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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission file number 0-27078
HENRY SCHEIN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Duryea Road
Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 843-5500
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
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES: [X] NO: [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 21, 1997 was
approximately $369,341,068.
As of March 21, 1997, 23,324,085 shares of registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 28, 1996) are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
Page Number
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PART I
ITEM 1. Business 1
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 15
ITEM 6. Selected Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
ITEM 8. Financial Statements and Supplementary Data 26
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 57
PART III
ITEM 10. Directors and Executive Officers of the Registrant 57
ITEM 11. Executive Compensation 57
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 57
ITEM 13. Certain Relationships and Related Transactions 57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58
Financial Statement Schedules 60
Exhibit Index 73
PART I
ITEM 1. Business
Recent Developments
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million. Additionally, on March 7, 1997, the Company entered
into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
Micro Bio-Medics, Inc. (Nasdaq:MBMI) will merge into a wholly-owned subsidiary
of the Company. As a result of the transaction, which has been approved by the
Boards of Directors of MBMI and the Company, outstanding shares of MBMI's common
stock will be exchanged at a fixed rate of 0.62 of a share of the Company's
Common Stock for each outstanding 1.0 share of MBMI. Each of the members of
MBMI's Board of Directors has granted to the Company a proxy to vote their
shares of MBMI common stock in favor of the Merger Agreement and an option,
exercisable under certain circumstances, to acquire their shares for the
consideration that they would have received under the Merger Agreement in
respect of those shares.
MBMI distributes medical supplies to physicians and hospitals in the New
York metropolitan area, as well as to healthcare professionals in sports
medicine, emergency medicine, school health, industrial safety, government and
laboratory markets nationwide. MBMI had net sales of approximately $150.0
million and earnings of approximately $1.7 million for its fiscal year ended
November 30, 1996. Upon completion of the acquisition, the Company believes that
it will become North America's largest distributor of healthcare products to
office-based healthcare practitioners and a leading provider of healthcare
products and services to the U.S. physician market.
The completion of the transaction is subject to the satisfaction of
customary closing conditions, including, among others, MBMI shareholder
approval, and Hart-Scott-Rodino waiting periods. The transaction is expected to
be completed by mid-1997 although no assurances can be given in this regard. For
a more complete description of the terms of the Merger Agreement and other
related agreements entered into in connection with the Merger Agreement,
reference is made to the Exhibits to this Form 10-K. The Company intends to file
a Registration Statement on Form S-4 with the Securities and Exchange Commission
with respect to the securities to be issued in connection with the Merger
Agreement.
General
The Company is the largest direct marketer of healthcare products and
services to office-based healthcare practitioners in the combined North American
and European markets. The Company has operations in the United States, Canada,
the United Kingdom, the Netherlands, Belgium, Germany, France, the Republic of
Ireland and Spain. The Company sells products and services to over 230,000
customers, primarily dental practices and dental laboratories, as well as
physician practices, veterinary clinics and institutions. In 1996, the Company
sold products to over 65% of the estimated 100,000 dental practices in the
United States. The Company believes that there is strong awareness of the "Henry
Schein" name among
office-based healthcare practitioners due to its more than 60 years of
experience in distributing healthcare products. Through its comprehensive
catalogs and other direct sales and marketing programs, the Company offers its
customers a broad product selection of both branded and private brand products
which include approximately 50,000 stock keeping units ("SKUs") in North
America and approximately 40,000 SKUs in Europe at published prices that the
Company believes are below those of many of its competitors. The Company also
offers various value-added products and services, such as practice management
software. As of December 28, 1996, the Company had sold over 18,000 dental
practice management software systems, more than any of its competitors. On
February 28, 1997, the Company acquired all of the outstanding common stock of
Dentrix Dental Systems, Inc., a leading provider of clinically-based dental
practice management systems, with 1996 net sales of approximately $10.3 million
and a 3,500 installed user base.
During 1996, the Company distributed over 9.0 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 500,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 450 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with over 300 field sales
consultants. The Company utilizes database segmentation techniques to more
effectively market its products and services to customers. In recent years, the
Company has continued to expand its management information systems and has
established strategically located distribution centers in the United States and
Europe to enable it to better serve its customers and increase its operating
efficiency. The Company believes that these investments, coupled with its broad
product offerings, enable the Company to provide its customers with a single
source of supply for substantially all their healthcare product needs and
provide them with convenient ordering and rapid, accurate and complete order
fulfillment. The Company estimates that approximately 99% of all orders in the
United States and Canada received before 7:00 p.m. and 4:00 p.m., respectively,
are shipped on the same day the order is received and approximately 90% of
orders are received by the customer within two days of placing the order. In
addition, the Company estimates that approximately 99% of all items ordered in
the United States and Canada are shipped without back ordering.
Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office-based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into joint ventures with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channelled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. The Company has
entered into or completed seventeen acquisitions during the year ended December
28, 1996. The businesses acquired included 10 dental and three medical
companies, a veterinary supply distributor and three international dental
companies, with aggregate net sales in their last fiscal year ends of
approximately $104.0 million, all of which were accounted for as purchase
transactions. Of these, fifteen were for majority ownership (100% in nine of the
transactions). In 1995, the Company acquired the distribution business of The
Veratex Corporation, a national direct marketer of dental, medical and
veterinary products, and Schein Dental Equipment Corp., a distributor and
manufacturer of large dental equipment. The Company also completed the majority
acquisition of 11 other companies and a 50% acquisition of one other company
during 1995.
2
Corporate Structure Background
The Company was formed on December 23, 1992 as a wholly-owned subsidiary
of Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the
business in which the Company is now engaged and, in addition, owned 100% of the
outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a
company engaged in the manufacture and distribution of multi-source
pharmaceutical products. In December 1992, Holdings separated the Company's
business from Pharmaceutical by transferring to the Company all of the assets
(including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and
distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of
the healthcare distribution business now conducted by the Company. The Company
did not assume any other liabilities of Holdings, including the liabilities
associated with Pharmaceutical's business. In February 1994, the Company,
Holdings and their stockholders entered into a number of reorganization
agreements, and in September 1994, pursuant to such agreements, all of the
Company's common stock, par value $.01 per share ("Common Stock"), held by
Holdings was distributed to certain of the current stockholders of the Company
(the "Reorganization").
On November 8, 1995, the Company completed an initial public offering of
its Common Stock, and on June 21, 1996, the Company completed a follow-on
offering of its Common Stock. Proceeds from these offerings to the Company,
after expenses, were approximately $72.5 million and $124.1 million,
respectively. The proceeds enabled the Company to pay off certain indebtedness,
with the remaining proceeds available for general corporate purposes, including
subsequent acquisitions.
Customers
The Company serves over 230,000 customers worldwide in the dental, medical
and veterinary markets. The Company's dental customers include office-based
dental practices, dental laboratories, universities, institutions, governmental
agencies and large group and corporate accounts; medical customers include
office-based physician practices, podiatrists, renal dialysis centers, surgery
centers, institutions and governmental agencies; and the Company's veterinary
products are sold primarily to office-based veterinarians serving primarily
small animals.
The Company believes that its customers generally order from two or more
suppliers for their healthcare product needs, and often use one supplier as
their primary resource. The Company believes that its customers generally have
larger order sizes and order more frequently from their primary suppliers. The
Company estimates that it serves as a primary supplier to less than 10% of its
total customer base, and believes it has an opportunity to increase sales by
increasing its level of business with those customers for which it serves as a
secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, renal dialysis centers and surgery centers.
