
Inc. and Subsidiaries as of November 30, 1996 and the results of their
operations and their cash flows for each of the two years in the period ended
November 30, 1996, in conformity with generally accepted accounting principles.
MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
February 2, 1997, except for Notes 8 and 12 which are dated March 7, 1997
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Sullivan Dental Products, Inc.
West Allis, Wisconsin
We have audited the balance sheets of Sullivan Dental Products, Inc. as of
December 31, 1996 and the related statements of income, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996, not
presented separately herein. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sullivan Dental Products, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE, LLP
Milwaukee, Wisconsin
February 18, 1997
32
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 27, December 28,
1997 1996
--------- ---------
ASSETS (Restated)
Current assets:
Cash and cash equivalents ............................... $ 7,824 $ 45,814
Accounts receivable, less reserves of $13,048 and $9,035,
respectively ......................................... 261,665 207,187
Inventories ............................................. 212,848 180,750
Deferred income taxes ................................... 13,323 7,944
Other ................................................... 39,396 31,987
--------- ---------
Total current assets ............................. 535,056 473,682
Property and equipment, net ................................ 54,449 48,019
Goodwill and other intangibles, net ........................ 122,217 77,718
Investments and other ...................................... 29,472 29,525
--------- ---------
$ 741,194 $ 628,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable ........................................ $ 129,806 $ 120,693
Bank credit lines ....................................... 11,973 6,716
Accruals:
Salaries and related expenses ........................ 20,729 14,146
Merger and integration costs ......................... 17,056 --
Other ................................................ 39,095 36,879
Current maturities of long-term debt .................... 9,370 8,894
--------- ---------
Total current liabilities ........................ 228,029 187,328
Long-term debt ............................................. 93,192 33,283
Other liabilities .......................................... 6,550 3,527
--------- ---------
Total liabilities ................................ 327,771 224,138
--------- ---------
Minority interest .......................................... 2,225 5,289
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000;
issued: 35,146,892 and
33,817,550, respectively ............................. 352 338
Additional paid-in capital .............................. 322,998 314,000
Retained earnings ....................................... 92,238 89,717
Treasury stock, at cost, 62,479 and 281,394
shares, respectively ................................. (1,156) (3,902)
Foreign currency translation adjustment ................. (1,609) (636)
Deferred compensation ................................... (1,625) --
--------- ---------
Total stockholders' equity ....................... 411,198 399,517
--------- ---------
$ 741,194 $ 628,944
========= =========
See accompanying notes to consolidated financial statements.
33
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-----------------------------------------
December 27, December 28, December 30,
1997 1996 1995
----------- ----------- -----------
(Restated) (Restated)
Net sales .................................... $ 1,518,123 $ 1,231,848 $ 958,744
Cost of sales ................................ 1,067,299 865,156 663,508
----------- ----------- -----------
Gross profit .............................. 450,824 366,692 295,236
Operating expenses:
Selling, general and administrative ....... 388,394 319,294 260,952
Special management compensation ........... -- -- 20,797
Merger and integration costs .............. 50,779 -- --
----------- ----------- -----------
Operating income ....................... 11,651 47,398 13,487
Other income (expense):
Interest income ........................... 7,242 6,353 2,680
Interest expense .......................... (5,541) (4,712) (7,341)
Other-net ................................. 577 985 453
----------- ----------- -----------
Income before taxes on income, minority
interest and equity in earnings of
affiliates ......................... 13,929 50,024 9,279
Taxes on income .............................. 17,512 18,606 10,823
Minority interest in net income (loss) of
subsidiaries .............................. (430) 246 509
Equity in earnings of affiliates ............. 2,141 1,595 1,537
----------- ----------- -----------
Net income (loss) ............................ $ (1,012) $ 32,767 $ (516)
=========== =========== ===========
Net income (loss) per common share:
Basic ..................................... $ (0.03) $ 1.06 $ (0.02)
=========== =========== ===========
Diluted ................................... $ (0.03) $ 1.01 $ (0.02)
=========== =========== ===========
Weighted average shares outstanding:
Basic ..................................... 34,557 30,912 23,157
Diluted ................................... 34,557 32,400 23,157
Pro forma:
Historical net income (loss) .............. $ 32,767 $ (516)
Pro forma adjustments:
Special management compensation ........ -- 20,797
Tax effect of above .................... -- (1,174)
Provision for income taxes on previously
untaxed earnings of an acquisition . (1,197) (533)
----------- -----------
Pro forma net income ...................... $ 31,570 $ 18,574
=========== ===========
Pro forma net income per common share:
Basic .................................. $ 1.02 $ 0.80
=========== ===========
Diluted ................................ $ 0.97 $ 0.76
=========== ===========
Weighted average shares outstanding:
Basic .................................. 30,912 23,157
Diluted ................................ 32,400 24,443
See accompanying notes to consolidated financial statements.
34
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 31, 1994, as previously reported ............... 9,923,859 $ 99 $ 9,960 $ 29,954
Adjustment for pooled companies ................................... 10,032,498 100 39,950 36,225
----------- ----------- ----------- -----------
Balance, December 31, 1994, as restated ........................... 19,956,357 199 49,910 66,179
Net loss .......................................................... -- -- -- (516)
Dividends paid by pooled companies ................................ -- -- -- (2,912)
Shares issued for acquisition ..................................... 1,341,266 14 7,957 --
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 (233,442 shares) ....................... -- -- -- --
Shares reacquired from a prior year's acquisition (7,497 shares) .. -- -- -- --
Foreign currency translation adjustment ........................... -- -- -- --
Shares issued for stock options and warrants, including tax benefit 84,996 1 779 --
Shares issued for conversion of debentures ........................ 116,250 1 1,389 --
----------- ----------- ----------- -----------
Balance, December 30, 1995 ........................................ 28,673,267 286 167,437 62,751
Net income ........................................................ -- -- -- 32,767
Dividends paid by pooled companies ................................ -- -- -- (5,801)
Shares issued for acquisitions .................................... 820,930 10 16,246 --
Stock issued in follow-on offering ................................ 3,734,375 37 124,070 --
Stock issued to ESOP trust ........................................ 24,210 -- 820 --
Purchase of treasury stock (27,455 shares) ........................ -- -- -- --
Shares reacquired from a prior year's acquisition (13,000 shares) . -- -- -- --
Foreign currency translation adjustment ........................... -- -- -- --
Shares issued for stock options and warrants, including tax benefit 448,518 4 4,030 --
Shares issued for conversion of debentures ........................ 116,250 1 1,397 --
----------- ----------- ----------- -----------
Balance, December 28, 1996 ........................................ 33,817,550 338 314,000 89,717
Retained earnings of three companies acquired under the pooling of
interests method, deemed not material in the aggregate ......... -- -- -- 5,899
Adjustment to change the fiscal year end of a company acquired
under the pooling of interests method .......................... -- -- -- 76
Net loss .......................................................... -- -- -- (1,012)
Dividends paid by pooled companies ................................ -- -- -- (2,442)
Shares issued for acquisitions .................................... 906,401 9 2,945 --
Restricted stock issued in accordance with executive compensation
agreements ..................................................... 44,846 -- -- --
Treasury shares issued for acquisitions (246,960 shares) .......... -- -- -- --
Purchase of treasury stock (30,507 shares) ........................ -- -- -- --
Shares reacquired from a prior year's acquisition (2,339 shares) .. -- -- -- --
Treasury shares retired .......................................... (5,644) -- (95) --
Foreign currency translation adjustment ........................... -- -- -- --
Stock issued to ESOP trust ........................................ 44,122 -- 1,150 --
Shares issued for stock options, including tax benefit ............ 339,617 5 4,998 --
----------- ----------- ----------- -----------
Balance, December 27, 1997 ........................................ 35,146,892 $ 352 $ 322,998 $ 92,238
=========== =========== =========== ===========
Currency Deferred Total
Treasury Translation Compen- Stockholders'
Stock Adjustment sation Equity
----------- ----------- ----------- -----------
Balance , December 31, 1994, as previously reported ............... $ -- $ (458) $ -- $ 39,555
Adjustment for pooled companies ................................... -- -- -- 76,275
----------- ----------- ----------- ------------
Balance, December 31, 1994, as restated ........................... -- (458) -- 115,830
Net loss .......................................................... -- -- -- (516)
Dividends paid by pooled companies ................................ -- -- -- (2,912)
Shares issued for acquisition ..................................... -- -- -- 7,971
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 (233,442 shares) ....................... (3,000) -- -- (3,000)
Shares reacquired from a prior year's acquisition (7,497 shares)... (101) -- -- (101)
Foreign currency translation adjustment ........................... -- 283 -- 283
Shares issued for stock options and warrants, including tax benefit -- -- -- 780
Shares issued for conversion of debentures ........................ -- -- -- 1,390
----------- ----------- ----------- ------------
Balance, December 30, 1995 ........................................ (3,101) (175) -- 227,198
Net income ........................................................ -- -- -- 32,767
Dividends paid by pooled companies ................................ -- -- -- (5,801)
Shares issued for acquisitions .................................... -- -- -- 16,256
Stock issued in follow-on offering ................................ -- -- -- 124,107
Stock issued to ESOP trust ........................................ -- -- -- 820
Purchase of treasury stock (27,455 shares) ........................ (628) -- -- (628)
Shares reacquired from a prior year's acquisition (13,000 shares) . (173) -- -- (173)
Foreign currency translation adjustment ........................... -- (461) -- (461)
Shares issued for stock options and warrants, including tax benefit -- -- -- 4,034
Shares issued for conversion of debentures ........................ -- -- -- 1,398
----------- ----------- ----------- ------------
Balance, December 28, 1996 ........................................ (3,902) (636) -- 399,517
Retained earnings of three companies acquired under the pooling of
interests method, deemed not material in the aggregate ......... -- -- -- 5,899
Adjustment to change the fiscal year end of a company acquired
under the pooling of interests method .......................... -- -- -- 76
Net loss .......................................................... -- -- -- (1,012)
Dividends paid by pooled companies ................................ -- -- -- (2,442)
Shares issued for acquisitions .................................... -- -- -- 2,954
Restricted stock issued in accordance with executive compensation
agreements ..................................................... -- -- (1,625) (1,625)
Treasury shares issued for acquisitions (246,960 shares) .......... 3,303 -- -- 3,303
Purchase of treasury stock (30,507 shares) ........................ (618) -- -- (618)
Shares reacquired from a prior year's acquisition (2,339 shares) .. (34) -- -- (34)
Treasury shares retired .......................................... 95 -- -- --
Foreign currency translation adjustment ........................... -- (973) -- (973)
Stock issued to ESOP trust ........................................ -- -- -- 1,150
Shares issued for stock options, including tax benefit ............ -- -- -- 5,003
----------- ----------- ----------- -----------
Balance, December 27, 1997 ........................................ $ (1,156) $ (1,609) $ (1,625) $ 411,198
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
35
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
-----------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ............................................. $ (1,012) $ 32,767 $ (516)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................. 14,374 11,624 9,063
Provision for losses and allowances on accounts
receivable ......................................... 3,083 1,477 2,445
Stock issued to ESOP trust ................................. 1,150 820 --
Provision (benefit) for deferred income taxes .............. (3,920) 2,884 (874)
Provision for merger and integration costs ................. 17,056 -- --
Special management compensation ............................ -- -- 20,289
Undistributed earnings of affiliates ....................... (2,141) (1,595) (1,537)
Minority interest in net income (loss) of subsidiaries ..... (430) 246 509
Other ...................................................... 221 (593) (524)
Changes in assets and liabilities:
Increase in accounts receivable ......................... (45,304) (50,149) (38,710)
Increase in inventories ................................. (24,113) (16,936) (16,648)
Increase in other current assets ........................ (4,882) (7,430) (5,400)
Increase in accounts payable and accruals ............... 8,761 13,965 15,475
--------- --------- ---------
Net cash used in operating activities ......................... (37,157) (12,920) (16,428)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ....................................... (16,511) (13,778) (12,737)
Business acquisitions, net of cash acquired ................ (33,123) (32,222) (17,541)
Other ...................................................... (5,469) (6,378) (5,282)
--------- --------- ---------
Net cash used in investing activities ......................... (55,103) (52,378) (35,560)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................... 5,423 1,154 3,698
Principal payments on long-term debt ....................... (14,795) (5,291) (15,808)
Proceeds from issuance of stock ............................ 4,116 128,132 73,120
Proceeds from borrowings from banks ........................ 64,493 4,449 12,346
Purchase of treasury stock ................................. (618) (628) (3,000)
Payments on borrowings from banks .......................... (1,177) (23,378) (20,976)
Distributions to stockholders .............................. (2,442) (4,632) (2,443)
Other ...................................................... (730) (565) 1,839
--------- --------- ---------
Net cash provided by financing activities ..................... 54,270 99,241 48,776
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... (37,990) 33,943 (3,212)
Cash and cash equivalents, beginning of year .................. 45,814 11,871 15,083
--------- --------- ---------
Cash and cash equivalents, end of year ........................ $ 7,824 $ 45,814 $ 11,871
========= ========= =========
See accompanying notes to consolidated financial statements.
36
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Henry Schein,
Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates which are greater than 20%
and less than 51% owned are accounted for under the equity method. All material
intercompany accounts and transactions are eliminated in consolidation. The
financial statements include adjustments to give retroactive effect to the
acquisitions of Dentrix Dental Systems, Inc. ("Dentrix"), effective February 28,
1997, Micro Bio-Medics, Inc. ("MBMI"), effective August 1, 1997 and Sullivan
Dental Products, Inc. ("Sullivan"), effective November 12, 1997, which were
accounted for under the pooling of interests method of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the last
Saturday of December. Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995 all consisted of 52 weeks. The accounts of (i) MBMI, and
(ii) Sullivan and Dentrix, have been consolidated on a basis with years-ended
of; (i) November 30, and (ii) December 31, respectively, for periods through
December 28, 1996. MBMI and Dentrix adopted the Company's fiscal year end
starting in 1997.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered,
except for the portion of revenues from sales of practice management software
which is attributable to noncontractual post contract customer support, which is
deferred and recognized ratably over the period in which the support is expected
to be provided.
Inventories
Inventories consist substantially of finished goods and are valued at the
lower of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
37
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 accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a
consolidated Federal income tax return with its 80% or greater owned
subsidiaries.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows is not
material.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the 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).
38
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the basis of the transaction when it is
completed.
In order to manage interest rate exposure, the Company has entered into
interest rate swap agreements to exchange variable rate debt into fixed rate
debt without the exchange of the underlying principal amounts. Net payments or
receipts under the agreements are recorded as adjustments to interest expense.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for
long-term debt approximates fair value because 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. In
connection with certain recent acquisitions, the Company has determined that
certain long-lived assets have been impaired (see Note 7).
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."
39
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
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which provides for
the calculation of "basic" and "diluted" earnings per share. This Statement is
effective for financial statements issued for periods ending after December 15,
1997. Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options. As required by this Statement, all
periods presented have been restated to comply with the provisions of SFAS No.
128.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS 131)
which supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the relatively recent issuance of this standard, management
has been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
NOTE 2--REORGANIZATION
In connection with the Company's corporate restructuring in 1992, certain shares
issued to an executive officer and certain senior management were subject to
repurchase by the Company at fair market value in the event employment was
terminated for any reason or an initial public offering 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)).
40
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 3--EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows (in thousands):
Historical Pro Forma
---------- ---------
December 28, 1996:
Basic 30,912 30,912
Effect of assumed
conversion of employee
stock options 1,488 1,488
------ ------
Diluted 32,400 32,400
====== ======
December 30, 1995:
Basic 23,157 23,157
Effect of assumed
conversion of employee
stock options -- 1,286
------ ------
Diluted 23,157 24,443
====== ======
Options to purchase approximately 4,135,000 and 2,395,000 shares of common
stock at exercise prices ranging from $4.21 to $36.18 per share were outstanding
during a portion of 1997 and 1995, respectively, but were not included in the
computation of diluted earnings per share because they are anti-dilutive. These
options expire through 2007.
41
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 27, December 28,
1997 1996
-------- --------
Land ..................................... $ 1,654 $ 1,539
Buildings and leasehold
improvements ........................... 28,786 27,591
Machinery and warehouse equipment ........ 24,930 25,979
Furniture, fixtures and other ............ 20,987 20,419
Computer equipment and software .......... 36,089 21,253
-------- --------
112,446 96,781
Less accumulated depreciation and
amortization ........................... 57,997 48,762
-------- --------
Net property and equipment ............... $ 54,449 $ 48,019
======== ========
Equipment held under capital leases amounted to approximately $2,510 and
$2,400 as of December 27, 1997 and December 28, 1996, respectively (see Note
15(b)).
NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET
Goodwill and other intangibles consist of the following:
December 27, December 28,
1997 1996
-------- --------
Goodwill ............................. $121,538 $ 76,282
Other ................................ 11,074 7,412
-------- --------
132,612 83,694
Less accumulated
amortization ....................... 10,395 5,976
-------- --------
$122,217 $ 77,718
======== ========
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of identifiable net assets acquired. During 1997, six
acquisitions, including the acquisition of the minority interests of a foreign
subsidiary, accounted for $36,485 of the increase in goodwill. Other intangibles
include covenants not to compete, computer programming costs, customer lists and
deferred acquisition costs. Goodwill and other intangibles are amortized on a
straight-line basis over periods not exceeding 30 years. In connection with
certain recent acquisitions, the Company has determined that the goodwill of
certain prior acquisitions has been impaired (see Note 7).
42
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 27, December 28,
1997 1996
------- -------
Investments in unconsolidated affiliates ..... $13,048 $11,524
Long-term receivables (see Note 11(b)) ....... 8,203 11,051
Other ........................................ 8,221 6,950
------- -------
$29,472 $29,525
======= =======
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 and
distributes generic pharmaceuticals. As of December 27, 1997, the Company's
investments in unconsolidated affiliates were $3,121 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 27, 1997,
approximately $8,773 of the Company's retained earnings represented
undistributed earnings of affiliates. Combined financial data for substantially
all of these companies is as follows:
December 27, December 28,
1997 1996
------- -------
Current assets............................ $39,688 $38,172
Total assets.............................. 56,239 47,103
Liabilities............................... 35,753 30,939
Stockholders equity....................... 19,832 16,164
Years Ended
- --------------------------------------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
-------- -------- --------
Net sales ................... $ 98,954 $103,169 $ 55,090
Operating income ............ 7,303 7,044 5,147
Net income .................. 4,841 3,755 2,920
43
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7--BUSINESS ACQUISITIONS
The Company has completed the acquisition of 60 healthcare distribution
businesses between 1995 and 1997, the most significant of which were; Sullivan
Dental Products, Inc. ("Sullivan"), a distributor of consumable dental supplies
and dental equipment through 52 sales and service centers located throughout the
United States, Micro Bio-Medics, Inc. ("MBMI"), a distributor of medical
supplies to physicians and hospitals as well as to other healthcare
professionals nationwide, and Dentrix Dental Systems, Inc. ("Dentrix"), a
leading provider of clinically-based dental practice management systems, in
merger transactions accounted for as poolings of interests. Pursuant to the
respective merger agreements, which were completed on November 12, 1997, August
1, 1997 and February 28, 1997, the Company issued approximately 7,594,900,
3,231,400 and 1,070,000 shares of its Common Stock with aggregate market values
(on their respective closing dates) of approximately $266,800, $122,800 and
$29,400, respectively and assumed and exchanged all options to purchase Sullivan
and MBMI stock for options to purchase 1,192,000 and 1,117,000, respectively of
the Company's Common Stock. Sullivan, MBMI and Dentrix had net sales and
earnings of approximately $241,600 and $8,700, $150,000 and $1,700, and $10,000
and $2,000, respectively in 1996.
Additionally, during 1997 the Company acquired 20 other businesses with
aggregate net sales for 1996 of approximately $132,800, three of which were
accounted for under the pooling of interests method, with the remainder being
accounted for under the purchase method of accounting (fourteen for 100%
ownership interests and three for majority ownership interests). The total
amount of cash paid and promissory notes issued, and the value of the Company's
Common Stock issued in connection with these acquisitions was $33,123 and
$34,000, respectively.
The financial statements have been restated to give retroactive effect to
three of the pooling transactions (Sullivan, MBMI and Dentrix) as the remaining
three pooling transactions were not material and have been included in the
consolidated financial statements from the beginning of the quarter in which the
acquisitions occurred. Operations of the 1997 completed acquisitions, accounted
for under the purchase method of accounting, have been included in the
consolidated financial statements from their respective acquisition dates.
During 1996, the Company acquired twelve dental and four medical companies,
a veterinary supply distributor and three international dental companies, with
aggregate net sales in their last fiscal year ends of approximately $104,000,
all of which were accounted for under the purchase method of accounting. Of
these, eighteen were for majority ownership (100% in twelve of the
transactions). The total amount of cash paid and promissory notes issued for
these acquisitions was approximately $33,105. The Company also issued 818,591
shares of common stock valued at approximately $16,200 in 1996 in connection
with five of these acquisitions. Operations of these businesses have been
included in the consolidated financial statements from their respective
acquisition dates. No single 1996 acquisition was material.
During 1995, the Company acquired the distribution business of The Veratex
Corporation, a national direct marketer of dental, medical and veterinary
products, and Schein Dental Equipment Corp., a distributor and manufacturer of
large dental equipment. The Company also completed the majority acquisition of
fourteen other companies and a 50% acquisition of one other company during 1995.
The total amount of cash paid and promissory notes issued for the 1995
acquisitions was approximately $23,518. The Company also issued 1,331,711 shares
of common stock valued at approximately $20,600 in connection with three of the
44
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7 - BUSINESS ACQUISITIONS (Continued)
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
probable that targets will be met. As of December 27, 1997 additional contingent
consideration of $271 was recorded as goodwill.
Additionally, pursuant to a shareholders' agreement, certain minority
shareholders of a subsidiary of the Company exercised their option to sell their
shares in the subsidiary to the Company. The value of the shares put to the
Company was approximately $11,800, of which approximately $3,200 was paid for in
cash, with the remainder payable over two years in equal annual installments.
In connection with these acquisitions, the Company recorded merger and
integration costs of approximately $50,800 during the year ended December 27,
1997. Net of taxes, merger and integration costs were approximately $1.17 per
share, on a diluted basis. These charges include approximately $13,300 of direct
transaction costs (consisting primarily of investment banking and professional
fees) and $37,500 for integration and other merger related charges. Such charges
include the following:
- $8,600 related to the write-off of fixed assets (including duplicate
management information systems and other corporate assets), purchased
technology, other assets and goodwill (of approximately $4,800)
primarily associated with the consolidation of the medical business
under a national infrastructure;
- $11,900 related to sales force and certain senior management signing
bonuses directly related to the mergers;
- $7,100 related to the closure of a distribution center;
- $3,700 for severance and direct compensation, and
- $6,200 of other nonrecurring costs associated with planning and
executing the merger of the acquired companies operations.
Additional charges are expected to be recorded in subsequent reporting
periods, and to the extent actual costs exceed estimated amounts, as the mergers
are implemented. Excluding merger and integration costs, net income and net
income per share, on a diluted basis, would have been $41,746 and $1.14,
respectively, for the year ended December 27, 1997.
45
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7 - BUSINESS ACQUISITION (Continued)
The summarized unaudited pro forma results of operations set forth below
for 1997 and 1996 assume the acquisitions, which were accounted for under the
purchase method of accounting, occurred as of the beginning of each of these
periods.
Years Ended
----------------------------
December 27, December 28,
1997 1996
----------- -----------
Net sales ......................................... $ 1,564,545 $ 1,383,039
Net income (loss) (1) ............................. (1,472) 32,583
Net income (loss) per common share:
Basic......................................... $ (0.04) $ 1.05
Diluted....................................... $ (0.04) $ 1.01
Pro forma net income, reflecting adjustment in 1996
for income taxes on previously untaxed
earnings of Dentrix .......................... 31,386
Pro forma net income (loss) per common share:
Basic ........................................ $ 1.02
Diluted ...................................... $ 0.97
- ---------
(1) Includes, in 1997, merger and integration costs of approximately $50,779
and related tax benefit of $8,021.
Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because the pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings or potential sales erosion that may result from the Company's
integration efforts.
46
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 7 -- BUSINESS ACQUISITIONS (Continued)
Net sales, net income (loss) and pro forma net income for the Company,
Dentrix, MBMI, Sullivan and on a combined basis for the years ended December
1996 and 1995 were as follows:
Years Ended
----------------------------
December 28, December 30,
1996 1995
----------- -----------
Net sales:
HSI, as previously reported $ 829,962 $ 616,209
Dentrix 10,160 7,093
MBMI 150,143 119,874
Sullivan 241,583 215,568
----------- -----------
Combined $ 1,231,848 $ 958,744
=========== ===========
Net income (loss):
HSI, as previously reported $ 19,340 $ (10,216)
Dentrix 3,183 1,415
MBMI 1,745 1,109
Sullivan 8,665 7,240
----------- -----------
32,933 (452)
Adjustments to conform
accounting policies (166) (64)
----------- -----------
Combined $ 32,767 $ (516)
=========== ===========
Pro forma net income:
HSI, as previously reported(1) $ 19,340 $ 9,407
Dentrix(2) 1,986 882
MBMI 1,745 1,109
Sullivan 8,665 7,240
----------- -----------
31,736 18,638
Adjustments to conform
accounting policies (166) (64)
----------- -----------
Combined $ 31,570 $ 18,574
=========== ===========
- ----------
(1) Reflects adjustment to exclude special management compensation in 1995, net
of applicable tax benefits.
