================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-27078 HENRY SCHEIN, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 11-3136595 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 135 Duryea Road Melville, New York 11747 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 843-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 ---------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the NASDAQ National Market on March 21, 1997 was approximately $369,341,068. As of March 21, 1997, 23,324,085 shares of registrant's Common Stock, par value $.01 per share, were outstanding. Documents Incorporated by Reference Portions of the Registrant's definitive proxy statement filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year (December 28, 1996) are incorporated by reference in Part III hereof. ================================================================================
TABLE OF CONTENTS Page Number ----------- PART I ITEM 1. Business 1 ITEM 2. Properties 13 ITEM 3. Legal Proceedings 14 ITEM 4. Submission of Matters to a Vote of Security Holders 14 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 ITEM 6. Selected Financial Data 16 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 ITEM 8. Financial Statements and Supplementary Data 26 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 57 PART III ITEM 10. Directors and Executive Officers of the Registrant 57 ITEM 11. Executive Compensation 57 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 57 ITEM 13. Certain Relationships and Related Transactions 57 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 58 Financial Statement Schedules 60 Exhibit Index 73
PART I ITEM 1. Business Recent Developments Since December 28, 1996, the Company has acquired (i) in a pooling-of-interests transaction, all of the outstanding common stock of Dentrix Dental Systems, Inc., a leading provider of clinically-based dental practice management systems, with 1996 net sales of approximately $10.3 million, and (ii) in a purchase transaction, the business of Smith Holden, Inc., the longest operating dental supply company in the United States, with 1996 net sales of approximately $14.2 million. Additionally, on March 7, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Micro Bio-Medics, Inc. (Nasdaq:MBMI) will merge into a wholly-owned subsidiary of the Company. As a result of the transaction, which has been approved by the Boards of Directors of MBMI and the Company, outstanding shares of MBMI's common stock will be exchanged at a fixed rate of 0.62 of a share of the Company's Common Stock for each outstanding 1.0 share of MBMI. Each of the members of MBMI's Board of Directors has granted to the Company a proxy to vote their shares of MBMI common stock in favor of the Merger Agreement and an option, exercisable under certain circumstances, to acquire their shares for the consideration that they would have received under the Merger Agreement in respect of those shares. MBMI distributes medical supplies to physicians and hospitals in the New York metropolitan area, as well as to healthcare professionals in sports medicine, emergency medicine, school health, industrial safety, government and laboratory markets nationwide. MBMI had net sales of approximately $150.0 million and earnings of approximately $1.7 million for its fiscal year ended November 30, 1996. Upon completion of the acquisition, the Company believes that it will become North America's largest distributor of healthcare products to office-based healthcare practitioners and a leading provider of healthcare products and services to the U.S. physician market. The completion of the transaction is subject to the satisfaction of customary closing conditions, including, among others, MBMI shareholder approval, and Hart-Scott-Rodino waiting periods. The transaction is expected to be completed by mid-1997 although no assurances can be given in this regard. For a more complete description of the terms of the Merger Agreement and other related agreements entered into in connection with the Merger Agreement, reference is made to the Exhibits to this Form 10-K. The Company intends to file a Registration Statement on Form S-4 with the Securities and Exchange Commission with respect to the securities to be issued in connection with the Merger Agreement. General The Company is the largest direct marketer of healthcare products and services to office-based healthcare practitioners in the combined North American and European markets. The Company has operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, the Republic of Ireland and Spain. The Company sells products and services to over 230,000 customers, primarily dental practices and dental laboratories, as well as physician practices, veterinary clinics and institutions. In 1996, the Company sold products to over 65% of the estimated 100,000 dental practices in the United States. The Company believes that there is strong awareness of the "Henry Schein" name among
office-based healthcare practitioners due to its more than 60 years of experience in distributing healthcare products. Through its comprehensive catalogs and other direct sales and marketing programs, the Company offers its customers a broad product selection of both branded and private brand products which include approximately 50,000 stock keeping units ("SKUs") in North America and approximately 40,000 SKUs in Europe at published prices that the Company believes are below those of many of its competitors. The Company also offers various value-added products and services, such as practice management software. As of December 28, 1996, the Company had sold over 18,000 dental practice management software systems, more than any of its competitors. On February 28, 1997, the Company acquired all of the outstanding common stock of Dentrix Dental Systems, Inc., a leading provider of clinically-based dental practice management systems, with 1996 net sales of approximately $10.3 million and a 3,500 installed user base. During 1996, the Company distributed over 9.0 million pieces of direct marketing materials (such as catalogs, flyers and order stuffers) to approximately 500,000 office-based healthcare practitioners. The Company supports its direct marketing efforts with approximately 450 telesales representatives who facilitate order processing and generate sales through direct and frequent contact with customers and with over 300 field sales consultants. The Company utilizes database segmentation techniques to more effectively market its products and services to customers. In recent years, the Company has continued to expand its management information systems and has established strategically located distribution centers in the United States and Europe to enable it to better serve its customers and increase its operating efficiency. The Company believes that these investments, coupled with its broad product offerings, enable the Company to provide its customers with a single source of supply for substantially all their healthcare product needs and provide them with convenient ordering and rapid, accurate and complete order fulfillment. The Company estimates that approximately 99% of all orders in the United States and Canada received before 7:00 p.m. and 4:00 p.m., respectively, are shipped on the same day the order is received and approximately 90% of orders are received by the customer within two days of placing the order. In addition, the Company estimates that approximately 99% of all items ordered in the United States and Canada are shipped without back ordering. Acquisition and Joint Venture Strategies The Company believes that there has been consolidation among healthcare products distributors serving office-based healthcare practitioners and that this consolidation will continue to create opportunities for the Company to expand through acquisitions and joint ventures. In recent years, the Company has acquired or entered into joint ventures with a number of companies engaged in businesses that are complementary to those of the Company. The Company's acquisition and joint venture strategies include acquiring additional sales that will be channelled through the Company's existing infrastructure, acquiring access to additional product lines, acquiring regional distributors with networks of field sales consultants and international expansion. The Company has entered into or completed seventeen acquisitions during the year ended December 28, 1996. The businesses acquired included 10 dental and three medical companies, a veterinary supply distributor and three international dental companies, with aggregate net sales in their last fiscal year ends of approximately $104.0 million, all of which were accounted for as purchase transactions. Of these, fifteen were for majority ownership (100% in nine of the transactions). In 1995, the Company acquired the distribution business of The Veratex Corporation, a national direct marketer of dental, medical and veterinary products, and Schein Dental Equipment Corp., a distributor and manufacturer of large dental equipment. The Company also completed the majority acquisition of 11 other companies and a 50% acquisition of one other company during 1995. 2
Corporate Structure Background The Company was formed on December 23, 1992 as a wholly-owned subsidiary of Schein Holdings, Inc. ("Holdings"). At that time, Holdings conducted the business in which the Company is now engaged and, in addition, owned 100% of the outstanding capital stock of Schein Pharmaceutical, Inc. ("Pharmaceutical"), a company engaged in the manufacture and distribution of multi-source pharmaceutical products. In December 1992, Holdings separated the Company's business from Pharmaceutical by transferring to the Company all of the assets (including Holdings' 50% interest in HS Pharmaceutical, Inc., a manufacturer and distributor of generic pharmaceuticals ("HS Pharmaceutical")) and liabilities of the healthcare distribution business now conducted by the Company. The Company did not assume any other liabilities of Holdings, including the liabilities associated with Pharmaceutical's business. In February 1994, the Company, Holdings and their stockholders entered into a number of reorganization agreements, and in September 1994, pursuant to such agreements, all of the Company's common stock, par value $.01 per share ("Common Stock"), held by Holdings was distributed to certain of the current stockholders of the Company (the "Reorganization"). On November 8, 1995, the Company completed an initial public offering of its Common Stock, and on June 21, 1996, the Company completed a follow-on offering of its Common Stock. Proceeds from these offerings to the Company, after expenses, were approximately $72.5 million and $124.1 million, respectively. The proceeds enabled the Company to pay off certain indebtedness, with the remaining proceeds available for general corporate purposes, including subsequent acquisitions. Customers The Company serves over 230,000 customers worldwide in the dental, medical and veterinary markets. The Company's dental customers include office-based dental practices, dental laboratories, universities, institutions, governmental agencies and large group and corporate accounts; medical customers include office-based physician practices, podiatrists, renal dialysis centers, surgery centers, institutions and governmental agencies; and the Company's veterinary products are sold primarily to office-based veterinarians serving primarily small animals. The Company believes that its customers generally order from two or more suppliers for their healthcare product needs, and often use one supplier as their primary resource. The Company believes that its customers generally have larger order sizes and order more frequently from their primary suppliers. The Company estimates that it serves as a primary supplier to less than 10% of its total customer base, and believes it has an opportunity to increase sales by increasing its level of business with those customers for which it serves as a secondary supplier. Over the past several years the Company has expanded its customer base to include larger purchasing organizations, including certain dental laboratories, institutions, government agencies, renal dialysis centers and surgery centers. More recently, as cost-containment pressures have resulted in increased demand for low-cost products and value-added services, the Company has targeted specific groups of practices under common ownership, institutions, and professional groups. For example, the Company has an exclusive direct marketing agreement with an American Medical Association ("AMA") sponsored service and a veterinarian sponsored service, pursuant to which member practitioners have access to the services' lower priced products. In 1996, the AMA-sponsored service and the veterinarian-sponsored purchasing service accounted for net sales of over $27.4 million. These services, government institutions and agencies, and other large or collective purchasers, require low-cost pricing and detailed product and usage information and reporting. The Company believes it is well situated to meet the needs of these customers, given its broad, low-cost 3