More recently, as cost-containment pressures have resulted in increased demand
for low-cost products and value-added services, the Company has targeted
specific groups of practices under common ownership, institutions, and
professional groups. For example, the Company has an exclusive direct marketing
agreement with an American Medical Association ("AMA") sponsored service and a
veterinarian sponsored service, pursuant to which member practitioners have
access to the services' lower priced products. In 1996, the AMA-sponsored
service and the veterinarian-sponsored purchasing service accounted for net
sales of over $27.4 million. These services, government institutions and
agencies, and other large or collective purchasers, require low-cost pricing and
detailed product and usage information and reporting. The Company believes it is
well situated to meet the needs of these customers, given its broad, low-cost
3
product offerings and its management information systems. No single customer
accounted for more than 4.7% of net sales in 1996.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through frequent direct marketing contact,
emphasize the Company's broad product lines, competitive prices and ease of
order placement. In addition, the Company's marketing efforts involve personal
interaction with field sales consultants in certain locations. The key elements
of the Company's program in the United States are:
o Direct Marketing. During 1996, the Company distributed over 9.0
million pieces of direct marketing material, including catalogs, flyers,
order stuffers and other promotional materials to approximately 500,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 300
pages and includes approximately 20,000 SKUs. The number of catalogs and
other material received by each customer depends upon the market they
serve as well as their purchasing history. The Company's catalogs include
detailed descriptions and specifications of both branded and private brand
products and are utilized by healthcare practitioners as a reference
source. By evaluating its customers' purchasing patterns, area of
specialty, past product selections and other criteria, the Company
identifies customers who may respond better to specific promotions or
products. To facilitate its direct marketing activities, the Company
maintains an in-house advertising department which performs many creative
services, which the Company believes streamlines the production process,
provides greater flexibility and creativity in catalog production, and
results in cost savings.
o Telesales. The Company supports its direct marketing with over 450
inbound and outbound telesales representatives who facilitate order
processing and generate new sales through direct and frequent contact with
customers. Inbound telesales representatives are responsible for assisting
customers in purchasing decisions as well as answering product pricing and
availability questions. In addition to assisting customers, inbound
telesales representatives also market complementary or promotional
products. The Company's telesales representatives utilize on-line computer
terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying
history.
The Company utilizes outbound telesales representatives and programs
to better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts. The
Company's U.S. dental outbound telesales representatives accounted for
approximately $101.6 million of the Company's net sales in 1996. The
Company has approximately 100 medical and veterinary telesales
representatives who make outbound calls in addition to handling inbound
telesales. Outbound telesales representatives strive to manage long-term
relationships with these customers through frequent and/or regularly
scheduled phone contact and personalized service.
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic training
sessions and special sales programs and receive incentives, including
monthly commissions.
4
o Field Sales Consultants. In 1992, the Company initiated its field
sales consultant program and now has over 300 field sales consultants
covering certain of its major North American and European markets. The
field sales consultants concentrate on attracting new customers and
increasing sales to customers who do not currently order a high percentage
of their total product needs from the Company. This strategy is designed
to complement the Company's direct marketing and telesales strategies and
to enable the Company to better market, service and support the sale of
more sophisticated products and equipment. Once a field sales consultant
has established a relationship with a customer, the representative
encourages the customer to use the Company's automated ordering process or
its telesales representatives for its day-to-day needs. This simplifies
the ordering process for the customer and increases the effectiveness of
the field sales consultant.
Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
PROTONE(R) (the Company's 24-hour automated phone service) or its computerized
order entry system. The Company has developed an enhanced Windows(R)-based
version of its computerized order entry system, known as ArubA(R), which was
introduced at the end of 1995.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 90% of orders are received within two days of placing
the order. The Company continually monitors its customer service through
customer surveys, focus groups and daily statistical reports. The Company
maintains a liberal return policy to better assure customer satisfaction with
its products.
5
Products
The following chart sets forth the principal categories of products
offered by the Company and certain top selling types of products in each
category, with the percentage of 1996 net sales in parenthesis:
Dental Products (69.5%)
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Consumable Dental Products Dental Laboratory
and Small Equipment (57.5%) Products (5.1%) Large Dental Equipment (6.9%)
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X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs, Units and Lights; X-Rays;
Handpieces; Preventatives; Impression Acrylics; Articulators; and and Equipment Repair
Materials; Composites; and Anesthetics Abrasives
Value-Added Products
Medical Products (23.4%) Veterinary Products (4.4%) and Services (2.7%)
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Branded and Generic Pharmaceuticals; Branded and Generic Software and Related Products;
Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Products; Financial Products; and other value-
Infection Control; and Vitamins and Dental Products added products
The percentage of 1995 and 1994 net sales was as follows: consumable
dental products and small equipment, 59.3% and 61.8%, respectively; dental
laboratory products, 5.8% and 6.6%, respectively; large dental equipment, 2.2%
and 3.6%, respectively; medical products, 23.5% and 20.1%, respectively;
veterinary products, 4.9% and 5.7%, respectively; and value-added products and
services, 4.3% and 2.2%, respectively.
Consumable Supplies and Equipment
The Company offers approximately 50,000 SKUs to its customers in North
America, of which approximately 40,000 SKUs are offered to its dental customers,
approximately 14,000 are offered to its medical customers and approximately
17,000 are offered to its veterinary customers. Over 16% of the Company's
products are offered to all three types of the Company's customers in North
America. The Company offers approximately 40,000 SKUs to its customers in
Europe. Approximately 4,000 of the Company's SKUs accounted for 80% of the
Company's sales in the United States in 1996. Approximately 15% of the Company's
net sales in 1996 were from sales of products offered under the Henry Schein
private brand (i.e., products manufactured by various third parties and HS
Pharmaceutical for distribution by the Company under the Henry Schein(R) brand).
The Company believes that the Henry Schein private brand line of over 5,000 SKUs
offered in the United States and Canada is one of the most extensive in the
industry. The Company also distributes certain generic pharmaceuticals
manufactured by HS Pharmaceutical, a 50%- owned company, and manufactures and
distributes certain large dental equipment through Schein Dental Equipment Corp.
("Schein Dental Equipment"), a distributor and manufacturer of large dental
equipment which was owned 73.7% by Marvin H. Schein, a director and principal
stockholder of the Company prior to its acquisition by the Company. The Company
updates its product offerings regularly to meet its customers' changing needs.
6
Value-Added Products and Services
In an effort to promote customer loyalty, the Company offers certain
value-added products and services. These products and services include the
following:
o Practice Management Software. The Company sells practice
management software systems to its dental and veterinary customers. The
Company has sold over 18,000 of its Easy Dental(R) Plus software systems
as of the end of fiscal 1996, and over 2,400 of its AVImark(R) veterinary
software systems. In December 1995, the Company released its new
Windows(R) version of Easy Dental(R) Plus and has since sold or converted
over 4,800 such systems by the end of 1996. The Company's practice
management software provides practitioners with patient treatment history,
billing and accounts receivable analysis and management, an appointment
calendar, electronic claims processing and word processing programs, and
the Company provides technical support and conversion services from other
software. In addition, the Easy Dental(R) Plus software allows the
customer to connect with the Company's order entry management systems. On
February 28, 1997, the Company acquired all of the outstanding common
stock of Dentrix Dental Systems, Inc., which had net sales for 1996 of
approximately $10.3 million and has an approximate 3,500 installed user
base. The Dentrix system is one of the most comprehensive clinically-based
dental practice management software package in the United States. The
Dentrix premium software product complements Easy Dental (R) Plus , the
Company's high-value practice management system. The Company believes the
combined software products offering enhances its ability to provide its
customers with the widest array of system solutions to help manage their
practices. With this acquisition, the Company now has an installed user
base of approximately 21,000.
o Financial Services. The Company has begun to offer its customers
assistance in managing their practices by providing access to a number of
financial services and products at rates which the Company believes are
lower than what they would be able to secure independently. The patient
financing program provides the Company's customers a method for reducing
receivables and improving cash flow by providing patients access to
financing. The Company facilitates the processing of credit applications,
payments to its customers and electronic bankcard processing and offers
electronic insurance claims submission services for faster, cheaper
processing of patient reimbursements, all through a third-party provider
for a transaction fee. The Company does not assume any financial
obligation to its customers or their patients in these programs.
o Equipment Repair and Installation. The Company offers a repair
service, ProRepair(R), which provides one to two-day turnaround for
handpieces and certain small equipment. The Company also provides
in-office installation and repair services for large equipment in certain
markets in North America and Europe. In accordance with its plan to expand
its repair service business and sales of large dental equipment in
connection with its acquisition of Schein Dental Equipment, in 1996 the
Company opened 15 new equipment sales and service centers in North America
and four in Europe, with a total of 35 centers open at the end of 1996.