(2) Reflects adjustment for provision for income taxes on previously untaxed
earnings.
Sullivan had net sales of approximately $196,300 and earnings of $7,400 for
the nine months ended September 30, 1997, and MBMI had net sales of $77,800 and
earnings of $700 for the six months ended May 31, 1997.
47
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 8--BANK CREDIT LINES
At December 27, 1997, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $37,533 expiring through July
1999. Borrowings of $11,973 under these credit lines at interest rates ranging
from 4.1% to 8.75% were collateralized by accounts receivable, inventory and
property and equipment of the subsidiaries with an aggregate net book value of
$22,885 at December 27, 1997.
NOTE 9--LONG-TERM DEBT
Long-term debt consists of:
December 27, December 28,
1997 1996
-------- --------
Borrowings under Revolving Credit Agreement (a) ............ $ 76,152 $ 18,040
Secured Revolving Loan (b) ................................. -- 7,500
Notes payable for business acquisitions (c) ................ 11,552 4,383
Notes payable to banks, interest variable (9.25% at
December 27, 1997), payable in quarterly installments
ranging from $16 to $34 through 2004, secured by inventory
and accounts receivable in the amount of $26,164 ........ 3,925 1,932
Mortgage payable to bank in quarterly installments of $14,
interest at 4.5% through November 2013, collateralized by
a building with a net book value of $1,305 .............. 814 987
Various notes and loans payable with interest, in varying
installments through 2006, uncollateralized ............. 8,253 8,141
Capital lease obligations in various installments through
fiscal 2006; interest at 6.5% to 9.06% or varies with
prime rate .............................................. 1,866 1,194
-------- --------
Total ...................................................... 102,562 42,177
Less current maturities .................................... 9,370 8,894
-------- --------
Total long-term debt ....................................... $ 93,192 $ 33,283
======== ========
(a) Revolving Credit Agreement
On August 15, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum available borrowings
to $150,000 from $100,000 and extended the term of the agreement to August 15,
2002. The interest rate on any borrowings under the agreement is based on prime
or LIBOR as defined in the agreement, which were 8.50% and 6.065%, respectively,
at December 27, 1997. The borrowings outstanding at December 27, 1997 were at
interest rates ranging from 6.1% to 8.5%. The agreement provides for a sliding
scale fee ranging from 0.1% to 0.3%, based upon certain financial ratios, on any
unused portion of the commitment. The agreement also provides, among other
things, that HSI will maintain, on a consolidated basis, as defined, a minimum
tangible net worth, current, cash flow, and interest coverage ratios, a maximum
leverage ratio, and contains restrictions relating to annual dividends
48
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
in excess of $500, guarantees of subsidiary debt, investments in subsidiaries,
mergers and acquisitions, liens, capital expenditures, certain changes in
ownership and employee and shareholder loans.
(b) Secured Revolving Loan
A subsidiary of the Company had a $25,000 secured revolving loan agreement
with certain banks which was paid off following the acquisition of the
subsidiary by the Company and the agreement was terminated.
(c) Notes Payable for Business Acquisitions
In May 1997, a subsidiary of the Company entered into a term loan for
$8,299 to acquire the remaining minority interests of a foreign subsidiary. The
loan provides for $4,312 of principal payable upon demand beginning in March
1998, with the remainder payable upon demand beginning in March 1999. The loan
is denominated in British Pounds. Interest is payable quarterly at 4.5% through
May 1998 and 5.5% thereafter.
A balloon payment of approximately $3,400 due to a bank under a term loan
related to a Dutch acquisition came due in October 1997. The Company settled
this loan by entering into a new Netherlands Guilder (NLG) loan in the amount of
6,500 NLG. Principal is payable in semi-annual installments of 300 NLG through
January 2002, with a final balloon payment of 4,100 NLG on January 31, 2002.
Interest is payable quarterly at a rate of 4.90% per annum, plus a margin . The
agreement also provides for the same financial covenants and restrictions as the
revolving credit agreement. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary.
As of December 27, 1997, the aggregate amounts of long-term debt maturing
in each of the next five years are as follows: 1998- $9,370; 1999- $9,455; 2000
- - $1,668; 2001- $1,331, 2002- $78,580.
49
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME
Taxes on income are based on income before taxes on income, minority
interest and equity in earnings of affiliates as follows:
Years Ended
--------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Domestic ................................ $11,799 $47,781 $ 7,962
Foreign ................................. 2,130 2,243 1,317
------- ------- -------
Total income before taxes on income,
minority interest and equity in
earnings of affiliates ............... $13,929 $50,024 $ 9,279
======= ======= =======
The provision for taxes on income was as follows:
Years Ended
------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Current tax expense:
U.S. Federal .................... $ 18,019 $ 12,476 $ 8,987
State and local ................. 2,297 2,551 2,094
Foreign ......................... 1,116 695 616
-------- -------- --------
Total current ...................... 21,432 15,722 11,697
-------- -------- --------
Deferred tax expense (benefit):
U.S. Federal .................... (3,954) 1,984 (628)
State and local ................. (78) 747 (276)
Foreign ......................... 112 153 30
-------- -------- --------
Total deferred ..................... (3,920) 2,884 (874)
-------- -------- --------
Total provision .................... $ 17,512 $ 18,606 $ 10,823
======== ======== ========
50
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10 --TAXES ON INCOME (Continued)
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
December 27, December 28,
1997 1996
-------- --------
Current deferred tax assets:
Inventory, premium coupon redemptions
and accounts receivable valuation
allowances .............................. $ 4,145 $ 3,614
Uniform capitalization adjustments to
inventories ............................. 2,838 2,053
Accrued special professional fees and other
accrued liabilities ..................... 2,692 2,277
Merger and integration costs ................... 3,648 --
-------- --------
Total current deferred tax asset .................. 13,323 7,944
-------- --------
Non-current deferred tax assets (liabilities):
Property and equipment ......................... (2,591) (2,592)
Provision for long-term executive incentive
compensation and other accrued
liabilities ............................. (1,573) (85)
Net operating loss carryforward ................ 175 262
Net operating losses of foreign subsidiaries ... 2,375 1,928
Other .......................................... -- (88)
-------- --------
Total non-current deferred tax asset (liability) .. (1,614) (575)
Valuation allowance for non-current deferred
tax assets .............................. (2,421) (1,928)
-------- --------
Net non-current deferred tax liabilities .......... (4,035) (2,503)
-------- --------
Net deferred tax asset ............................ $ 9,288 $ 5,441
======== ========
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.
At December 27, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of $427 which are available to offset future
Federal taxable income through 2009. Foreign net operating losses totalled
$7,300 at December 27, 1997. Such losses can be utilized against future foreign
income. The losses expire between 1999 and 2002, with $2,000 expiring in 1999.
51
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 10--TAXES ON INCOME (Continued)
The tax provisions differ from the amount computed using the Federal
statutory income tax rate as follows:
Years Ended
------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ----------- -----------
Provision at Federal statutory rate .......... $ 4,877 $ 17,508 $ 3,248
State income taxes, net of Federal income tax
effect ..................................... 1,472 2,555 1,381
Net foreign and domestic losses for which no
tax benefits are available ................. 167 -- 574
Foreign income taxed at other than the Federal
statutory rate ............................. (2) (55) (25)
Tax effect of Sub S income ................... -- (1,197) (533)
Non-deductible appreciation in stock issued as
special management compensation ............ -- -- 6,109
Non-deductible merger and integration costs .. 10,752 -- --
Tax exempt interest .......................... -- (237) --
Other ........................................ 246 32 69
-------- -------- --------
Income tax provision ......................... $ 17,512 $ 18,606 $ 10,823
======== ======== ========
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 27, 1997, the cumulative amount of reinvested
earnings was approximately $4,173.
52
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 27, 1997, the Company has outstanding foreign currency
forward contracts aggregating $12,162 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of the
Canadian dollar ($428), Swiss Franc ($140), The Netherland Guilder ($506),
Spanish Pesetas ($1,000), Deutsche Mark ($1,293), Japanese Yen ($78) and British
Pounds ($8,717). The contracts expire at various dates through December 1998. At
December 27, 1997, the Company had net deferred losses from foreign currency
forward contracts of $147.
As of December 27, 1997, HSI had $13,000 outstanding in interest rate
swaps. These 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 27, 1997, the net fair value of the Company's interest rate swap
agreements resulted in a recognized loss of $249.
On June 7, 1995, an acquired subsidiary of the Company entered into a zero
cost, three year interest rate collar agreement for $10,000 intented to reduce
interest rate risk. The agreement was assumed by the Company and serves to limit
the net interest rate charged on the first $10,000 of the Company's Revolving
Credit Agreement to 8.25%. The Company receives no further interest rate benefit
once the applicable interest rate falls below 6.55%.
(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.
53
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued)
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 27, 1997 and December 28, 1996 is $10,967 and $4,651, and $18,355 and
$7,485, respectively, related to Easy Dental(R) Plus software sales with
non-interest bearing extended payment terms. Total unamortized discounts at
December 27, 1997 and December 28, 1996 amounted to $843 and $1,487 based on an
imputed interest rate of 8.5% and 8.25%, respectively. Included in interest
income for the years ended December 27, 1997 and December 28, 1996 was
approximately $1,216 and $998, respectively, of imputed interest relating to
these non-interest bearing extended payment term receivables. Imputed interest
relating to these receivables was not material for 1995.
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 $17,951, $15,037 and $8,730 in 1997, 1996 and
1995, respectively. Included in Accounts payable at December 27, 1997 and
December 28, 1996 were $890 and $1,523, 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 $421, $602 and $891 during 1997, 1996 and 1995,
respectively, for these services. In addition, sales (at cost) to unconsolidated
affiliates were $4,069, $5,832 and $3,784 in 1997, 1996 and 1995, respectively.
(c) The Company recorded interest income of $414, $129 and $88, and
interest expense of $0, $32 and $26 in 1997, 1996 and 1995, respectively,
attributable to transactions with unconsolidated affiliates. Included in Current
Assets - Other are amounts due from unconsolidated affiliates of $9,417 and
$5,154 at December 27, 1997 and December 28, 1996, respectively.
(d) Certain subsidiaries of the Company lease their executive office and
distribution facilities from their respective officers, some of which are
stockholders of the Company, and certain members of their families. Rent expense
attributed to these facilities amounted to $753, $866 and $824 for 1997, 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 1997 and 1996 amounted $ 412 and $
340, respectively. Amounts paid under this agreement during 1995 were not
material.
54
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 12--RELATED PARTY TRANSACTIONS (Continued)
(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 in 1995.
(g) Since 1988, a subsidiary of the Company has been affiliated with Dash
Medical Gloves, Inc., which is owned by an officer of a subsidiary and his
family. Purchases of inventory by the subsidiary from Dash in 1997, 1996 and
1995 totalled $4,323, $4,586 and $4,575, respectively.
55
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.
1997 United States Europe Consolidated
- ---- ------------- ----------- ------------
Net sales ...................... $1,352,723 $ 165,400 $1,518,123
Operating income ............... 7,635* 4,016 11,651
Pre-tax income ................. 11,799* 2,130 13,929
Identifiable assets ............ 641,070 100,124 741,194
Depreciation and amortization .. 12,240 2,134 14,374
Capital expenditures ........... 14,556 1,955 16,511
1996
- ----
Net sales ...................... $1,095,854 $ 135,994 $1,231,848
Operating income ............... 44,002 3,396 47,398
Pre-tax income ................. 47,781 2,243 50,024
Identifiable assets ............ 559,418 69,526 628,944
Depreciation and amortization .. 9,655 1,969 11,624
Capital expenditures ........... 12,382 1,396 13,778
1995
- ----
Net sales ...................... $ 859,329 $ 99,415 $ 958,744
Operating income ............... 10,897** 2,590 13,487
Pre-tax income ................. 7,962** 1,317 9,279
Identifiable assets ............ 394,225 53,190 447,415
Depreciation and amortization .. 7,730 1,333 9,063
Capital expenditures ........... 9,041 3,696 12,737
- ---------
* Includes merger and integration costs of $50,779.
** Includes special management compensation of $20,797.
56
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 established the 1994 Stock Option Plan for the benefit of
certain employees. As amended in May 1997, pursuant to this plan the Company
can issue up to approximately 2,280,000 shares of its Common Stock. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and 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. The exercise price of all Class B options issued has been
equal to the market price on the date of grant and accordingly no compensation
cost has been recognized. Substantially all Class B options become exercisable
ratably over three years from the date of issuance. The Class A and Class B
options are exercisable up to the tenth anniversary of the date of issuance,
subject to acceleration upon termination of employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1997 and 1996, 2,000 and 10,000 options, respectively were
granted to certain non-employee directors at an exercise prices which were equal
to the market price on the date of grant.
Additionally, as a result of the Company's recent acquisition of Sullivan
and MBMI, the Company has assumed their respective stock option plans (the
"Assumed Plans"). Options granted under the Assumed Plans are exercisable for up
to ten years from the date of grant at prices not less than the fair market
value of the respective acquirees' common stock at the date of grant, on a
converted basis.
57
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)
A summary of the status of the Company's two fixed stock option plans, and
the Assumed Plans, and the related transactions for the years ended
December 27, 1997, December 28, 1996 and December 30, 1995 is presented below:
December 27, 1997 December 28, 1996
-------------------------------- -------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
-------- ---------------- -------- ---------------
Outstanding at beginning of year ................ 2,713,255 $11.68 2,394,584 $10.44
Granted ......................................... 1,758,918 27.45 409,595 18.58
Exercised ....................................... (279,363) 12.60 (40,895) 8.72
Forfeited ....................................... (58,233) 23.25 (50,027) 11.31
--------- ---------
Outstanding at end of year ...................... 4,134,577 $18.19 2,713,255 $11.68
========= =========
Options exercisable at year-end ................. 2,755,010 $13.24 2,248,505 $ 7.06
Weighted-average fair value of
options granted during the year.............. $17.68 $12.64
December 30, 1995
--------------------------------
Weighted Average
Shares Exercise Price
-------- ----------------
Outstanding at beginning of year ................ 1,403,496 $10.63
Granted ......................................... 1,078,415 12.50
Exercised ....................................... (53,523) 6.57
Forfeited ....................................... (33,804) 12.99
----------
Outstanding at end of year ...................... 2,394,584 $10.44
==========
Options exercisable at year-end ................. 1,829,997 $ 8.99
Weighted-average fair value of
options granted during the year.............. $ 9.71
The following table summarizes information about stock options outstanding
at December 27, 1997:
Options Exercisable Options Outstanding
------------------------------ ------------------------------
Weighted Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Price
------ ----------- ---------------- -------------- ----------- -----
$ 4.21 to 12.59......... 1,173,023 5.1 years $ 6.66 1,180,053 $ 6.64
12.93 to 23.30......... 1,584,055 8.1 16.34 1,285,735 16.09
24.63 to 36.18......... 1,377,499 9.3 30.16 289,222 27.51
---------- ----------
4,134,577 7.6 $18.19 2,755,010 $13.24
========== ==========
58
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company and its acquired
subsidiary had accounted for its employee stock options under the fair value
method of SFAS 123. The weighted average fair value of options granted during
1997, 1996 and 1995 was $17.68, $12.64 and $9.71, 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%; volatility factor of the expected
market price of the Company's Common Stock of 30%; and a weighted-average
expected life of the option of 10 years. The same assumptions were used for
1997 except for the risk free interest rate, which was assumed to be 6.5%.
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
1997 1996 1995
---------- ---------- ----------
Net income (loss)....................................... $ (13,842) $ 30,101 $ (1,408)
Net income (loss) per common share:
Basic........................................... $ (0.40) $ 0.77 $ (0.06)
Diluted......................................... $ (0.40) $ 0.93 $ (0.06)
Net income reflecting special adjustments (1)........... 28,904 17,682
Net income per common share to reflect special
adjustments (1):
Basic........................................... $ 0.94 $ 0.76
Diluted......................................... $ 0.89 $ 0.72
- ----------
(1) Special adjustments include management compensation in 1995 arising from
the value of Class A options which became exercisable upon the closing of
the initial public offering and an adjustment for provision for income
taxes on previously untaxed earnings of Dentrix.
(b) Warrants Of An Acquired Subsidiary - MBMI
MBMI's Series 1 Warrants expired in June 1996. Most of these warrants were
exercised at $9.68 per 0.65 shares, on a converted basis. The total net proceeds
from the exercise of all warrants from 1992 (inception) through June 1996 was
approximately $7,900, and resulted in approximately 868,000 shares of MBMI's
common stock being issued, on a converted basis.
59
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(c) Profit Sharing Plans
The Company has qualified contributory and noncontributory profit sharing
and 401(k) plans for eligible employees. Contributions to the plans as
determined by the Board of Directors and charged to operations during 1997, 1996
and 1995 amounted to $4,972, $3,734 and $2,797, respectively.
(d) 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. Changes to operations related to this plan were
$1,226, $1,151 and $820 for 1997, 1996 and 1995, respectively. Under this plan,
the Company issued 44,122 and 24,210 shares of the Company's Common Stock to the
trust in 1997 and 1996 to satisfy the 1996 and 1995 contribution . In 1998, the
Company expects to fund the 1997 contribution with shares of the Company's
Common Stock.
(e) 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 $112, $84 and $68 for 1997,
1996 and 1995, respectively .
NOTE 15--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2011. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 27, 1997 are as follows:
1998.................................................. $15,409
1999.................................................. 14,248
2000.................................................. 12,408
2001.................................................. 9,206
2002.................................................. 7,560
Thereafter............................................ 29,668
---------
Total minimum lease payments.......................... $ 88,499
========
Total rental expense for 1997, 1996 and 1995 was $17,566, $14,771 and
$11,725, respectively.
60
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(b) Capital Leases
The Company leases certain equipment under capital leases. The following is
a schedule by years of approximate future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at December 27, 1997.
1998 ............................................ $ 849
1999 ............................................ 749
2000 ............................................ 377
2001 ............................................ 124
2002 ............................................ 7
------
Total minimum lease payments .................... 2,106
Less: Amount representing interest at 6.5% to 9% 240
------
$1,866
======
(c) 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.
The Company has been named a defendant in eleven cases involving claims
made by healthcare workers who claim allergic reaction relating to exposure to
latex gloves. In each of these cases, the Company acted as a distributor of both
brand name and "Henry Schein" private brand latex gloves which were manufactured
by third parties. To date, discovery in these cases has been limited to product
identification issues. The manufacturers in these cases have withheld
indemnification pending product identification, however the Company is taking
steps to implead those manufacturers into each case in which the Company is a
defendant. The Company believes it is adequately covered by insurance in all
cases, subject to certain self retention limits, and that none of the currently
pending cases should have a material adverse effect on the Company.
(d) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2003 (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 $7,853 per year which decrease
periodically to approximately $2,538 per year. In addition, some agreements have
provisions for incentive and additional compensation.
61
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 27, December 28, December 30,
1997 1996 1995
----------- ------------ ------------
Indemnification Interest.. $6,525 $5,010 $7,606
Income taxes.............. 12,950 14,791 10,858
In conjunction with business acquisitions, the Company used cash as
follows:
Years Ended
------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Fair value of assets acquired,
excluding cash .................. $59,285 $62,149 $65,517
Less liabilities assumed and
created upon acquisition ........ 26,162 29,927 47,976
------- ------- -------
Net cash paid ..................... $33,123 $32,222 $17,541
======= ======= =======
In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.
62
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
NOTE 17--QUARTERLY INFORMATION (Unaudited)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during 1997 and 1996 in the
Company's Quarterly Reports on Form 10-Q as a result of the restatement of the
financial statements to give retroactive effect to the results of the companies
acquired during 1997 in business combinations accounted for under the pooling of
interests method of accounting and includes pro forma tax adjustments relating
to Dentrix in 1996:
Quarters Ended
-------------------------------------------------------------
March 29, June 28, September 27, December 27,
1997 1997 1997 1997
--------- --------- --------- -----------
Net sales ........................ $ 339,049 $ 373,434 $ 395,484 $ 410,156
Gross profit ..................... 100,037 110,932 113,779 126,076
Operating income (loss) .......... 7,108 13,569 (2,039) (6,987)
Net income (loss) ................ 3,506 8,541 (6,677) (6,382)
Net income (loss) per share:
Basic ........................ $ 0.10 $ 0.25 $ (0.19) $ (0.18)
Diluted ...................... $ 0.10 $ 0.24 $ (0.19) $ (0.18)
Quarters Ended
-------------------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996
--------- --------- --------- -----------
Net sales ........................ $ 271,686 $ 292,094 $ 319,074 $ 348,994
Gross profit ..................... 81,427 87,359 93,667 104,239
Operating income ................. 7,196 10,573 13,300 16,329
Net income ....................... 4,038 7,174 9,332 12,223
Net income per share:
Basic ........................ $ 0.14 $ 0.25 $ 0.28 $ 0.37
Diluted ...................... $ 0.13 $ 0.24 $ 0.27 $ 0.36
Pro forma net income ............. 4,038 6,745 9,036 11,751
Pro forma net income per share:
Basic ........................ $ 0.14 $ 0.23 $ 0.27 $ 0.35
Diluted ...................... $ 0.14 $ 0.22 $ 0.26 $ 0.34
NOTE 17 - QUARTERLY INFORMATION (Unaudited)
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software, year-end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of software
enhancements, timing of purchases, special promotional campaigns, fluctuations
in exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 1996 the Company made adjustments 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.
Diluted earnings per share calculations for each quarter include the effect
of stock options, when such stock options are dilutive to average number of
shares outstanding for each period. The sum of the quarters may not
necessarily be equal to the full year earnings per share amount.
63
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: MARCH 27, 1998
By: /s/ Steven Paladino
-----------------------------------
Steven Paladino
Senior Vice President & Chief
Financial Officer
64
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 1998
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. Executive Compensation
The information required by this item is hereby incorporated by reference
from the Company's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference
from the Company 's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
from the Company's definitive 1998 Proxy Statement to be filed pursuant to
Regulation 14A.
65
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as a part of this
report are listed on the index on page 29.
2. Financial Statement Schedules
(i) HS PHARMACEUTICAL, INC. AND SUBSIDIARIES
Page
Number
------
Report of Independent Certified Public Accountants ................... 67
Consolidated Financial Statements:
Balance Sheets as of December 27, 1997 and December 28, 1996 ..... 68
Statements of Income and Retained Earnings for the years
ended December 27, 1997, December 28, 1996 and December 30, 1995. 69
Statements of Cash Flows for the years ended
December 27, 1997, December 28, 1996 and December 30, 1995 ..... 70
Notes to Consolidated Financial Statements ........................... 71
Report of Independent Certified Public Accountants.................... 86
Schedule II Valuation and Qualifying Accounts ........................ 87
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
During the fourth quarter of 1997, the Company filed one Form 8-K: The
Report, dated November 12, 1997 and filed on November 26, 1997, reported the
Company's acquisition of Sullivan and incorporated by reference Sullivan's
audited financial statements filed as part of Sullivan's Annual Report on Form
10-K for the year ended December 31, 1996. On January 26, 1998, the Company
filed Amendment No. 1 to the foregoing report on Form 8-K/A which, among other
things, included (i) unaudited pro forma combined condensed financial
information pursuant to Article 11 of Regulation S-X giving effect to the
merger, (ii) Sullivan's unaudited balance sheets as of September 30, 1997 and
December 31, 1996 and the related unaudited statements of income and cash flow
for the three-month and nine-month periods ended September 30, 1997 and (iii)
consolidated balance sheets of the Company 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, restated to give effect to the Company's acquisition of MBMI.
66
Report of Independent Certified Public Accountants
HS Pharmaceutical, Inc.
New Castle, Delaware
We have audited the accompanying consolidated balance sheets of HS
Pharmaceutical, Inc. and subsidiaries as of December 27, 1997 and December 28,
1996, and the related consolidated statements of income and retained earnings,
and cash flows for each of the three years in the period ended December 27,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HS Pharmaceutical,
Inc. and subsidiaries at December 27, 1997 and December 28, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 27, 1997, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
January 30, 1998, except
for Note 13, as to which the
date is March 20, 1998.