product offerings and its management information systems. No single customer accounted for more than 4.7% of net sales in 1996. Sales and Marketing The Company's sales and marketing efforts, which are designed to establish and solidify customer relationships through frequent direct marketing contact, emphasize the Company's broad product lines, competitive prices and ease of order placement. In addition, the Company's marketing efforts involve personal interaction with field sales consultants in certain locations. The key elements of the Company's program in the United States are: o Direct Marketing. During 1996, the Company distributed over 9.0 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to approximately 500,000 office-based healthcare practitioners. The Company's principal U.S. dental catalog, which is issued semi-annually, contains an average of over 300 pages and includes approximately 20,000 SKUs. The number of catalogs and other material received by each customer depends upon the market they serve as well as their purchasing history. The Company's catalogs include detailed descriptions and specifications of both branded and private brand products and are utilized by healthcare practitioners as a reference source. By evaluating its customers' purchasing patterns, area of specialty, past product selections and other criteria, the Company identifies customers who may respond better to specific promotions or products. To facilitate its direct marketing activities, the Company maintains an in-house advertising department which performs many creative services, which the Company believes streamlines the production process, provides greater flexibility and creativity in catalog production, and results in cost savings. o Telesales. The Company supports its direct marketing with over 450 inbound and outbound telesales representatives who facilitate order processing and generate new sales through direct and frequent contact with customers. Inbound telesales representatives are responsible for assisting customers in purchasing decisions as well as answering product pricing and availability questions. In addition to assisting customers, inbound telesales representatives also market complementary or promotional products. The Company's telesales representatives utilize on-line computer terminals to enter customer orders and to access information about products, product availability, pricing, promotions and customer buying history. The Company utilizes outbound telesales representatives and programs to better market its services to those customer accounts identified by the Company as either being high volume or high order frequency accounts. The Company's U.S. dental outbound telesales representatives accounted for approximately $101.6 million of the Company's net sales in 1996. The Company has approximately 100 medical and veterinary telesales representatives who make outbound calls in addition to handling inbound telesales. Outbound telesales representatives strive to manage long-term relationships with these customers through frequent and/or regularly scheduled phone contact and personalized service. The Company's telesales representatives generally participate in an initial two-week training course designed to familiarize the sales representative with the Company's products, services and systems. In addition, generally all telesales representatives attend periodic training sessions and special sales programs and receive incentives, including monthly commissions. 4
o Field Sales Consultants. In 1992, the Company initiated its field sales consultant program and now has over 300 field sales consultants covering certain of its major North American and European markets. The field sales consultants concentrate on attracting new customers and increasing sales to customers who do not currently order a high percentage of their total product needs from the Company. This strategy is designed to complement the Company's direct marketing and telesales strategies and to enable the Company to better market, service and support the sale of more sophisticated products and equipment. Once a field sales consultant has established a relationship with a customer, the representative encourages the customer to use the Company's automated ordering process or its telesales representatives for its day-to-day needs. This simplifies the ordering process for the customer and increases the effectiveness of the field sales consultant. Customer Service A principal element of the Company's customer service approach is to offer an order entry process that is convenient, easy and flexible. Customers typically place orders with one of the Company's experienced telesales representatives. Orders may also be placed 24-hours a day by fax, mail, PROTONE(R) (the Company's 24-hour automated phone service) or its computerized order entry system. The Company has developed an enhanced Windows(R)-based version of its computerized order entry system, known as ArubA(R), which was introduced at the end of 1995. The Company focuses on providing rapid and accurate order fulfillment and high fill rates. The Company estimates that approximately 99% of all items ordered in the United States and Canada are shipped without back ordering, and that approximately 99% of all orders in the United States and Canada received before 7:00 p.m. and 4:00 p.m. respectively, are shipped on the same day the order is received. In addition, because the Company seeks to service a customer's entire order from the distribution center nearest the customer's facility, approximately 90% of orders are received within two days of placing the order. The Company continually monitors its customer service through customer surveys, focus groups and daily statistical reports. The Company maintains a liberal return policy to better assure customer satisfaction with its products. 5
Products The following chart sets forth the principal categories of products offered by the Company and certain top selling types of products in each category, with the percentage of 1996 net sales in parenthesis: <TABLE> <CAPTION> Dental Products (69.5%) - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Consumable Dental Products Dental Laboratory and Small Equipment (57.5%) Products (5.1%) Large Dental Equipment (6.9%) - --------------------------------------------------------------------------------------------------------------------------- X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Dental Chairs, Units and Lights; X-Rays; Handpieces; Preventatives; Impression Acrylics; Articulators; and and Equipment Repair Materials; Composites; and Anesthetics Abrasives Value-Added Products Medical Products (23.4%) Veterinary Products (4.4%) and Services (2.7%) - --------------------------------------------------------------------------------------------------------------------------- Branded and Generic Pharmaceuticals; Branded and Generic Software and Related Products; Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Products; Financial Products; and other value- Infection Control; and Vitamins and Dental Products added products </TABLE> 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. <TABLE> <CAPTION> Name Age Position - ---------------------- --- ----------------------------------------------------- Corporate <S> <C> <C> 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 </TABLE> 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: <TABLE> <CAPTION> Approximate Own or Square Lease Property Location Lease Footage Expiration Date -------- -------- ------- ----------- --------------- <S> <C> <C> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> High Low ---- --- <C> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> 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 </TABLE> 16
<TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> 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 </TABLE> - ---------- (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. <TABLE> <CAPTION> 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): <S> <C> <C> <C> <C> <C> 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 </TABLE> (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) <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> 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 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 28
HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) <TABLE> <CAPTION> Years Ended ------------------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> 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 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 29
HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) <TABLE> <CAPTION> Common Stock $.01 Par Value Additional --------------------------- Paid-in Retained Treasury Shares Amount Capital Earnings Stock ------------- ----------- ----------- ------------ -------- <S> <C> <C> <C> <C> <C> 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) =========== =========== =========== =========== ========= <CAPTION> Foreign Currency Deferred Total Translation Compen- Stockholders' Adjustment sation Equity ----------- ------------ ----------- <S> <C> <C> <C> Balance, December 25, 1993 .................................... $ (635) $ (8,197) $ 43,897 Net loss ...................................................... -- -- (10,876) Deemed dividend ............................................... -- -- (552) Adjustment resulting from revaluation of stock issued for special compensation (including $4,897 attributable to stock of former parent) ................................... -- (9,104) -- Stock issued and issuable, in part, to settle accrued liability under long-term executive incentive compensation plan ..... -- -- 3,465 Recognition of deferred compensation .......................... -- 17,301 17,301 Stock issued to ESOP trust .................................... -- -- 900 Reclassification of redeemable stock issued as special compensation and to ESOP trust ............................ -- -- (14,745) Foreign currency translation adjustment ....................... 177 -- 177 -------- ----------- ----------- Balance, December 31, 1994 .................................... (458) -- 39,567 Net loss ...................................................... -- -- (10,216) Shares issued for acquisition ................................. -- -- 6,513 Stock issued in initial public offering ....................... -- -- 72,468 Reclassification of redeemable stock issued as special compensation and to ESOP trust upon closing of initial public offering ........................................... -- -- 32,200 Issuance of compensatory stock options ........................ -- -- 2,805 Purchase of treasury stock (51,679 shares) .................... -- -- (769) Foreign currency translation adjustment ....................... 283 -- 283 -------- ----------- ----------- Balance, December 30, 1995 .................................... (175) -- 142,851 Net income .................................................... -- -- 19,340 Shares issued for acquisitions ................................ -- -- 5,426 Stock issued in follow-on offering ............................ -- -- 124,107 Stock issued to ESOP trust .................................... -- -- 820 Purchase of treasury stock (8,850 shares) ..................... -- -- (321) Foreign currency translation adjustment ....................... (461) -- (461) -------- ----------- ----------- Balance, December 28, 1996 .................................... $ (636) $ -- $ 291,762 ======== =========== =========== </TABLE> See accompanying notes to consolidated financial statements 30
HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Years Ended --------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ----------- ------------ <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) ...................................... $ 19,340 $(10,216) $(10,876) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .................... 7,898 6,037 3,811 Provision for losses and allowances on accounts receivable ................................... 970 2,016 1,061 Stock issued to ESOP trust ....................... 820 -- 900 Provision (benefit) for deferred income taxes .... 2,397 (1,091) (3,553) Special management compensation .................. -- 20,289 18,866 Undistributed earnings of affiliates ............. (1,595) (1,537) (494) Minority interest in net income of subsidiaries 246 509 561 Other ............................................ (619) (558) (965) Changes in assets and liabilities: Increase in accounts receivable .............. (43,063) (35,055) (12,809) Increase in inventories ...................... (22,962) (7,342) (5,412) Increase in other current assets ............. (8,603) (4,411) (3,571) Increase in accounts payable and accruals .... 10,683 20,562 18,759 --------- -------- -------- Net cash provided by (used in) operating activities .... (34,488) (10,797) 6,278 --------- -------- -------- Cash flows from investing activities: Capital expenditures ................................ (11,213) (9,219) (5,919) Business acquisitions, net of cash acquired ......... (32,540) (16,377) -- Other ............................................... (5,338) (3,893) (1,972) --------- -------- -------- Net cash used in investing activities .................. (49,091) (29,489) (7,891) --------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt ............ 1,154 3,698 5,391 Principal payments on long-term debt ................ (4,688) (15,289) (1,150) Proceeds from issuance of stock ..................... 124,107 72,468 -- Proceeds from borrowings from banks ................. 4,449 2,446 3,764 Purchase of treasury stock .......................... (321) (769) -- Payments on borrowings from banks ................... (6,478) (20,826) (4,200) Deemed dividend ..................................... -- -- (552) Other ............................................... (574) 1,711 445 --------- -------- -------- Net cash provided by financing activities .............. 117,649 43,439 3,698 --------- -------- -------- Net increase in cash and cash equivalents ............. 34,070 3,153 2,085 Cash and cash equivalents, beginning of year ........... 7,603 4,450 2,365 --------- -------- -------- Cash and cash equivalents, end of year ................. $ 41,673 $ 7,603 $ 4,450 ========= ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 31
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share data) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Henry Schein, Inc. and all of its wholly-owned and majority-owned subsidiaries (the "Company"). Investments in unconsolidated affiliates which are 50% or less owned are accounted for under the equity method. All material intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year The Company reports its operations on a 52-53 week basis ending on the last Saturday of December. Accordingly, fiscal years ended December 28, 1996 and December 30, 1995 consisted of 52 weeks and the fiscal year ended December 31, 1994 consisted of 53 weeks. Revenue Recognition Sales are recorded when products are shipped or services are rendered, except for the portion of revenues from sales of practice management software which is attributable to noncontractual postcontract customer support, which is deferred and recognized ratably over the period in which the support is expected to be provided. Inventories Inventories consist substantially of finished goods and are valued at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. 32
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) Property and Equipment and Depreciation and Amortization Property and equipment are stated at cost. Depreciation is computed primarily under the straight-line method over the following estimated useful lives: <TABLE> <CAPTION> Years ---------- <S> <C> Buildings and improvements 40 Machinery and warehouse equipment 5 - 10 Furniture, fixtures and other 3 - 10 Computer equipment and software 5 - 7 </TABLE> Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term. Taxes on Income The Company filed a consolidated Federal income tax return with Schein Holdings, Inc. for the period ended September 30, 1994 (see Note 2). For the balance of 1994 the Company filed a consolidated Federal income tax return with its 80% or greater owned subsidiaries and expects to continue to do so thereafter. Income taxes for financial statement presentation were calculated through the period ending September 30, 1994 as if the Company filed a separate tax return. Premium Coupon Program The Company issues premium coupons to certain customers in conjunction with sales of its products which are redeemable for gifts. Premium coupon redemptions are accrued as issued based upon expected redemption rates. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. The Company has determined that the effect of foreign exchange rate changes on cash flows is not material. Foreign Currency Translation and Transactions The financial position and results of operations of the Company's foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in the cumulative translation adjustment account in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in earnings, except for certain hedging transactions (see below). 33
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) Financial Instruments The Company uses forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. Gains and losses on these positions are deferred and included in the basis of the transaction when it is completed. In order to manage interest rate exposure, the Company has entered into interest rate swap agreements to exchange variable rate debt based on LIBOR into fixed rate debt without the exchange of the underlying principal amounts. Net payments or receipts under the agreements are recorded as adjustments to interest expense. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value because the underlying instruments are at variable rates which are repriced frequently. Acquisitions The net assets of businesses purchased are recorded at their fair value at the acquisition date and the consolidated financial statements include their operations from that date. Any excess of acquisition costs over the fair value of identifiable net assets acquired is included in goodwill and is amortized on a straight-line basis over periods not exceeding 30 years. Long-Lived Assets Long-lived assets, such as goodwill and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment losses have been necessary through December 28, 1996. Stock-Based Compensation The Company accounts for its stock option awards under the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company makes pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied as required by Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation." 34
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) Earnings Per Share (a) Historical Historical per share information is computed using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares relating to the stock options issued to executive management in 1995, the shares issued to senior management in 1994, and the shares contributed to the ESOP trust in 1994 have been treated as if they were outstanding since the beginning of 1994. Such ESOP shares and common equivalent shares relating to the stock options are calculated using the treasury stock method, using the initial public offering price of $16.00 per share for assumed repurchase. Historical per share information for 1995 and 1994 is not considered relevant as it would differ materially from pro forma per share data, given the significance of the pro forma adjustments. (b) Pro Forma Net Income Per Share Pro forma net income per share is computed using pro forma net income and the pro forma weighted average number of common and common equivalent shares outstanding, after reflecting a 99-for-1 stock split effected immediately prior to the initial public offering. The common equivalent shares for pro-forma net income per share were computed on the same basis as the historical basis. (c) Supplemental Earnings Per Share Supplementary net income per share (which is required by APB Opinion No. 15) for the year ended December 28, 1996 was $.93. For this calculation, the weighted average number of common shares includes the shares assumed to provide the proceeds, at the follow-on offering price, needed to retire average revolving credit borrowings and debt for the period from the beginning of the year (or the date the debt was incurred) to the respective retirement date, and the pro forma net income was adjusted to exclude the related financing and interest expenses of the debt. NOTE 2--REORGANIZATION On December 26, 1992, Henry Schein, Inc., a New York corporation ("Old HSI"), reorganized its corporate structure to split into separate healthcare distribution and pharmaceutical companies (the "Split"). The Split was accomplished by transferring substantially all of Old HSI's assets and liabilities relating to the distribution business to Henry Schein USA, Inc., a newly formed corporation ("New HSI"). Subsequent to the Split, the name of Old HSI was changed to Schein Holdings, Inc. and the name of New HSI was changed to Henry Schein, Inc. ("HSI"). As a result of the Split, Schein Holdings, Inc. ("Holdings") became the parent of the Company and Schein Pharmaceutical, Inc. (the pharmaceutical company, "SPINC"). The accompanying financial statements give retroactive effect to the Split as described above, and reflect the historical cost bases of the assets and liabilities of the distribution business. 35
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 2 --REORGANIZATION--(Continued) On February 16, 1994, the shareholders of Holdings and HSI and certain HSI management entered into an agreement (the "HSI Agreement") whereby certain voting and non-voting shares of HSI stock were exchanged for new voting stock of HSI, a 100-for-1 stock split was effectuated, and certain additional agreements were entered into between HSI, the shareholders and management. The effect of the stock exchanges was that Holdings distributed all of its shares in HSI to certain shareholders of Holdings in exchange for its stock. The HSI Agreement was subject to approval by the Westchester County Surrogate Court, which approval was obtained on September 20, 1994. The HSI Agreement was also subject to the closing of a transaction between the shareholders of Holdings and Miles, Inc. ("Miles", an unrelated third party) involving the sale by shareholders of Holdings of 28% of their shares to Miles. In connection with the reorganization, during 1992 HSI issued 1,466,685 shares of common stock (valued at $6,173) to one of its executive officers and 147,312 shares of common stock (valued at $620) to an executive officer of SPINC. In addition, SPINC issued shares to one of its executive officers and an executive officer of HSI. Each company made cash payments to its respective executive officer to cover the income taxes relating to the stock issuances. The HSI shares issued to its executive officer originally were to vest after 10 years of employment. The other stock issuances were forfeitable if certain events did not occur. The stock issuances to HSI's executive officer were accounted for based on the estimated fair value at the date of issuance, as deferred compensation, which was classified as a reduction of stockholders' equity in the financial statements of the applicable company whose executive officer received the shares. Accordingly, the fair value of the shares of HSI issued to the executive officer of SPINC was recorded as a distribution to Holdings. Conversely, the fair value of the shares issued to HSI's executive officer by SPINC in the amount of $2,641 was treated as a contribution to HSI's capital. The cash payment to HSI's executive officer in the amount of $5,283 was charged to operations in 1992 as a special management compensation charge. In 1994, an additional cash payment of $258 was paid to HSI's executive officer to pay certain additional income taxes attributable to the 1992 stock issuance and was recorded as a special management compensation charge. As part of the HSI Agreement, the vesting and events of forfeiture were removed and the stock issued in 1992 became fully vested. Accordingly, the estimated fair value of the stock issuances to HSI's executive officer were revalued to reflect the fair values of HSI and SPINC at the time of vesting and the related deferred compensation, net of amortization, of $17,301 was charged to earnings as special management compensation in 1994. Additionally, pursuant to previous commitments, certain senior management of HSI were issued 489,456 shares including 91,377 shares issued subsequent to December 31, 1994 and 83,259 shares issued prior to the closing of the initial public offering in part to extinguish a previously accrued liability under a pre-existing long-term incentive plan. In connection with the issuance of these shares, a cash payment of approximately $2,472 was paid to cover the income taxes relating to this stock issuance and was charged, along with the estimated fair value of the related stock issued of $3,465, less the related obligations extinguished of approximately $1,900, as special compensation and is included in special compensation in 1994. 36