7
Information Systems
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. In the United States, the Company is in the
process of expanding and upgrading its order processing information system and,
during February 1997 completed the upgrading of its accounts receivable
information system. Additionally, worldwide, the Company is in the process of
installing an integrated information system for its large dental equipment sales
and service functions. Such a system will centralize the tracking of customers'
equipment orders as well as spare parts inventories and repair services.
Distribution
The Company distributes its products in the United States and Canada
primarily from its strategically located distribution centers in the Eastern,
Central, and Western United States. The Company maintains significant inventory
levels of certain products in order to satisfy customer demand for prompt
delivery and complete order fulfillment of their product needs. These inventory
levels are managed on a daily basis with the aid of the Company's sophisticated
purchasing and stock status management information systems. The Company's
European distribution centers include locations in the United Kingdom, France,
The Netherlands, Germany and Spain. Once a customer's order is entered, it is
electronically transmitted to the distribution center nearest the customer's
location and a packing slip for the entire order is printed for order
fulfillment. The Company's automated freight manifesting and laser bar code
scanning facilitates the speed of the order fulfillment. The Company currently
ships almost all of its orders in the United States by United Parcel Service. In
certain areas of the United States, the Company delivers its orders via contract
carriers.
Purchasing
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 1,200
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
distribution centers. In 1996, the Company's top 10 vendors and the Company's
single largest vendor, accounted for approximately 28.2% and 9.7%, respectively,
of the Company's aggregate purchases.
8
Competition
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the products the Company sells are available to
the Company's customers from a number of suppliers. In addition, competitors of
the Company could obtain exclusive rights from manufacturers to market
particular products. Manufacturers could also seek to sell directly to
end-users, and thereby eliminate the role of distributors, such as the Company.
Significant price reductions by the Company's competitors could result in a
similar reduction in the Company's prices as a consequence of its policy of
matching its competitors' lowest advertised prices. Any of these competitive
pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as
well as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products, the
Company's two principal national competitors are Patterson Dental Co. and
Sullivan Dental Products, Inc. In addition, the Company competes against a large
number of other distributors that operate on a national, regional and local
level. The Company's largest competitors in the sale of medical products are
General Medical Corp. and Physician's Sales and Service, Inc., which are
national distributors. In the veterinary product market, the Company's two
principal national competitors include The Butler Company and Burns Veterinary
Supply. The Company also competes against a large number of small local and
regional veterinary distributors, as well as a number of manufacturers that sell
direct to veterinarians whose practices are directed primarily to small animals.
With regard to the Company's practice management software, the Company competes
against a fragmented group of competitors, none of which currently have a
significant share of the market. The Company believes that it competes in Canada
substantially on the same basis as in the United States.
The Company also faces intense competition in its international markets,
where the Company competes on the basis of price and customer service against a
large number of dental product distributors and manufacturers in the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland and
Spain. The Company has several large competitors in these markets, including
ORBIS and the GACD Group.
Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned company, HS
Pharmaceutical, which distributes and manufactures generic pharmaceuticals) were
to receive an adverse report following an inspection by the Food and Drug
Administration (the "FDA") or the Drug Enforcement Administration, or if a
competitor were to receive prior approval of new products from the FDA. A
violation of a law by HS Pharmaceutical could cause its operations to be
suspended. A suspension could have an adverse effect on the Company's equity in
earnings of affiliates and could cause the Company to seek alternative sources
of products manufactured by HS Pharmaceutical, possibly at higher prices than
currently paid by the Company.
9
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well as certain other trademarks. Pursuant to certain agreements executed in
connection with the reorganization of the Company, both the Company and Schein
Pharmaceutical, Inc. are entitled to use the "Schein" name in connection with
their respective businesses, but Schein Pharmaceutical, Inc. is not entitled to
use the name "Henry Schein." The Company intends to protect its trademarks to
the fullest extent practicable.
Employees
As of December 28, 1996, the Company had more than 3,200 full-time
employees in North America and Europe, including approximately 450 telesales
representatives, 300 field sales consultants, 1,000 warehouse employees, 120
computer programmers and technicians, 350 management employees and 980 office,
clerical and administrative employees. None of the Company's employees are
represented by a collective bargaining agreement. The Company believes that its
relations with its employees are excellent.
Seasonality
The Company's business has been subject to seasonal and other quarterly
influences. Net sales and operating profits have been generally higher in the
fourth quarter due to the timing of sales of software, year-end promotions and
purchasing patterns of office-based healthcare practitioners and have been
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, the release of software enhancements, timing of purchases, special
promotional campaigns, fluctuations in exchange rates associated with
international operations and adverse weather conditions.
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 2, 3, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; and the results of legal
proceedings. The matters referred to in forward looking statements could be
affected by the risks and uncertainties involved in the Company's business.
These risks and uncertainties include, but are not limited to, the effect of
economic and market conditions, the impact of the consolidation of healthcare
practitioners, the impact of healthcare reform, opportunities for acquisitions
and the Company's ability to effectively integrate acquired companies, the
acceptance and quality of software products, acceptance and ability to manage
operations in foreign markets, possible disruptions in the Company's computer
systems or telephone systems, possible increases in shipping rates or
interruptions in shipping service, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and
regulation, as well as certain other risks described above in this Item under
"Competition" and "Government Regulation," and below in Item 3 in "Legal
Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Subsequent written and oral forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements in this
paragraph and elsewhere in this Form 10-K.
10
The Company's principal executive offices are located at 135 Duryea Road,
Melville, New York 11747, and its telephone number is 516-843-5500. As used in
this Report, the term the "Company" refers to Henry Schein, Inc., a Delaware
corporation, and its subsidiaries, 50%-owned companies and predecessor, unless
otherwise stated.
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Position
- ---------------------- --- -----------------------------------------------------
Corporate
Stanley M. Bergman.... 47 Chairman, Chief Executive Officer and President
James P. Breslawski... 43 Executive Vice President
Gerald A. Benjamin.... 44 Senior Vice President-- Administration and Customer
Satisfaction
Leonard A. David...... 48 Vice President--Human Resources and Special
Counsel
Diane Forrest......... 50 Senior Vice President--Information Services
and Chief Information Officer
Stephen R. LaHood..... 49 Senior Vice President--Distribution Services
Mark E. Mlotek........ 41 Vice President, General Counsel and Secretary
Steven Paladino....... 39 Senior Vice President and Chief Financial
Officer
Business Units
Jeffrey P. Gasparini.. 41 Senior Vice President--Medical Group
Ian G. Rosmarin....... 46 President--Professional Services Group
Larry M. Gibson....... 50 President--Practice Management Technologies Division
James W. Stahly....... 48 President--North American Dental Group
Michael Zack.......... 44 Senior Vice President--International Group
Stanley M. Bergman has been Chairman, Chief Executive Officer, and
President since 1989 and a director of the Company since 1982. Mr. Bergman held
the position of Executive Vice President of the Company and Schein
Pharmaceutical, Inc. from 1985 to 1989 and Vice President of Finance and
Administration of the Company from 1980 to 1985. Mr. Bergman is a certified
public accountant.
James P. Breslawski has been Executive Vice President of the Company since
1990, with primary responsibility for the North American Dental Group, the
Veterinary Group and corporate creative services, and a director of the Company
since 1990. Between 1980 and 1990, Mr. Breslawski held various positions with
the Company, including Chief Financial Officer, Vice President of Finance and
Administration and Controller. Mr. Breslawski is a certified public accountant.
11
Gerald A. Benjamin has been Senior Vice President of Administration and
Customer Satisfaction since 1993, including responsibility for the worldwide
human resource function, and has been a director of the Company since September
1994. Prior to holding his current position, Mr. Benjamin was Vice President of
Distribution Operations of the Company from 1990 to 1992 and Director of
Materials Management of the Company from 1988 to 1990. Before joining the
Company, Mr. Benjamin was employed for 13 years in various management positions
at Estee Lauder, where his last position was Director of Materials Planning and
Control.
Leonard A. David has been Vice President of Human Resources and Special
Counsel since January 1995. Mr. David held the office of Vice President, General
Counsel and Secretary from 1990 to 1995 and practiced corporate and business law
for eight years prior to joining the Company. Mr. David has been a director of
the Company since September 1994.