67
HS Pharmaceutical, Inc. and Subsidiaries
Consolidated Balance Sheets
December 27, December 28,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets (Note 4)
Current assets:
Cash $ 643,902 $ 291,738
Accounts receivable, less allowance for doubtful
accounts of $191,590 and $172,196 (Note 7) 10,666,474 9,214,519
Inventories (Note 2) 5,798,692 5,138,874
Advances to affiliates (Note 7) 800,271 668,568
Prepaid expenses and other 1,093,079 819,254
Deferred income taxes (Note 9) 266,000 --
- --------------------------------------------------------------------------------------------------------------------
Total current assets 19,268,418 16,132,953
Property and equipment, net (Note 3) 5,413,608 4,200,088
Goodwill and other intangibles, less accumulated
amortization of $498,793 and $300,789 (Note 5) 8,772,209 2,507,055
Advances and notes to affiliates (Note 7) 913,302 1,114,074
Deposits and other assets (Note 12) 797,327 67,966
- --------------------------------------------------------------------------------------------------------------------
$ 35,164,864 $ 24,022,136
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft (Note 4) $ 4,616,355 $ 1,057,570
Revolving credit agreement (Note 4) -- 1,106,000
Note payable, related party (Note 7) 6,000,000 --
Accounts payable and accrued expenses (Note 7) 5,400,376 4,865,854
Income taxes payable (Note 9) 496,557 543,592
Current maturities of long-term debt (Note 6) 686,035 1,536,428
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,199,323 9,109,444
Long-term debt, less current maturities (Note 6) 2,980,418 2,997,788
Deferred income taxes (Note 9) 218,700 191,500
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 20,398,441 12,298,732
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingency (Note 8)
Shareholders' equity:
Common stock - no par value, shares
Authorized 200;
Issued and outstanding 20 40,100 40,100
Additional paid-in capital 342,745 342,745
Retained earnings 14,383,578 11,340,559
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 14,766,423 11,723,404
- --------------------------------------------------------------------------------------------------------------------
$ 35,164,864 $ 24,022,136
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
68
HS Pharmaceutical, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
Year ended
---------------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Net sales (Note 7) $ 33,364,165 $ 30,305,702 $ 28,123,977
Cost of sales (Note 7) 20,312,401 18,507,815 17,467,680
- --------------------------------------------------------------------------------------------------------------------
Gross profit 13,051,764 11,797,887 10,656,297
Operating expenses:
Selling, general and administrative 8,068,701 6,995,028 6,157,515
- --------------------------------------------------------------------------------------------------------------------
Operating income 4,983,063 4,802,859 4,498,782
Other income (expense):
Interest expense, net (578,914) (577,712) (500,293)
Foreign exchange remeasurement gain (loss) 175,079 (43,599) (10,163)
Other (primarily fees from medical testing
during 1997) 361,117 166,431 147,387
- --------------------------------------------------------------------------------------------------------------------
Income before taxes on income 4,940,345 4,347,979 4,135,713
Taxes on income (Note 9) 1,897,326 1,587,906 1,368,131
- --------------------------------------------------------------------------------------------------------------------
Net income 3,043,019 2,760,073 2,767,582
Retained earnings, beginning of year 11,340,559 8,580,486 5,812,904
- --------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year $ 14,383,578 $ 11,340,559 $ 8,580,486
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
69
HS Pharmaceutical, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended
--------------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,043,019 $ 2,760,073 $ 2,767,582
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 839,610 597,184 425,861
Provision for losses on accounts receivable 19,394 55,682 15,000
Provision for obsolete inventories -- 112,677 --
Provision for deferred income taxes (238,800) 39,500 81,000
Other -- -- 5,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,471,349) (1,761,616) 180,067
(Increase) in inventories (659,818) (323,245) (1,199,165)
(Increase) decrease in advances
to affiliates 69,069 (161,994) (381,170)
(Increase) in prepaid expenses and other (273,825) (239,287) (138,634)
(Increase) decrease in deposits and
other assets (739,317) (58,608) 263,270
Increase in accounts payable and
accrued expenses 534,522 178,650 415,386
Increase (decrease) in income taxes
payable (47,035) 62,908 339,870
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,075,470 1,261,924 2,774,067
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,536,838) (662,725) (369,978)
Business acquisition, net of cash acquired (6,155,416) (800,000) --
Purchase of sales rights (616,074) -- --
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (8,308,328) (1,462,725) (369,978)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft $ 3,558,785 $ 131,904 $ (575,847)
Credit line borrowings, net (1,106,000) 1,106,000 (1,000,000)
Proceeds from long-term debt 27,331 217,816 --
Proceeds from note payable, related party 6,000,000 -- --
Principal payments on long-term debt (895,094) (963,181) (828,242)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 7,585,022 492,539 (2,404,089)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash 352,164 291,738 --
Cash, beginning of year 291,738 -- --
- --------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 643,902 $ 291,738 $ --
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 795,677 $ 802,331 $ 608,216
- --------------------------------------------------------------------------------------------------------------------
Taxes $ 2,084,361 $ 1,535,744 $ 996,520
- --------------------------------------------------------------------------------------------------------------------
Business acquisition:
Fair value of net assets acquired, excluding cash $ 6,155,416 $ 4,070,265 $ --
Less liabilities assumed and created
upon acquisition $ -- $ 3,270,265 $ --
- --------------------------------------------------------------------------------------------------------------------
Net cash paid $ 6,155,416 $ 800,000 $ --
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
70
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Description of Business
Significant
Accounting HS Pharmaceutical, Inc. and subsidiaries
Policies (the "Company") manufactures and
distributes pharmaceutical products and
sells other accessory products to dental,
medical and veterinary distributors worldwide.
Principles of Consolidation
The consolidated financial statements include
the accounts of HS Pharmaceutical, Inc. and
all of its wholly owned subsidiaries. All
material intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Fiscal Year
The Company reports its operations on a 52-53
week basis ending on the last Saturday of
December. Accordingly, fiscal years ended
December 27, 1997, December 28, 1996 and
December 30, 1995 consisted of 52 weeks.
Inventories
Inventories are valued at the lower of cost or
market value. Manufactured inventories of raw
materials, work-in-progress and finished goods
are valued using standard costing methods,
which approximate the first-in, first-out
("FIFO") method. The cost of inventory
purchased for resale is determined by the FIFO
method.
71
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Property and Equipment and Depreciation and
Amortization
Property and equipment are stated at cost.
Depreciation is computed primarily under the
straight-line method over the following
estimated useful lives:
Years
--------------------------------------------
Buildings and improvements 40
Machinery and warehouse equipment 5-10
Computer hardware 5
Capital lease equipment 5-10
--------------------------------------------
Amortization of leasehold improvements is
computed using the straight-line method over
the lesser of the useful lives of the assets
or the lease term.
Goodwill
Goodwill represents the excess of costs over
the fair value of assets acquired and is
amortized using the straight-line method over
a life of 30 years.
Intangibles
Intangibles consist of costs incurred in
connection with obtaining abbreviated new drug
applications, investigational new drug
exemptions and licenses, permits and approvals
relating to the manufacture and sale of
pharmaceutical products. These costs are being
amortized using the straight-line method over
their estimated useful lives which is expected
to be 20 years, except for sales licensing
rights which are amortized over the 5-year
term of the licensing agreement.
72
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Taxes on Income
Deferred income taxes are recognized for the
tax consequences of temporary differences
between the financial reporting bases and the
tax bases of the Company's assets and
liabilities.
Statement of Cash Flows
For purposes of the statement of cash flows,
the Company considers all highly liquid debt
instruments and other short-term investments
with an initial maturity of three months or
less to be cash equivalents.
Foreign Currency Remeasurement
Monetary assets and liabilities denominated in
foreign currency have been remeasured into the
functional currency (the U.S. dollar) at the
year-end rate of exchange (U.S. $1 = Canadian
$1.43, $1.35 and $1.40 at December 27, 1997,
December 28, 1996 and December 30, 1995,
respectively). Non-monetary items are
remeasured at historical rates. Revenue and
expenses are remeasured based on the average
monthly rate. Foreign exchange remeasurement
gains and losses are included in the
determination of net income for the year.
Long-Lived Assets
Long-lived assets, such as goodwill,
intangibles 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 27, 1997.
73
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Concentrations of Credit Risk
Financial instruments, which potentially
subject the Company to concentrations of
credit risk, consist principally of cash and
trade receivables. The Company places its cash
with high quality financial institutions. At
times, such amounts may be in excess of the
FDIC insurance limits of $100,000. At December
27, 1997, the Company's cash balances on
deposit exceeded this limit by approximately
$512,000. With respect to accounts receivable,
the Company performs ongoing credit
evaluations of its customers' financial
condition before extending credit and
maintains an allowance for losses based on the
expected collectibility of all receivables.
Generally, the Company does not require
collateral from its customers.
Fair Value of Financial Instruments
The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value of Financial
Instruments," which requires disclosures of
fair value information about certain financial
instruments.
The carrying amounts of the Company's
financial instruments, consisting of accounts
receivable, bank overdraft, revolving credit
agreement, long-term debt, accounts payable
and accrued expenses approximate their fair
value because of the immediate or short-term
maturity of these financial instruments.
Restatement of Prior Year
In connection with the preparation of the
December 27, 1997 financial statements, the
Company has restated certain prior year
amounts to conform with current year's
presentation.
74
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Recent Accounting Pronouncements
Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income"
("SFAS 130"), establishes standards for
reporting and display of comprehensive income,
its components and accumulated balances.
Comprehensive income is defined to include all
changes in equity except those resulting from
investments by owners and distributions to
owners. Among other disclosures, SFAS 130
requires that all items required to be
recognized under current accounting standards
as components of comprehensive income be
reported in a financial statement that is
displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of a
Business Enterprise" ("SFAS 131"), establishes
standards for public enterprises reporting of
information about operating segments in annual
financial statements and requires reporting of
selected information about operating segments
in interim financial statements issued to the
public. It also establishes standards for
disclosures regarding products and services,
geographic areas and major customers. SFAS 131
defines operating segments as components of an
enterprise about which separate financial
information is available and that is evaluated
regularly by the chief operating decision
maker in deciding how to allocate resources
and in assessing performance.
Statement of Financial Accounting Standards
No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS
132"), revises employers' disclosures about
pension and other postretirement benefit
plans. It does not change the measurement or
recognition of those plans. It standardizes
the disclosure requirements for pensions and
other postretirement benefits to the extent
practicable, requires additional information
on changes in the benefit obligations and fair
values of plan assets that will facilitate
financial analysis and eliminate certain
existing disclosure requirements.
75
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
SFAS 130, SFAS 131 and SFAS 132 are effective
for financial statements for periods beginning
after December 15, 1997 and require
comparative information for earlier years to
be restated. Adoption of all three statements
is not expected to impact financial statements
or disclosures.
2. Inventories Inventories consist of the following:
December 27, December 28,
1997 1996
-------------------------------------------------------------------------------
Raw materials $ 1,946,203 $ 1,969,239
Work-in-progress 485,787 38,259
Finished goods 3,366,702 3,131,376
-------------------------------------------------------------------------------
$ 5,798,692 $ 5,138,874
-------------------------------------------------------------------------------
3. Property and Major classes of property and equipment
Equipment, Net consist of the following:
December 27, December 28,
1997 1996
-------------------------------------------------------------------------------
Land $ 23,474 $ 23,474
Building 1,369,578 1,335,465
Machinery and equipment 8,303,598 6,691,295
Computer hardware 340,389 318,481
Leasehold improvements 700,795 532,281
-------------------------------------------------------------------------------
10,737,834 8,900,996
Less accumulated depreciation
and amortization 5,324,226 4,700,908
-------------------------------------------------------------------------------
Net property and equipment $ 5,413,608 $ 4,200,088
-------------------------------------------------------------------------------
76
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Bank Overdraft The bank overdraft is due on demand and
and Revolving consists of two loan segments consisting of a
Credit Agreement U.S. dollar overdraft and a Canadian dollar
overdraft. They bear interest at the U.S.
prime rate and the Canadian prime rate,
respectively. The revolving credit agreement
is due on demand and bears interest at LIBOR
plus 3/4%. These facilities are secured by a
general assignment of accounts receivable, a
general security agreement on all machinery,
inventory and equipment, a $2,500,000 demand
debenture on building and land, including an
assignment of fire insurance, a postponement
of claim and guarantee bond.
5. Business On August 15, 1997, the Company acquired
Acquisitions substantially all of the net assets of a
manufacturer and distributor of anesthetics
and dental products. The acquisition was
accounted for as a purchase and, accordingly,
the operations of this business have been
included in the consolidated financial
statements from the acquisition date. The
aggregate purchase price of $6,155,416 was
financed primarily by a demand note from a
shareholder (see Note 7(a)) and has been
allocated to the net assets acquired based
upon their respective fair market values.
The excess of the acquisition costs over the
fair value of the identifiable net assets
acquired of $5,355,416 has been recorded as
goodwill. Amortization expense totaled
approximately $58,000 for the year ended
December 27, 1997.
On March 15, 1996, the Company acquired
substantially all of the net assets of a
manufacturer and distributor of private label
dental products. The acquisition was accounted
for as a purchase and, accordingly, the
results of the acquiree are included in the
consolidated financial statements from January
1, 1996, the effective date of the agreement.
The aggregate purchase price is estimated at
$2,850,000, the maximum contingent amount
which is based upon future revenues attained.
The purchase price, which was financed through
available cash resources and a note payable to
the seller in the amount of $1,793,874 (see
Note 6), has been
77
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
allocated to the net assets acquired based
upon their respective fair market values.
The excess of the acquisition costs over the
fair value of the identifiable net assets
acquired of $2,501,924 has been recorded as
goodwill. Amortization expense totaled
approximately $83,000 and $81,000 for the
years ended December 27, 1997 and December 28,
1996, respectively.
6. Long-Term Long-term debt consists of the following:
Debt
December 27, December 28,
1997 1996
-------------------------------------------------------------------------------
Unsecured acquisition note payable over 5
years with annual payments ranging from
$250,000 to $500,000, including interest at
6%, due March 15, 2000 (see Note 5). $ 1,543,874 $ 1,793,874
Term loans payable in monthly installments
maturing at varying dates from August 1997
through February 2000, with interest at
Canadian prime plus 0.25%, refinanced during
1997. -- 1,723,462
Term loans payable in monthly
installments maturing at varying dates
through December 2002,
with interest at LIBOR plus 1.15%. 1,300,000 --
78
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 27, December 28,
1997 1996
-------------------------------------------------------------------------------
Notes payable bearing interest at U.S.
prime (8.5% at December 27, 1997),
payable in annual principal installments
of $191,885, plus interest due March 31,
2001. $ 767,539 $ 959,424
Various capital lease obligations 55,040 57,456
-------------------------------------------------------------------------------
3,666,453 4,534,216
Less current maturities 686,035 1,536,428
-------------------------------------------------------------------------------
$ 2,980,418 $ 2,997,788
-------------------------------------------------------------------------------
Principal payments on long-term debt mature as
follows:
1998 $ 686,035
1999 893,175
2000 903,661
2001 923,582
2002 260,000
-------------------------------------------------------------------------------
$ 3,666,453
-------------------------------------------------------------------------------
The Company was in default of a certain
financial covenant in connection with its
banking facilities. This default has been
waived by the lender.
79
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Related Party (a) Certain services of a 50% shareholder are
Transactions provided to the Company at the shareholder's
cost. Total charges from this shareholder were
approximately $257,000, $160,000 and $83,000
for 1997, 1996 and 1995, respectively. At
December 27, 1997 and December 28, 1996,
"Advances to affiliates" includes amounts due
to this shareholder of approximately $-0- and
$1,113,000 and "Accounts payable and accrued
expenses" includes amounts due to this
shareholder of approximately $2,938,000 and
$900,000, respectively.
Additionally, the Company has a $6,000,000
demand note payable to this shareholder which
was used to fund the 1997 business acquisition
(see Note 5). Interest is payable in monthly
installments at U.S. prime.
In March 1991, the Company entered into an
agreement with this same shareholder to supply
products at prices and quantities as defined
in the agreement. Sales to this same
shareholder (including sales under this
agreement) accounted for approximately 31%,
26% and 22% of the Company's sales for 1997,
1996 and 1995, respectively. Included in
"Accounts receivable" at December 27, 1997 and
December 28, 1996 were approximately
$2,443,000 and $1,680,000, respectively, for
amounts due from this shareholder.
(b) In March 1991, the other 50% shareholder
of the Company granted the Company a ten-year
license to use certain of its trademarks.
Royalties of $75,000 annually are required
under the terms of the agreement and were paid
in 1997, 1996 and 1995.
80
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In the ordinary course of business, the
Company sells products to this same
shareholder. Net sales to this shareholder
amounted to approximately $1,030,000,
$1,090,000 and $608,000 for 1997, 1996 and
1995, respectively. Included in "Accounts
receivable" at December 27, 1997 and December
28, 1996 were approximately $285,000 and
$271,000, respectively, for amounts due from
this shareholder.
In addition, the Company also purchases
pharmaceutical products from this shareholder.
Net purchases from this shareholder amounted
to approximately $3,387,000, $1,080,000 and
$4,434,000 for 1997, 1996 and 1995,
respectively. Included in "accounts payable
and accrued expenses" at December 27, 1997 and
December 28, 1996 were approximately $313,000
and $5,549,000, respectively, for amounts due
to this shareholder.
(c) Interest expense related to accounts
payable and accrued expenses owing to the
above shareholders amounted to approximately
$184,000, $65,000 and $51,000 for 1997, 1996
and 1995, respectively.
(d) An affiliated company supplies a new
product line to the Company. Included in
"advances to affiliates" are net amounts due
from this affiliate of approximately
$1,218,000 and $1,225,000 at December 27, 1997
and December 28, 1996, respectively. Included
in the net advances of $1,218,000 and
$1,225,000 are two notes receivable of
approximately $1,127,000 at December 27, 1996
and 1997. Principal on these notes are due in
various annual installments ranging between
$156,000 and $411,000 beginning in 1997
through 2005, with an interest rate to be
determined annually. These notes are secured
by an assignment pledge and a first priority
security interest in certain investment assets
of the affiliated company.
81
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments Operating Leases
and
Contingency The Company leases facilities and equipment
under various noncancelable operating leases
expiring through September 2002. Total rental
expense for 1997, 1996 and 1995 was
approximately $441,000, $416,000 and $163,000,
respectively. At December 27, 1997, future
minimum annual rental payments under these
leases are as follows:
Year Amount
------------------------------------------
1998 $ 426,444
1999 385,297
2000 279,730
2001 12,601
2002 1,129
------------------------------------------
$ 1,105,201
------------------------------------------
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
mattes 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.
82
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Taxes on Income Income taxes are based upon income before
taxes as follows:
Year ended
-------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
-------------------------------------------------------------------------------
Domestic $ 2,424,151 $ 2,233,668 $ 2,500,916
Foreign 2,516,194 2,114,311 1,634,797
-------------------------------------------------------------------------------
Total income before
taxes on income $ 4,940,345 $ 4,347,979 $ 4,135,713
-------------------------------------------------------------------------------
The significant components of income tax
expense (benefit) consist of the following:
Year ended
-------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
-------------------------------------------------------------------------------
Current tax expense
U.S. Federal $ 1,113,517 $ 748,423 $ 764,670
State and local 221,209 139,925 26,801
Foreign 801,400 660,058 495,660
-------------------------------------------------------------------------------
Total current 2,136,126 1,548,406 1,287,131
-------------------------------------------------------------------------------
Deferred tax
expense (benefit)
U.S. Federal (226,000) -- --
State and local (40,000) -- --
Foreign 27,200 39,500 81,000
-------------------------------------------------------------------------------
Total deferred (238,800) 39,500 81,000
-------------------------------------------------------------------------------
Total provision $ 1,897,326 $ 1,587,906 $ 1,368,131
-------------------------------------------------------------------------------
83
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Temporary differences between the financial
statement carrying amounts and tax bases of
assets and liabilities that give rise to
deferred income taxes, relate to the
following:
December 27, December 28,
1997 1996
-------------------------------------------------------------------------------
Nondeductible accruals $ 228,000 $ --
Allowance for losses on inventory 38,000 --
-------------------------------------------------------------------------------
Total deferred income tax assets 266,000 --
Depreciation and amortization (218,700) (191,500)
-------------------------------------------------------------------------------
Net deferred income tax asset
(liabilities) $ 47,300 $ (191,500)
-------------------------------------------------------------------------------
The Company's effective tax rate approximates
the U.S. Federal statutory rate when taking
into account state, local and provincial
taxes.
10. Major Sales to three unaffiliated customers
Customers accounted for approximately 34%, 38% and 25%
of net sales in 1997, 1996 and 1995,
respectively.
11. Employee Effective January 1, 1992, the Company adopted
Benefit Plan a 401(k) profit sharing plan to provide
retirement benefits for eligible employees.
Matching contributions by the Company, which
were determined by the board of directors,
were approximately $44,000, $41,000 and
$39,000 in 1997, 1996 and 1995, respectively.
In addition, the Company maintains a defined
contribution plan for eligible employees.
Contributions to this plan, which were
determined by the board of directors, were
approximately $180,000, $92,000 and $92,000 in
1997, 1996 and 1995, respectively.
84
HS Pharmaceutical, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Deposits and During 1995, the Company entered into an
Other Assets agreement to exclusively distribute certain
dental products to specific markets for a
period of four years. The agreement contains
provisions for minimum purchase requirements
each year. During 1997, the Company prepaid
approximately $442,000 for merchandise in
accordance with the minimum purchase
requirements. Additionally, the Company has
advanced approximately $255,000 for joint
promotional costs and clinical studies which
are expected to be reimbursed as specified in
the agreement. The Company has obtained the
product and manufacturing rights as collateral
for all of these advances.
13. Subsequent In March 1998, the Company entered into an
Events agreement with a related party to be the
exclusive distributors of certain dental
anesthetics in Canada and the United States.
The purchase price for the distribution rights
is $3,000,000 with $2,100,000 payable at
closing and the remainder payable in two
installments of $500,000 and $400,000 in April
and May 1998, respectively. The cost of the
distribution agreement will be recorded as an
asset by the Company and amortized over the
period of its estimated benefit.
In March 1998, the Company entered into an
agreement to acquire patent rights for certain
dental anesthetics. The purchase price for
these patent rights is $2,014,000 with $50,000
payable at closing, $500,000 payable at least
10 days prior to the date the Company markets
the product to the public ("launch date"),
$250,000 on each of the first two anniversary
dates of the launch date, and guaranteed
payments of $356,000 and $608,000 on each of
the anniversary dates for years three and four
from the launch date. The costs to acquire the
patent rights will be recorded as an asset by
the Company and amortized over the period of
its estimated benefit. Additionally, during
the first four years starting from the launch
date, royalty payments will be made at 25% of
annual sales in excess of $1,685,000 for years
one and two and $4,377,000 and $5,723,000, for
years three and four.
85
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
The audits referred to in our report dated February 27, 1998 relating to the
consolidated financial statements of Henry Schein, Inc. and subsidiaries, which
is contained in Item 8 of the Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based upon our
audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
New York, New York
February 27, 1998
86
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 28, 1996
Allowance for doubtful
accounts ............... $ 4,049 $ 1,872 $ (275) $ 5,646
Other accounts receivable
allowances(1) .......... 3,821 -- (432) 3,389
-------- -------- -------- --------
$ 7,870 $ 1,872 $ (707) $ 9,035
======== ======== ======== ========
Year ended December 27, 1997
Allowance for doubtful
accounts ............... $ 5,646 $ 3,547 $ (1,544) $ 7,649
Other accounts receivable
allowances(1) .......... 3,389 2,010 -- 5,399
-------- -------- -------- --------
$ 9,035 $ 5,557 $ (1,544) $ 13,048
======== ======== ======== ========
- --------------
(1) Primarily allowance for sales returns.
87
EXHIBIT INDEX
Unless otherwise indicated, exhibits are incorporated by reference to
the correspondingly numbered exhibits in the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528)
3.1 Form of Amended and Restated Articles of Incorporation
3.2 Form of Amended and Restated By-laws.
+3.3 Amendment dated November 12, 1997 to Amended and Restated
Articles of Incorporation.
3.4 Amendments to Amended and Restated By-laws adopted July 15, 1997
(filed as Exhibit 3.2 to the Company's Registration Statement on Form
S-4, Commission File No. 333-3601).
9.1 Voting Trust Agreement dated September 30, 1994, as amended, among the
Company, the Estate of Jacob M. Schein, the Trusts under Articles Third
and Fourth of the Will of Jacob M. Schein, the Trust established by Pamela
Joseph under Trust Agreement dated February 9, 1994, the Trust established
by Martin Sperber under Trust Agreement dated September 19, 1994,
management stockholders and Stanley M. Bergman, as voting trustee
9.2 Agreements dated December 27, 1994 among the Company, various executive
officers and Stanley M. Bergman, as voting trustee
9.3 Agreements dated as of May 1, 1995 among the Company, various executive
officers and Stanley M. Bergman, as voting trustee
10.1 Amended and Restated HSI Agreement (the "HSI Agreement"), effective as of
February 16, 1994, among the Company, Marvin H. Schein, the Trust
established by Marvin H. Schein under Trust Agreement dated September 9,
1994, the Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, the Estate of Jacob M. Schein, the
Trusts established by Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under Trust Agreement dated
February 9, 1994, the Trust established by Martin Sperber under Trust
Agreement dated September 19, 1994, the Trust established by Stanley M.
Bergman under Trust Agreement dated September 15, 1994, Pamela Schein,
Pamela Joseph, Martin Sperber, Stanley M. Bergman, Steven Paladino and
James P. Breslawski (collectively, the "HSI Parties")
10.2 HSI Registration Rights Agreement dated September 30, 1994, among the
Company, Pamela Schein, the Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994, Marvin H. Schein, the Trust established
by Marvin H. Schein under Trust Agreement dated December 31, 1993, the
Trust established by Marvin H. Schein under Trust Agreement dated
September 19, 1994, the Charitable Trust established by Marvin H. Schein
under Trust Agreement dated September 12, 1994, Martin Sperber, the Trust
established by Martin Sperber under Trust Agreement dated September 19,
1994, Stanley M. Bergman and the Trust established by Stanley M. Bergman
under Trust Agreement dated September 15, 1994
10.3 Letter Agreement dated September 30, 1994 to the Company from Marvin H.
Schein, Pamela Joseph and Pamela Schein
10.4 Release to the HSI Agreement dated September 30, 1994
10.5 Separation Agreement dated as of September 30, 1994 by and between the
Company, Schein Pharmaceutical, Inc. and Schein Holdings, Inc.