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 2 -- REORGANIZATION --(Continued) The shares issued to the executive officer and the senior management of HSI were subject to repurchase by HSI at fair market value in the event employment was terminated for any reason or an initial public offering of HSI's stock did not occur by December 31, 1999. The repurchase feature was eliminated upon the closing of the initial public offering. Special management compensation for the year ended December 30, 1995 includes a $17,484 charge to operations to reflect the appreciation in the market value of stock grants and issuances based on the initial public offering price of $16.00 per share and a cash payment of approximately $508 to cover income taxes related to those stock grants and issuances. In addition, special management compensation for the year ended December 30, 1995 includes a charge of $2,805 to reflect the excess of the initial public offering price over the exercise price of Class A options issued to certain executive management in May 1995 (see Note 14(a)). Special charges incurred in connection with this reorganization consist of special management compensation expense of $20,797 and $21,596 for the years ended 1995 and 1994, respectively, and special professional fees of $2,007 for 1994. In 1994, the Company incurred special professional fees on behalf of its stockholders relating to the reorganization in the amount of $552. This amount was deemed to be a dividend and deducted from retained earnings. NOTE 3--OTHER CURRENT ASSETS Other current assets consist of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ----------- ---------- <S> <C> <C> Prepaid expenses ................. $ 5,314 $ 3,941 Vendor rebates receivable ........ 11,798 5,744 Amounts due from affiliates....... 5,154 2,084 Refundable income taxes .......... 727 2,645 Other ............................ 6,672 5,078 ------- ------- $29,665 $19,492 ======= ======= </TABLE> 37
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 4--PROPERTY AND EQUIPMENT--NET Major classes of property and equipment consist of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ----------- ---------- <S> <C> <C> Land ............................... $ 1,445 $ 1,718 Buildings and leasehold improvements ..................... 24,726 23,288 Machinery and warehouse equipment .. 14,937 10,509 Furniture, fixtures and other ...... 14,585 12,165 Computer equipment and software .... 20,914 15,937 ------- ------- 76,607 63,617 Less accumulated depreciation and amortization ..................... 39,453 33,904 ------- ------- Net property and equipment ......... $37,154 $29,713 ======= ======= </TABLE> NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET Goodwill and other intangibles consist of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ----------- <S> <C> <C> Goodwill ........................... $52,407 $22,267 Other .............................. 4,672 3,917 ------- ------- 57,079 26,184 Less accumulated amortization ..................... 3,659 1,795 ------- ------- $53,420 $24,389 ======= ======= </TABLE> Goodwill represents the excess of the purchase price of acquisitions over the fair value of net assets acquired. During 1996, four acquisitions accounted for $16,887 of the increase in goodwill. Other intangibles include covenants not to compete, customer lists and deferred acquisition costs. Goodwill and other intangibles are amortized on a straight-line basis over periods not exceeding 30 years. 38
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 6--INVESTMENTS AND OTHER Investments and other consist of: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Investments in unconsolidated affiliates... $11,524 $ 9,865 Long-term receivables (see Note 11(b)) .... 11,051 8,399 Other ..................................... 6,431 2,747 ------- ------- $29,006 $21,011 ======= ======= </TABLE> The Company's investments are predominately 50% owned unconsolidated affiliates consisting of various companies involved in the healthcare distribution business and HS Pharmaceutical, Inc., which manufactures generic pharmaceuticals. As of December 28, 1996, the Company's investments in unconsolidated affiliates were $2,859 more than the Company's proportionate share of the underlying equity of these affiliates. This amount, which has been treated as goodwill, is being amortized over 30 years and charged to equity in the operating results of these companies. As of December 28, 1996, approximately $6,632 of the Company's retained earnings represented undistributed earnings of affiliates. Combined financial data for substantially all of these companies is as follows: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ----------- ----------- <S> <C> <C> Current assets ............. $38,172 $28,904 Total assets ............... 47,103 35,220 Liabilities ................ 30,939 22,995 Stockholders' equity ....... 16,164 12,225 </TABLE> <TABLE> <CAPTION> Years Ended ------------------------------------------ December 28, December 30, December 31, 1996 1995 1994 ----------- ----------- ----------- <S> <C> <C> <C> Net sales ................. $103,169 $55,090 $34,003 Operating income .......... 7,044 5,147 3,183 Net income ................ 3,775 2,920 1,428 </TABLE> 39
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 7--BUSINESS ACQUISITIONS The Company acquired 34 healthcare distribution businesses between 1994 and 1996, including, on July 7, 1995, the distribution business of The Veratex Corporation ("Veratex"), a national direct marketer of medical, dental and veterinary products, and on July 10, 1996, Scientific Supply Company, Inc., a regional distributor of medical supplies. The total amount of cash paid and promissory notes issued for these acquisitions was approximately $33,423, $22,710 and $2,660, for 1996, 1995 and 1994, respectively. The Company also issued 155,183 shares of common stock in 1996 in connection with two of its acquisitions and 1,260,416 shares of common stock in connection with one of its 1995 acquisitions, of which approximately 928,700 shares were issued to a stockholder of the Company. These acquisitions have been accounted for under the purchase method, except one from an affiliate which involves carryover of predecessor basis with respect to the affiliate's proportionate share of net assets. Operations of these businesses have been included in the consolidated financial statements from their acquisition dates. Certain acquisitions provide for contingent consideration in the event certain financial targets are satisfied. The summarized unaudited pro forma results of operations set forth below for 1996 and 1995 assume the acquisitions occurred as of the beginning of each of these periods. <TABLE> <CAPTION> Years Ended -------------------------- December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Net sales ......................................... $877,925 $ 762,333 Net income (loss) ................................. 19,699 (9,594) Pro forma net income, reflecting adjustment in 1995 to exclude special management compensation...... 19,699 10,029 Pro forma net income per common share ............. $ 0.95 $ 0.75 </TABLE> Pro forma net income per common share, including acquisitions, may not be indicative of actual results, primarily because the pro forma earnings include historical results of operations of acquired entities and do not reflect any cost savings that may result from the Company's integration efforts. Since December 28, 1996, the Company has acquired (i) in a pooling-of-interests transaction, all of the outstanding common stock of Dentrix Dental Systems, Inc., a leading provider of clinically-based dental practice management systems, with 1996 net sales of approximately $10.3 million, and (ii) in a purchase transaction, the business of Smith Holden, Inc., the longest operating dental supply company in the United States, with 1996 net sales of approximately $14.2 million. 40
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 7--BUSINESS ACQUISITIONS--(Continued) The following summarized pro forma unaudited results of operations combines the results of the Company and Dentrix assuming the acquisition of Dentrix occurred on December 26, 1993: <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Net sales .................................... $840,122 $623,302 $ 490,734 Net income (loss) ............................ 21,236 (9,333) (10,371) Pro forma net income, reflecting adjustment in 1995 and 1994 to exclude special management compensation and professional fees ......... 21,236 10,290 7,483 Pro forma net income per common share ........ $ 0.98 $ 0.71 $ 0.57 </TABLE> 41
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 8--BANK CREDIT LINES At December 28, 1996, certain subsidiaries of the Company had available various bank credit lines totaling approximately $13,157, expiring through December 1997. Borrowings of $6,716 under these credit lines at interest rates ranging from 3.5% to 7.5% were collateralized by accounts receivable, inventory and property and equipment of the subsidiaries with an aggregate net book value of $17,163 at December 28, 1996. NOTE 9--LONG-TERM DEBT Long-term debt consists of: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Borrowings under Revolving Credit Agreement (a) ............ $18,040 $17,000 Notes payable for business acquisitions (b) ................ 3,930 6,783 Notes payable to banks, interest variable (8.0% at December 28, 1996), payable in quarterly installments ranging from $16 to $34 through 2003, secured by inventory and accounts receivable in the amount of $21,192 ............ 1,932 2,020 Mortgage payable to bank in quarterly installments of $14, interest at 5.2% through November 2013, collateralized by a building with a net book value of $1,606 .............. 987 1,137 Various notes and loans payable with interest, in varying installments through 2001, uncollateralized ............. 8,141 6,784 ------- ------- Total ...................................................... 33,030 33,724 Less current maturities .................................... 8,461 3,343 ------- ------- Total long-term debt ....................................... $24,569 $30,381 ======= ======= </TABLE> 42
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 9--LONG-TERM DEBT--(Continued) (a) Revolving Credit Agreement On January 31, 1997, the Company entered into an amended revolving credit agreement which, among other things, increased the maximum borrowings to $100 million from $65 million, extended the term of the agreement to January 30, 2002 and reduced the interest rate charged to the Company. The interest rate on any borrowings under the agreement is based on prime or LIBOR as defined in the agreement, which were 8.25% and 5.69%, respectively, at December 28, 1996. The borrowings outstanding at December 28, 1996 were at interest rates ranging from 6.3% to 8.25%. The agreement provides for a sliding scale fee ranging from .1% to .3%, based upon certain financial ratios, on any unused portion of the commitment. The agreement also provides, among other things, that HSI will maintain, on a consolidated basis, as defined, a minimum tangible net worth, current, cash flow, and interest coverage ratios, a maximum leverage ratio, and contains restrictions relating to annual dividends in excess of $500, guarantees of subsidiary debt, investments in subsidiaries, mergers and acquisitions, liens, capital expenditures, certain changes in ownership and employee and shareholder loans. (b) Notes Payable for Business Acquisitions In November 1993, a subsidiary of the Company entered into a term loan agreement for $5,290 with a bank. The proceeds of this loan were used to acquire a dental supply distribution company. Principal is payable in semi-annual installments of $227 through October 1997, with a final balloon payment of $3,474 on October 31, 1997. Interest is payable quarterly at a rate of 6.5% per year. The agreement also provides for the same financial covenants and restrictions as the revolving credit agreement. In October 1995, the Company entered into a term loan agreement for $2,400 with a third party. The proceeds of this loan were used to acquire a medical distribution company. The loan was repaid in June 1996. As of December 28, 1996, the aggregate amounts of long-term debt maturing in each of the next five years are as follows: 1997--$8,461; 1998--$1,670; 1999--$774; 2000--$710, 2001 -- $689. 43
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 10--TAXES ON INCOME (RECOVERY) Taxes on income (recovery) are based on income (loss) before taxes on income (recovery), minority interest and equity in earnings of affiliates as follows: <TABLE> <CAPTION> Years Ended ----------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Domestic ............................................. $ 27,091 $ (7,435) $(13,978) Foreign .............................................. 2,243 1,317 1,539 -------- -------- -------- Total income (loss) before taxes on income (recovery), minority interest and equity in earnings of affiliates ...................................... $ 29,334 $ (6,118) $(12,439) ======== ======== ======== </TABLE> The provision for (recovery of) income taxes on income (loss) was as follows: <TABLE> <CAPTION> Years Ended ----------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Current tax expense (recovery): U.S. Federal ...................... $ 7,182 $ 4,677 $ 1,528 State and local ................... 1,069 924 459 Foreign ........................... 695 616 (64) ------- ------- ------- Total current ....................... 8,946 6,217 1,923 ------- ------- ------- Deferred tax expense (benefit): U.S. Federal ...................... 1,466 (836) (3,563) State and local ................... 778 (285) (155) Foreign ........................... 153 30 165 ------- ------- ------- Total deferred ...................... 2,397 (1,091) (3,553) ------- ------- ------- Total provision (recovery) .......... $11,343 $ 5,126 $(1,630) ======= ======= ======= </TABLE> 44