Diane Forrest joined the Company in 1994 as Senior Vice President of
Information Services and Chief Information Officer. Prior to joining the
Company, Ms. Forrest was employed by Tambrands Inc. as Vice President of
Information Services from 1987 to 1994, KPMG Peat Marwick as Senior Manager in
the management consulting division from 1982 to 1987 and Nabisco Brands, Inc. as
Corporate Manager of Manufacturing Systems from 1978 to 1982.
Stephen R. LaHood joined the Company in 1992 as Senior Vice President of
Distribution Services and is also responsible for purchasing. Prior to joining
the Company, Mr. LaHood was employed by Lex/Schweber Electronics Inc. as Vice
President of Operations and Quality from 1988 to 1991. Mr. LaHood also spent ten
years at Johnson & Johnson Products, Inc., where his last position was Manager
of Corporate Business Planning and thereafter, seven years at Schering-Plough
Corporation where his last position was Senior Director of Manufacturing
Operations.
Mark E. Mlotek joined the Company in December 1994 as Vice President,
General Counsel and Secretary and became a director of the Company in September
1995. Prior to joining the Company, Mr. Mlotek was a partner in the law firm of
Proskauer Rose Goetz & Mendelsohn LLP, counsel to the Company, specializing in
mergers and acquisitions, corporate reorganizations and tax law from 1989 to
1994.
Steven Paladino has been Senior Vice President and Chief Financial Officer
of the Company since 1993 and has been a director of the Company since 1992.
From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from
1987 to 1990 served as Corporate Controller of the Company. Before joining the
Company, Mr. Paladino was employed as a public accountant for seven years and
most recently was with the international accounting firm of BDO Seidman, LLP.
Mr. Paladino is a certified public accountant.
Jeffrey P. Gasparini joined the Company in February 1996 as Senior Vice
President of the Medical Group. Prior to joining the Company, Mr. Gasparini was
employed by General Medical Corp. from 1982 to 1996, where his last position was
Corporate Vice President, Operations and member of the Executive Board.
Ian G. Rosmarin joined the Company in 1992 as General Manager of the
Canadian Division and in 1993 was named to his current position of President of
the Professional Service Group of the Company. Prior to joining the Company, Mr.
Rosmarin was President of Rosmarin Management and Investment Corporation for 13
years. Mr. Rosmarin is a Canadian Chartered Accountant.
12
Larry M. Gibson joined the Company as President of the Practice Management
Technologies Division on February 24, 1997 concurrent with the acquisition of
Dentrix Dental Systems, Inc. Before joining the Company, Mr. Gibson was founder,
Chairman and CEO of Dentrix, started in 1980. Prior to his employment with
Dentrix, Mr. Gibson was employed by Weidner Communication Systems from 1978.
James W. Stahly joined the Company in 1994 as President of the North
American Dental Group of the Company. Before joining the Company, Mr. Stahly was
employed by Fox Meyer Corporation for seven years where his last position was
Senior Vice President -- Hospital and Alternate Care Sales. Prior to his
employment with Fox Meyer, Mr. Stahly spent 16 years at McKesson Drug Company.
Michael Zack has been responsible for the International Group of the
Company since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to 1989
and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to
1984.
ITEM 2. Properties
The Company owns or leases the following properties:
Approximate
Own or Square Lease
Property Location Lease Footage Expiration Date
-------- -------- ------- ----------- ---------------
Corporate
Headquarters......... Eastern United States Lease 100,000 December 2005
Distribution Center.. Eastern United States Own 173,000 N/A
Distribution Center.. Central United States Lease 225,000 December 1999
Distribution Center.. Western United States Lease 115,500 June 2002
Distribution Center.. United Kingdom Lease 85,000 August 2005
Manufacturing
Facilities........... Western United States Own 75,000 N/A
The Company also leases warehouse, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain and the United Kingdom. Two 50%-owned companies
also lease space in the United States and Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business.
The Company has additional operating capacity at its listed facilities.
13
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 28,
1996, the Company was named a defendant in 12 such cases. The Company believes
it is adequately covered by insurance in all these cases, subject to certain
self retention limits, and that none of the currently pending cases should have
a material adverse effect on the Company.
The Company has various insurance policies, including product liability
insurance covering risks and in amounts it considers adequate. In many cases the
Company is covered by indemnification from the manufacturer of the product.
There can be no assurance that the coverage maintained by the Company is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost, or that indemnification agreements will provide
adequate protection for the Company.
As part of the Company's effort to expand its field sales force, the
Company frequently hires field sales consultants with experience in the
office-based healthcare practitioner industry. The Company's hiring practices
have from time to time resulted in litigation instituted by former employers of
the field sales consultants hired by the Company. On October 19, 1995, an action
was filed against the Company by H. Meer Dental Supply Co., Inc. ("Meer") in the
United States District Court for the Eastern District of Michigan, Southern
Division. The complaint alleged unfair competition, predatory pricing or
anticompetitive conduct and, through the hiring of Meer sales representatives,
improper interference with Meer's relationships with its employees and customers
and misappropriation of trade secrets. The lawsuit sought unspecified damages
and an injunction against the Company. In November 1996, the Company entered
into a settlement of the action brought by Meer, which contains a limited
provision for mutual non-solicitation but permits employment of the other's
employees consistent with the Company's need to employ experienced sales and
service representatives. The settlement did not involve the payment of any
money. There are two additional litigations that similarly allege improper
interference with employee and customer relationships. The plaintiffs in these
actions seek unspecified damages, and one of the plaintiffs also seeks an
injunction against the Company. The Company intends to vigorously defend these
litigations. The Company believes that neither of these actions will have a
material adverse effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The following table sets forth for the periods indicated the high and low
reported sales prices of the Common Stock on the NASDAQ National Market System
from November 3, 1995, the date of the commencement of the Company's Initial
Public Offering (the "IPO"), through March 21, 1997.
High Low
---- ---
Fiscal 1995:
4th Quarter (from November 3, 1995) $29-1/2 $20-3/8
Fiscal 1996:
1st Quarter $30-3/4 $23-1/2
2nd Quarter $43-1/2 $27-1/2
3rd Quarter $40-1/4 $31-1/4
4th Quarter $41-1/4 $32-3/4
Fiscal 1997:
1st Quarter (through March 21, 1997) $27 $25-1/2
The Company's Common Stock is quoted through the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "HSIC." On March 21, 1997,
there were approximately 136 holders of record of the Common Stock. On March 21,
1997, the last reported sales price was $26-5/8.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
Issuance of Unregistered Securities
On July 10, 1996 and November 1, 1996, the Company completed the 100%
acquisition of two companies and issued, in partial consideration for one
acquisition and in full consideration for another acquisition, 37,197 and
117,986 shares, respectively, of its Common Stock, with an aggregate value of
approximately $5.4 million. These transactions were completed without
registration under the Securities Act in reliance upon exemptions provided by
Section 4(2) of the Securities Act.
15
ITEM 6. Selected Financial Data
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 28, 1996 set forth below has been derived from the
audited consolidated financial statements of the Company. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The Selected Operating Data, Net Sales By Market Data and Balance Sheet
Data presented below have not been audited.