10.6 Restructuring Agreement dated September 30, 1994 among Schein Holdings,
Inc., the Company, the Estate of Jacob M. Schein, Marvin H. Schein, the
Trust established by Marvin H. Schein under Trust Agreement dated December
31, 1993, the Trust established by Marvin H. Schein under Trust Agreement
dated September 9, 1994, the Charitable Trust established by Marvin H.
Schein under Trust Agreement dated September 12, 1994, Pamela Schein,
Pamela Joseph, the Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994; the Trusts under Articles Third and
Fourth of the Will of Jacob M. Schein; Stanley M. Bergman, the Trust
established by Stanley M. Bergman under Trust Agreement dated September
15, 1994, Martin Sperber, the Trust established by Martin Sperber under
Trust Agreement dated December 31, 1993, and the Trust established by
Martin Sperber under Trust Agreement dated September 19, 1994
10.7 Agreement and Plan of Corporate Separation and Reorganization dated as of
September 30, 1994 among Schein Holdings, Inc., the Company, the Estate of
Jacob M. Schein, Marvin H. Schein, the Trust established by Marvin H.
Schein under Trust Agreement dated December 31, 1993, the Trust
established by Marvin H. Schein under Trust Agreement dated September 9,
1994, the Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, Pamela Schein, the Trust established
Article Fourth of the Will of Jacob M. Schein for the benefit of Pamela
Schein and her issue under Trust Agreement dated September 29, 1994,
Pamela Joseph, the Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994, the Trust established by Pamela Joseph
under Trust Agreement dated September 28, 1994 and the Trusts under
Articles Third and Fourth of the Will of Jacob M. Schein
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended and restated
effective as of July 1, 1995**
10.9 Henry Schein, Inc. Amendment and Restatement of the Supplemental Executive
Retirement Plan **
10.10 Henry Schein, Inc. Summary Executive Incentive Plan**
10.11 Consulting Agreement dated September 30, 1994 between the Company and
Marvin H. Schein**
10.12 Employment Agreement dated as of January 1, 1992 between the Company and
Stanley M. Bergman**
10.13 Amended and Restated Stock Issuance Agreement dated as of December 24,
1992 between the Company and Stanley M. Bergman**
10.14 Stock Issuance Agreements dated December 27, 1994 between the Company and
various executive officers**
10.15 Agreement and Plan of Merger dated as of September 1, 1995, among Henry
Schein, Inc., Schein Dental Equipment Corp., Marvin Schein and others
10.16 Stock Purchase Agreement dated August 25, 1995, by Henry Schein, Inc., PRN
Medical, Inc. and its shareholders,and Florida Doctor Supply, Inc. and its
shareholders
10.17 Restated Standard Indemnity Agreement dated February 8, 1993, as amended
January 25, 1993, by and between Showa Denko America, Inc. and the Company
10.18 Guaranty Agreement by and between Showa Denko K.K. and the Company,
relating to the Restated Standard Indemnity Agreement dated February 8,
1993, as amended January 25,1993, by and between Showa Denko America, Inc.
and the Company
10.19 Stock Issuance Agreements dated as of May 1, 1995 between the Company and
executive officers
10.20 Agreement of Purchase and Sale of Assets dated February 28, 1996 by and
among the Company, Benton Dental, Inc. and Modern Dental Concepts, Inc.*
10.21 Credit Agreement dated as of December 8, 1994 between the Company and The
Chase Manhattan Bank, N.A.
10.22 Loan Agreement dated May 5, 1995 by and between the Company and New York
State Urban Development Corporation
10.23 Term Loan Agreement dated as of November 15, 1993 between Henry Schein
Europe, Inc. and Cooperatieve Centrale Raiffeisen- Boerenleenbank B.A.
10.24 Corporate Guarantee dated November 15, 1993 by the Company, Zahn Dental
Co., Inc. Zahn Dental (Florida), Inc., Zahn Dental (Mass), Inc., Tri-State
Medical Supply, Inc. and Zahn Holdings, Inc. with respect to the Term Loan
dated as of November 15, 1993 between Henry Schein Europe, Inc. and
Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A.
10.25 Joint and Several Guarantee dated February 7, 1995 by the Company in favor
of Banque Nationale de Paris
10.26 Joint and Several Guarantee dated February 7, 1995 by the Company in favor
of Banque Francaise du Commerce Exterieur
10.27 Guarantee dated March 1, 1996 by the Company in favor of Deutsche Bank AG*
10.28 Lease Agreement dated December 22, 1995 by and between Dugan Realty,
L.L.C. and the Company*
10.29 Commercial Guaranty dated August 1, 1994 by the Company in favor of the
Mid-City National Bank
10.30 Discretionary Line of Credit dated August 18, 1995 between PNC Bank,
Delaware and one of the Company's 50% owned companies
10.31 Discretionary Line of Credit Demand Note dated August 18, 1995 in favor of
one of the Company's 50% owned companies
10.32 Loan Agreement dated March 30, 1992 between the Royal Bank of Scotland
plc, Henry Schein U.K. Holdings Limited and BDG U.K. Holdings Limited
10.33 Loan Agreement dated January 28, 1994 between the Royal Bank of Scotland
plc, Henry Schein U.K. Holdings Limited and Dental Express (Supplies)
Limited
10.34 Credit Agreement dated June 5, 1995 among Canadian Imperial Bank of
Commerce and one of the Company's 50% owned companies
10.35 Master Lease Agreement dated as of February 28, 1991 between General
Electric Capital Corporation and the Company
10.36 Master Lease Agreement dated December 2, 1994 between Chase Equipment
Leasing, Inc. and the Company
10.37 Software License Agreement dated as of June 20, 1995 between the Company
and XcelleNet, Inc.
10.38 Software License Agreement dated as of October 31, 1994, as amended,
between J.D. Edwards & Company
10.39 Software Update Agreement dated as of October 31, 1994, as amended,
between J.D. Edwards & Company
10.40 Software Services Agreement dated as of October 31, 1994, as amended,
between J.D. Edwards & Company
10.41 Lease dated December 3, 1990 between WRC Properties, Inc. and the Company
10.42 Lease dated March 2, 1992 between Vista Distribution Center, Inc. and the
Company
10.43 Lease dated as of September 30, 1993, as amended October 14, 1993 and May
23, 1995, by and between Broad Hollow Realty Co. and the Company
10.44 Lease dated April 27, 1995 by Lyndean Investments Limited to Kent Dental
Limited and Henry Schein U.K. Holdings Limited
10.45 Lease dated October 23, 1994 between Georg and Pia Netzhammer and Henry-
Schein Dentina GmbH (English translation and original version)
10.46 Lease dated January 11, 1995 between Lyndean Investments Limited, Kent
Dental Limited and Henry Schein U.K. Holdings Limited
10.47 Stock Purchase Agreement dated as of August 18, 1995 among the Company,
the Mark Family Partnership and others
10.48 Group Purchasing Program Agreement dated March 31, 1994, as amended June
26, 1995, by and between AMA Resources, Inc. and the Company
10.49 Hospital Supply Purchase Agreement dated as of November 10, 1994 between
Veterinary Centers of America, Inc. and the Company
10.50 Award of Contract to the Company dated April 14, 1995 by Department of the
Army
10.51 Sales Agent Agreement dated March 1, 1995 by and between Merck & Co., Inc.
and the Company
10.52 Supply Agreement dated March 20, 1991
10.53 Shareholders' Agreement dated March 20, 1991
10.54 Non-Negotiable Promissory Note dated March 20, 1991 from the Company to
N-Tech 10.55 Guaranty dated March 20, 1991 by the Company and others in
favor of N-Tech, Inc.
10.56 Demand Debenture dated December 20, 1988 from one of the Company's 50%
owned companies to Canadian Imperial Bank of Commerce
10.57 Pledge Agreement dated December 20, 1988 of one of the Company's 50% owned
companies to Canadian Imperial Bank of Commerce
10.58 Shareholders' Agreement dated as of December 1, 1990 by and among the
shareholders of Henry Schein Espana, S.A.
10.59 Shareholders' Agreement dated as of April 1, 1991 between the shareholders
of Schein-Dentina, B.V. (English translation)
10.60 Put and Call Option Agreement dated August 29, 1991 between Schein
International (Europe) Inc. and the shareholders of Henry Schein U.K.
Holdings Limited
10.61 Deed of Guarantee dated August 29, 1991 between Henry Schein, Inc. and the
shareholders of Henry Schein U.K. Holdings Limited
10.62 Stock Purchase Agreement dated November 1, 1992 among SSN Healthcare
Supply, Inc., the Company, Tri-State Medical Supply, Inc. and a
shareholder
10.63 Stock Purchase and Shareholders' Agreement dated March 19, 1993 by and
among S.A. Hospithera and Henry Schein Europe, Inc.
10.64 Agreement dated March 19, 1993 by and among S.A. Hospithera N.V., Henry
Schein Europe Inc., and S.A. Henry Schein Hospithera N.V.
10.65 Supply Agreement dated as of March 15, 1993 between Henry Schein B.V. and
S.A. Henry Schein Hospithera N.V.
10.66 Put and Call Option Agreement dated July 1, 1993 between P.W. White
Holdings Limited and Henry Schein Europe Inc.
10.67 Shareholders' Agreement dated July 1, 1993 between the shareholders of
Henry Schein UK Holdings Ltd.
10.68 Consortium Agreement dated July 1, 1993 between the shareholders of Henry
Schein UK Holdings Ltd.
10.69 Guarantee dated July 1, 1993 between the Company and P.W. White Holdings
Limited
10.70 Restructuring Agreement dated July 30, 1993 by and among the Company,
Dental Plan, Inc., and certain of its employees
10.71 Share Purchase Agreement dated as of November 17, 1993 by and among Henry
Schein B.V. and Johannes Cornelis van den Braak
10.72 Asset Purchase and Business Development Agreement dated May 23, 1994 among
the Company, Chicago Medical Equipment Company, and its principal
stockholder, Universal Footcare Holdings Corp., Universal Footcare
Products, Inc. and Universal Footcare Sales Co., L.L.C.
10.73 Sales Service Agreement dated as of August 1, 1994 between Universal
Footcare Products, Inc. and Universal Footcare Sales Co., L.L.C.
10.74 Unanimous Shareholders Agreement dated August 4, 1994 among Henry Schein
Canada Inc., the Company, 972704 Ontario Inc. and its shareholders, and
Consolidated Dental Ltd.
10.75 Share Purchase Agreement dated June 27, 1994 by and between the
shareholders of Henry Schein France S.A.
10.76 Shareholders Agreement dated January 1, 1995 among SSN Healthcare Supply,
Inc., South Jersey Medical Supply Co., Inc., South Jersey Surgical Supply
Co., Inc., and its shareholders
10.77 Shareholders Agreement dated as of January 24, 1995 by and among the
shareholders of Dentisoft, Inc.
10.78 Purchase Agreement dated as of June 14, 1995 among The Veratex
Corporation, the Company and HSI Michigan Corp.
10.79 Form of Henry Schein, Inc. Non-Employee Director Stock Option Plan* **
10.80 Supply Agreement made as of July 7, 1995 between Tidi Products, Inc. and
the Company
10.81 Agreement Subject to Conditions Precedent dated July 21, 1995 between
Henry Schein Europe Inc., Henry Schein France S.A., Gerard Ifker, Didier
Cochet, Frederic Ladet, Jean-Hugues Lelievre and Christophe Morales
(English Translation)
10.82 Put and Call Option Agreement dated June 9, 1995 between William Roger
Killiner and Henry Schein U.K. Holdings Limited
10.83 Put and Call Option Agreement dated June 9, 1995 between Anthony Alan
Anderson and Henry Schein U.K. Holdings Limited.
10.84 Agreement of Purchase and Sale of Assets dated as of July 1, 1995 by and
among Precision Dental Specialties, Inc. and its shareholders, PDS
Acquisition Corp., and the Company
10.85 Shareholders Agreement dated as of July 1, 1995 by and among Precision
Dental Specialties, Inc. and its shareholders, PDS Acquisition Corp., and
the Company
10.86 Agreement dated January 1, 1995 between Henry Schein (UK) Holdings Ltd.
and The Royal Bank of Scotland plc
10.87 Agreement dated March 4, 1993 between Henry Schein (UK) Holdings Ltd. and
The Royal Bank of Scotland plc
10.88 Loan Agreement dated November 16, 1993 between Henry Schein B.V. and
others and Crediet-en-Effectenbank N.V. (English translation and original
version)
10.89 Multicurrency Credit Policy between Henry Schein Espana, S.A. and others
and Banco Popular Espanol, S.A. (English translation and original version)
10.90 Amended and Restated Credit Agreement (the "Amended Credit Agreement")
dated as of July 5, 1995 among the Company, The Chase Manhattan Bank,
N.A., Natwest Bank, N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank,
B.A. "Rabobank Nederland", New York Branch and European American Bank
(previously Exhibit 10.20 to the Company's Registration Statement on Form
S-1 (Commission File No. 33-96528))
10.91 First Amendment to the Amended Credit Agreement dated December 15, 1995
among the Company, The Chase Manhattan Bank, N.A., Natwest Bank, N.A.,
Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A. "Rabobank
Nederland", New York Branch and European American Bank
10.92 Supply Agreement dated January 8, 1996 between the Bompany and Modern
Dental Concepts, Inc.
10.93 Agreement of Purchase and Sale of Assets dated February 28, 1996
by and among the Company, Benton Dental, Inc. and Modern Dental
Concepts, Inc.
10.94 Agreement and the Plan of Merger, dated as of August 3, 1997 by and
among the Company, HSI Acquisition Corp and Sullivan Dental Products, Inc.
(Exhibit 2.1 to the Company's Registration Statement on Form S-4
(Commission File No. 333-3601)).
10.95 Amendments to the Company's 1994 Stock Option Plan effective as of
July 15, 1997.+*
10.96 Revolving Credit Agreement (the "Credit Agreement") dated as of
January 31, 1997 among the Company, The Chase Manhattan Bank, Fleet
Bank, N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A.,
"Rabobank Nederland", New York Branch and European American Bank
(previously Exhibit 10.20 to the Company's Registration Statement on Form
S-1 (Commission File No. 33-96528)).
10.97 Employment Agreement, dated March 7, 1997, between Bruce J. Haber
and the Company (Incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-30615)).*
10.98 Termination of Employment Agreement, dated March 7, 1997, as revised,
between Bruce J. Haber and the Company (filed as Exhibit 10.92 to the
Company's Registration Statement on Form S-4 (Registration No.
333-30615)).*
10.99 Agreement and Plan of Merger among the Company, HS Acquisition,
Inc., Roane- Barker, Inc. and Ralph L. Falls, Jr. dated as of May 23,
1997, as amended by letters dated June 24, 1997 and June 25, 1997
(filed as Exhibit 10.94 to the Company's Registration Statement on Form
S-4 (Registration No. 333-30615)).
10.100 Employment Agreement, dated as of August 3, 1997, by and between
Robert J. Sullivan and the Company (filed as Exhibit 10.96 to the
Company's Registration Statement on Form S-4 (Commission File No.
333-36081)).*
10.101 Amendment No. 2 and Supplement to Revolving Credit Agreement,
dated August 15, 1997 (filed as Exhibit 10.104 to the Company's
Registration Statement on Form S-4 (Commission File No.
333-36081)).
10.102 Amendment dated as of June 30, 1997 to Credit Agreement (filed
as Exhibit 10.103 to the Company's Registration Statement
on Form S-4 (Commission File No. 333-36081)).
10.103 Lease Agreement dated December 23, 1997, between First Industrial
Pennsylvania, L.P. and the Company.+
10.104 Amendment dated as of June 30, 1997 to Credit Agreement (filed as
Exhibit 10.103 to the Company's Registration Statement on Form S-4
(Commission File No. 333-36081)).
27.1 Financial Data Schedules - Year ended December 27, 1997
27.2 Financial Data Schedules - Year ended December 28, 1996
27.3 Financial Data Schedules - Three months ended March 29, 1997
27.4 Financial Data Schedules - Six months ended June 28, 1997
27.5 Financial Data Schedules - Nine months ended September 27, 1997
27.6 Financial Data Schedules - Three months ended March 30, 1996
27.7 Financial Data Schedules - Six months ended June 29, 1996
27.8 Financial Data Schedules - Nine months ended September 28, 1996
27.9 Financial Data Schedules - Year ended December 30, 1995
- -----------
+ Filed herewith
+* Indicates management contract or compensatory plan or arrangement.
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
HENRY SCHEIN, INC.
(Under Section 242 of the General Corporation
Law of the State of Delaware)
HENRY SCHEIN, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware, does hereby certify that:
FIRST: The name of the corporation is Henry Schein, Inc. (the
"Corporation"). The name under which the Corporation was originally
incorporated was Henry Schein USA, Inc., and the date of filing the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware was December 23, 1992.
SECOND: The Certificate of Incorporation of the Corporation is hereby
amended by
striking out Article FIFTH thereof and by substituting in lieu of said Article
the following new Article:
"FIFTH:
A. The number of directors which shall constitute the entire Board of
Directors shall be as fixed from time to time by resolution of the Board of
Directors, but shall not be fewer than five nor more than nineteen.
B. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(1) To adopt, amend or repeal any By-Law (provided, however, that
(a) any By-Law made, amended or repealed by the Board of Directors may be
amended or repealed, and that any By-Laws may be adopted, by the stockholders
of the Corporation and (b) the Board of Directors may not amend or repeal any
By-Law adopted by the stockholders of the Corporation from and after the 1997
Annual Meeting of Stockholders of the Corporation).
(2) To authorize and cause to be executed mortgages and liens upon
the real and personal property of the Corporation;
(3) To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created; and
(4) By resolution passed by a majority of the whole Board, to
designate one or more committees, each committee to consist of two or more of
the directors of the Corporation, which,
to the extent provided in such resolution or in the By-Laws of the Corporation,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or names as may be
stated in the By-Laws of the Corporation or as may be determined from time to
time by resolution adopted by the Board of Directors.
C. The affirmative vote of the holders of 66-2/3% or more of the
shares entitled to vote in the election of directors shall be required to
amend or repeal, or adopt any provisions inconsistent with, this Article
FIFTH."
IN WITNESS WHEREOF, Henry Schein, Inc. has caused this Certificate to be
signed this ____ day of November, 1997.
HENRY SCHEIN, INC.
By:
-----------------------
Name:
Title:
ATTEST:
- ---------------------------
Name:
Title:
EXHIBIT 10.95
Amendments to the Henry Schein, Inc. 1994 Stock Option Plan
At the July 15, 1997 Annual Meeting of Stockholders of Henry Schein,
Inc., the stockholders amended the Henry Schein, Inc. 1994 Stock Option Plan
(the "Plan") as follows:
1. The first sentence of Section 5(b) of the Plan was amended to read in
its entirety as follows:
Subject to adjustment as provided in this Section 5, the maximum
aggregate number of Shares that may be issued under the Plan shall be
2,279,635 shares of Common Stock of which a maximum of 237,897 of such
Shares shall be covered by Class A Options and the balance of such Shares
shall be covered by Class B Options.
2. The first sentence of Section 5(c) of the Plan was amended to read in
its entirety as follows:
The Maximum number of Shares subject to any Option which may be
granted under this Plan to each Participant on or after the HSI Public
Offering shall not exceed 100,000 Shares (subject to any adjustment
pursuant to Section 5(d)) during each fiscal year of HSI during the
entire term of the Plan.
LEASE
This LEASE made as of this ____ day of ________, 1997, between
FIRST INDUSTRIAL PENNSYLVANIA, L.P., a Delaware limited partnership (the
"Landlord"), and HENRY SCHEIN (LANCASTER, PA.) INC., a Pennsylvania
corporation (the "Tenant").
BACKGROUND
The Premises (hereinafter defined) is a portion of certain
property (the "Property") located partly in Denver Borough, and partly
in East Cocalico Township, Lancaster County, Pennsylvania. The Property
consists of the land with the buildings and improvements now or
hereafter erected thereon, as more particularly described on Exhibit
"Legal Description". Tenant desires to lease that portion of the
Property consisting of approximately 412,711 square feet of the main
warehouse building (exclusive of interior docking area) on the Property
(the "Building"), as more particularly shown on Exhibit "Premises" (the
"Premises").
ARTICLE ONE
Term/Demise
1.1. Landlord leases the Premises to Tenant, and Tenant leases the
Premises from Landlord, upon the terms and conditions of this Lease, for
a term (the "Term") commencing on the Commencement Date (hereinafter
defined) and expiring on the last day of the one-hundredth twentieth
(120th) calendar month following the Commencement Date, together with
(a) the exclusive right to use for parking fifteen (15) tractor trailers
the areas designated as the "Schein Trailer Area" on Exhibit "Site Plan"
attached hereto (the "Schein Trailer Area"), (b) the exclusive right to
use for parking family vehicles of Tenant's employees, invitees and
guests the area shown designated as "Schein Parking Area" on Exhibit
"Site Plan" attached hereto, and (c) the non-exclusive right to use only
for their intended purposes the roads, sidewalks, driveways, parking
areas and landscaped areas on the Property intended for the common use
of the tenants of the Property and others to whom Landlord has granted
or may grant such rights (together with the Schein Trailer Area and the
Schein Parking Area, the "Common Areas"). Notwithstanding anything
contained in this Lease to the contrary, Tenant shall not have the right
to park tractor trailers on any portion of the Common Areas, except for
the Schein Trailer Area.
1.2. The Term shall commence and Rent (as hereinafter defined) shall
begin to accrue on March 1, 1998 (the "Commencement Date").
1.3. Landlord shall prepare the Premises for Tenant's initial occupancy
in accordance with the plans and specifications for the Premises, which
plans and specifications are attached hereto as Exhibit "Specifications"
(the "Specifications"). Landlord reserves the right, however; (i) to
make substitutions of material of equivalent grade and quality when and
if specified material shall not be readily and reasonably available, and
(ii) to make reasonable changes necessitated by conditions met in the
course of construction which changes shall not substantially deviate
from the intended results of the Specifications, provided, however, that
no such
substitutions or changes shall materially alter the appearance or
utility of the furnished Premises as intended by the Specifications. The
Premises shall be deemed to be substantially completed on the date when
the Borough of Denver or the Township of East Cocalico as applicable,
has issued a certificate of occupancy for the Premises and the Premises
have been substantially completed in accordance with the Specifications
under this Section 1.2, except for (i) such items of finishing and
construction of a nature which are not necessary to make the Premises
reasonably tenantable for Tenant's use and (ii) items not then completed
because of a Tenant Delay (hereinafter defined) (the "Substantial
Completion Date"). Landlord shall give Tenant notice of the Substantial
Completion Date.
1.4. The Specifications anticipate that Landlord's work pursuant to
Section 1.3 shall be completed in Phases, delineated in the
Specifications as Phases I through VB, Office Phase and Exterior. For
purposes of this Section 1.4 only, the term "substantially completed"
shall mean that a Phase has been completed to the extent necessary to
allow the Tenant to install racking and conveyance equipment in the area
related to such Phase. In the event that Phases I, II, III and IV
(collectively, the "Key Phases") are not substantially completed by
April 1, 1998 because of delays due to governmental intervention (not
caused by Landlord's violation of law), Tenant Delay (hereinafter
defined), unusual scarcity of or inability to obtain labor or materials,
strikes, walkouts or similar labor difficulties, casualty or any other
causes not within Landlord's reasonable control (collectively,
"Uncontrollable Delays"), Landlord shall not be subject to any liability
to Tenant, and no such failure to substantially complete the Key Phases
by April 1, 1998 shall in any respect affect the validity of this Lease
or any obligation of the Tenant hereunder. In the event and to the
extent that the Key Phases are not substantially completed by April 1,
1998 for reasons other than Uncontrollable Delays, Basic Rent reserved
hereunder shall be abated for the number of days beyond April 1, 1998 by
which substantial completion of the Key Phases is delayed for such
reasons other than Uncontrollable Delays (which abatement shall be
Tenant's sole and exclusive remedy for such delay). As used in this
Lease, the term "Tenant Delay" shall mean any delays resulting from
changes in the work to be performed by Landlord which are required by
Tenant or any delays resulting from any activity or the performance of
any work in or about the Premises or Property by Tenant or any of its
employees, agents or contractors. Landlord acknowledges that Tenant is
not expected to deliver a detailed scope of work for the office area
until December 31, 1997 and agrees that failure of Tenant to provide
such detailed scope of work prior to December 31, 1997 shall not
constitute Tenant Delay.
1.5. Landlord presently estimates that the Substantial Completion Date
will be May 1, 1998 (the "Scheduled Commencement Date"). If the Premises
are not substantially completed by the Scheduled Commencement Date
because of Uncontrollable Delays, Landlord shall not be subject to any
liability to Tenant and no such failure to complete the Premises by the
Scheduled Commencement Date shall in any respect affect the validity of
this Lease or any obligation of the Tenant hereunder. In the event and
to the extent that the Premises are not substantially completed May 1,
1998 for reasons other than Uncontrollable Delays, time being of the
essence, the Tenant shall receive a credit against Basic Rent equal to
(a) two hundred percent (200%) of the daily Basic Rent accrual times (b)
the number of days beyond May 1, 1998 by which the Substantial
Completion Date is delayed for such reasons other than Uncontrollable
Delays (which credit shall be Tenant's sole and exclusive remedy for
such delay).