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 10--TAXES ON INCOME (RECOVERY)--(Continued) The tax effects of temporary differences that give rise to the Company's deferred tax asset (liability) are as follows: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------- ------------ <S> <C> <C> Current deferred tax assets: Inventory, premium coupon redemptions and accounts receivable valuation allowances.. $ 2,798 $ 3,592 Uniform capitalization adjustments to inventories................................... 1,520 1,472 Accrued special professional fees and other accrued liabilities........................... 1,871 1,832 ------- ------- Total current deferred tax asset................... 6,189 6,896 ------- ------- Non-current deferred tax assets (liabilities): Property and equipment.......................... (1,607) (428) Provision for long-term executive incentive compensation and other accrued liabilities.... (85) (110) Net operating losses of foreign subsidiaries.... 1,928 2,403 ------- ------- Total non-current deferred tax asset............... 236 1,865 Valuation allowance for non-current deferred tax assets.................................... (1,928) (2,403) ------- ------- Net non-current deferred tax liabilities........... (1,692) (538) ------- ------- Net deferred tax asset............................. $ 4,497 $ 6,358 ======= ======= </TABLE> The net deferred tax asset is realizable as the Company has sufficient taxable income in prior carryback years to realize the tax benefit for deductible temporary differences. The non-current deferred liability is included in Other liabilities on the Consolidated Balance Sheets. 45
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 10--TAXES ON INCOME (RECOVERY)--(Continued) The tax provisions (recovery) differ from the amount computed using the Federal statutory income tax rate as follows: <TABLE> <CAPTION> Years Ended ------------------------------------------ December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Provision (recovery) at Federal statutory rate......... $10,267 $(2,141) $(4,354) State income taxes, net of Federal income tax effect... 1,575 582 53 Net foreign and domestic losses for which no tax benefits are available............................... -- 574 23 Foreign income taxed at other than the Federal statutory rate....................................... (55) (25) (214) Non-deductible appreciation in stock issued as special management compensation...................... --- 6,109 3,318 Deduction for charitable contributions................. --- -- (180) Tax exempt interest................................... (237) -- -- Other.................................................. (207) 27 (276) ------- ------- ------- Income tax provision (recovery)........................ $11,343 $ 5,126 $(1,630) ======= ======= ======= </TABLE> Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on the foreign earnings; however, the Company believes that foreign tax credits would substantially offset any U.S. tax. At December 28, 1996, the cumulative amount of reinvested earnings was approximately $2,078. 46
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (a) Financial Instruments To reduce its exposure to fluctuations in foreign currencies and interest rates, the Company is party to foreign currency forward contracts and interest rate swaps with major financial institutions. While the Company is exposed to credit loss in the event of nonperformance by the counterparties of these contracts, the Company does not anticipate nonperformance by the counterparties. The Company does not require collateral or other security to support these financial instruments. As of December 28, 1996, the Company has outstanding foreign currency forward contracts aggregating $9,790 related to debt and the purchase and sale of merchandise. The contracts hedge against currency fluctuations of the Canadian dollar $3,946, Swiss Franc $707, The Netherland Guilder $4,776, Deutsche Mark $180, and Japanese Yen $181. The contracts expire at various dates through October 1997. At December 28, 1996, the Company had net deferred losses from foreign currency forward contracts of $27. As of December 28, 1996, interest rate swaps totaling $13,000 were outstanding. The swaps are used to convert floating rate debt to fixed rate debt to reduce the Company's exposure to interest rate fluctuations. The net result was to substitute a weighted average fixed interest rate of 7.81% for the variable LIBOR rate on $13,000 of the Company's debt. The swaps expire in October and November 2001. Under the interest rate environment during the year ended December 28, 1996, the net fair value of the Company's interest rate swap agreements resulted in a recognized loss of $299. In October 1994, a subsidiary of the Company recorded a $509 foreign currency gain relating to an intercompany loan intended to be repaid. This gain is reflected in the Other-net section of the Consolidated Statements of Operations. (b) Concentrations of Credit Risk Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade receivables and short-term cash investments. The Company places its short-term cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to a large customer base and its dispersion across different types of healthcare professionals and geographic areas. The Company maintains an allowance for losses based on the expected collectability of all receivables. Included in Accounts Receivable and LongTerm Receivables at December 28, 1996 is $18,355 and $7,785, respectively, related to Easy Dental(R) Plus software sales with non-interest bearing extended payment terms. Total unamortized discounts at December 28, 1996 amounted to $1,487 based on an imputed interest rate of 8.25%. Included in interest income for the year ended December 28, 1996 was approximately $998 of imputed interest relating to these non-interest bearing extended payment term receivables. Imputed interest relating to these receivables was not material for 1995 and 1994. 47
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 12--RELATED PARTY TRANSACTIONS (a) In the ordinary course of business, the Company purchases pharmaceutical products from certain unconsolidated affiliates. Net purchases from these affiliates amounted to $15,037, $8,730 and $12,055 in 1996, 1995 and 1994, respectively. Included in Accounts Payable at December 28, 1996 and December 30, 1995 were $1,523 and $1,591, respectively, for amounts due to these affiliates for purchases made from them. (b) The Company also shares certain services with these and other unconsolidated affiliates which are charged to the affiliates at cost. The Company charged these affiliates $602, $891 and $1,691 during 1996, 1995 and 1994, respectively, for these services. In addition, sales (at cost) to unconsolidated affiliates were $5,832, $3,784 and $3,160 in 1996, 1995 and 1994, respectively. (c) The Company recorded interest income of $129, $88 and $87, and interest expense of $32, $26 and $13 in 1996, 1995 and 1994, respectively, attributable to transactions with unconsolidated affiliates. Included in the Other section of current assets are amounts due from unconsolidated affiliates of $5,154 and $2,051 at December 28, 1996 and December 30, 1995, respectively. (d) A subsidiary of the Company leases its primary operating facility from an officer of the subsidiary. Rent expense attributed to this facility amounted to $209 for 1996 and 1995. (e) During 1994, a subsidiary of the Company entered into a sales service agreement with an entity ("Salesco") owned by an officer of the subsidiary. Under the terms of this agreement the subsidiary is required to reimburse Salesco for all reasonable expenses incurred in connection with the services it provides to the subsidiary and pay a fee to Salesco based upon a formula applied to its pre-tax profit. Amounts paid during 1996, 1995 and 1994 under this agreement were not material. (f) The Company purchases products from Schein Dental Equipment Corp. ("SDEC"), formerly owned by a stockholder. In September 1995, the Company acquired SDEC. Net purchases from SDEC prior to the acquisition amounted to $1,803 and $1,738, in 1995 and 1994, respectively. 48
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 13--SEGMENT AND GEOGRAPHIC DATA The Company is engaged principally in one line of business, the distribution of healthcare products to healthcare practitioners and professionals. The following table presents information about the Company by geographic area. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of United States export sales. <TABLE> <CAPTION> 1996 United States Europe Consolidated - ----------------------- ------------- ------ ------------ <S> <C> <C> <C> Net sales.............. $693,968 $135,994 $829,962 Operating income ...... 26,267 3,396 29,663 Pre-tax income......... 27,091 2,243 29,334 Identifiable assets.... 394,410 69,526 463,936 Depreciation and amortization........... 5,929 1,969 7,898 Capital expenditures... 9,817 1,396 11,213 1995 - ----------------------- Net sales.............. $516,794 $99,415 $616,209 Operating income (loss) (3,626)* 2,590 (1,036) Pre-tax income (loss).. (7,435)* 1,317 (6,118) Identifiable assets.... 243,677 53,190 296,867 Depreciation and 4,704 1,333 6,037 amortization........... Capital expenditures... 5,523 3,696 9,219 1994 - ----------------------- Net sales.............. $402,683 $83,927 $486,610 Operating income (loss) (11,649)* 2,174 (9,475) Pre-tax income (loss).. (13,978)* 1,539 (12,439) Identifiable assets.... 155,772 34,248 190,020 Depreciation and 2,524 1,287 3,811 amortization........... Capital expenditures... 4,425 1,494 5,919 </TABLE> * Includes special management compensation, special professional fees and special contingent consideration expense of $20,797 and $23,603 for 1995 and 1994, respectively. 49
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 14--EMPLOYEE BENEFIT PLANS (a) Stock Compensation Plan The Company maintains a 1994 Stock Option Plan for the benefit of certain employees under which 679,635 shares of common stock may be issued. The Plan provides for two classes of options: Class A options and Class B options. A maximum of 237,897 shares of common stock may be covered by Class A options. Both incentive and nonqualified stock options may be issued under the Plan. In 1995, Class A options to acquire 237,897 common shares were issued to certain executive management at an exercise price of $4.21 per share, substantially all of which became exercisable upon the closing of the initial public offering, at which time the $2,805 excess of the initial public offering price of $16.00 over the exercise price was charged to special management compensation expense. On November 3, 1995, the Company issued Class B options to acquire 413,400 shares of common stock to certain employees at an exercise price of $16.00 per share. During 1996, Class A options totalling 16,500 and Class B options totalling 10,200 were forfeited, and 48,000 Class B options were issued. The exercise price of all Class B options equalled the market price on the date of grant and accordingly no compensation cost is recognized. Substantially all Class B options become exercisable ratably over three years from the date of issuance. The Class A and Class B options are exercisable up to the tenth anniversary of the date of issuance, subject to acceleration upon termination of employment. On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee Director Stock Option Plan, under which the Company may grant options to each director who is not also an officer or employee of the Company for up to 50,000 shares of the Company's Common Stock. The exercise price and term, not to exceed 10 years, of each option is determined by the plan committee at the time of the grant. During 1996, 10,000 options were granted to certain non-employee directors at an exercise price of $29.00 per share which was equal to the market price on the date of grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The weighted average fair value of options granted during 1996 and 1995 was $14.75 and $10.00, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995; risk-free interest rates of 6% for both years; volatility factor of the expected market price of the Company's common stock of 30% for both years; and a weighted-average expected life of the option of 10 years. 50