Years Ended
----------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
Statement of Operations Data:
Net sales ................... $ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
Cost of sales ............... 584,738 425,625 343,922 294,693 257,226
--------- --------- --------- --------- ---------
Gross profit ................ 245,224 190,584 142,688 121,017 105,699
Selling, general and
administrative expenses ... 215,561 170,823 128,560 109,574 96,287
Special management
compensation(1) ........... -- 20,797 21,596 617 5,283
Special contingent
consideration(2) .......... -- -- -- 3,216 --
Special professional
fees(3) ................... -- -- 2,007 2,224 2,227
--------- --------- --------- --------- ---------
Operating income (loss) ..... 29,663 (1,036) (9,475) 5,386 1,902
Interest income ............. 2,456 475 251 856 1,210
Interest expense ............ (3,421) (5,833) (3,756) (3,216) (2,953)
Other income (expense) - net 636 276 541 (634) 255
--------- --------- --------- --------- ---------
Income (loss) before taxes
on income (recovery),
minority interest and
equity in earnings of
affiliates ................ 29,334 (6,118) (12,439) 2,392 414
Taxes on income (recovery) .. 11,343 5,126 (1,630) 1,351 622
Minority interest in net
(loss) of subsidiaries
income ................... 246 509 561 318 (249)
Equity in earnings of
affiliates ................ 1,595 1,537 494 1,296 514
--------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change ......... 19,340 (10,216) (10,876) 2,019 555
Cumulative effect of
accounting change ......... -- -- -- 1,891 --
--------- --------- --------- --------- ---------
Net income (loss) ........... $ 19,340 ($ 10,216) ($ 10,876) $ 3,910 $ 555
========= ========= ========= ========= =========
Net income per common share . $ .93
Average shares outstanding .. 20,724
16
Years Ended
------------------------------------------------------------------------------
December 28, December 30, December 31, December 25, December 26,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
Pro Forma Income Data (4):
Pro forma operating income .................... $ 19,761 $ 14,128
Pro forma net income .......................... $ 9,407 $ 6,978
Pro forma net income per
common share ............................... $. 70 $. 58
Pro forma average shares
outstanding ................................ 13,447 12,127
Selected Operating Data:
Number of orders shipped ...................... 3,078,000 2,629,000 2,274,000 2,044,000 1,824,000
Average order size ............................ $ 270 $ 234 $ 214 $ 203 $ 199
Net Sales by Market Data (5):
Dental(6) ..................................... $ 435,643 $ 327,697 $ 274,337 $ 253,223 $ 234,655
Medical ....................................... 191,186 125,565 89,789 71,021 51,923
Veterinary .................................... 35,329 29,330 27,872 24,312 19,481
Technology(7) ................................. 20,805 25,914 10,685 7,738 5,825
International(8) .............................. 146,999 107,703 83,927 59,416 51,041
---------- ---------- ---------- ---------- ----------
$ 829,962 $ 616,209 $ 486,610 $ 415,710 $ 362,925
========== ========== ========== ========== ==========
Balance Sheet Data
(at period end):
Working capital ............................... $ 204,755 $ 103,899 $ 76,392 $ 74,125 $ 28,276
Total assets .................................. 463,936 296,867 190,020 160,793 137,957
Total debt .................................... 39,746 43,049 61,138 56,567 41,373
Redeemable stock (9) .......................... -- -- 14,745 -- --
Minority interest ............................. 5,289 4,547 1,823 1,051 411
Stockholders' equity .......................... 291,762 142,851 39,567 43,897 40,117
- ----------
(1) Includes: (a) for 1995, non-cash special management compensation charges
of $17.5 million arising from final mark-to-market adjustments (reflecting
an increase in estimated market value from 1994 to the initial public
offering price of $16.00 per share) for stock grants made to an executive
officer of the Company in 1992 and other stock issuances made to certain
other senior management of the Company (because of certain repurchase
features which expired with the initial public offering), an approximate
$2.8 million non-cash special management compensation charge (also based
on the initial public offering price of $16.00 per share) relating to
compensatory options granted in 1995, and a cash payment of $0.5 million
for additional income taxes resulting from such stock issuances; (b) for
1994, non-cash special management compensation arising from accelerated
amortization of deferred compensation arising from the 1992 stock grants
to an executive officer of the Company of $17.3 million, which included a
1994 mark-to-market adjustment (because of the repurchase features
referred to above) of $9.1 million, due to the resolution, with the
closing of the Reorganization, of certain contingencies surrounding the
issuance of the stock grants, non-cash special management compensation
charges of $1.6 million (net of prior accruals of approximately $1.9
million under an executive incentive plan) arising from stock issuances to
certain other senior management of the Company, valued at $3.5 million,
and cash payments for income taxes of approximately $2.4 million resulting
from these stock issuances and $0.3 million for additional income taxes
resulting from the 1992 stock grants; (c) for 1993, non-cash special
management compensation charges of $0.6 million in amortization of
deferred compensation arising from the 1992 stock grants; and (d) for
17
1992, cash payments of $5.3 million for income taxes resulting from stock
grants made to an executive officer of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Overview" in Item 7 herein.
(2) Includes $0.7 million paid in connection with an acquisition and $2.5
million resulting from the buyout of employees' rights to future income
contained in their employment agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7
herein.
(3) Includes special professional fees incurred by the Company in connection
with the Reorganization. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 herein.
(4) Reflects the pro forma elimination of special charges incurred in 1995 and
1994 for special management compensation of $20.8 million and $21.6
million, respectively, and special professional fees incurred in 1994 of
$2.0 million, arising from the Reorganization, and the related tax effects
of $1.2 million and $5.8 million for 1995 and 1994, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 herein.
(5) Restated to conform with 1996 presentation.
(6) Dental consists of the Company's dental business in the United States and
Canada.
(7) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(8) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily Europe.
(9) Redeemable stock includes stock issued for compensation which was subject
to repurchase by the Company at fair market value in the event of
termination of employment of the holder of such shares, as well as shares
purchased by the trust for the Company's ESOP and allocable to the ESOP
participants. With the completion of the Company's initial public
offering, the stock issued for compensation and the ESOP Common Stock were
no longer subject to repurchase. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 herein.
18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's consolidated financial
condition and consolidated result of operations should be read in conjunction
with the Company's consolidated financial statements and notes thereto in Item 8
herein.
Overview
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements. The
Company's results of operations in recent years have also been impacted by the
Reorganization.
From 1992 through 1994, the Company was a party to a series of transactions
leading to the Reorganization that resulted in, among other things, the Company
being separated from Holdings and the distribution of shares of the Common Stock
of the Company to its then current stockholders. In December 1992, an executive
officer of the Company received certain stock grants in the Company and Schein
Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6 million,
respectively, and cash of approximately $5.3 million to pay income taxes on the
stock grants received. These stock grants were subject to the occurrence of
certain future events, including the fulfillment of the employment term by the
executive officer. Accordingly, these stock grants, totaling $8.8 million, were
treated as deferred compensation while the cash payments were charged to
earnings as special management compensation in the year ended December 26, 1992.
During 1993, the Company amortized the deferred compensation relating to stock
grants by the Company to the executive officer resulting in a charge to earnings
of $0.6 million. In 1994, the contingencies relating to the stock granted to the
executive officer were eliminated, such that these shares became fully vested.
Accordingly, deferred compensation of $8.8 million, less the 1993 amortization
of $0.6 million, plus a mark-to-market adjustment (because of certain repurchase
features) of approximately $9.1 million, along with a $0.3 million cash payment
for income taxes relating to the 1992 stock grants, was expensed in 1994 as
special management compensation.
In addition, in connection with the Reorganization, certain senior
management of the Company were issued shares of Common Stock of the Company in
1994 and 1995 to extinguish an obligation under a pre-existing long-term
incentive plan and to provide them with an ownership interest in the Company. In
connection with the issuance of the shares, a cash payment for income taxes
relating to such stock issuances of approximately $2.4 million was paid. This
cash bonus, plus $3.5 million, the fair value of the related stock issued, net
of amounts accrued under the long-term incentive plan of approximately $1.9
million, resulted in an additional special management compensation charge to the
Company of approximately $4.0 million in 1994. Charges to earnings for the year
ended 1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.
Additionally, the Company has granted certain employees options for shares
of the Company's Common Stock, which became exercisable upon the Company's
initial public offering on November 3, 1995, at which time substantially all
such options vested. Non-recurring special compensation charges for the options
19
issued to employees recorded in the fourth quarter of 1995 amounted to
approximately $2.8 million. In addition, the Company recorded an approximate
$1.1 million related tax benefit.
Special charges for special management compensation and special professional
fees incurred in connection with the Reorganization aggregated $20.8 million and
$23.6 million for 1995 and 1994, respectively.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales by market of the Company and the percentage change in such items for
the years ended 1996, 1995 and 1994.