2
1.6. Within ten (10) days after the Substantial Completion Date,
Landlord and Tenant, and their respective construction representatives,
shall inspect the Premises and shall prepare a punchlist of work
required under Section 1.2 not then actually completed by Landlord (the
"Punchlist Inspection"); Landlord agrees that Landlord shall complete
with commercially reasonable speed and diligence the items specified on
such punchlist. Provided that Tenant notifies Landlord within sixty (60)
days after the Commencement Date of latent defects in work required
under Section 1.2 which could not have been reasonably discovered at the
time of the Punchlist Inspection, Landlord shall correct with
commercially reasonable speed and diligence any such latent defects of
which Landlord is notified within sixty (60) days after the Commencement
Date.
1.7. Subject to Landlord's reasonable requirements imposed to assure
that Landlord and Landlord's contractors can work on the Building and
the Premises without interference or delay, Tenant shall have access to
the Premises during normal working hours prior to the Commencement Date
only for the purpose of installing Tenant's racking and other equipment
within the Premises and stocking inventory prior to commencement of
operations. In performing such work, Tenant shall be bound by all of the
obligations of Tenant under this Lease including specifically, without
limitation, the requirements of Article 7. Landlord and Tenant each
agree to use reasonable efforts to coordinate their respective work with
the other so as to achieve the Substantial Completion Date.
1.8. The first lease year of the Term shall commence on the
Commencement Date and shall end on the day immediately preceding the first
anniversary of the Commencement Date. Each subsequent lease year shall be a
period of twelve months, commencing on the day immediately following the
expiration of the prior lease year and expiring on the day immediately
preceding the anniversary of the commencement of such lease year.
1.9. On a single occasion only, at any time prior to or during the
Term, Tenant may at its sole cost and expense retain a licensed engineer or
architect ("Tenant's Professional") who shall furnish to both parties
measurements, expressed in terms of rentable square feet, of the
Premises and the Building. In the event that Tenant's Professional
certifies to a measurement which varies more than 2,000 square feet from
the 412,711 square feet represented by Landlord in the Lease (any
smaller discrepancy being deemed "de minimus" and of no consequence),
Landlord shall either (i) agree to and execute an amendment to this
Lease adjusting the rentable square footage of the Premises and/or the
rentable square footage of the Building in accordance with the
measurement(s) of Tenant's Professional and acknowledging the resulting
change in Tenant's Proportionate Share or (ii) retain, at its sole cost
and expense, a licensed architect or engineer ("Landlord's
Professional") to provide a certification as to the actual rentable
square footage of the Premises and/or the Building, as appropriate. In
the event that Landlord elects "(ii)" above and Landlord's Professional
certifies as to a measurement which varies by 8,000 square feet or less
from the measurement furnished by Tenant's Professional, the two
measurements shall be added, with the sum divided by two and the
resulting average measurement shall be deemed for all purposes under the
lease to be the actual measurement. In the event that Landlord elects
"(ii)" above and Landlord's Professional certifies as to a
3
measurement which varies by more than 8,000 square feet from the
measurement furnished by Tenant's Professional, then Landlord's
Professional and Tenant's Professional shall attempt to reach a
consensus regarding the measurement(s) in dispute, failing which
Landlord's Professional and Tenant's Professional shall jointly select a
third professional (the "Third Professional"), whose fees shall be
shared equally by the parties, to certify as to the measurement in
dispute. The certification and measurement findings of the Third
Professional shall be conclusive and binding upon the parties hereto.
Tenant shall have an additional one time right to
obtain a measurement of the Premises and the Building in the event that
Landlord and Tenant, or their respective successors, enter into an
agreement for the lease of any additional space in the Building, as the
same shall then exist or in the event that Landlord expands the
Building. Any dispute as to such measurement(s) shall be resolved as set
forth in the immediately preceding paragraph.
ARTICLE TWO
Use
2.1. Tenant shall use the Premises only for assembling, packaging,
labeling, warehousing and distributing pharmaceutical products that are
not Hazardous Materials (hereinafter defined), with appurtenant offices,
employee cafeteria, and vending machine area, and for no other purposes.
Notwithstanding anything to the contrary contained in this Section 2.1,
Tenant shall have the right:
(a) to assemble, package, label, warehouse and distribute
pharmaceutical products and related products used in medical offices which
are, or which have components which are, Hazardous Materials provided: (i) such
products are not inherently flammable or explosive and (ii) such
products are assembled, packaged, labeled, stored, used and disposed of
in accordance with all applicable laws, ordinances and regulations and
the other requirements of this Lease; and
(b) to use in conducting Tenant's operations at the Premises
(i) propane in the operation of Tenant's forklifts, (ii) materials and supplies
required for use by Tenant in servicing its truck fleet, (iii) cleaning
substances or materials in commercially reasonable amounts which are
customarily used in commercial warehouse operations provided that the
items described in this subsection (b) shall be used, stored and
disposed of in accordance with all applicable laws, ordinances and
regulations and other requirements of this Lease.
ARTICLE THREE
Rent
3.1. Tenant agrees to pay to Landlord, promptly when due, without
notice or demand and without deduction or set-off of any amount for any reason
whatsoever, except as may be expressly set forth in this Lease, as basic
rent for the Premises ("Basic Rent") during the Term the annual amount
set forth on Exhibit "Basic Rent" attached hereto and hereby made a part
hereof.
4
3.2. Basic Rent is payable in equal monthly installments of one-twelfth
of the annual amount in advance, on or before the first day of each
calendar month during the Term.
3.3. All amounts payable by Tenant to Landlord under the terms of this
Lease shall be paid to Landlord at 311 South Wacker Drive, Suite 4000,
Chicago, Illinois 60606, or to such other entity or place as Landlord
may from time to time designate by written notice to Tenant.
3.4. All amounts payable by Tenant pursuant to this Lease other than
Basic Rent are additional rent ("Additional Rent") (Basic Rent and
Additional Rent collectively being referred to as "Rent"), and Landlord
shall have the same rights and remedies for nonpayment of Additional
Rent as Landlord has for nonpayment of Basic Rent.
ARTICLE FOUR
Taxes; Utilities
4.1. Throughout the Term, Tenant shall pay to Landlord Tenant's
Proportionate Share of all Taxes (as those terms are defined below).
Tenant shall pay to Landlord, at the time when the monthly installment
of Basic Rent is payable, an amount equal to one-twelfth (1/12th) of the
estimated annual Taxes for each Tax Year during the Term as reasonably
estimated by Landlord. Tenant shall also pay to Landlord, within ten
(10) days after receipt of Landlord's notice, the amount by which
Tenant's Proportionate Share of the Taxes becoming due exceeds the
monthly payments on account thereof previously made by Tenant to
Landlord pursuant to the preceding sentence, which obligation of Tenant
shall survive the termination of this Lease. Any overpayment of Taxes
shall be credited against the next installments of Taxes due hereunder
or, at the option of Tenant, repaid to Tenant (net of any sums then past
due to Landlord under this Lease) upon the later of (i) within thirty
(30) days after the end of the month in which such overpayment occurs or
(ii) at the time such excess is refunded by any mortgagee escrowing
Taxes to Landlord, but in no event later than sixty (60) days after the
end of the month in which such overpayment occurs. The amounts paid by
Tenant pursuant to this Section 4.1 shall be used to pay the Taxes, but
such amounts shall not be deemed to be trust funds and no interest shall
be payable thereon. Taxes payable for the Tax Years in which the Term
begins and ends shall be prorated to correspond to that portion of such
Tax Years occurring within the Term (calculated on the basis of 365 day
Tax Years).
As used in this Lease, the term "Taxes" means all taxes, liens,
charges, imposts and burdens, general and special assessments of every
kind and nature, ordinary and extraordinary, assessed or imposed by any
governmental authority on or with respect to the Premises or the
Property, or both, which Landlord shall become obligated to pay because
of or in connection with the ownership, leasing and operating of the
Premises or the Property, or both, including any such Taxes which are
levied or assessed in lieu of all or any part of Taxes or an increase in
Taxes as provided in Section 4.2.
As used in this Lease, the term "Tax Year" shall mean each
calendar year, or such other period of twelve (12) months as hereafter
may be duly adopted by any applicable governmental
5
or quasi-governmental body or authority or special service district
imposing Taxes on the Property or Premises, or both, as its fiscal year
for purposes of Taxes, occurring during the Term.
As used in this Lease, the term "Tenant's Proportionate Share"
means the ratio that the number of rentable square feet in the Premises
bears to the number of rentable square feet of building space on the
Property, as such number may change from time to time.
4.2. Nothing herein contained shall be interpreted as requiring Tenant
to pay any income, excess profits, corporate capital stock, franchise,
succession, transfer, gift, estate or inheritance tax imposed or
assessed upon Landlord, unless such tax or any similar tax is levied or
assessed in lieu of all or any part of any Taxes or an increase in any
Taxes. If under the requirements of any state or local laws with respect
to such new method of taxation, Tenant is prohibited from paying such
new tax which is in lieu of all or any part of any Taxes or any increase
in Taxes, Landlord may, at its election, require that Tenant enter into
a new lease for the balance of the Term, upon all of the same terms and
conditions as this Lease, but which provides for a net rent to Landlord
after the imposition of such tax, which is equal to the Rent payable
hereunder, or Landlord may elect to amend this Lease to achieve the same
economic result.
4.3. Notwithstanding the foregoing provisions of this Article Four,
Landlord from time to time during the Term may elect to waive the
requirement for payment of monthly installments on account of Taxes and,
in such case, Tenant shall pay the full amount of any unpaid Taxes
within fifteen (15) days after Tenant receives any bill for Taxes from
Landlord which, notwithstanding the foregoing, may be sent to Tenant at
any time and from time to time for any Tax Year. Such election by
Landlord shall not preclude Landlord from thereafter requiring Tenant to
commence paying monthly installments on account of Taxes as set forth
above in this Article Four.
4.4. Tenant shall purchase all metered utilities in Tenant's name and
shall pay, prior to any late payment or delinquency dates, all charges
for water, sewer, electricity, gas, fuel, heat, telephone, and other
utility services used on the Premises during the Term. Tenant shall pay
Landlord within fifteen (15) days after being billed therefor for any
utility services which are submetered to the Premises, and shall pay, as
a component of Operating Expenses, any for any utility services which
are provided to Tenant in common with another tenant or tenants in the
Building and are not submetered to the Premises. Landlord is not
required to furnish to Tenant any of the foregoing or other facilities
or services of any kind whatsoever. Landlord reserves the right, without
any liability to Tenant and without affecting Tenant's covenants and
obligations under this Lease, to stop service of the HVAC, electric,
sanitary, elevator (if any), or other systems serving the Premises, or
to stop any other services required by Landlord under this Lease,
whenever and for so long as may be necessary by reason of (i) accidents,
emergencies, strikes, or the making of repairs or changes which Landlord
in good faith deems necessary or (ii) any other cause beyond Landlord's
reasonable control. Further, it is also understood and agreed that
Landlord shall have no liability or responsibility for an interruption
or cessation of services to the Premises or to the Property that occurs
as a result of causes beyond Landlord's reasonable control. No such
interruption or cessation of service shall be deemed an eviction or
disturbance of Tenant's use and possession of the Premises or any part
thereof, or render
6
Landlord liable to Tenant for damages, or relieve Tenant from
performance of Tenant's obligations under this Lease, including, but not
limited to, the obligation to pay Rent.
ARTICLE FIVE
Insurance and Restoration
5.1. Landlord shall maintain and keep in effect or cause to be
maintained and kept in effect such insurance as it deems commercially
reasonable, including, without limitation, (i) insurance against loss or
damage to the Premises or other buildings and improvements on the
Property owned by Landlord by fire and such other casualties as may be
included within fire and extended coverage insurance, in an amount equal
to the full replacement costs of such buildings and improvements, and
(ii) commercial general liability insurance against claims for bodily
injury, death and property damage in and about the Property owned by
Landlord. Landlord shall, prior to the Commencement Date, and at least
thirty (30) days prior to the expiration of each policy required under
this Article, deliver to Tenant a certificate evidencing the foregoing
insurance or renewal thereof, as the case may be. Each policy of
insurance required by this Section 5.1 shall shall contain the insurer's
waiver of subrogation against Tenant and shall be issued by an insurer
licensed to do business in Pennsylvania. Landlord shall use reasonable
efforts to cause such certificate to provide that it shall not be
canceled without at least thirty (30) days prior written notice to
Tenant.
5.2. Throughout the Term, Tenant shall pay to Landlord, as Additional
Rent and as part of Tenant's Proportionate Share of Operating Expenses
payable under Article Ten, Tenant's Proportionate Share of all premiums
to be paid by Landlord for all insurance maintained by Landlord with
respect to the Property (except for extraordinary insurance that may be
necessitated solely by the use of another portion of the Property by
another tenant).
5.3. Tenant, at Tenant's sole cost and expense, shall maintain and keep
in effect the following insurance coverages throughout the Term:
(a) insurance against liability for bodily injury (including
death) and property damage in or about the Property under a policy of commercial
general liability insurance and umbrella liability (if necessary), on an
occurrence basis (and including, without limitation, contractual
liability coverage for liabilities assumed by Tenant under this Lease)
and with such limits as to each as may be reasonably required by
Landlord from time to time, but not less than $5,000,000, combined
single limit each occurrence;
(b) business automobile liability insurance including owned,
hired and non-owned automobiles, on an occurrence basis and with such limits as
may be reasonably required by Landlord from time to time, but not less
than $5,000,000 combined single limit;
(c) causes of loss-special form insurance upon Tenant's personal
property, fixtures and leasehold improvements and items stored on the
Premises by Tenant for the full replacement costs thereof (subject,
however, to the deductible permitted under Section 5.4);
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(d) workers' compensation insurance in statutorily required
amounts and employers liability (with umbrella liability if necessary), with
such limits as may be reasonably required by Landlord from time to time, but
not less than $1,000,000 each accident/disease - policy limit/disease -
each employee; and
(e) warehouseman's legal liability insurance (with umbrella
liability, if necessary) in an amount to the greater of $5,000,000 or the full
replacement value of property of others in the care, custody, or control
of Tenant in, on, or about the Premises or the Property;
(f) loss-of-income insurance in an amount sufficient to assure
that Landlord shall recover the loss of Rent due and owing under this Lease
for a period of at least twelve (12) consecutive months; and
(g) such other policies as are (i) reasonably required by
Landlord or any mortgagee or (ii) required by insurers by reason of Tenant's
use of or activities at the Premises; provided that any such other policies are
customarily required by Landlord or mortgagees of tenants using
properties on the vicinity of the Property for purposes and scope of use
similar to the Tenant's use and scope of use of the Premises.
5.4. The policies of insurance required pursuant to Section 5.3 shall
name Landlord, and Landlord's mortgagees as additional insured parties,
as their interests may appear. Each policy of insurance required by
Section 5.3 shall provide that it shall not be canceled without at least
thirty (30) days prior written notice to Landlord and to any mortgagee
named in any endorsement thereto; shall contain the insurer's waiver of
subrogation against Landlord, shall be issued by an insurer licensed to
do business in Pennsylvania and reasonably acceptable to Landlord and
Landlord's mortgagee; and shall be in a form reasonably satisfactory to
Landlord. Each policy shall provide that no act or omission of Tenant
shall affect the obligation of the insurer to pay the full amount of any
loss sustained. The total amount of any deductible under any policy of
insurance which Tenant is required to maintain pursuant to Section 5.3
shall be no more than $25,000.00.
5.5. Prior to the Commencement Date, and at least thirty (30) days
prior to the expiration of each policy required under this Article, Tenant
shall deliver to Landlord certificates in form reasonably acceptable to
Landlord evidencing the foregoing insurance or renewal thereof, as the
case may be.
5.6. Each of the parties hereto hereby releases the other, and shall
obtain a waiver of subrogation from its insurer, to the extent of the
releasing party's required insurance coverage under sections 5.1 and 5.3
and all deductibles, from any and all liability for, or right of
recovery against, any loss or damage covered by such insurance which may
be inflicted upon the property of such party, or which may be claimed
for bodily injury or death, even if such claim, loss or damage shall be
brought about by the fault or negligence of the other party, its agents
or employees.
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In addition to the foregoing, Tenant hereby releases Landlord
from all claims for loss of profits or earnings which would be covered
under a policy of business interruption insurance in an amount
sufficient to reimburse Tenant for loss of earnings attributable to loss
of occupancy of the Premises for a period of at least one year, as a
result of perils included in a standard comprehensive fire or casualty
insurance policy or in a business or rent interruption insurance policy.
The foregoing release shall apply even if such fire or other casualty
shall have been caused by the fault or negligence of Landlord or anyone
for whom Landlord is responsible, and shall apply irrespective of
whether Tenant is insured for such loss.
5.7. Tenant will not do anything which would prevent Landlord from
procuring either fire insurance on the Premises or public liability
insurance with respect to the Property from companies and in a form
reasonably satisfactory to Landlord. If Tenant, by its use of the
Premises in a manner not permitted under this Lease, shall cause the
rate for any insurance maintained by Landlord to be increased, Tenant
will pay the amount of such increase as Additional Rent within ten (10)
days after being billed therefor.
5.8. (a) In the event of damage to or destruction of the Premises
caused by fire or other casualty, Landlord shall undertake to make repairs as
hereinafter provided, unless this Lease is terminated by Landlord or
Tenant. In the event that such damage or destruction is due to the gross
negligence or willful misconduct of Tenant, Tenant shall be responsible
for the first costs incurred for such repairs, up to the amount of the
deductible of Landlord's insurance, not to exceed $25,000.00.
(b) If (i) the damage is of such nature or extent, in
the reasonable opinion of Landlord's architect or contractor, such
opinion to be delivered to Tenant, in writing, within thirty (30) days
after the damage has occurred, that (A) more than one hundred eighty
(180) consecutive days, after commencement of the work, would be
required (with normal work crews and hours) to repair and restore the
part of the Premises which has been damaged, or (B) such restoration or
repairs require the expenditure of more than fifty percent (50%) of the
full replacement cost of the Premises prior to such casualty or (ii)
less than two (2) years remain on the Term, and Landlord reasonably
estimates that the restoration will take one hundred and twenty (120)
days or more after the commencement of work, Landlord shall so advise
Tenant promptly, and either party, for a period of thirty (30) days
thereafter, shall have the right to terminate this Lease by written
notice to the other, as of the date specified in such notice, which
termination date shall be no later than thirty (30) days after the date
of such notice.
5.9. In the event of such fire or other casualty, if this Lease is not
terminated pursuant to the terms of Section 5.8, and if this Lease is
then in full force and effect, Landlord shall proceed diligently to
restore the Premises to substantially the same size and configuration
and with substantially the same improvements existing prior to the
occurrence of the damage. Landlord shall not be obligated to repair or
restore any alterations, additions or fixtures which Tenant may have
installed after the date of the execution of this Lease (whether or not
Tenant has the right or the obligation to remove the same or is required
to leave the same on the Premises as of the expiration or earlier
termination of this Lease) and which are not covered by the insurance
required to be carried by Landlord under their Lease, unless Tenant, in
a manner reasonably
9
satisfactory to Landlord, assures payment in full of such costs as may
be incurred by Landlord in connection therewith. If there be any such
alteration, fixtures or additions and Tenant does not assure payment of
the cost of restoration or repair as aforesaid, Landlord shall have the
right to determine the manner in which the Premises shall be restored,
as if such alterations, additions or fixtures had not then been made or
installed. The validity and effect of this Lease shall not be impaired
in any way by the failure of Landlord to complete repairs and
restoration of the Premises within one hundred eighty (180) consecutive
days after commencement of work, even if Landlord had in good faith
notified Tenant that the repair and restoration could be completed
within such period, provided that Landlord proceeds diligently with such
repair and restoration. Notwithstanding anything to the contrary to the
foregoing, if Landlord does not complete restoration of the Premises
within the Permitted Restoration Period (hereinafter defined), then, in
such event, Tenant may at any time prior to the substantial completion
of such work, terminate this Lease whereupon this Lease shall become
null and void as of the date of the casualty and neither party shall
have any further liability or obligation under this Lease. The term
"Permitted Restoration Period" means two hundred ten (210) days after
commencement of the work plus an additional period equal to the length
of any delays caused by circumstances beyond the reasonable control of
Landlord, not to exceed an additional forty-five (45) days.
5.10. In the case of damage to the Premises which is of a nature or
extent that all or a portion of the Premises is rendered untenantable
(including, without limitation, untenantability resulting from
inaccessibility) during the period of repair and restoration by
Landlord, the Rent otherwise payable by Tenant pursuant to this Lease
shall be abated for the period of such untenantability in such
proportion as the number of rentable square feet of the portion of the
Premises rendered untenantable bears to the total number of rentable
square feet in the Premises.
ARTICLE SIX
Rent Absolute and Net to Landlord
6.1. Landlord shall receive, except as otherwise expressly provided in
this Lease, all Basic Rent and all Additional Rent free from any
charges, taxes, assessments, fees, impositions, expenses, or deductions
of any and every kind or nature whatsoever, and, except as otherwise
expressly provided in this Lease, free of all obligation to insure or to
repair, restore, or maintain the Premises. Landlord shall not be
responsible for any costs, expenses, or charges of any kind or nature
respecting the Premises, except as otherwise expressly provided in this
Lease. Landlord shall not be required to render any services of any kind
to Tenant or to the Premises, except as otherwise expressly provided in
this Lease.
ARTICLE SEVEN
Signs; Alterations
7.1. Except for signs which are located wholly within the interior of
the Premises and which are not visible from the exterior of the
Premises, no signs shall be placed, erected, maintained or painted at
any place upon the Premises without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed.
All signs shall be maintained by Tenant in good condition during the
Term, and Tenant shall remove all signs at
10
the termination of this Lease and shall repair and restore any damage
caused by the installation or removal thereof.
7.2. Tenant may, from time to time, at its expense, make such
alterations, decorations, additions, or improvements to the Premises
(hereinafter collectively referred to as "Alterations") in and to the
Premises, excluding structural changes, as Tenant may reasonably
consider appropriate for the conduct of its business in the Premises;
provided, however, that except as provided in Section 7.5. of this
Lease, the written consent of the Landlord is first obtained. Landlord's
consent to Alterations shall not be unreasonably withheld or delayed,
provided that (a) the exterior of the improvements located on the
Property shall not be affected; (b) the Alterations are non-structural
and the structural integrity of the improvements located on the Property
shall not be adversely affected; (c) the Alterations are to the interior
of the Premises and no part of the outside of the Premises or the
Building shall be affected; (d) the proper functioning of the
mechanical, electrical, sanitary and other service systems of the
Property shall not be adversely affected and such systems shall not be
overburdened by their use by Tenant; (e) the Alternations do not have
any effect on other leased premises or tenants on the Property; (f)
Tenant shall have appropriate insurance coverage reasonably satisfactory
to Landlord regarding the performance and installation of the
Alterations; and (g) before proceeding with any Alterations, Tenant
shall submit for Landlord's approval plans and specifications for the
work to be done and Tenant shall not proceed with such work until it has
received such approval. Landlord's approval of such Alterations under
the immediately preceding sentence shall be deemed to have been given if
Landlord does not send notice of disapproval to Tenant within fifteen
(15) days after Landlord has received all of the plans and
specifications for the Alterations from Tenant. If the costs of the
alterations exceeds one hundred thousand dollars ($100,000.00), Tenant
shall obtain and deliver to Landlord (if so requested) either (i) a
performance bond and a labor and materials payment bond (issued by a
corporate surety licensed to do business in Pennsylvania) each in an
amount equal to one hundred fifteen percent (115%) of the estimated cost
of the Alterations and in form satisfactory to Landlord, or (ii) such
other security as shall be reasonably satisfactory to Landlord.
7.3. Tenant, at its expense, shall obtain all necessary governmental
permits and certificates for the commencement and prosecution of
Alterations and for the final approval thereof upon completion, and
shall cause the Alterations to be performed in compliance therewith and
in compliance with all applicable laws and requirements of public
authorities and with rules and regulations promulgated by Landlord in
Landlord's reasonable discretion or any other restrictions that Landlord
may, in the exercise of reasonable discretion, impose on the Alterations
provided, the same do not conflict with the terms of this Lease. Tenant
shall not commence any Alterations without having first demonstrated, to
Landlord's reasonable satisfaction, that all required permits and
certificates have been obtained. The Alterations shall be diligently
performed in a good and workmanlike manner, using new materials and
equipment at least equal in quality and class to the then quality and
class standards of the Premises and Building. Alterations shall be
performed by contractors first approved by Landlord (which approval
shall not be unreasonably withheld or delayed), and Tenant's agents,
contractors, workmen, mechanics, suppliers and invitees shall work in
harmony, and not interfere with, Landlord and its agents and contractors
(if any) or the Premises. Tenant shall, and hereby does,
11
indemnify, defend, and hold Landlord and Agent harmless from any and all
claims, damages or losses of any nature (including reasonable fees of
attorneys of Landlord's choosing), suffered by Landlord, as a result of,
or due to, or arising from, the performance of any Alterations by, or on
behalf of, Tenant. Tenant acknowledges that any Alterations commenced or
performed in violation of any provision of this Article Seven shall
cause Landlord irreparable injury, and Landlord shall have the right to
seek to enjoin any such violations by injunction or other equitable
relief. All Alterations except Tenant's trade fixtures (including its
machinery and conveyance equipment) shall be and remain part of the
Premises, and shall not be removed by Tenant, unless in connection with
Landlord's approval of the Alterations, Landlord requires Tenant to
remove them, at Tenant's sole expense, at the expiration or sooner
termination of the Term or if such Alterations are made pursuant to
Section 7.5 of this Lease unless Landlord requires Tenant to remove them
at Tenant's sole expense, at the expiration or sooner termination of the
Term by written notice to Tenant within sixty (60) days after their
completion; in performing such removal, Tenant shall restore the
Premises to its condition prior to such Alteration, shall repair any
damage caused by such removal, and shall otherwise comply with this
Article 7.