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 14--EMPLOYEE BENEFIT PLANS--(Continued) Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Net income: As reported, reflecting adjustment in 1995 to exclude special management compensation(1) $19,340 $9,407 Pro forma 18,060 9,227 Net income per common share: As reported, reflecting adjustment in 1995 to exclude special management compensation(1) $ 0.93 $ 0.70 Pro forma 0.87 0.69 </TABLE> - ---------- (1) Special management compensation in 1995 includes the value of Class A options which became exercisable upon the closing of the Initial Public Offering. A summary of the status of the Company's two fixed stock option plans as of December 28, 1996 and December 30, 1995, and changes during the years ending those dates is presented below: <TABLE> <CAPTION> December 28, 1996 December 30, 1995 ------------------------------- --------------------------------- Shares Weighted Average Shares Weighted Average (000) Exercise Price (000) Exercise Price ----- ---------------- ----- ---------------- <S> <C> <C> <C> <C> Outstanding at beginning of year 651,297 $11.69 -- $ -- Granted 58,000 30.02 651,297 11.69 Exercised (1,000) 16.00 -- -- Forfeited (26,700) 8.71 -- -- --------- ------- Outstanding at end of year 681,597 $13.36 651,297 $11.69 ========= ======= Options exercisable at year-end 359,597 $ 8.74 237,897 $ 4.21 Weighted average fair value of options granted during the year $ 14.75 $10.00 </TABLE> 51
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 14--EMPLOYEE BENEFIT PLANS--(Continued) The following table summarizes information about stock options outstanding at December 28, 1996: <TABLE> <CAPTION> Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------ Range of Weighted-Average Weighted- Weighted- Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------ ----------- ---------------- -------------- ------------ -------------- <S> <C> <C> <C> <C> <C> $ 4.21 221,397 8.8 years $ 4.21 221,397 $ 4.21 16.00 402,200 8.8 16.00 138,200 16.00 29.00 to 36.25 58,000 9.3 30.02 -- -- ------- ------- $ 4.21 to 36.25 681,597 8.8 $ 13.36 359,597 8.74 ======= ======= </TABLE> (b) Profit Sharing Plans The Company has qualified noncontributory profit sharing plans for eligible employees. Contributions to the plans as determined by the Board of Directors and charged to operations during 1996, 1995 and 1994 amounted to $3,057, $2,178 and $1,719, respectively. (c) Employee Stock Ownership Plan (ESOP) In 1994, the Company established an ESOP and a related trust as a benefit for substantially all of its domestic employees. This plan supplements the Company's Profit Sharing Plan. Under this plan, the Company issued 24,210 and 128,257 shares of HSI common stock to the trust in 1996 and 1994, at an estimated fair value of $820 and $900, respectively, which amounts were charged to operations during 1995 and 1994. For 1996, the Company will contribute 3% of eligible compensation with shares of the Company's common stock. (d) Supplemental Executive Retirement Plan In 1994, the Company instituted a nonqualified supplemental executive retirement plan for eligible employees. Contributions, as determined by the Board of Directors and charged to operations, were $84, $68 and $27 for 1996, 1995, and 1994, respectively. 52
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 15--COMMITMENTS AND CONTINGENCIES (a) Operating Leases The Company leases facilities and equipment under noncancelable operating leases expiring through 2009. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Future minimum annual rental payments under the noncancelable leases at December 28, 1996 are as follows: <TABLE> <CAPTION> <S> <C> 1997........................................... $ 9,704 1998........................................... 8,760 1999........................................... 7,469 2000........................................... 5,968 2001........................................... 4,666 Thereafter..................................... 11,769 ------- Total minimum lease payments................... $48,336 ======= </TABLE> Total rental expense for 1996, 1995 and 1994 was $9,667, $7,324 and $5,874, respectively. (b) Litigation Various claims, suits and complaints, such as those involving government regulations and product liability, arise in the ordinary course of the Company's business. In the opinion of the Company, all such pending matters are without merit, covered by insurance or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial statements of the Company if disposed of unfavorably. (c) Employment, Consulting and Noncompete Agreements The Company has employment, consulting and noncompete agreements expiring through 2002 (except for a lifetime consulting agreement with a principal stockholder which provides for initial compensation of $283 per year, increasing $25 every fifth year beginning in 2002). The agreements provide for varying base aggregate annual payments of approximately $4,106 per year which decrease periodically to approximately $1,366 per year. In addition, some agreements have provisions for incentive and additional compensation. 53
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes amounted to the following: <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Interest....................... $3,708 $6,124 $3,132 Income taxes................... 8,988 5,540 2,451 </TABLE> In conjunction with business acquisitions, the Company used cash as follows: <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Fair value of assets acquired, excluding cash............... $50,970 $59,544 $ 3,525 Less liabilities assumed and created upon acquisition..... 18,430 43,167 3,525 ------- ------- ------- Net cash paid.................. $32,540 $16,377 $ --- ======= ======= ======= </TABLE> In 1995, the Company entered into a note payable of $2,400 in connection with one of its acquisitions. 54
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 17--OTHER INCOME (EXPENSE)-NET Other income (expense)-net consists of the following: <TABLE> <CAPTION> Years Ended --------------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Investment gains................ $ 80 $ --- $ --- Gain on sale of assets.......... 520 33 100 Net foreign exchange gain ..... 3 43 415 Other non-operating income...... 33 200 26 ------------ ------------ ------------ $ 636 $ 276 $ 541 ============ ============ ============ </TABLE> NOTE 18--QUARTERLY INFORMATION (Unaudited) The following table sets forth summary quarterly unaudited financial information for 1996 and 1995, excluding non-recurring special charges and the related tax effects: <TABLE> <CAPTION> Quarters Ended -------------------------------------------------- March 30, June 29, September 28, December 28, 1996 1996 1996 1996 --------- -------- ------------- ------------ <S> <C> <C> <C> <C> Net sales.............. $185,359 $194,722 $212,529 $237,352 Gross profit........... 54,949 57,930 61,944 70,401 Operating income....... 4,704 6,470 7,621 10,868 Net income............. 2,464 4,214 5,290 7,372 Earnings per share..... $ 0.13 $ 0.22 $ 0.24 $ 0.33 </TABLE> <TABLE> <CAPTION> Quarters Ended ------------------------------------------------ April 1, July 1, September 30, December 30, 1995 1995 1995 1995 -------- --------- ------------- ---------- <S> <C> <C> <C> <C> Net sales..................... $136,040 $139,753 $156,667 $183,749 Gross profit.................. 40,315 42,107 48,090 60,072 Pro forma operating income.... 2,986 4,689 5,188 6,898 Pro forma net income.......... 936 2,066 2,093 4,312 Pro forma earnings per share.. $ 0.08 $ 0.17 $ 0.17 $ 0.26 </TABLE> 55
HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except share data) NOTE 18--QUARTERLY INFORMATION (Unaudited)--(Continued) The Company's business is subject to seasonal and other quarterly influences. Net sales and operating profits are generally higher in the fourth quarter due to timing of sales of software, year-end promotions and purchasing patterns of office-based healthcare practitioners and are generally lower in the first quarter due primarily to the increased purchases in the prior quarter. Quarterly results also may be materially affected by a variety of other factors, including the timing of acquisitions and related costs, the release of software enhancements, timing of purchases, special promotional campaigns, fluctuations in exchange rates associated with international operations and adverse weather conditions. In the fourth quarter of 1996 the Company made adjustments, primarily relating to changes in estimated accruals. The aggregate effect of such adjustments increased net income in the fourth quarter by approximately $2,400. Earnings per share calculations for each quarter were based on the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year earnings per share amount. NOTE 19 -- SUBSEQUENT EVENTS On March 7, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Micro Bio-Medics, Inc. (MBMI) will merge into a wholly-owned subsidiary of the Company. As a result of the transaction, which has been approved by the Boards of Directors of MBMI and the Company, outstanding shares of MBMI's common stock will be exchanged at a fixed rate of 0.62 of a share of the Company's Common Stock for each outstanding 1.0 share of MBMI. Each of the members of MBMI's board of directors have granted to the Company a proxy to vote their shares of MBMI common stock in favor of the Merger Agreement and an option, exercisable under certain circumstances, to acquire their shares for the consideration that they would have received under the Merger Agreement in respect of those shares. MBMI distributes medical supplies to physicians and hospitals in the New York metropolitan area, as well as to healthcare professionals in sports medicine, emergency medicine, school health, industrial safety, government and laboratory markets nationwide. MBMI had net sales of approximately $150.0 million and earnings of approximately $1.7 million for its fiscal year ended November 30, 1996. The completion of the transaction is subject to the satisfaction of customary closing conditions, including, among others, MBMI shareholder approval and Hart-Scott-Rodino waiting periods. 56
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III ITEM 10. Directors and Executive Officers of the Registrant The information set forth under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K and the information set forth under the caption "Election of Directors" in the Company's definitive 1997 Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by reference. ITEM 11. Executive Compensation The information required by this item is hereby incorporated by reference from the Company's definitive 1997 Proxy Statement to be filed pursuant to Regulation 14A. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is hereby incorporated by reference from the Company's definitive 1997 Proxy Statement to be filed pursuant to Regulation 14A. ITEM 13. Certain Relationships and Related Transactions The information required by this item is hereby incorporated by reference from the Company's definitive 1997 Proxy Statement to be filed pursuant to Regulation 14A. 57
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The Consolidated Financial Statements of the Company filed as a part of this report are listed on the index on page 26. 2. Financial Statement Schedules <TABLE> <CAPTION> (i) HS PHARMACEUTICAL, INC. AND SUBSIDIARIES Page Number ----------- <S> <C> Report of Independent Certified Public Accountants....................................... 60 Consolidated Financial Statements: Balance Sheets as of December 28, 1996 and December 30, 1995...................... 61 Statements of Income and Retained Earnings for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 ......................................................... 62 Statements of Cash Flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 ................................... 63 Notes to Consolidated Financial Statements ..............................................64-71 (ii) Valuation and Qualifying Accounts .................................................. 72 </TABLE> 3. Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit List immediately preceding the exhibits. (b) Reports on Form 8-K During the fourth quarter of 1996, there were no reports filed on Form 8-K. 58