Percentage Increase
Percentage of Net Sales (Decrease)
---------------------------------------------------------------------
Years Ended
----------------------------------------
December 28, December 30, December 31,
1996 1995 1994 1995 to 1996 1994 to 1995
---------------------------------------------------------------------
Net Sales by Market (1):
Dental (2) 52.5% 53.2% 56.3% 32.9% 19.5%
Medical 23.0 20.3 18.5 52.3 39.8
Veterinary 4.3 4.8 5.7 20.5 5.2
Technology (3) 2.5 4.2 2.2 (19.7) 142.1
International (4) 17.7 17.5 17.3 36.5 28.4
----- ----- -----
100.0% 100.0% 100.0% 34.7 26.6
(1) Restated to conform to 1996 presentation.
(2) Dental consists of the Company's dental business in the United States and
Canada.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(4) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily in Europe.
1996 Compared to 1995
Net sales increased $213.8 million, or 34.7%, to $830.0 million in 1996
from $616.2 million in 1995. Of the $213.8 million increase, approximately
$107.9 million represented a 32.9% increase in the Company's dental business,
$65.6 million represented a 52.3% increase in its medical business, $39.3
million represented a 36.5% increase in its international business and $6.0
million represented a 20.5% increase in the Company's veterinary business,
offset by a $5.1 million, or 19.7% decrease in its technology business. The
dental net sales increase was primarily the result of the Company's continued
emphasis on its integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), expansion into the U.S. market for large dental equipment and
20
acquisitions. Of the approximately $65.6 million increase in medical net sales,
approximately $20.9 million, or 31.9%, represents incremental net sales to renal
dialysis centers, with the effects of acquisitions and increased outbound
telesales activity primarily accounting for the balance of the increase in
medical net sales. In the international market, the increase in net sales was
due to acquisitions, primarily in France, and increased account penetration in
Germany and the United Kingdom. Unfavorable exchange rate translation
adjustments resulted in a net sales decrease of approximately $4.4 million
dollars. Had net sales for the International market been translated at the same
exchange rates in effect during 1995, net sales would have increased by an
additional 4.1%. In the veterinary market, the increase in net sales was due to
the full year impact of new product lines introduced in the fourth quarter of
1995, increased account penetration and continued volume growth to customers of
a veterinary-sponsored purchasing service. As anticipated, net sales in the
Company's technology group was below last year's sales volume levels due to
unusually high sales volume in the fourth quarter of 1995 related to the
introductory launch, at that time, of the Company's Easy Dental (R) Plus Windows
(R) based product.
Gross profit increased by $54.6 million, or 28.7%, to $245.2 million in
1996, from $190.6 million in 1995, while gross profit margin decreased by 1.4%
to 29.5% from 30.9% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(R) Plus for
Windows (R) products were sold in 1996. Excluding gross profit margin for the
Company's technology group, which was 64.9% for 1996 as compared to 80.7% for
1995, gross profit margins were relatively unchanged at 28.6% for 1996 as
compared to 28.7% for 1995.
Selling, general and administrative expenses increased by $44.8 million, or
26.2%, to $215.6 million in 1996 from $170.8 million in 1995. Selling and
shipping expenses increased by $37.8 million, or 33.6%, to $150.3 million in
1996 from $112.5 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 18.1% in 1996 from 18.3% in 1995. The
decrease in selling and shipping expenses as a percentage of net sales was
primarily due to reductions in sales promotions offered by the Company's
technology group in conjunction with the introductory promotion of Easy
Dental(R) Plus for Windows(R) version which occurred during 1995. These
introductory promotional expenses represented 0.6% of net sales in 1995.
Excluding these expenses from 1995, selling and shipping expenses, as a
percentage of net sales, would have been 0.4% higher than last year. This
increase was due primarily to various promotional programs and incremental field
sales and marketing personnel. General and administrative expenses increased
$7.0 million, or 12.0%, to $65.3 million in 1996 from $58.3 million in 1995,
primarily as a result of acquisitions. As a percentage of net sales, general and
administrative expenses decreased 1.6% to 7.9% in 1996 from 9.5% in 1995 due
primarily to the relatively fixed nature of general and administrative expenses
when compared to the 34.7% increase in sales volume for the same period.
Net interest expenses decreased $4.4 million to $1.0 million in 1996 from
$5.4 million in 1995. This decrease primarily resulted from the use of the
proceeds of the Company's follow-on offering in June 1996 to reduce debt and an
increase in interest income arising from the temporary investment of proceeds in
excess of debt and imputed interest income arising from non-interest bearing
extended payment term sales, offset in part by an increase in average interest
rates.
For 1996, the Company's provision for taxes was $11.3 million, while the
pre-tax income was $29.3 million. The difference between the Company's effective
tax rate of 38.6% and the Federal statutory rate relates primarily to state
income taxes offset by tax-exempt interest on municipal securities. In 1995, the
Company's provision for taxes was $5.1 million, while the pre-tax loss was $6.1
million. The difference between the tax provision and the amount that would have
been recoverable by applying the statutory rate to pre-tax loss was attributable
substantially to the non-deductibility for income tax purposes of the $17.5
21
million appreciation in the value of the stock issued to an executive officer
and other senior management of the Company. On a pro forma basis, excluding
special charges, taxes on income for 1995 were $6.3 million, resulting in an
effective tax rate of 42.9%. The difference between the pro forma effective tax
rate and the Federal statutory rate relates primarily to state income taxes and
currently non-deductible net operating losses of certain foreign subsidiaries,
primarily in France, which are not included in the Company's consolidated tax
return.
1995 Compared to 1994
Net sales increased $129.6 million, or 26.6%, to $616.2 million in 1995 from
$486.6 million in 1994. Of the $129.6 million increase, approximately $53.4
million represented a 19.5% increase in the Company's dental business, $35.8
million represented a 39.8% increase in its medical business, $23.8 million
represented a 28.4% increase in its international business, $15.2 million
represented a 142.1% increase in its technology business and $1.4 million
represented a 5.2% increase in the Company's veterinary business. The dental net
sales increase, after taking into consideration acquisitions, was primarily due
to the Company's increase in field sales consultants and telesales personnel,
database marketing programs and promotional activities. Of the approximately
$35.8 million increase in medical net sales, approximately $17.0 million, or
47.5%, represents incremental net sales to renal dialysis centers, with the
effects of acquisitions and increased telesales personnel accounting for the
other major increase in net sales. In the international market, the increase in
net sales was due to the full year benefit of an acquisition made in France in
July 1994, acquisitions made in 1995, increased unit volume growth and favorable
exchange rate translation adjustments. The increase in net sales for the
Company's technology market was primarily the result of an increase in unit
sales due to the release of the new Windows(R) version of Easy Dental(R) Plus
software in December 1995 and substantial price increases. The increased pricing
on the Easy Dental(R) Plus software product was accompanied by substantial sales
promotions and related expense. In the veterinary market, the Company now earns
a commission on certain products which the manufacturer now sells direct.
Including those sales on a basis similar to 1994, sales to the veterinary market
would have increased by approximately 19.0%
Gross profit increased by $47.9 million, or 33.6%, to $190.6 million in
1995, from $142.7 million in 1994, while gross profit margin increased by 1.6%
to 30.9% from 29.3% for the same period. Of the 1.6% increase in gross profit
margin, approximately 87.5%, or 1.4%, was primarily attributed to increased
sales volume of the Company's Easy Dental(R) Plus software, which carried a
higher gross profit margin than other products sold by the Company. The higher
net sales volume for the Company's technology business, up 142.1% to $25.9
million from $10.7 million for the same period last year, was primarily due to
the release of the new Windows(R) version of Easy Dental(R) Plus software, which
increased unit sales, coupled with substantial price increases. The increased
pricing on the Easy Dental(R) Plus software product was accompanied with
substantial sales promotions. The balance of the change in gross profit margin
was due to changes in product mix.