7.4. Tenant shall not permit any mechanics or materialmen's liens to
attach to the Premises, Tenant's leasehold estate, or the Property.
Tenant shall and hereby does defend, indemnify, and hold Landlord
harmless from and against any and all mechanics and other liens and
encumbrances filed in connection with Alterations or any other work,
labor, services, or materials done for or supplied to Tenant, or any
person claiming through or under Tenant including, without limitation,
security interests in any materials, fixtures or articles installed in
and constituting a part of the Premises and against all costs, expenses,
and liabilities (including reasonable fees of attorneys of Landlord's
choosing) incurred in connection with any such lien or encumbrance or
any action or proceeding brought thereon. Tenant, at its expense, shall
procure the satisfaction or discharge of record (which discharge of
record may be by posting of a bond or other security as required by law)
of all such liens and encumbrances within thirty (30) days after the
filing thereof. In the event Tenant has not so performed, Landlord may,
at its option, after ten (10) day's notice to Tenant, pay and discharge
such liens and Tenant shall be responsible to reimburse Landlord for all
costs and expenses incurred in connection therewith, together with
interest thereon at the rate set forth in Section 26.4 below, which
expenses shall include reasonable fees of attorneys of Landlord's
choosing, and any costs in posting bond to effect discharge or release
of the lien as an encumbrance against the Premises, Tenant's leasehold
estate, or the Property or any part thereof.
7.5. Notwithstanding anything to the contrary contained in this Article
Seven, Tenant may make Minor Alterations (as hereinafter defined)
without Landlord's prior consent provided, however, that:
(a) Tenant shall first have given Landlord at least
fifteen (15) days prior written notice of its intention to commence such
construction, which notice shall be accompanied by plans and specifications
for the work to be performed; and
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(b) Tenant shall comply with the other provisions of
Sections 7.2(a-f), 7.3 and 7.4 of this Lease.
For purposes of this Lease, the term "Minor Alterations" shall mean any
alteration complying with this Section 7.5 and involving a cost of less
than Fifty Thousand Dollars ($50,000.00), provided that, for the purpose
of determining such cost, multiple construction or alteration projects
shall be aggregated to the extent that they are related to each other,
whether undertaken simultaneously or sequentially.
7.6. Notwithstanding anything to the contrary contained in this Article
7, Landlord shall not unreasonably withhold or delay consent to the
following Alterations which may be partially structural in nature,
provided that such Alterations do not adversely effect the structural
integrity of the Building and Tenant shall comply with the other
provisions of Sections 7.2, 7.3 and 7.4 of this Lease: construction of a
cafeteria, extension of the mezzanine, enclosing of dock doors, removal
of the shipping office and creation of additional access ways through
the existing fire walls in the Premises.
ARTICLE EIGHT
Repairs
8.1. Except for the items specified in Section 8.3, Tenant at its own
cost and expense shall keep the interior of the Premises including,
without limitation, the lighting and other units, equipment and systems
in connection with the Premises, and all other parts of the Premises in
good order and condition and will make all necessary repairs and
replacements thereto, ordinary and extraordinary, foreseen and
unforeseen, and will make all necessary replacements thereto when
necessary. Tenant shall hire and pay for all security, cleaning,
custodial and janitorial services for the Premises. All glass, both
interior and exterior, is the sole responsibility of Tenant, and any
broken glass shall promptly be replaced by Tenant at Tenant's expense
with glass of the same kind (to the extent permitted by applicable
building codes), size and quality.
8.2. All repairs and replacements required of Tenant hereunder shall be
promptly made with new materials of like kind and quality and shall be
made subject to Tenant's compliance with Article Seven.
8.3. Landlord shall maintain in good order and repair at Landlord's
sole cost and expense the structure and roof of the Building. Landlord shall
maintain, repair and replace, or cause to be maintained, repaired and
replaced, the Common Areas, the exterior of the Building and the
plumbing, electrical, sprinkler and heating, ventilating and air
conditioning units, equipment and systems serving the Premises, so as to
keep the same in good order and repair; except as otherwise provided in
Sections 8.4 and 8.5 below, the costs of such maintenance, repair and
replacement shall be a part of the Operating Expenses as set forth in
Article Ten.
8.4. Notwithstanding the provisions of Section 8.3, but subject to the
limitations of this Section 8.5, Tenant shall be fully responsible for
the costs of maintaining, repairing and replacing any plumbing,
electrical, sprinkler and heating, ventilating and air conditioning
units,
13
equipment and systems, or portions thereof, which exclusively serve the
Premises and no other portion of the Building.
8.5. Landlord agrees that repairs and replacements (as opposed to
maintenance) to the plumbing, electrical, sprinkler and heating,
ventilating and air conditioning units, equipment and systems shall not
be included in Operating Expenses, but shall be billed directly to
Tenant as such expenses occur. Tenant shall be responsible for (i)
Tenant's Proportionate Share of the costs of such repairs and
replacements to such systems which serve the Premise in common with one
or more other tenants, and (ii) the entire cost of such repairs and
replacements to such systems which serve only the Premises; provided,
however, that Tenant's obligation to reimburse Landlord for costs
pursuant to this Section 8.5 shall be limited, in any one calendar year
to (i) up to $15,000 for repairs and replacements to the heating,
ventilating and air conditioning units, equipment and systems and (ii)
up to $25,000 in the aggregate for repairs and replacements to the
plumbing, electrical and sprinkler systems serving the Premises.
8.6. The obligations of Landlord to maintain the items specified in
Section 8.3 and to bear certain costs pursuant to Sections 8.3 and 8.5
does not include any maintenance, repairs or replacements due to the
negligence or willful misconduct of Tenant, its employees, agents,
contractors, or invitees; or to alterations made by Tenant, all of which
shall be the sole responsibility of Tenant and shall be made by Tenant
at Tenant's sole expense and in compliance with Article Seven
ARTICLE NINE
Rules and Regulations; Compliance with Laws
9.1. Tenant, at all times during the Term hereof, and at its sole cost
and expense, agrees:
(a) to take such available legal action, if any, as may be
necessary to bring about the cessation of any work stoppage, picketing or labor
activity by Tenant's employees or against Tenant, which may materially
interfere with the operation of or access to the Property or any work
being performed or to be performed in or about the Property.
(b) to pay promptly and when due, all taxes, licenses, fees,
assessments or other charges levied or imposed upon the business of Tenant or
upon any fixtures, furnishings or equipment in, on or at the Premises; to pay
Landlord any use and occupancy tax which Landlord is legally obligated
to collect from Tenant;
(c) not to commit, permit or allow any waste, damage or nuisance
to or on the Property or any portion(s) thereof, or use, permit or allow the
plumbing facilities to be used for any purpose injurious to same or
dispose of any garbage or any other foreign substance therein, or place
a load on any floor in the Premises which would damage the floor or
install, attach, operate or maintain in the Premises any heavy equipment
or apparatus without the consent of Landlord, or install, operate or
maintain in the Premises any electrical equipment which would
14
overload the electrical system therein, or any part thereof, beyond its
capacity for proper and safe operation as reasonably determined by
Landlord;
(d) not to use, permit or allow the Premises to be used in any
manner which would be illegal or constitute a nuisance because of the emission
of noise, smoke, dust or odors or which could damage the Premises or the
Property, or be a nuisance or menace to or interfere with, any other
occupants or the public, or, pursuant to any applicable governmental law
or requirement, require any plan or bond to be furnished or require any
work to be performed to cure or correct any condition created by Tenant,
or be for a purpose not permitted by this Lease (and Landlord agrees to
cause a provision substantially similar to this Section 9.1(d) to be
included in every lease of space in the Building);
(e) to comply with the requirements of all suppliers of utility
services to the Premises and not to suffer or permit knowingly any act or
omission, the consequence of which could be to cause the interruption,
curtailment, limitation or cessation of any utility service to the
Property;
(f) not to assemble, package, label, store or discharge or
otherwise use any Hazardous Materials, flammable, explosive, poisonous or other
hazardous or dangerous substances on the Premises, except in accordance
with Sections 2.1(a) and 2.1(b) of this Lease; and
(g) not to block or obstruct or otherwise impede access by others
through or across the Common Areas.
9.2. Tenant, at its sole cost and expense, agrees to promptly comply
with all rules and regulations reasonably established by Landlord from
time to time with respect to the Property. Landlord agrees not to
enforce rules and regulations in a discriminatory manner. Such rules and
regulations shall not conflict with the provisions of this Lease. In the
event of any such conflict between the provisions of this Lease and such
rules and regulations, the provisions of this Lease shall prevail.
9.3. The term "Legal Requirements" as used in this Lease means all
present and future laws, orders, ordinances, rules, regulations and
requirements of any lawful authorities and the orders, rules and
regulations of the appropriate Board of Fire Underwriters or similar
body, and all requirements of insurance companies writing policies
covering the Premises. Tenant shall at Tenant's expense promptly comply
with all Legal Requirements relating to or applicable to the use or
occupancy of the Premises by Tenant (including, without limitation, the
Americans With Disabilities Act). Tenant shall pay all costs, expenses,
claims, and penalties, that may in any manner arise out of the failure
of Tenant to comply with the requirements of this section.
15
ARTICLE TEN
Operating Expenses
10.1. Tenant shall pay to Landlord, Tenant's Proportionate Share of all
expenses incurred or paid by Landlord in connection with the
maintenance, operation, repair, or replacement of (a) the Common Areas,
and (b) all other portions of the Property (not including the buildings
thereon, except as expressly set forth in this Section 10.1), even if
such portions of the Property (not including the buildings thereon,
except as expressly set forth in this Section 10.1) are reserved for the
exclusive use of others (unless those having such exclusive right of use
pay the entire expense of maintenance, operation, repair and replacement
of such portion of the Property reserved for such exclusive use). Such
expenses shall include, without limitation, (a) the costs of (1)
cleaning, maintenance, repair and replacement of the roads, sidewalks,
parking areas, and driveways on or adjoining the Property, including the
cost of snow and ice removal; (2) repaving and restriping paved portions
of the Property; (3) maintenance, repair and replacement of all
landscaped areas on the Property; (4) maintenance, operation, repair and
replacement of the lighting of the Property (not including the buildings
thereon); (5) repairs and replacements of the systems referred to in
Section 8.5. which serve the Premises in common with other tenants; (6)
utility services which are provided to Tenant in common with another
tenant or tenants in the Building and are not submetered to the
Premises; (7) insurance carried by Landlord; (8) compliance with Legal
Requirements affecting the Common Areas and all other portions of the
Property (not including the buildings thereon), and (b) a
management/administrative fee equal to two and twenty six hundredths
percent (2.26%) of the annual Basic Rent per year. All sums payable
under this Section 10.1 shall be referred to in this Lease collectively
as the "Operating Expenses."
The term "Operating Expenses" shall not include (1) the
salaries or benefits of any executive officers of Landlord; (2) any
repairs or replacements necessitated by the negligence or willful
misconduct of Landlord or any other tenant of the Property; (3) debt
service or refinancing costs; (4) legal fees related to negotiation or
enforcement of leases or any mortgages applicable to the Property; (5)
depreciation of the Building; (6) interest or penalties to Landlord's
late payment; (7) advertising costs; (8) leasing commissions and costs
reimbursed by other tenants or insurance proceeds; (9) the cost of
remediating any environmental condition existing as of the date of the
Lease; or (9) the salary of an offsite manager. In the event of any
capital expense incurred by Landlord to maintain, operate, repair or
replace the Common Areas and all other portions of the Property (not
including the buildings thereon, except as expressly set forth in
Section 10.1), the annual amortization of such expenditure (calculated
by dividing the amount of the expenditure over the useful life of the
improvement) shall be deemed an Operating Expense for each year of such
period.
10.2. Tenant shall pay to Landlord at the time when the monthly
installment of Basic Rent is payable, an amount equal to one-twelfth
(1/12th) of Tenant's Proportionate Share of the annual Operating
Expenses as reasonably estimated by Landlord. Such estimate shall
generally itemize the Operating Expenses and may be reasonably changed
by Landlord from time to time, whereupon the amounts payable hereunder
shall change (so that amounts payable by Tenant shall be sufficient to
pay in full Tenant's Proportionate Share of the annual Operating
Expenses, as
16
reasonably estimated by Landlord, over the balance of the calendar
year). Tenant shall also pay to Landlord within ten (10) days after a
statement is rendered for the applicable calendar year (the "Operating
Expense Statement") the amount by which Tenant's Proportionate Share of
the Operating Expenses for such calendar year exceeds the monthly
payments on account thereof previously made by Tenant. Any overpayment
of Operating Expenses shall be credited against the next installments of
Tenant's Proportionate Share of Operating Expenses due hereunder or, at
the option of Tenant, repaid to Tenant (net of any unpaid sums due to
Landlord under this Lease) within thirty (30) days after the end of the
month in which the Operating Statement is issued. The Operating Expense
Statement shall set forth the Operating Expenses for the prior year in
reasonable detail. Tenant shall have the right to review Landlord's
records relative to Operating Expenses during normal business hours at
the office at which Landlord maintains such records. If Tenant desires
to review Landlord's records, Tenant shall give Landlord notice thereof
within ninety (90) days following the furnishing of the Operating
Expense Statement to Tenant. Such review shall be completed by Tenant,
if at all, within sixty (60) days following the giving of such notice by
Tenant to Landlord. The amounts paid by Tenant pursuant to this Section
10.2 shall be used to pay the Operating Expenses, but such amounts shall
not be deemed to be trust funds and no interest shall be payable
thereon.
ARTICLE ELEVEN
Landlord's Right of Entry
11.1. Tenant shall permit Landlord and the authorized representatives
of Landlord and of any mortgagee or any prospective mortgagee, prospective
purchaser or tenant to enter the Premises at all reasonable times and
with a representative of Tenant upon two days prior notice (except no
notice shall be required in the event of emergency), for the purpose of
(a) inspecting or showing the same, or (b) performing any obligations of
Landlord under this Lease, or (c) correcting any defaults by Tenant
under this Lease. Landlord will exercise reasonable efforts to minimize
interference with the operations of Tenant, but shall not be liable for
inconvenience, annoyance, disturbance or other damage to Tenant by
reason of making any repair or by bringing or storing materials,
supplies, tools and equipment in the Premises during the performance of
any work (except for damage caused by Landlord's negligence or willful
misconduct), and, except as otherwise expressly provided for in this
Lease, the obligations of Tenant under this Lease shall not be thereby
affected in any manner whatsoever.
ARTICLE TWELVE
Indemnification
12.1. Subject to the provisions of Section 5.6, Tenant will indemnify
Landlord and save Landlord harmless from and against any and all claims,
actions, damages, liability and expense (including, without limitation,
reasonable fees of attorneys, investigators and experts) in connection
with loss of life, personal injury or damage to property caused to any
person in or about the Premises or arising out of the occupancy by
Tenant or use by Tenant of the Property or occasioned wholly or in part
(as to such part) by any act or omission of Tenant, its agents,
contractors, employees, licensees or invitees, or by reason of any
breach by Tenant of the terms and conditions of this Lease, unless such
loss, injury or damage was caused by the gross
17
negligence or willful misconduct of Landlord, its agents, employees,
licensees or invitees. This Section 12.1 shall survive the termination
of the Lease. In case any such claim, action or proceeding is brought
against Landlord, upon notice from Landlord and at Tenant's sole cost
and expense, Tenant shall resist or defend such claim, action or
proceeding or shall cause it to be resisted or defended by an insurer.
ARTICLE THIRTEEN
Condemnation
13.1. (a) If the whole or any part of the Premises shall be taken under
the power of eminent domain, this Lease shall terminate as to the part
so taken on the date Tenant is required to yield possession thereof to
the condemning authority.
(b) (i) If the portion of the Premises so taken under
the power of eminent domain substantially impairs the beneficial and
economic use and occupancy of the remainder of the Premises for the use
specified in Section 2.1, either Landlord or Tenant may terminate this
Lease as of the date when Tenant is required to yield possession to the
condemning authority by giving notice of termination within forty-five
(45) days after the date of notice of such taking by Landlord to Tenant.
(ii) If any portion of the Property is so taken
thereby causing the use of the Premises specified in Section 2.1 to be
unlawful under applicable governmental requirements, and Landlord cannot
or does not deem it reasonably feasible to take action to make such use
lawful, then Landlord or Tenant may elect to terminate this Lease as of
the date on which possession thereof is required to be yielded to the
condemning authority, by giving notice of such election within
forty-five (45) days after the date of notice of such taking by Landlord
to Tenant.
(iii) If ten percent (10%) or more of the parking
spaces in the Schein Parking Area or Schein Trailer Area are taken
and Landlord does not replace such spaces at the Property, or if Tenant is
permanently deprived of access to the Premises as a result of any condemnation
of a portion of the Property, Tenant may elect to terminate this Lease as of
the date the condemned property is required to be yielded to the possession of
condemning authority by giving notice of termination within forty-five
(45) days after receiving notice of such taking from Landlord.
(c) If this Lease is not terminated under this Section
13.1, Landlord, subject to Section 5.9 of this Lease, shall make such
repairs and alterations as may be necessary in order to restore the part
of the Premises not taken to tenantable condition, (i) all Rent (other
than any Additional Rent due Landlord by reason of Tenant's failure to
perform any of its obligations hereunder) shall be reduced
proportionately as to the portion of the Premises so taken commencing on
the date the property taken is require to be yielded to the possession
of the condemning authority, and (ii) if the portion of the Premises
being repaired is rendered untenantable during the period of repair and
restoration by Landlord, the Rent otherwise payable by Tenant pursuant
to this Lease shall be abated for the period of such untenantability in
such
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proportion as the number of rentable square feet of the portion of the
Premises rendered untenantable bears to the total number of rentable
square feet of the Premises.
(d) If any notice of termination is given pursuant to
this section, this Lease shall terminate on the date the property taken
is required to be yielded to the possession of the condemning authority
and all Rent shall be adjusted as of the date of such termination.
13.2. In the event of a condemnation affecting Tenant, Tenant shall
have the right to make a claim against the condemning authority for
relocation and moving expenses, and the unamortized cost of Alterations
made by Tenant; provided and to the extent, however, that such claims or
payments do not reduce the sums otherwise payable by the condemning
authority to Landlord. Except as aforesaid, Tenant hereby waives all
claims against Landlord and against the condemning authority, and Tenant
hereby assigns to Landlord all claims against the condemning authority,
including, without limitation, all claims for leasehold damages and
diminution in value of Tenant's leasehold interest.
ARTICLE FOURTEEN
Quiet Enjoyment
14.1. Landlord hereby covenants that Tenant, upon paying all Rent and
other charges herein provided for, and observing and keeping all
covenants, agreements and conditions of this Lease on its part to be
kept, shall quietly have and enjoy the Premises during the Term without
hindrance or molestation by anyone claiming by or through Landlord,
subject, however, to the exceptions, reservations and conditions of this
Lease.
ARTICLE FIFTEEN
Assignment and Subletting
15.1. (a) Tenant shall not, voluntarily, or by operation of law or
otherwise, assign, mortgage, pledge or encumber this Lease, or sublet
the whole or any part of the Premises, or permit the Premises to be used
or occupied by anyone other than Tenant, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld.
(b) An assignment of this Lease shall include any
transfer of a majority of the voting stock of Tenant or to any other
change in voting control of Tenant (if Tenant is a corporation) in one
(1) or more transactions, or to a transfer of a majority of the general
partnership interests in Tenant or managerial control of Tenant (if
Tenant is a partnership), or to any comparable transaction involving any
other form of business entity, whether effectuated in one (1) or more
transactions; but, without Landlord's consent, Tenant shall have the
right to assign this Lease or sublet the Premises or any portion thereof
to a corporation into or with which Tenant is merged or consolidated, or
to which substantially all of Tenant's assets are transferred, or to any
corporation that controls or is controlled by Tenant, or is under common
control with Tenant, provided in any of such events, (i) the successor
to Tenant has a net worth (computed in accordance with generally
accepted accounting principles), at least equal to the greater of (A)
the net worth of Tenant and Guarantor immediately prior to such merger,
consolidation or transfer or
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(B) the net worth of Tenant and Guarantor on the date of this Lease,
(ii) proof satisfactory to Landlord of such net worth shall have been
delivered to Landlord at least twenty (20) days prior to such
assignment, (iii) Guarantor (defined hereafter), if Landlord so
requires, provides a reaffirmation of the Guaranty (defined hereafter)
in form satisfactory to Landlord at least twenty (20) days prior to such
assignment, and (iv) Tenant complies with this Article in all other
respects in connection with such assignment.
15.2. In the event of any assignment of this Lease or a subletting of
all or any portion of the Premises, whether or not consent to such
assignment or subletting is required, Tenant nevertheless shall remain
liable for the performance of all of the terms, conditions and covenants
of this Lease and Guarantor shall remain liable for the performance of
all of the terms conditions and covenants of the Guaranty. In the event
of an assignment, Tenant shall require any assignee to execute and
deliver to Landlord an assumption of liability agreement in form
reasonably satisfactory to Landlord, including an assumption by the
assignee of all of the obligations of Tenant and the assignee's
ratification of and agreement to be bound by all of the provisions of
this Lease. Any subleases of the Premises, whether or not consent is
required to such sublease, shall be under and subject to the terms of
this Lease, and each sublease shall specifically so state. In addition
to all sums payable hereunder, Landlord shall be entitled to, and Tenant
shall promptly remit to Landlord, one hundred percent (100%) of any
consideration received by Tenant as a result of any assignment of this
Lease in excess of Tenant's reasonable costs of preparing the Premises
for the assignee, reasonable legal fees of preparing the assignment
documents, and reasonable brokerage commissions paid to an independent
third party broker in connection with such assignment, and one hundred
percent (100%) of any rent and other consideration received by Tenant as
a result of any subletting of the Premises in excess of the Basic Rent
and Tenant's reasonable costs of preparing the Premises (or a portion
thereof for the subtenant) the reasonable legal fees of preparing the
sublease, and reasonable brokerage commissions paid to an independent
third party broker in connection with such assignment.
Tenant's request for consent to any assignment or subletting
shall be given to Landlord at least twenty (20) days before the
execution of any assignment or sublease, shall be in writing and contain
the name, address, and description of the business of the proposed
assignee or subtenant, its most recent financial statement and other
evidence of financial responsibility, its intended use of Premises, the
terms and conditions of the proposed assignment or subletting, and a
copy of the proposed form of assignment or sublease. Tenant shall also
give Landlord at least twenty (20) days prior notice of any assignment
or sublease permitted under Section 15.1(b) together with all of the
information required by the immediately preceding sentence.
ARTICLE SIXTEEN
Subordination
16.1. This Lease and Tenant's rights hereunder shall be subject
and subordinate at all times in lien and priority to all mortgages now
or hereafter placed upon or affecting the Property, and to all renewals,
modifications, consolidations and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant
shall execute and deliver upon demand any further instrument or
instruments confirming the subordination of this Lease to the
20
lien of any such mortgages and any further instrument or instruments of
attornment that may be desired by any mortgagee. Notwithstanding the
foregoing, any mortgagee may at any time subordinate its mortgage to
this Lease, without Tenant's consent, by giving notice in writing to
Tenant, and thereupon this Lease shall be deemed prior to such mortgage
without regard to their respective dates of execution and delivery. The
foregoing provisions of this Section 16.1 are subject, however, to the
condition that the holder of any mortgage to which this Lease is
subordinate shall deliver to Tenant a subordination, non-disturbance and
attornment agreement in form reasonably satisfactory to Tenant and such
mortgagee. Provided such non-disturbance is afforded to Tenant, Tenant
hereby agrees to attorn (i) to any purchaser of any real estate of which
the Premises is a part of any foreclosure sale, execution sale or
private sale conducted pursuant to any mortgage, security instrument, or
lien encumbering or affecting the Premises, and (ii) to any grantee or
transferee designated in any deed given in lieu of foreclosure.
16.2. Tenant agrees that in the event the interest of Landlord becomes
vested in the holder of any mortgage, or in anyone claiming by, through
or under the holder of any mortgage, then such holder shall not be:
(a) liable for any act or omission of any prior landlord
(including Landlord herein); or
(b) subject to any offsets or defenses which Tenant may have
against any prior landlord (including Landlord herein); or
(c) required to make or complete any improvements; or
(d) bound by any rent which Tenant may have paid for more than
the current month to any landlord (including Landlord herein); or
(e) bound by any amendment or modification of any provisions
hereof, or any cancellation or surrender of this Lease, after the mortgage is
placed of record unless such amendment, modification, cancellation or
surrender shall have been approved in writing by the holder of such
mortgage.