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Melville, State of New York, on March 28, 1997. Henry Schein, Inc. By: /s/ Stanley M. Bergman ----------------------------------------- Stanley M. Bergman Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Capacity Date --------- -------- ---- <S> <C> <C> /s/ Stanley M. Bergman Chairman, Chief Executive Officer, and - ----------------------- President (principal executive officer) March 28, 1997 Stanley M. Bergman /s/ Steven Paladino Senior Vice President, Chief Financial - ----------------------- Officer and Director (principal financial and Steven Paladino accounting officer) March 28, 1997 /s/ James P. Breslawski Director March 28, 1997 - ----------------------- James P. Breslawski /s/ Gerald A. Benjamin Director March 28, 1997 - ----------------------- Gerald A. Benjamin /s/ Leonard A. David Director March 28, 1997 - ----------------------- Leonard A. David /s/ Mark E. Mlotek Director March 28, 1997 - ----------------------- Mark E. Mlotek /s/ Barry Alperin Director March 28, 1997 - ----------------------- Barry Alperin /s/ Pamela Joseph Director March 28, 1997 - ----------------------- Pamela Joseph /s/ Donald J. Kabat Director March 28, 1997 - ----------------------- Donald J. Kabat /s/ Marvin H. Schein Director March 28, 1997 - ----------------------- Marvin H. Schein /s/ Irving Shafran Director March 28, 1997 - ----------------------- Irving Shafran </TABLE> 59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS HS Pharmaceutical, Inc. We have audited the accompanying consolidated balance sheets of HS Pharmaceutical, Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995 and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HS Pharmaceutical, Inc. and Subsidiaries at December 28, 1996 and December 30, 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP New York, New York February 5, 1997 60
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> ASSETS Current: Cash $ 291,738 $ --- Accounts receivable, less allowance for doubtful accounts of $172,196 and $95,703................ 9,214,519 7,062,447 Inventories........................................ 5,138,874 4,258,660 Advances to affiliates............................. 668,568 543,925 Prepaid expenses and other......................... 819,254 565,845 ---------- ----------- Total current assets 16,132,953 12,430,877 Property and equipment, net........................... 4,200,088 3,539,376 Goodwill and other intangibles, less accumulated amortization of $300,789 and $201,479 ............. 2,507,055 165,439 Advances and notes to affiliates...................... 1,114,074 1,076,723 Deposits and other assets............................. 67,966 5,786 ----------- ----------- $24,022,136 $17,218,201 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft..................................... $1,057,570 $ 324,875 Revolving credit agreement......................... 1,106,000 --- Accounts payable and accrued expenses.............. 4,865,854 4,266,631 Income taxes payable............................... 543,592 480,684 Current portion of long-term debt.................. 1,536,428 834,700 ----------- ----------- Total current liabilities 9,109,444 5,906,890 Long-term debt, less current portion.................. 2,997,788 2,195,980 Deferred income taxes................................. 191,500 152,000 ----------- ----------- Total liabilities 12,298,732 8,254,870 ----------- ----------- Commitments and contingencies Stockholders' equity: Common stock--no par value, shares authorized 200; issued and outstanding 20....................... 40,100 40,100 Additional paid-in capital......................... 342,745 342,745 Retained earnings.................................. 11,340,559 8,580,486 ----------- ----------- Total stockholders' equity.................. 11,723,404 8,963,331 ----------- ----------- $24,022,136 $17,218,201 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 61
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ----------- <S> <C> <C> <C> Net sales.............................. $30,305,702 $28,123,977 $24,500,962 Cost of sales.......................... 18,507,815 17,467,680 15,925,685 ----------- ----------- ----------- Gross profit........................ 11,797,887 10,656,297 8,575,277 Operating expenses: Selling, general and administrative. 6,995,028 6,157,515 5,615,183 ----------- ----------- ----------- Operating income................. 4,802,859 4,498,782 2,960,094 Other income (expense): Interest expense, net............... (577,712) (500,293) (395,159) Foreign exchange remeasurement gain (loss)...................... (43,599) (10,163) 47,543 Other .............................. 166,431 147,387 --- ---------- ----------- ----------- Income before taxes on income.... 4,347,979 4,135,713 2,612,478 Taxes on income........................ 1,587,906 1,368,131 1,004,000 ----------- ----------- ----------- Net income............................. 2,760,073 2,767,582 1,608,478 Retained earnings, beginning of year... 8,580,486 5,812,904 4,204,426 ----------- ----------- ----------- Retained earnings, end of year......... $11,340,559 $ 8,580,486 $ 5,812,904 =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 62
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Cash flows from operating activities: Net income................................................. $2,760,073 $2,767,582 $1,608,478 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................... 597,184 425,861 469,763 Provision for losses on accounts receivable............. 55,682 15,000 38,843 Provision for obsolete inventories...................... 112,677 --- --- Provision for deferred income taxes..................... 39,500 81,000 16,000 Other .................................................. --- 5,000 25,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable............ (1,761,616) 180,067 (1,821,447) Increase in inventories............................... (323,245) (1,199,165) (33,420) (Increase) decrease in advances to affiliates......... (161,994) (381,170) 156,123 Increase in prepaid expenses and other................ (239,287) (138,634) (212,711) (Increase) decrease in deposits and other............. (58,608) 263,270 (258,071) Increase in accounts payable and accrued expenses.... 178,650 415,386 940,230 Increase (decrease) in income taxes payable........... 62,908 339,870 (1,763,056) ---------- ---------- ---------- Net cash provided by (used in) operating activities.......... 1,261,924 2,774,067 (834,268) ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures....................................... (662,725) (369,978) (1,156,332) Business acquisition, net of cash acquired................. (800,000) --- --- ---------- ---------- ---------- Net cash (used) in investing activities...................... (1,462,725) (369,978) (1,156,332) ---------- ---------- ---------- Cash flows from financing activities: Increase (decrease) in bank overdraft...................... 131,904 (575,847) (309,837) Credit line borrowings, net................................ 1,106,000 (1,000,000) 1,000,000 Proceeds from long-term debt............................... 217,816 --- 1,792,020 Principal payments on long-term debt....................... (963,181) (828,242) (491,583) ---------- ---------- ---------- Net cash provided by (used in) financing activities.......... 492,539 (2,404,089) 1,990,600 ---------- ---------- ---------- Net increase in cash......................................... 291,738 --- --- Cash, beginning of year...................................... --- --- --- ---------- ---------- ---------- Cash, end of year............................................ $ 291,738 $ --- $ --- ========== ========== ========== Supplemental cash flow information: Interest paid.............................................. $ 802,331 $ 608,216 $ 387,101 Taxes paid................................................. $1,535,744 $ 996,520 $2,836,776 Business acquisitions Fair value of assets acquired, excluding cash.............. $4,070,265 $ --- --- Less liabilities assumed and created upon acquisition ..... 3,270,265 --- --- ---------- ---------- ---------- $ 800,000 $ --- $ --- ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 63
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF ACCOUNTING POLICIES Description of Business HS Pharmaceutical, Inc. and Subsidiaries (the "Company") manufactures and distributes pharmaceutical products and sells other accessory products to dental, medical and veterinary distributors worldwide. Principles of Consolidation The consolidated financial statements include the accounts of HS Pharmaceutical, Inc. and all of its wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year The Company reports its operations on a 52-53 week basis ending on the last Saturday of December. Accordingly, fiscal years ended December 28, 1996 and December 30, 1995 consisted of 52 weeks and the fiscal year ended December 31, 1994 consisted of 53 weeks. Inventories Inventories are valued at the lower of cost or market value. Manufactured inventories of raw materials, work-in-progress and finished goods are valued using standard costing methods, which approximate the first-in, first-out ("FIFO") method. The cost of inventory purchased for resale is determined by the FIFO method. 64
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF ACCOUNTING POLICIES--(Continued) Property and Equipment and Depreciation and Amortization Property and equipment are stated at cost. Depreciation is computed primarily under the straight-line method over the following estimated useful lives: <TABLE> <CAPTION> Years ---------- <S> <C> Buildings and improvements........ 40 Machinery and warehouse equipment. 5 - 10 Computer hardware................. 5 Capital lease equipment........... 5 - 10 </TABLE> Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful lives of the assets or the lease term. Goodwill Goodwill represents the excess of costs over the fair value of assets acquired and is amortized using the straight-line method over a life of 30 years. Intangibles Intangibles consist of costs incurred in connection with obtaining abbreviated new drug applications, investigational new drug exemptions and licenses, permits and approvals relating to the manufacture and sale of pharmaceutical products. These costs are being amortized using the straight-line method over their estimated useful lives which is expected to be 20 years. Taxes on Income Deferred income taxes are recognized for the tax consequences of temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Statement of Cash Flows For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. Foreign Currency Remeasurement Monetary assets and liabilities denominated in foreign currency have been remeasured into the functional currency (the U.S. dollar) at the year-end rate of exchange (U.S. $1 = Canadian $1.35, $1.35 and $1.40 at December 28, 1996, December 30, 1995 and December 31, 1994, respectively). Non-monetary items are remeasured at historical rates. Revenue and expenses are remeasured based on the average monthly rate. Foreign exchange remeasurement gains and losses are included in the determination of net income for the year. Long-Lived Assets Long-lived assets, such as goodwill and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment losses have been necessary through December 28, 1996. 65
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2--INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Raw materials............................. $1,969,239 $1,110,857 Work-in-progress.......................... 38,259 136,062 Finished goods............................ 3,131,376 3,011,741 ---------- ---------- $5,138,874 $4,258,660 ========== ========== </TABLE> NOTE 3--PROPERTY AND EQUIPMENT, NET Major classes of property and equipment consist of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Land.................................. $ 23,474 $ 23,474 Building.............................. 1,335,465 1,331,400 Machinery and equipment............... 7,414,138 5,552,819 Computer hardware..................... 318,481 281,645 Capital lease equipment............... 277,545 359,658 Leasehold improvements................ 261,823 199,519 ---------- ---------- 9,630,926 7,748,515 Less accumulated depreciation and amortization...................... 5,430,840 4,209,139 ---------- ---------- Net property and equipment............ $4,200,086 $3,539,376 ========== ========== </TABLE> NOTE 4--BANK OVERDRAFT AND REVOLVING CREDIT AGREEMENT The bank overdraft and revolving credit agreements are due on demand and bear interest at the U.S. prime rate, the Canadian prime rate and LIBOR plus 3/4%, respectively. These facilities are secured by a general assignment of accounts receivable, a general security agreement on all machinery and equipment, a $2,500,000 demand debenture on building and land, a postponement of claim, and a guarantee bond. 66