22
Selling, general and administrative expenses increased by $42.2 million, or
32.8%, to $170.8 million in 1995 from $128.6 million in 1994. Selling and
shipping expenses increased by $34.8 million, or 44.8%, to $112.5 million in
1995 from $77.7 million in 1994. As a percentage of net sales, selling and
shipping expenses increased 2.4% to 18.3% in 1995 from 15.9% in 1994. The
increase in selling and shipping expenses as a percentage of net sales was
primarily due to substantial sales promotions offered by the Company's
technology group in conjunction with the promotion of Easy Dental(R) Plus
software and the new Windows(R) version released in December 1995, which
accounted for approximately 0.9% of the 2.4% increase in selling and shipping
expenses as a percentage of net sales. The balance of the increase was due
primarily to various promotional programs and incremental field sales and
marketing personnel. General and administrative expenses increased $7.4 million,
or 14.5%, to $58.3 million in 1995 from $50.9 million in 1994, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses decreased 1.0% to 9.5% in 1995 from 10.5% in 1994 due primarily to the
relatively fixed nature of general and administrative expenses when compared to
the 26.6% increase in sales volume for the same period.
Interest expense--net increased $1.9 million, or 54.3%, to $5.4 million in
1995 from $3.5 million in 1994. This increase was due to two factors: average
interest rates rose to 8.3% in 1995 from 6.4% in 1994, and the Company's average
borrowings increased by $11.3 million in 1995 as compared to 1994 as a result of
higher working capital requirements and financing of acquisitions.
Equity in earnings of affiliates increased by $1.0 million, or 200.0%, to
$1.5 million in 1995 from $0.5 million in 1994. This increase in equity in
earnings of affiliates was primarily due to an increase in earnings of one
unconsolidated affiliate which was the result of increased sales volume and the
acquisition of another unconsolidated affiliate during the fourth quarter of
1995.
In 1995, the Company's provision for taxes was $5.1 million, while the
pre-tax loss was $6.1 million. The difference between the tax provision and the
amount that would have been recoverable by applying the statutory rate to
pre-tax loss was attributable substantially to the non-deductibility for income
tax purposes of the $17.5 million appreciation in the value of the stock issued
to an executive officer and other senior management of the Company. On a pro
forma basis, to give effect to special charges, taxes on income for 1995 were
$6.3 million, resulting in an effective tax rate of 42.9%. The difference
between the pro forma effective tax rate and the Federal statutory rate relates
primarily to state income taxes and currently non-deductible net operating
losses of certain foreign subsidiaries, primarily in France, which are not
included in the Company's consolidated tax return. In 1994, the income tax
recovery was $1.6 million, while the pre-tax loss was $12.4 million. The
effective tax rate of the Company for 1994 differed from the Federal statutory
rate, primarily due to non-deductible special charges of approximately $9.1
million arising from the appreciation in the value of stock issued to an
executive officer of the Company and currently non-deductible net operating
losses of certain foreign subsidiaries.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Risk Management
The Company has operations in the United States, Canada, the United Kingdom,
The Netherlands, Belgium, Germany, France, the Republic of Ireland and Spain.
Each of the Company's operations endeavors to protect its margins by using
foreign currency forward contracts to hedge the estimated foreign currency
payments to foreign vendors. The total U.S. dollar equivalent of all foreign
currency forward contracts hedging vendor payments was $5.0 million as of the
1996 fiscal year end.
23
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company experienced a negative
translation adjustment of $0.5 million in 1996 and a positive translation
adjustment of $0.3 million in 1995, which adjustments were reflected in the
balance sheet as an adjustment to stockholders' equity. The cumulative
translation adjustment at the end of 1996 showed a net negative translation
adjustment of $0.6 million.
The Company issues a Canadian catalog once a year with prices stated in
Canadian dollars; however, orders are shipped from the Company's United States
warehouses resulting in U.S. dollar costs for Canadian dollar sales. To minimize
the exposure to fluctuations in foreign currency exchange rates, the Company
enters into foreign currency forward contracts with major international banks
and an unconsolidated 50%- owned company to convert estimated monthly Canadian
dollar receipts into U.S. dollars. The Company usually enters into the forward
contract prior to the issuance of its Canadian catalog and for the expected life
of the catalog. As of December 28, 1996, the Company had 28 forward contracts
outstanding for the forward sale of 5.2 million Canadian dollars. The last of
the contracts expires on October 31, 1997; however, the Company anticipates
entering into new contracts in the normal course of its business.
The Company borrowed money in U.S. dollars under a term loan related to the
Van den Braak acquisition. The Company loaned the proceeds to Henry Schein B.V.
in Netherland Guilders ("NLG") with principal and interest payable in NLGs. To
minimize the resultant exposure to fluctuations in foreign currency exchange
rates between the U.S. dollar and The Netherland Guilder, the Company entered
into a series of foreign currency forward contracts to sell NLGs for U.S.
dollars. As of December 28, 1996, the Company had 5 contracts outstanding for
the forward sale of NLG 7.1 million. The last contract expires on October 31,
1997.
The Company entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in October and November of 2001.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products and special inventory buying opportunities, (b) acquisitions, and (c)
capital expenditures. Since sales have been strongest during the fourth quarter
and special inventory buying opportunities are most prevalent just before the
end of the year, the Company's working capital requirements have been generally
higher from the end of the third quarter to the end of the first quarter of the
following year. The Company has financed its business primarily through its
revolving credit facilities and stock issuances.
Net cash used in operating activities for the year ended December 28, 1996
of $34.5 million resulted primarily from a net increase in working capital of
$63.9 million offset in part by net income, adjusted for non-cash charges
relating primarily to depreciation and amortization and deferred income taxes of
$27.2 million and $2.4 million, respectively. The increase in working capital
was primarily due to (i) $43.1 million increase in accounts receivable resulting
from increased sales and extended payment terms, and a decrease in the
percentage of customers who make payment with their orders, (ii) a $23.0 million
increase in inventories, primarily due to year-end inventory buying
opportunities and (iii) an $8.6 million increase in loans and other receivables
offset in part by an increase in accounts payable and other accrued expenses of
$10.7 million. The Company anticipates future increases in working capital as a
result of its continued sales growth, extended payment terms and special
inventory buying opportunities.
24
Net cash used in investing activities for the year ended December 28, 1996
of $49.1 million resulted primarily from cash used to make acquisitions of $32.5
million and capital expenditures of $11.2 million. During the past three years,
the Company has invested more than $26.3 million in the development of new
computer systems, and expenditures for new operating facilities. The Company
expects that it will continue to invest in excess of $10.0 million per year in
capital projects to modernize and expand its facilities and infrastructure
systems.
Net cash provided by financing activities for the year ended December 28,
1996 of $117.6 million resulted primarily from net cash proceeds from a
follow-on offering of the Company's Common Stock, which was completed on June
21, 1996 amounting to $124.1 million, partially offset by net debt repayments of
approximately $5.6 million.
A balloon payment of approximately $3.5 million is due on October 31, 1997
under a term loan associated with a foreign acquisition. In addition, with
respect to certain acquisitions and joint ventures, holders of minority
interests in the acquired entities or ventures have the right at certain times
to require the Company to acquire their interest at either fair market value or
a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of December 28, 1996 of $41.7
million consist of bank balances and investments in short-term tax exempt
securities rated AAA by Moody's (or an equivalent rating). These investments
have staggered maturity dates, none of which exceed three months, and have a
high degree of liquidity as the securities are actively traded in public
markets.
The Company entered into an amended revolving credit facility on January 31,
1997 that increased its main credit facility from $65.0 million to $100.0
million, extended the facility termination date to January 30, 2002 and reduced
the interest rate on the Company's borrowings under the facility. Borrowings
under the credit facility were $18.0 million at December 28, 1996. Certain of
the Company's subsidiaries have additional credit facilities available which
totaled $13.2 million at December 28, 1996 under which $6.7 million had been
borrowed.
The aggregate purchase price of the acquisitions completed during 1996 was
approximately $38.8 million, payable $32.5 million in cash, $0.9 million in
notes and $5.4 million in stock. The cash portion of the purchase price was
primarily funded by proceeds from the Company's initial public offering,
completed in November 1995, and a follow-on offering, completed in June 1996.
Since December 28, 1996, the Company has acquired (i) in a
pooling-of-interests transaction, all of the outstanding common stock of Dentrix
Dental Systems, Inc., a leading provider of clinically-based dental practice
management systems, with 1996 net sales of approximately $10.3 million, and (ii)
in a purchase transaction, the business of Smith Holden, Inc., the longest
operating dental supply company in the United States, with 1996 net sales of
approximately $14.2 million. Additionally, on March 7, 1997, the Company entered
into the Merger Agreement pursuant to which MBMI will merge into a wholly-owned
subsidiary of the Company.