ARTICLE SEVENTEEN
Estoppel Certificates; Financials
17.1. Each party, at any time and from time to time and within ten (10)
days after written request by the other, shall execute, acknowledge and
deliver to the other a written instrument certifying:
(a) whether this Lease has been modified or amended, and if so,
the date, substance and manner of such modification or amendment;
(b) the validity and force and effect of this Lease;
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(c) the existence of any default hereunder, and if so, the
nature, scope and extent thereof;
(d) the existence of any offsets, counterclaims or defenses
thereto on the part of the certifying party, and if so, the nature, scope and
extent thereof;
(e) the commencement and expiration dates of the Term;
(f) the dates to which Rent has been paid;
(g) any other matters as may be reasonably requested.
Any such certificate may be relied upon by the recipient party
and any other person, firm or corporation to whom the same may be
exhibited or delivered, and the party executing such certificate shall
be bound by the contents of the same.
17.2. Tenant agrees to furnish to Landlord at any time, but not more
frequently than twice per year, within ten (10) days after request by
Landlord, a copy of its financial statements for its last full fiscal
year, including a balance sheet and a profit and loss statement for such
year, and for the year in which the request is made through the end of
the last fiscal period of Tenant for such year. Tenant agrees to furnish
to Landlord at any time, but not more frequently than twice per year,
within ten (10) days after request by Landlord, a copy of the
Guarantor's financial statements for its last full fiscal year,
including a balance sheet and a profit and loss statement for such year,
and for the year in which the request is made through the end of the
last fiscal period of Guarantor for such year.
ARTICLE EIGHTEEN
Curing Tenant's Defaults
18.1. If Tenant shall be in default in the performance of any of its
obligations under this Lease, Landlord, without any obligation to do so,
in addition to any other rights it may have in law or equity, may elect
to cure such default on behalf of Tenant after providing Tenant written
notice thereof (which notice shall, without obligating Landlord in any
manner, expressly reiterate Landlord's cure right contained herein), and
such time to cure as Landlord determines is reasonable under the
circumstances; provided, however, that no notice or opportunity to cure
shall be required in case of emergency. Tenant shall reimburse Landlord
upon demand for any sums paid or costs reasonably incurred by Landlord
in curing such default, including interest thereon from the respective
dates of Landlord's making the payments and incurring such costs, which
sums and costs together with interest thereon shall be deemed Additional
Rent payable within ten (10) days after Tenant receives a bill therefor
(which bill shall set forth in reasonable detail the costs for which
compensation is claimed).
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ARTICLE NINETEEN
Surrender
19.1. At the expiration or earlier termination of the Term, Tenant
shall promptly yield up vacant, broom clean and neat, and in the same
condition, order and repair in which they are required to be kept
throughout the Term, the Premises and all improvements, alterations and
additions thereto, ordinary wear and tear and damage by fire or other
casualty excepted.
19.2. All movable non-structural partitions, business and trade
fixtures, machinery and equipment, communications equipment and office
equipment, whether or not attached to, or built into, the Premises,
which are installed in the Premises by, or for the account of, Tenant
without expense to Landlord and that can be removed without structural
damage to the Premises or Property, and all furniture, furnishings and
other articles of movable personal property owned by Tenant, or property
of others in the care, custody and control of Tenant (collectively, the
"Tenant's Property") shall be and shall remain the property of Tenant.
At or before the expiration of the Term or the date of any earlier
termination, Tenant, at its expense, shall remove from the Premises all
of Tenant's Property (except such items thereof as Landlord shall have
expressly permitted, in writing, to remain, which property shall become
the property of Landlord), and Tenant shall repair any damage to the
Premises or Property resulting from any installation or removal of
Tenant's Property. Any items of Tenant's Property that shall remain in
the Premises or Property after the expiration date of the Term, or
following an earlier termination date, may, at the option of Landlord,
be deemed to have been abandoned, and in such case, such items may be
retained by Landlord as its property or be disposed of by Landlord, in
Landlord's sole and absolute discretion and without accountability, at
Tenant's expense. Notwithstanding the foregoing, if Tenant is in default
under the terms of this Lease, it may remove Tenant's Property from the
Premises only upon the express written direction of Landlord. Landlord
may not require Tenant to remove Alterations at the expiration or
earlier termination of the Term unless Tenant was notified by Landlord
of the requirement for such removal at the time specified in Section
7.3.
19.3. If Tenant, or any person claiming through Tenant, shall continue
to occupy the Premises after the expiration or earlier termination of
the term or any renewal thereof, such occupancy shall be deemed to be
under a month-to-month tenancy under the same terms and conditions set
forth in this Lease; except, however, that the Basic Rent during such
continued occupancy shall be equal to one hundred fifty percent (150%)
of the Basic Rent in effect immediately prior to such holdover. Anything
to the contrary notwithstanding, any holding over by Tenant without
Landlord's prior written consent shall constitute an event of default
hereunder and shall be subject to all the remedies set forth in Article
Twenty hereof.
ARTICLE TWENTY
Default-Remedies
20.1. It shall be an event of default under this Lease:
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(a) If Tenant does not pay in full any and all installments
of Basic Rent or Additional Rent or any other charges or payments whether or not
herein defined as Rent, within seven (7) days after notice that the same
is due, provided, however that Tenant shall not be entitled to any such
notice or grace period more than twice in any twelve (12) month period;
or
(b) If Tenant violates or fails to perform or otherwise
breaches any agreement, term, covenant or condition herein contained (other than
requiring the payment of money) and such failure continues for more than
thirty (30) days after written notice thereof to Tenant unless the
failure is of such a nature as to reasonably require more than thirty
(30) days to correct or cure, in which case, provided that Tenant using
its best efforts, has commenced to cure the default within such thirty
(30) day period and thereafter continues to use Tenant's best efforts to
cure the default, the period shall be extended for a reasonable period
of time, not to exceed ninety (90) days after Landlord's notice under
this Section 20.1(b), for Tenant, using its best efforts, to cure the
default provided, however that Tenant shall not be entitled to any such
notice or grace period more than twice in any twelve (12) month period;
or
(c) If Tenant voluntarily abandons the Premises for a period
greater than ninety (90) days or removes or attempts to remove Tenant's goods or
property therefrom other than in the ordinary course of business; or
(d) If Guarantor violates or fails to perform or otherwise
breaches any agreement, term, covenant or condition contained in the Guaranty;
or
(e) If Tenant or Guarantor becomes insolvent or bankrupt in any
sense or makes an assignment for the benefit of creditors or offers a
composition or settlement to creditors, or if a petition in bankruptcy or for
reorganization or for an arrangement with creditors under any federal or
state law is filed by or against Tenant or Guarantor, or a bill in
equity or other proceeding for the appointment of a receiver, trustee,
liquidator, custodian, conservator or similar official for any of
Tenant's or Guarantor's assets is commenced, or if a significant portion
of the real or personal property of Tenant or Guarantor shall be levied
upon by any sheriff, marshal or constable; provided, however, that any
proceeding brought by anyone other than the parties to this Lease under
any bankruptcy, reorganization arrangement, insolvency, readjustment,
receivership or similar law shall not constitute an event of default
until such proceeding, decree judgment or order has continued unstayed
for more than ninety (90) consecutive days.
20.2. Anything to the contrary contained in this Lease notwithstanding,
it shall not be a default under this Lease for Tenant to remove from all
or a portion of the Premises to another location operated by Tenant (or
any affiliate of Tenant) any or all of the equipment, trade fixtures,
inventory and alterations owned by it, in connection with a transfer,
closure, relocation or modification of any portion of its operations,
provided that, prior to such removal, Tenant provides reasonably
adequate assurance to Landlord that it intends to promptly reestablish
significant business operations at the Premises and, within 90 days of
the completion of any such removal, actually reestablishes significant
business operations at the Premises.
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20.3. Upon the occurrence of an event of default, Landlord shall have
the following remedies and rights:
(a) To terminate this Lease by giving written notice
thereof to Tenant, and upon the giving of such notice the Term, and all
rights of Tenant hereunder shall terminate, without affecting Tenant's
liability for all sums due under this Lease;
(b) To reenter the Premises, together with all additions,
alterations and improvements, and, at the option of Landlord, remove all
persons and all or any property therefrom, without being liable for
prosecution or damages therefor, and repossess and enjoy the Premises;
(c) At any time after repossession of the Premises, whether or
not the
Lease shall have been terminated by Landlord, Landlord may make such
reasonable alterations and repairs as may be necessary in order to relet
the Premises and relet the Premises or any part or parts thereof, either
in Landlord's name or otherwise, for a term or terms which may, at
Landlord's option, be less than or exceed the period which would
otherwise have constituted the balance of the Term of this Lease and at
such rent or rents and upon such other terms and conditions as Landlord
may decide. If the rentals received from such reletting during any month
after deducting all costs incurred by Landlord in exercising its rights
hereunder shall be less than that to be paid during that month by
Tenant, Tenant shall pay any such deficiency to Landlord, provided such
reletting is a bona fide arms length transaction. Such deficiency shall
be calculated and paid monthly.
(d) To declare due and payable all unpaid Basic Rent for
the unexpired period of the Term (and also all Additional Rent, as reasonably
estimated by Landlord,) as if by the terms of this Lease the same were
due and payable in advance, all discounted to present worth using a rate
equal to the annual rate for United States obligations of equal duration
to the period remaining in the term of the Lease, and upon payment of
the same, Tenant shall be entitled to continue in possession pursuant to
the terms of this Lease;
(e) In the event of the termination of this Lease, or
repossession of the Premises, Landlord shall be entitled to recover, in
addition to any and all sums and damages for violation of Tenant's obligations
hereunder in existence at the time of such termination, damages for Tenant's
default in an amount equal to the amount of Basic Rent reserved for the
balance of the Term of this Lease (plus Landlord's reasonable estimate
of Additional Rent as well as all other charges, payments, costs and
expenses herein agreed to be paid by Tenant), all discounted to present
worth using a rate equal to the annual rate for United States
obligations of equal duration to the period remaining in the term of the
Lease, less the fair rental value of the Premises for the remainder of
the Term, also discounted to present value at such rate, all of which
shall be immediately due and payable from Tenant to Landlord; and
(f) TENANT, IN CONSIDERATION OF THE EXECUTION OF THIS LEASE
BY LANDLORD AND FOR THE COVENANTS AND AGREEMENTS ON THE PART OF LANDLORD HEREIN
CONTAINED, AND FULLY COMPREHENDING THE
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RELINQUISHMENT OF CERTAIN RIGHTS INCLUDING RIGHTS OF PREJUDGMENT NOTICE
AND HEARING AND OF POST-JUDGMENT/PRE-EXECUTION NOTICE AND HEARING, AND
AFTER DEFAULT BY TENANT UNDER THIS LEASE AND TEN (10) DAYS' PRIOR NOTICE
FROM LANDLORD OF LANDLORD'S INTENT TO CONFESS JUDGMENT IN EJECTMENT (IN
ADDITION TO ANY OTHER NOTICE REQUIRED, IF ANY, UNDER SECTION 20.1(a) OR
20.1(b) OF THIS LEASE, HEREBY EXPRESSLY AUTHORIZES ANY ATTORNEY OF ANY
COURT OF RECORD TO ACCEPT SERVICE OF PROCESS FOR, TO APPEAR FOR, AND TO
CONFESS JUDGMENT IN EJECTMENT AGAINST TENANT IN ANY AND ALL ACTIONS
BROUGHT HEREUNDER BY LANDLORD AGAINST TENANT TO RECOVER POSSESSION FROM
TIME TO TIME OF THE PREMISES (AND TENANT AGREES THAT UPON THE ENTRY OF
EACH JUDGMENT FOR SUCH POSSESSION A WRIT OF POSSESSION OR OTHER
APPROPRIATE PROCESS MAY ISSUE FORTHWITH). THE RIGHT TO CONFESS JUDGMENT
IN EJECTMENT SHALL NOT BE EXHAUSTED BY THE SINGLE OR MULTIPLE USE
THEREOF. TENANT CONFIRMS THAT THIS IS A COMMERCIAL LEASE, THAT TENANT
WAS REPRESENTED BY COUNSEL IN TENANT'S NEGOTIATION AND EXECUTION OF THIS
LEASE, AND THAT TENANT KNOWINGLY, WILLINGLY, FREELY AND VOLUNTARILY
EXECUTED THIS LEASE WITH THIS SECTION 20.3.(F) AS A PART THEREOF.
20.4. Any payment of Basic Rent, Additional Rent, or any other charge
under this Lease (including amounts due by acceleration) which is not
paid within ten (10) days after the same is due, shall bear interest
from the date due until the date paid by Tenant. In addition, Tenant
shall pay to Landlord an administrative charge of three percent (3%) of
any amount owed to Landlord pursuant to this Lease which is not paid
within ten (10) days of the date which is set forth in this Lease if a
date is specified as the due date for such payment, or, if a date is not
specified, within ten (10) days of the mailing of a bill therefor by
Landlord. The three percent (3%) administrative charge paid by Tenant
shall be applied against the amount of interest which accrues on any
delinquent installment, so that once Tenant has paid the administrative
charge, no further interest shall accrue on any delinquent installment
until the amount of interest due exceeds the amount of the
administrative charge. If Landlord incurs a penalty in connection with
any payment which Tenant has failed to make within the times required in
this Lease, Tenant shall pay Landlord, in addition to such sums, the
full amount of such penalty incurred by Landlord.
20.5. No waiver by either Landlord or Tenant of any breach by the other
of any obligations, agreements or covenants herein shall be a waiver of
any subsequent breach or of any obligation, agreement or covenant, nor
shall any forbearance by either Landlord or Tenant to seek a remedy for
any breach by the other be a waiver of any rights and remedies with
respect to such or any subsequent breach.
20.6. No right or remedy herein conferred upon or reserved to Landlord
or Tenant is intended to be exclusive of any other right or remedy
provided herein or by law, but each shall be cumulative and in addition
to every other right or remedy given herein or now or hereafter existing
at law or in equity or by statute.
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20.7. In addition to, and in no way limiting the other remedies set
forth herein, Landlord and Tenant agree that if Tenant ever becomes the
subject of a voluntary or involuntary bankruptcy, reorganization,
composition, or other similar type proceeding under the federal
bankruptcy laws, as now enacted or hereinafter amended, then:
(a) "Adequate assurance of future performance" by Tenant and/or
any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include
(but not be limited to) payment of an additional/new security deposit in
the amount of two (2) months the then-current Base Rent payable
hereunder.
(b) Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code, shall be deemed, without
further act or deed, to have assumed all of the obligations of Tenant arising
under this Lease on and after the effective date of such assignment. Any such
assignee shall, upon demand by landlord, execute and deliver to landlord
an instrument confirming such assumption of liability.
(c) Notwithstanding anything in this Lease to the contrary, all
amounts payable by Tenant to or on behalf of Landlord under this Lease, whether
or not expressly denominated as "Rent", shall constitute "rent" for the
purposes of Section 502(b)(6) of the Bankruptcy Code.
(d) If this Lease is assigned to any person or entity pursuant
to the provisions of the Bankruptcy Code, any and all monies or other
considerations payable or otherwise to be delivered to Landlord or Agent
(including Basic Rent, Additional Rent and other amounts hereunder),
shall be the remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the bankruptcy estate of Tenant. Any
and all monies or other considerations constituting Landlord's property
under the preceding sentence not paid or delivered to landlord or Agent
shall be held in trust by Tenant or Tenant's bankruptcy estate for the
benefit of Landlord and shall be promptly paid to or turned over the
Landlord.
20.8. If Landlord shall be in default in the performance of any of its
obligations under this Lease for thirty (30) consecutive days after
written notice from Tenant (unless such default is not susceptible of
cure within thirty (30) days in which event Landlord shall failed to
commence curing such default within such thirty (30) day period and to
diligently prosecute such cure to completion), then Tenant shall notify
Landlord in writing if Tenant intends to cure such default on behalf of
Landlord. If, ten (10) days following such second notice Landlord has
failed to commence curing such default, Tenant shall have the right to
cure the default on behalf of Landlord. Landlord shall reimburse Tenant
for all reasonable out-of-pocket costs incurred by Tenant in curing such
default within ten (10) days after Landlord receives a bill therefor
(which bill shall set forth in reasonable detail the costs for which
compensation is claimed). Notwithstanding the foregoing, Tenant shall
not have any right in exercising its remedies under the preceding
sentence to make any repairs or modifications to areas outside the
Premises, except those solely serving the Premises.
27
20.9. Notwithstanding anything to the contrary contained in Section
20.8, in the event that Landlord fails to promptly perform of any of its
obligations under this Lease and, as a result of such failure, Tenant
cannot reasonably conduct normal business activities under the
circumstances, Tenant shall have the right, following notice to Landlord
(which, for purposes of this Section 20.8 only, may be by telephone
only), to commence curing such failure on behalf of Landlord, and
Landlord shall reimburse Tenant for all reasonable out-of-pocket costs
incurred by Tenant in curing such default within twenty (20) days after
Landlord receives a bill therefor (which bill shall set forth in
reasonable detail the costs for which compensation is claimed).
ARTICLE TWENTY-ONE
Condition of Title and of Premises
21.1. Tenant represents that the Property and the Premises, the street
or streets, sidewalks, parking areas, curbs and access ways adjoining
them, any surface and subsurface conditions thereof, and the present
uses and non-uses thereof, have been examined by Tenant, and Tenant
accepts them AS-IS, WHERE-IS in the condition or state in which they now
are, or any of them now is, without relying on any representation of
Landlord, subject, however, to the Landlord's obligations under Section
1.2 and with respect to the items specified at Section 8.3. This Lease
is made under and subject to all liens, encumbrances, easements,
covenants, conditions, restrictions and other documents or matters now
or hereafter of record.
ARTICLE TWENTY-TWO
Interruption of Services
22.1. Except as specifically provided in this Lease, in case Landlord
is prevented or delayed by Uncontrollable Delay in furnishing any service
required to be provided by Landlord under this Lease, Landlord shall not
be liable to Tenant therefor, nor shall the same give rise to a claim in
Tenant's favor that such absence of services constitutes actual or
constructive, total or partial eviction or renders the Premises
untenantable.
ARTICLE TWENTY-THREE
Waiver of Jury Trial
23.1. Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by either against the other on any
matter arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises, or any claim of injury or damage, or any other remedy with
respect thereto.
ARTICLE TWENTY-FOUR
Waiver of Notices
24.1. Except for notices expressly provided for in this Lease, Tenant
hereby waives all notices of any nature, including, without limitation,
all notice requirements of the Pennsylvania Landlord and Tenant Act.
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ARTICLE TWENTY-FIVE
Enforcement Expenses
25.1. In the event any action or proceeding is brought by Landlord or
Tenant to enforce any of the provisions of this Lease, the prevailing
party shall be entitled to receive from the other all costs and
expenses, including reasonable legal fees, incurred in connection
therewith. In addition, each party shall pay upon demand all of the
other party's reasonable costs and expenses, including reasonable legal
fees, incurred in any litigation in which the defaulting party causes
the other, without the other's fault, to become involved. Tenant shall
pay Landlord's reasonable attorneys' fees (not including in-house
counsel) incurred in connection with Tenant's request for Landlord's
consent under provisions of this Lease governing assignment and
subletting, or in connection with any other act which Tenant proposes to
do and which requires Landlord's consent.
ARTICLE TWENTY-SIX
Interpretation
26.1. The captions in this Lease are for convenience only and are not a
part of this Lease and do not in any way define, limit, describe or
amplify the terms and provisions of this Lease or the scope or intention
thereof.
26.2. This Lease represents the entire agreement between the parties
hereto and there are no collateral or oral agreements or understandings
between Landlord and Tenant with respect to the Premises or the
Property. No rights, easements or licenses are acquired in the Property
or any land adjacent to the Property by Tenant by implication or
otherwise. Tenant agrees, within twenty (20) days after request by
Landlord, to make such changes to this Lease as are required by any
institutional mortgagee, provided such changes do not increase any
amounts payable by Tenant, impede Tenant's access to Premises, decrease
the size of or change the location of the Premises, or otherwise
materially and adversely affect Tenant's rights and obligations under
this Lease. This Lease shall not be modified in any manner except by an
instrument in writing executed by the parties. The masculine (or neuter)
pronoun, singular number, shall include the masculine, feminine and
neuter genders and the singular and plural number. Tenant shall not
record or file this Lease (or any memorandum hereof) in the public
records of any county or state.
26.3. Time is of the essence of this Agreement.
26.4. This Lease shall be governed by the laws of the Commonwealth of
Pennsylvania.
26.5. Each writing or plan referred to herein as being attached hereto
as an Exhibit or otherwise designated herein as an Exhibit hereto is
hereby made a part hereof.
26.6. Wherever interest is required to be paid hereunder, such interest
shall be at the rate of four percent (4%) per annum over the rate
announced publicly by First National Bank of Chicago, or its successors,
from time to time as its prime rate.
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ARTICLE TWENTY-SEVEN
Common Areas
27.1. All Common Areas, including but not limited to roads, driveways,
sidewalks, loading facilities, rail lines and other common facilities as
may be provided, from time to time are for the general nonexclusive use,
in common, of Landlord and all owners and tenants of the Property, their
employees and guests, and at all times, are subject to the sole and
exclusive control of the Landlord and the owners of other portions of
the Property. Landlord and the owners of other portions of the Property
shall have the right, from time to time, to establish, modify and
enforce rules and regulations regarding the Common Areas, to alter,
modify or otherwise change the Common Areas, to grant exclusive rights
to use portions of the Common Areas and to do such other acts, in and to
all Common Areas, as in Landlord's and such owners' sole judgment, shall
be desirable or advisable to improve or maintain them; provided,
however, that in the exercise of the rights set forth in this sentence,
parking comparable to Schein Parking Area and Schein Trailer Area, and
access to and from the Premises shall be maintained and Tenant's right
to use and occupy the Premises in accordance with the terms of this
Lease shall not be materially and adversely affected. Landlord and the
other owners of portions of the Property shall have the right to
construct additional buildings and other improvements on the Property
for such purposes as Landlord and such owners may deem appropriate and
to alter, modify or otherwise change the Property, provided, however,
that parking comparable to Schein Parking and the Schein Trailer Area
and access to and from the Premises is maintained and Tenant's right to
use and occupy the Premises in accordance with the terms of this Lease
shall not be materially and adversely affected.
ARTICLE TWENTY-EIGHT
Definitions
28.1. The word "Landlord" is used herein to include the Landlord named
above as well as its successors and assigns, each of which shall have
the same rights, remedies, powers, authorities and privileges as it
would have had it originally signed this Lease as Landlord. Any such
person, whether or not named herein, shall have no liability hereunder
after such person ceases to hold title to the Premises except for
obligations which may have theretofore accrued. Neither Landlord nor any
partner or other principal of Landlord nor any owner of the Premises,
whether disclosed or undisclosed, shall have any personal liability with
respect to any of the provisions of this Lease or the Premises, and if
Landlord is in breach or default with respect to Landlord's obligations
under this Lease or otherwise, Tenant shall look solely to Landlord's
interest in the Premises, or if the Premises have been sold, solely to
the net proceeds to the Landlord from such sale (net of customary
closing costs, broker's commissions, and apportionments), for the
satisfaction of any claim, recovery, or judgment against Landlord; the
liability of Landlord shall be limited to Landlord's interest in the
Premises, or if the Premises have been sold, solely to the net proceeds
to the Landlord from such sale (net of customary closing costs, broker's
commissions, and apportionments).
30
28.2. The word "Tenant" is used herein to include the Tenant named
above as well as its successors and assigns, each of which shall be under the
same obligations, liabilities and disabilities and each of which shall
have the same rights, privileges and powers as it would have possessed
had it originally signed this Lease as Tenant. Each and every of the
persons named above as Tenant shall be bound formally and severally by
the terms, covenants and agreements contained herein. However, no such
rights, privileges or power shall inure to the benefit of any assignee
of Tenant immediate or remote, unless the assignment to such assignee is
permitted or has been approved in writing by Landlord.
28.3. The word "mortgage" is used herein to include any lien or
encumbrance on the Premises or the Property or on any part of or
interest in or appurtenance to any of the foregoing. The word
"mortgagee" is used herein to include the holder of any mortgage.
Wherever any right is given to a mortgagee, that right may be exercised
on behalf of such mortgagee by any representative or servicing agent of
such mortgagee.
28.4. The word "person" is used herein to include a natural person, a
partnership, a corporation, an association, and any other form of
business association or entity.
ARTICLE TWENTY-NINE
Notices
29.1. All notices, demands, requests, consents, certificates, waivers
and other communications required or permitted hereunder from either
party to the other shall be in writing and sent by recognized overnight
delivery service providing receipted delivery, such as Federal Express,
and shall be deemed delivered and received one (1) business day after
delivery to such overnight delivery service. All such notices shall be
addressed as follows:
If to Landlord:
First Industrial
Harrisburg, L.P.
c/o First Industrial
Realty Trust, Inc.
6360 Flank Drive - Suite 600
Harrisburg, PA 17112
Attention: Mr. Craig Cosgrove
and
First Industrial Harrisburg, L.P.
c/o First Industrial
Realty Trust, Inc.
311 South Wacker Drive - Suite 4000
Chicago, IL 60606
Attention: Mr. Michael W. Brennan
and
31
F. Michael Wysocki, Esquire
Saul, Ewing, Remick & Saul LLP
Centre Square West
1500 Market Street - 38th Floor
Philadelphia, PA 19102
If to Tenant:
Henry Schein, Inc.
135 Duryea Road
Melville, NY 11747
Attention: Mark Mlotek, Esquire
Steven R.La Hood, Senior Vice President
and
Parker Chapin Fallau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Bruce S. DePaola, Esquire
Either party may at any time, in the manner set forth for giving notices
to the other, specify a different address to which notices to it shall
be sent.
ARTICLE THIRTY
Brokers
30.1. Landlord and Tenant each for itself, hereby covenants, warrants
and represents to the other that neither Landlord nor Tenant has had any
conversations or negotiations with any broker, except Cushman &
Wakefield of Long Island, Inc., concerning the leasing of the Premises
by Tenant. Landlord shall be solely responsible for paying the
commissions of Cushman & Wakefield of Long Island, Inc. Each party
agrees to and hereby does indemnify, defend and hold the other harmless
from and against any brokerage commissions or finder's fees or claims
therefor by a party (other than Cushman & Wakefield of Long Island, Inc.
for whose commission Landlord is responsible) claiming to have dealt
with the indemnifying party and all costs, expenses, and liabilities in
connection therewith, including, without limitation, reasonable
attorney's fees and expenses, for any breach of the foregoing. The
foregoing indemnification shall survive the termination of the Lease for
any reason.
ARTICLE THIRTY-ONE
Environmental Matters
31.1. For purposes of this Lease, the term "Hazardous Materials" shall
mean (1) radon gas, asbestos, petroleum, petroleum products and
byproducts, urea formaldehyde foam insulation, transformers or other
equipment which contain dielectric fluid containing levels of
32
polychlorinated biphenyls in excess of federal, state or local safety
guidelines, whichever are more stringent; (2) any substance, gas,
material or chemical which is defined as or included in the definition
of "hazardous substances", "toxic substances", "hazardous materials",
"hazardous wastes" or words of similar import under any federal, state
or local statute, law, or ordinance applicable to the Premises or under
the regulations adopted or guidelines promulgated pursuant thereto,
including, but not limited to, the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections
9061 et seq. ("CERCLA"); the Hazardous Materials Transportation Act, as
amended 49 U.S.C. Sections 1801, et seq.; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Sections 6901, et seq.; and (3) any
other chemical, material, gas, or substance, exposure to or release of
which is prohibited, limited or regulated by any governmental or
quasi-governmental entity or authority that has jurisdiction over the
Premises or the operations or activity at the Premises.
31.2. For purposes of this Lease, the term "Environmental Laws" means
all applicable statutes, regulations, rules, ordinances, codes,
licenses, permits, orders, approvals, authorizations, agreements and
similar items, of or with any and all governmental agencies,
departments, commissions, boards, bureaus or instrumentalities of the
United States, Pennsylvania and political subdivisions having
jurisdiction over the Premises or Property, and all applicable judicial
and administrative and regulatory decrees, judgments and orders relating
to the protection of the environment, including, without limitation, all
requirements pertaining to reporting, licensing, permitting,
investigation and remediation of emissions, discharges, Releases or
threatened releases of Hazardous Materials into the air, surface water,
groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials or relating to storage tanks.
31.3. For purposes of this Lease, the term "Release" means any
releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, disposing or dumping into
soil, surface waters, ground waters, land, stream sediments, surface or
subsurface strata, ambient air and any environmental medium comprising
or proximate to the Premises or Property.
31.4. For purposes of this Lease, the term "Threat of Release" means a
substantial likelihood of a Release which requires action to prevent or
mitigate damage to the soil, surface waters, ground waters, land, stream
sediments, surface or subsurface strata, ambient air and any
environmental medium comprising or proximate to the Premises or Property
which may result from such Release.
31.5. Tenant shall not store. place, use, generate, transport or
dispose of any Hazardous Materials at, on, or in the Premises or Property
(except to the extent permitted under Sections 2.1(a) and 9.1(f)), shall
comply with Environmental Laws, and promptly shall take all remedial
action, at Tenant's sole cost and expense, necessary or desirable to
remedy, clean-up and remove the presence of Hazardous Materials
resulting from Tenant's violation of the prohibitions set forth in this
section or Tenant's failure to comply with Environmental Laws. Any such
remedial action shall be performed by an independent reputable
environmental remediation engineer, in strict compliance with the
requirements of Environmental Laws, in accordance with
33
environmental remediation industry practices, in accordance with the
then current and evolving best available environmental remediation
technology, and in accordance with a remediation plan approved by
Landlord. Such remediation shall comply with the terms of Sections 7.2,
7.3 and 7.4 of this Lease. Tenant shall immediately notify Landlord of
any Release or Threat of Release caused by Tenant or of which Tenant has
knowledge. Tenant shall promptly provide to Landlord copies of all
correspondence relating to any Release, Threat of Release or remediation
or other, environmental response action under this Section 31.5.
Landlord shall have the right, but not the obligation, from time to time
during the performance of any remediation work and following the
completion of the same, to inspect the Premises and all information and
documentation relating thereto.
31.6. Tenant hereby agrees to indemnify, protect, defend and hold
harmless Landlord, and Landlord's successors and assigns, officers,
directors, shareholders, partners and employees ("Indemnified Landlord
Parties") (with counsel reasonably acceptable to the Indemnified
Landlord Parties) from and against, and shall pay and reimburse the
Indemnified Landlord Parties for, any and all losses, claims,
liabilities, damages, injunctive relief, injuries to persons, property
or natural resources, fines, penalties, costs, expenses, including,
without limitation, attorneys' fees, expenditures, expenses and court
costs, actions, administrative investigations and/or proceedings, and
causes of action and sums paid in settlement of litigation (it being
understood that so long as Tenant is defending the Indemnified Landlord
Party and is not in default of its obligations hereunder, no such
litigation (other than relating to governmental fines and penalties or
criminal actions) shall be settled without the reasonable consent of
Tenant), arising directly or indirectly, in whole or in part, out of any
Release, Threat of Release or any discharge, threatened discharge,
deposit, presence, treatment, transport, handling or disposal of any
Hazardous Materials on, at, under, in or from the Property caused or
generated by Tenant, its employees, agents or contractors or in the air,
land surface, subsurface strata, soil, surface water, groundwater, or
soil vapor on, under, in or from any part of the Property caused or
generated by Tenant, its employees, agents or contractors, or resulting
from the migration or the alleged or potential migration of Hazardous
Materials from the Property caused or generated by Tenant, its
employees, agents or contractors. The foregoing indemnity shall include,
without limitation, (1) all costs at law or in equity of inspection,
clean-up, removal, remediation, testing, monitoring and restoration of
any kind, and disposal of any Hazardous Materials, (2) all costs of
determining whether the Premises and Property are in compliance, and
causing the Premises and Property to be or become in compliance, with
all applicable Environmental Laws, (3) all costs and liabilities
associated with claims for damages to, and remedial action with respect
to, persons, property or natural resources, (4) all fines and other
penalties associated with claims of noncompliance with any Environmental
Laws, and (5) all reasonable consultants' and attorneys' fees and costs.
The foregoing indemnity shall survive any assignment or other transfer
by any or all of the Indemnified Landlord Parties of their respective
interests in the Premises and shall remain in full force and effect
regardless of whether the indemnified costs and liabilities are incurred
by the Indemnified Landlord Parties in question before or after
termination of the Lease.
31.7. Landlord hereby agrees to indemnify, protect, defend and hold
harmless Tenant, and Tenant's successors and assigns, officers,
directors, shareholders, partners and employees ("Indemnified Tenant
Parties") (with counsel reasonably acceptable to the Indemnified Tenant
34
Parties) from and against, and shall pay and reimburse the Indemnified
Tenant Parties for, any and all losses, claims, liabilities, damages,
injunctive relief, injuries to persons, property or natural resources,
fines, penalties, costs, expenses, including, without limitation,
attorneys' fees, expenditures, expenses and court costs, actions,
administrative investigations and/or proceedings, and causes of action
and sums paid in settlement of litigation (it being understood that so
long as Landlord is defending the Indemnified Tenant Party and is not in
default of its obligations hereunder, no such litigation (other than
relating to governmental fines and penalties or criminal actions) shall
be settled without the reasonable consent of Landlord), arising directly
or indirectly, in whole or in part, out of any Release, Threat of
Release or any discharge, threatened discharge, deposit, presence,
treatment, transport, handling or disposal of any Hazardous Materials
on, at, under, in or from the Property caused or generated by Landlord,
its employees, agents or contractors or in the air, land surface,
subsurface strata, soil, surface water, groundwater, or soil vapor on,
under, in or from any part of the Property caused or generated by
Landlord, its employees, agents or contractors, or resulting from the
migration or the alleged or potential migration of Hazardous Materials
from the Property caused or generated by Landlord, its employees, agents
or contractors. The foregoing indemnity shall include, without
limitation, (1) all costs at law or in equity of inspection, clean-up,
removal, remediation, testing, monitoring and restoration of any kind,
and disposal of any Hazardous Materials, (2) all costs of determining
whether the Premises and Property are in compliance, and causing the
Premises and Property to be or become in compliance, with all applicable
Environmental Laws, (3) all costs and liabilities associated with claims
for damages to, and remedial action with respect to, persons, property
or natural resources, (4) all fines and other penalties associated with
claims of noncompliance with any Environmental Laws, and (5) all
reasonable consultants' and attorneys' fees and costs. The foregoing
indemnity shall survive any assignment or other transfer by any or all
of the Indemnified Tenant Parties of their respective interests in the
Premises and shall remain in full force and effect regardless of whether
the indemnified costs and liabilities are incurred by the Indemnified
Tenant Parties in question before or after termination of the Lease.
31.8. Landlord agrees that it shall be solely responsible for complying
with Environmental Laws as they pertain to all underground storage tanks
on the Property (the "Tanks"). Landlord shall by April 15, 1998 remove
in accordance with applicable Environmental Laws the two (2) gasoline
pumps now located in the Common Areas immediately adjacent to the
Premises (the "Pumps"), at its cost and expense. Landlord shall
indemnify, defend and hold harmless Tenant from and against any claims,
actions, losses, costs, liabilities, damages or expenses relating to the
Tanks and Pumps, unless such claims, actions, losses, costs,
liabilities, damages or expenses are attributable to the actions of
Tenant, its employees, agents or contractors.
ARTICLE THIRTY-TWO
Subdivision or other Development of the Property
32.1. (a) Subject to the provisions of Article 35 hereof, Tenant
acknowledges and agrees that Landlord and other owners of the Property
have the right to develop, alter, modify or otherwise change the
Property in such manner and for such purposes as they may deem
appropriate provided that Tenant's rights to use and occupy the Premises
and to use the Schein
35
Parking Area and Schein Trailer Area (or parking facilities reasonably
comparable to the Schein Parking Area and Schein Trailer Area) in
accordance with the terms of this Lease are not materially and adversely
affected. Without limiting the generality of the foregoing, Tenant
acknowledges and agrees that at any time and from time to time as
Landlord and other owners of the Property shall deem necessary or
appropriate, they, or any of them shall have the right to subdivide the
Property, undertake development of the Property, or establish any
easement, dedication, or right of way over the Property. Tenant shall,
at the request of Landlord or any governmental authority, public utility
or private utility operator, and at Landlord's cost, promptly execute,
acknowledge and deliver such documents as Landlord, any governmental
authority, public utility or private utility may deem necessary or
desirable in connection with such subdivision, development, easement,
dedication or right-of-way. Landlord shall give Tenant notice of any
covenants, conditions or restrictions imposed upon the Property.
(b) Tenant acknowledges and agrees that Landlord's activities
pursuant to Section 32.1(a) may change the description of the Property and the
denominator in the calculating Tenant's Operating Expense Proportionate
Share. Landlord shall give Tenant notice of all such changes, and such
changes shall become effective upon at least five (5) days' prior notice
by Landlord to Tenant.
ARTICLE THIRTY-THREE
Options to Renew
33.1. Tenant is granted four (4) options (each, a "Renewal Option") to
extend the Term for three (3) consecutive additional periods of five (5)
years each and, immediately following such three (3) periods, one final
period of four (4) years, eleven (11) months (each period, a "Renewal
Term").
33.2. Each Renewal Option is granted subject to the following
conditions:
(a) Each Renewal Option must be exercised, if at all, by
notice from Tenant to Landlord given on or before the two hundred seventieth
(270th) day prior to the end of the then expiring Term or Renewal Term, as the
case may be, time being of the essence.
(b) In the case of the second, third and fourth Renewal Terms,
Tenant shall have first exercised its option with respect to all prior Renewal
Terms.
(c) At the time of exercise of each Renewal Option and the
commencement of each Renewal Term, this Lease must be in full force and
effect, and there shall not exist any default by Tenant under this Lease.
33.3. All terms, provisions and conditions contained in this Lease
shall continue to apply during the Renewal Terms, except that:
(a) The Basic Rent for each Renewal Term shall be in the amount
set forth on Exhibit "Renewal Term Rent."
33.4. There shall be no further right of renewal after the expiration
of the Renewal Terms set forth in this Article Thirty-Three.
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ARTICLE XXXIV
Right of First Offer
34.1. (a) Subject to the conditions set forth in this Article XXXIV, in
the event that during the First Offer Period (as hereinafter defined)
all or any portion of the First Offer Space (as hereinafter defined)
becomes available for lease from time to time, Landlord shall offer to
lease the First Offer Space to Tenant prior to leasing the same to
another person or entity. The term "First Offer Period" shall mean the
period from the Commencement Date through the date which is two (2)
years prior to the expiration of the Term, taking into account any
Renewal Terms, if the Renewal Options have been exercised by Tenant. The
"First Offer Space" consists of all space in the Building which shall
have, subsequent to the date of this Lease, been first leased to a
tenant other than F. W. Woolworth Company and then become vacant.
(b) Landlord shall make such offer by notice in
writing to Tenant (the "First Offer Notice"). The First Offer Notice
shall specify which portion of the First Offer Space Landlord proposes
to lease to Tenant and shall also set forth the following terms and
conditions for Tenant's lease of the First Offer Space, all of which
shall be determined by Landlord in its sole discretion:
(i) Basic Rent and Additional Rent;
(ii) any rent credits, abatements, construction allowances
and other concessions or economic terms;
(iii) the commencement date for Tenant's lease of the
First Offer Space; and
(iv) the expiration date(s) of the term of the lease of the
First Offer Space, which may be before or after the expiration date of the
Term of this Lease. If the expiration date of the Term as to the First Offer
Space would occur after the expiration date of the Term of this Lease as
to the balance of the Premises, this Lease shall continue in full force
and effect as to the First Offer Space until the expiration date of the
Term as to the First Offer Space.
(c) (i) Tenant shall have the right (the "Right of
First Offer") to lease all (but not less than all) of the portion of the
First Offer Space specified in Landlord's First Offer Notice upon the
terms and conditions set forth in Landlord's First Offer Notice and in
this Section. Tenant shall exercise its Right of First Offer only by
delivering written notice to Landlord within thirty (30) days after
Tenant's receipt of the First Offer Notice, time being of the essence.
At the time of the exercise of the Right of First Offer, and the
commencement of this
37
Lease as it pertains to the First Offer Space, this Lease must be in
full force and effect and there shall not exist any default by Tenant
under this Lease..
(ii) In the event Tenant does not exercise the
Right of First Offer with respect to any First Offer Space offered to
Tenant under this Section 35.1, Landlord may thereafter lease such First
Offer Space to any person or entity on any terms and conditions that
Landlord deems acceptable, subject, however, to the restriction that
that annual basic rent on a per rentable square foot basis (taking into
consideration all allowances, abatements and other economic factors)
under the terms of the lease which Landlord enters into with a person or
entity other than Tenant shall not be lower than the basic rent offered
Tenant in the First Offer Notice. Notwithstanding the foregoing, if
Landlord from time to time desires to lease the First Offer Space on
terms which would violate the foregoing restriction (the "Revised
Terms"), Landlord may lease the First Offer Space on the Revised Terms
so long as Landlord, by notice to Tenant (the "Revised First Offer
Notice"), shall first offer to lease the First Offer Space to Tenant on
the Revised Terms. Tenant shall exercise its Right of First Offer on the
Revised Terms by delivering written notice to Landlord within seven (7)
days after receipt of the Revised First Offer Notice, time being of the
essence. If Landlord does not receive Tenant's notice of its exercise of
its Right of First Offer on the Revised Terms within such seven (7) day
period, Landlord may lease the First Offer Space on any terms and
conditions, but again subject to the restriction against entering into a
lease at lower basic rent than that offered Tenant in the Revised First
Offer Notice.
(d) Any First Offer Space as to which Tenant exercises
its Right of First Offer shall become part of the Premises, and, except
as otherwise set forth in the First Offer Notice, all of the terms and
conditions applicable to the Premises shall also apply to such space.
(e) Promptly following Tenant's exercise of any Right
of First Offer, Landlord and Tenant shall execute an amendment to this
Lease setting forth the Basic Rent and the other terms of Tenant's lease
of such First Offer Space.
ARTICLE THIRTY-FIVE
No Construction Area
Notwithstanding anything in this Lease to the contrary,
Landlord agrees that it shall not construct an addition to the Building,
or other improvements, in the area designated as "No Construction Area"
on the Exhibit "Site Plan", without Tenant's prior written consent.
ARTICLE THIRTY-SIX
Guaranty
This Lease shall be guaranteed by Henry Schein, Inc. (the
"Guarantor") pursuant to a guaranty in the form of the Guaranty of Lease
attached hereto as Exhibit "Guaranty", (the "Guaranty") which shall be
delivered to Landlord simultaneously with delivery of this Lease.
38
ARTICLE THIRTY-SEVEN
Signs of Other Tenants of the Building
Anything to the contrary contained in this Lease
notwithstanding, Landlord shall not permit any other tenant of the
Building, as the same may be expanded, altered or reconfigured, to erect
a pylon, monument or any other sign on the Property or on any adjacent
property owned by Landlord or an affiliate of Landlord (unless the
Tenant leases space in such adjacent property in the building to which
the pylon, monument or other sign is related), without Tenant's prior
written consent; provided, however, that all other tenants of the
Building may be afforded space on Tenant's pylon sign which space shall
be beneath Tenant's space thereupon and shall be of a size equal to (x)
the surface area on the pylon sign which is usable for signage
multiplied by (y) such tenant's Proportionate Share. Additionally,
Landlord will not permit another tenant of the Building nor any other
person (including Landlord) to erect, install, affix or add any sign to
the roof, exterior walls, exterior windows or any other exterior surface
of the Building, provided that Landlord may permit other tenants of the
Building to have signs at access points into their respective premises.
ARTICLE THIRTY-EIGHT
Additional Reimbursements
38.1. Landlord has agreed to sell to Tenant, and Tenant has agreed to
purchase from Landlord, certain racking and conveyor equipment located
at the Property (the "Equipment"). The Equipment is being sold "as-is,
where is," without representation or warranty by Landlord. In
consideration of the Equipment, Tenant agrees to pay Landlord sixty (60)
consecutive monthly payments (the "Equipment Payments") of $2,844.76
each, commencing on the first day of March 1998 and thereafter on the
first day of each of the next fifty-nine months of the Term. Such
payments are Additional Rent hereunder. In the event that this Lease
shall be terminated prior to payment in full of the foregoing payments,
for any reason, Tenant shall, at the time of termination of this Lease,
pay to Landlord in full all remaining unpaid Equipment Payments.
38.2. At Tenant's request, Landlord has agreed to install certain new
heating equipment at the Premises during preparation of the Premises by
Landlord (the "Heating Equipment"). The Heating Equipment consists of
the new gas fired air rotation heating units for the Premises. In
consideration of the installation of the Heating Equipment, Tenant
agrees to pay Landlord monthly payments ("Heating Equipment Payments")
of $1,770.55 each, commencing on the first day of March 1998 and
thereafter on the first day of each of the next two hundred forty (240)
months of the Terms or until expiration of the Term, whichever shall
occur first; provided, however, that if the Term shall be terminated
prior to its scheduled expiration date pursuant to Article 1.1, as the
same may have been extended pursuant to Article 33, by reason of default
by Tenant hereunder, Tenant shall, at the time of termination of this
Lease, pay to Landlord the sum of the Heating Equipment Payments which
Tenant would have paid Landlord during the remainder of the Term had the
Term continued to its scheduled expiration date.
39
IN WITNESS WHEREOF, and in consideration of the mutual entry
into this Lease and for other good and valuable consideration, and
intending to be legally bound, each party hereto has caused this
agreement to be duly executed under seal.
Landlord:
FIRST INDUSTRIAL PENNSYLVANIA, L.P., a
Delaware limited partnership, by its
sole general partner, First Industrial
Pennsylvania Corporation, a Maryland
corporation
Witness:
______________________________ By: ____________________________________
Print Name: ______________________________
Print Title: ______________________________
Tenant:
Attest: HENRY SCHEIN (LANCASTER, PA.) INC., a
Pennsylvania corporation
______________________________ By: ____________________________________
Secretary President
40
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, NY
We hereby consent to the incorporation by reference in the previously filed
Registration Statements (No. 333-05453, No. 333-33193, and No. 333-39893) of
Henry Schein Inc. on Form S-8, filed with the Securities and Exchange Commission
on June 7, 1996, August 8, 1997 and November 11, 1997, respectively, of our
reports dated February 27, 1998 on the consolidated financial statements and
schedule of Henry Schein, Inc. Annual report on Form 10-K for the year ended
December 27, 1997.
BDO Seidman, LLP
New York, New York
March 27, 1998
5
1,000
12-MOS
DEC-27-1997
DEC-28-1996
DEC-27-1997
7,824
0
261,665
(7,649)
212,848
535,056
112,446
57,997
741,194
228,029
102,562
0
0
352
410,846
741,194
1,518,123
1,518,123
1,067,299
1,067,299
439,173
1,544
5,541
13,929
17,512
(1,012)
0
0
0
(1,012)
(0.03)
(0.03)
5
1,000
12-MOS
DEC-28-1996
DEC-30-1995
DEC-28-1996
45,814
0
207,187
(5,646)
180,750
473,682
96,781
48,762
628,944
187,328
42,177
0
0
338
399,179
628,944
1,231,848
1,231,848
865,156
865,156
319,294
275
4,712
50,024
18,606
32,767
0
0
0
32,767
1.06
1.01
5
1,000
3-MOS
DEC-27-1997
DEC-28-1996
MAR-29-1997
17,433
0
205,422
(6,835)
175,420
441,133
99,101
50,438
603,824
157,458
38,876
0
0
401
406,333
603,824
339,049
339,049
239,012
239,012
92,929
386
1,016
7,550
4,008
3,506
0
0
0
3,506
0.10
0.10
5
1,000
6-MOS
DEC-27-1997
DEC-28-1996
JUN-28-1997
20,823
0
232,693
(9,016)
175,181
471,964
104,200
53,692
654,619
174,925
62,579
0
0
411
420,853
654,619
712,483
712,483
501,514
501,514
190,292
386
2,032
21,620
10,033
12,047
0
0
0
12,047
0.35
0.33
5
1,000
9-MOS
DEC-27-1997
DEC-28-1996
SEP-27-1997
16,867
0
264,368
(10,508)
197,168
523,394
112,374
54,777
727,962
221,038
96,227
0
0
351
415,904
727,962
1,107,967
1,107,967
783,219
783,219
306,110
386
3,600
20,302
16,255
5,370
0
0
0
5,370
0.15
0.15
5
1,000
3-MOS
DEC-28-1996
DEC-30-1995
MAR-30-1996
10,896
0
160,820
(6,672)
141,889
342,221
86,510
44,588
448,679
140,621
86,776
0
0
330
233,695
448,679
271,686
271,686
190,259
190,259
74,231
69
1,457
6,713
2,881
4,038
0
0
0
4,038
0.14
0.14
5
1,000
6-MOS
DEC-28-1996
DEC-30-1995
JUN-29-1996
95,846
0
172,008
(6,726)
152,322
449,233
89,383
44,968
562,504
153,858
43,160
0
0
372
364,342
562,504
563,780
563,780
394,994
394,994
151,017
69
3,110
16,931
6,230
11,212
0
0
0
11,212
0.39
0.37
5
1,000
9-MOS
DEC-28-1996
DEC-30-1995
SEP-28-1996
55,237
0
199,543
(8,185)
158,652
451,209
94,391
46,862
596,931
170,556
42,773
0
0
389
382,507
596,931
882,854
882,854
620,401
620,401
231,385
69
4,132
30,838
11,420
20,544
0
0
0
20,544
0.67
0.64
5
1000
12-MOS
DEC-30-1995
DEC-31-1994
DEC-30-1995
11,872
0
149,297
(8,840)
154,938
346,996
82,714
42,602
447,415
173,262
51,473
0
0
324
227,059
447,415
958,744
958,744
663,508
663,508
281,749
451
7,341
9,279
10,823
(516)
0
0
0
(516)
(0.02)
(0.02)