The Company believes that its cash and cash equivalents of $41.7 million as
of December 28, 1996, its anticipated cash flow from operations, its ability to
access public debt and equity markets and the availability of funds under its
existing credit agreements will provide it with liquidity sufficient to meet its
currently foreseeable capital needs.
25
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
Report of Independent Certified Public Accountants............................27
Consolidated Financial Statements:
Balance Sheets as of December 28, 1996 and December 30, 1995.............. 28
Statements of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ..........................29
Statements of Stockholders' Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 .........30
Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994 ............................31
Notes to Consolidated Financial Statements .............................32-56
Schedule, years ended December 28, 1996,
December 30, 1995 and December 31, 1994
II - Valuation and Qualifying Accounts ...............................72
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or
the notes thereto.
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry Schein,
Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 1996. We have
also audited the financial statement schedule listed in the accompanying index.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedule. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Henry Schein, Inc.
and Subsidiaries at December 28, 1996 and December 30, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
March 7, 1997
27
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 28, December 30,
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 41,673 $ 7,603
Accounts receivable, less reserves of $7,305 and $6,335,
respectively ....................................... 140,197 91,248
Inventories ............................................. 126,632 96,515
Deferred income taxes ................................... 6,189 6,896
Other ................................................... 29,665 19,492
--------- ---------
Total current assets ........................... 344,356 221,754
Property and equipment, net ................................. 37,154 29,713
Goodwill and other intangibles, net ......................... 53,420 24,389
Investments and other ....................................... 29,006 21,011
--------- ---------
$ 463,936 $ 296,867
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 87,988 $ 65,105
Bank credit lines ....................................... 6,716 9,325
Accruals:
Salaries and related expenses ...................... 11,041 9,074
Other .............................................. 25,395 31,008
Current maturities of long-term debt .................... 8,461 3,343
--------- ---------
Total current liabilities ...................... 139,601 117,855
Long-term debt .............................................. 24,569 30,381
Other liabilities ........................................... 2,715 1,233
--------- ---------
Total liabilities .............................. 166,885 149,469
--------- ---------
Minority interest ........................................... 5,289 4,547
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000;
issued: 22,272,441 and 18,358,673, respectively .... 222 183
Additional paid-in capital .............................. 254,180 123,866
Retained earnings ....................................... 39,086 19,746
Treasury stock, at cost, 60,529 and 51,679 shares,
respectively ....................................... (1,090) (769)
Foreign currency translation adjustment ................. (636) (175)
--------- ---------
Total stockholders' equity ..................... 291,762 142,851
--------- ---------
$ 463,936 $ 296,867
========= =========
See accompanying notes to consolidated financial statements.
28
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended
-------------------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Net sales ................................................ $ 829,962 $ 616,209 $ 486,610
Cost of sales ............................................ 584,738 425,625 343,922
--------- --------- ---------
Gross profit ......................................... 245,224 190,584 142,688
Operating expenses:
Selling, general and administrative .................. 215,561 170,823 128,560
Special management compensation ...................... -- 20,797 21,596
Special professional fees ............................ -- -- 2,007
--------- --------- ---------
Operating income (loss) ......................... 29,663 (1,036) (9,475)
Other income (expense):
Interest income ...................................... 2,456 475 251
Interest expense ..................................... (3,421) (5,833) (3,756)
Other-net ............................................ 636 276 541
--------- --------- ---------
Income (loss) before taxes on income
(recovery), minority interest and
equity in earnings of affiliates ............ 29,334 (6,118) (12,439)
Taxes on income (recovery) ............................... 11,343 5,126 (1,630)
Minority interest in net income of subsidiaries .......... 246 509 561
Equity in earnings of affiliates ......................... 1,595 1,537 494
--------- --------- ---------
Net income (loss) ........................................ $ 19,340 $ (10,216) $ (10,876)
========= ========= =========
Net income per common share .............................. $ 0.93
=========
Weighted average common and common
equivalent shares outstanding ........................ 20,724
=========
Pro forma:
Historical net loss .................................. $ (10,216) $ (10,876)
Pro forma adjustments:
Special management compensation and
professional fees ........................... 20,797 23,603
Tax effect of above ............................. (1,174) (5,749)
--------- ---------
Pro forma net income ................................. $ 9,407 $ 6,978
========= =========
Pro forma net income per common share ................ $0. 70 $ 0.58
========= =========
Pro forma weighted average common and
common equivalent shares outstanding ............ 13,447 12,127
========= =========
See accompanying notes to consolidated financial statements.
29
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock
$.01 Par Value Additional
--------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------------- ----------- ----------- ------------ --------
Balance, December 25, 1993 .................................... 11,390,544 $ 114 $ 11,225 $ 41,390 $ --
Net loss ...................................................... -- -- -- (10,876) --
Deemed dividend ............................................... -- -- -- (552) --
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent) ................................... -- -- 9,104 -- --
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan ..... 489,456 5 3,460 -- --
Recognition of deferred compensation .......................... -- -- -- -- --
Stock issued to ESOP trust .................................... 128,257 1 899 -- --
Reclassification of redeemable stock issued as special
compensation and to ESOP trust ............................ (2,084,398) (21) (14,724) -- --
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 31, 1994 .................................... 9,923,859 99 9,964 29,962 --
Net loss ...................................................... -- -- -- (10,216) --
Shares issued for acquisition ................................. 1,260,416 13 6,500 -- --
Stock issued in initial public offering ....................... 5,090,000 51 72,417 -- --
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ........................................... 2,084,398 20 32,180 -- --
Issuance of compensatory stock options ........................ -- -- 2,805 -- --
Purchase of treasury stock (51,679 shares) .................... -- -- -- -- (769)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 30, 1995 .................................... 18,358,673 183 123,866 19,746 (769)
Net income .................................................... -- -- -- 19,340 --
Shares issued for acquisitions ................................ 155,183 2 5,424 -- --
Stock issued in follow-on offering ............................ 3,734,375 37 124,070 -- --
Stock issued to ESOP trust .................................... 24,210 -- 820 -- --
Purchase of treasury stock (8,850 shares) ..................... -- -- -- -- (321)
Foreign currency translation adjustment ....................... -- -- -- -- --
----------- ----------- ----------- ----------- ---------
Balance, December 28, 1996 .................................... 22,272,441 $ 222 $ 254,180 $ 39,086 $ (1,090)
=========== =========== =========== =========== =========
Foreign
Currency Deferred Total
Translation Compen- Stockholders'
Adjustment sation Equity
----------- ------------ -----------
Balance, December 25, 1993 .................................... $ (635) $ (8,197) $ 43,897
Net loss ...................................................... -- -- (10,876)
Deemed dividend ............................................... -- -- (552)
Adjustment resulting from revaluation of stock issued for
special compensation (including $4,897 attributable to
stock of former parent) ................................... -- (9,104) --
Stock issued and issuable, in part, to settle accrued liability
under long-term executive incentive compensation plan ..... -- -- 3,465
Recognition of deferred compensation .......................... -- 17,301 17,301
Stock issued to ESOP trust .................................... -- -- 900
Reclassification of redeemable stock issued as special
compensation and to ESOP trust ............................ -- -- (14,745)
Foreign currency translation adjustment ....................... 177 -- 177
-------- ----------- -----------
Balance, December 31, 1994 .................................... (458) -- 39,567
Net loss ...................................................... -- -- (10,216)
Shares issued for acquisition ................................. -- -- 6,513
Stock issued in initial public offering ....................... -- -- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of initial
public offering ........................................... -- -- 32,200
Issuance of compensatory stock options ........................ -- -- 2,805
Purchase of treasury stock (51,679 shares) .................... -- -- (769)
Foreign currency translation adjustment ....................... 283 -- 283
-------- ----------- -----------
Balance, December 30, 1995 .................................... (175) -- 142,851
Net income .................................................... -- -- 19,340
Shares issued for acquisitions ................................ -- -- 5,426
Stock issued in follow-on offering ............................ -- -- 124,107
Stock issued to ESOP trust .............