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--BUSINESS ACQUISITIONS On March 15, 1996, the Company acquired substantially all of the net assets of a manufacturer and distributor of private label dental products. The acquisition was accounted for as a purchase and, accordingly, the results of the acquiree are included in the consolidated financial statements from January 1, 1996, the effective date of the agreement. The aggregate purchase price is estimated at $2,850,000, the maximum contingent amount which is based upon future revenues attained. The purchase price, which was financed through available cash resources and a note payable to the seller in the amount of $1,793,874 (See Note 6), has been allocated to the net assets acquired based upon their respective fair market values. The excess of the acquisition costs over the fair value of the identifiable net assets acquired of $2,440,926 has been recorded as goodwill. NOTE 6--LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> December 28, December 30, 1996 1995 ------------ ------------ <S> <C> <C> Unsecured acquisition note payable over 5 years with annual payments ranging from $250,000 to $500,000, including interest at 6%, due March 15, 2000.................................................. $1,793,874 $ --- Term loans payable in monthly installments maturing at varying dates from August 1997 through February 2000, with interest at Canadian prime plus 0.25%..................................... 1,723,462 1,877,901 Notes payable bearing interest at prime, payable in annual installments of $191,885 principal, plus interest, due March 31, 2001......................... 959,424 1,151,308 Capital lease obligations .............................. 57,456 1,471 ---------- ---------- 4,534,216 3,030,680 Less: Current portion................................... 1,536,428 834,700 ---------- ---------- $2,997,788 $2,195,980 ========== ========== </TABLE> 67
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6--LONG-TERM DEBT--(Continued) Principal payments on long-term debt mature as follows: <TABLE> <CAPTION> Year Amount ---- ------ <S> <C> 1997..................................... $1,536,428 1998..................................... 797,684 1999..................................... 873,479 2000..................................... 663,048 2001..................................... 663,577 ---------- $4,534,216 ========== </TABLE> NOTE 7--RELATED PARTY TRANSACTIONS (a) Certain services of a 50% shareholder are provided to the Company at the shareholder's cost. Total charges from this shareholder were approximately $160,000 , $83,000 and $109,000 for 1996, 1995 and 1994, respectively. At December 28, 1996 and December 30, 1995, "Advances to affiliates" includes net amounts due (to) from this shareholder of approximately $1,113,000 and ($390,000), respectively, and "Accounts payable and accrued expenses" includes amounts due to this shareholder of approximately $900,000 and $927,000, respectively. In March 1991, the Company entered into an agreement with this same shareholder to supply products at prices and quantities as defined in the agreement. Sales to this same shareholder (including sales under this agreement) accounted for approximately 26%, 22% and 24% of the Company's sales for 1996, 1995 and 1994, respectively. Included in "Accounts receivable" at December 28, 1996 and December 30, 1995 were approximately $1,680,000 and $1,356,000, respectively, for amounts due from this shareholder. (b) In March 1991, the other 50% shareholder of the Company granted the Company a ten-year license to use certain of their trademarks. Royalties of $75,000 annually are required under the terms of the agreement and were paid in 1996, 1995 and 1994. In the ordinary course of business, the Company sells products to this same shareholder. Net sales to this shareholder amounted to approximately $1,090,000, $608,000 and $1,167,000 for 1996, 1995 and 1994, respectively. Included in "Accounts receivable" at December 28, 1996 and December 30, 1995 were approximately $271,000 and $88,000, respectively, for amounts due from this shareholder. In addition, the Company also purchases pharmaceutical products from this shareholder. Net purchases from this shareholder amounted to approximately $1,080,000, $4,434,000 and $3,773,000 for 1996, 1995 and 1994, respectively. Included in "Accounts payable and accrued expenses" at December 28, 1996 were approximately $5,549,000 and $974,000 respectively, for amounts due to this shareholder. (c) Interest expense related to accounts payable and accrued expenses owing to the above shareholders amounted to approximately $65,000, $51,000 and $65,000 for 1996, 1995 and 1994, respectively. 68
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7--RELATED PARTY TRANSACTIONS--(Continued) (d) An affiliated company supplies a new product line to the Company. Included in "Advances to affiliates" are net amounts due from this affiliate of approximately $1,225,000 and $974,000 at December 28, 1996 and December 30, 1995, respectively. Included in net advances is a note receivable of approximately $823,000 at December 28, 1996. Principal on this note is due in various annual installments beginning in 1997 through 2005, with an interest rate to be determined annually. NOTE 8--COMMITMENTS AND CONTINGENCIES (a) Operating Leases The Company leases facilities and equipment under noncancelable operating leases expiring through 2005. Total rental expense for 1996, 1995 and 1994 was approximately $ 416,000 , $163,000 and $153,000, respectively. At December 28, 1996, future minimum annual rental payments under these leases are as follows: <TABLE> <CAPTION> Year Amount ---- ------------ <S> <C> 1997..................................... $ 383,135 1998..................................... 378,153 1999..................................... 311,725 2000..................................... 200,554 2001..................................... 198,400 Thereafter............................... 2,929,500 ---------- $4,401,467 ========== </TABLE> (b) Litigation Various claims, suits and complaints, such as those involving government regulations and product liability, arise in the ordinary course of the Company's business. In the opinion of the Company, all such pending matters are without merit, covered by insurance or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial statements of the Company if disposed of unfavorably. NOTE 9 -TAXES ON INCOME Taxes on income are based on income before taxes as follows: <TABLE> <CAPTION> Years Ended ---------------------------------------- December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Domestic............................ $2,233,668 $2,500,916 $1,193,905 Foreign............................. 2,114,311 1,634,797 1,418,573 ---------- ---------- --------- Total income before taxes on income. $4,347,979 $4,135,713 $2,612,478 ========== ========== ========== </TABLE> 69
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - TAXES ON INCOME -- (Continued) The provisions for taxes on income was as follows: <TABLE> <CAPTION> Years Ended ------------------------------------------ December 28, December 30, December 31, 1996 1995 1994 -------------- ------------ ------------ <S> <C> <C> <C> Current tax expense: U.S. Federal............ $ 748,423 $ 764,670 $ 382,000 State and local......... 139,925 26,801 124,000 Foreign................. 660,058 495,660 482,000 ---------- ---------- ---------- Total current............. 1,548,406 1,287,131 988,000 Deferred tax expense: Foreign................. 39,500 81,000 16,000 ---------- ---------- ---------- Total provision........... $1,587,906 $1,368,131 $1,004,000 ========== ========== ========== </TABLE> The deferred tax liability arises from temporary differences relating to depreciation and amortization. The Company's effective tax rate approximates the U.S. Federal statutory rate. NOTE 10--MAJOR CUSTOMERS AND EXPORT SALES Sales to two unaffiliated customers accounted for approximately 38%, 25% and 25% of net sales in 1996, 1995 and 1994, respectively. NOTE 11--EMPLOYEE BENEFIT PLAN Effective January 1, 1992, the Company adopted a 401(k) profit sharing plan to provide retirement benefits for eligible employees. Matching contributions by the Company, which were determined by the board of directors, were approximately $41,000, $39,000 and $36,000 for 1996, 1995 and 1994, respectively. In addition, the Company maintains a defined contribution plan for eligible employees. Contributions to this plan, which were determined by the board of directors, were approximately $92,000 , $92,000 and $97,000 for 1996, 1995 and 1994, respectively. 70
HS PHARMACEUTICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12--FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade receivables and temporary cash investments. The carrying value of financial instruments approximated fair value as of December 28, 1996 because of the short maturity of these instruments. Concentrations of credit risk with respect to trade receivables are limited due to a large customer base and its dispersion across different geographic areas. The Company maintains an allowance for losses based on the expected collectability of all receivables. 71
HENRY SCHEIN, INC. Schedule II Valuation and Qualifying Accounts <TABLE> <CAPTION> Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Add --------- Balance at Charged to Balance beginning costs and at end of Description of period expenses Deductions period ----------- --------- ---------- ---------- --------- <S> <C> <C> <C> <C> Year ended December 31, 1994 Allowance for doubtful accounts ............... $2,015 $ 246 $ -- $2,261 Other accounts receivable allowances(1) .......... 1,243 815 -- 2,058 ------ ------- ------- ------ $3,258 $ 1,061 $ -- $4,319 ====== ======= ======= ====== Year ended December 30, 1995 Allowance for doubtful accounts ............... $2,261 $ 253 $ -- $2,514 Other accounts receivable allowances(1) .......... 2,058 1,763 -- 3,821 ------ ------- ------- ------ $4,319 $ 2,016 $ -- $6,335 ====== ======= ======= ====== Year ended December 28, 1996 Allowance for doubtful accounts ............... $2,514 $ 1,402 $ -- $3,916 Other accounts receivable allowances(1) .......... 3,821 -- (432) 3,389 ------ ------- ------- ------ $6,335 $ 1,402 $ (432) $7,305 ====== ======= ======= ====== </TABLE> - -------------- (1) Primarily allowance for sales returns. 72
EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- Unless otherwise indicated, exhibits are incorporated by reference to the correspondingly numbered exhibits in the Company's Registration Statement on Form S-1 (Commission File No. 33-96528) 3.1 Form of Amended and Restated Articles of Incorporation 3.2 Form of Bylaws 9.1 Voting Trust Agreement dated September 30, 1994, as amended, among the Company, the Estate of Jacob M. Schein, the Trusts under Articles Third and Fourth of the Will of Jacob M. Schein, the Trust established by Pamela Joseph under Trust Agreement dated February 9, 1994, the Trust established by Martin Sperber under Trust Agreement dated September 19, 1994, management stockholders and Stanley M. Bergman, as voting trustee 9.2 Agreements dated December 27, 1994 among the Company, various executive officers and Stanley M. Bergman, as voting trustee 9.3 Agreements dated as of May 1, 1995 among the Company, various executive officers and Stanley M. Bergman, as voting trustee 10.1 Amended and Restated HSI Agreement (the "HSI Agreement"), effective as of February 16, 1994, among the Company, Marvin H. Schein, the Trust established by Marvin H. Schein under Trust Agreement dated September 9, 1994, the Charitable Trust established by Marvin H. Schein under Trust Agreement dated September 12, 1994, the Estate of Jacob M. Schein, the Trusts established by Articles Third and Fourth of the Will of Jacob M. Schein, the Trust established by Pamela Joseph under Trust Agreement dated February 9, 1994, the Trust established by Martin Sperber under Trust Agreement dated September 19, 1994, the Trust established by Stanley M. Bergman under Trust Agreement dated September 15, 1994, Pamela Schein, Pamela Joseph, Martin Sperber, Stanley M. Bergman, Steven Paladino and James P. Breslawski (collectively, the "HSI Parties") 10.2 HSI Registration Rights Agreement dated September 30, 1994, among the Company, Pamela Schein, the Trust established by Pamela Joseph under Trust Agreement dated February 9, 1994, Marvin H. Schein, the Trust established by Marvin H. Schein under Trust Agreement dated December 31, 1993, the Trust established by Marvin H. Schein under Trust Agreement dated September 19, 1994, the Charitable Trust established by Marvin H. Schein under Trust Agreement dated September 12, 1994, Martin Sperber, the Trust established by Martin Sperber under Trust Agreement dated September 19, 1994, Stanley M. Bergman and the Trust established by Stanley M. Bergman under Trust Agreement dated September 15, 1994 10.3 Letter Agreement dated September 30, 1994 to the Company from Marvin H. Schein, Pamela Joseph and Pamela Schein 10.4 Release to the HSI Agreement dated September 30, 1994 73
Exhibit No. Description Page No. - ----------- ----------- -------- 10.5 Separation Agreement dated as of September 30, 1994 by and between the Company, Schein Pharmaceutical, Inc. and Schein Holdings, Inc. 10.6 Restructuring Agreement dated September 30, 1994 among Schein Holdings, Inc., the Company, the Estate of Jacob M. Schein, Marvin H. Schein, the Trust established by Marvin H. Schein under Trust Agreement dated December 31, 1993, the Trust established by Marvin H. Schein under Trust Agreement dated September 9, 1994, the Charitable Trust established by Marvin H. Schein under Trust Agreement dated September 12, 1994, Pamela Schein, Pamela Joseph, the Trust established by Pamela Joseph under Trust Agreement dated February 9, 1994; the Trusts under Articles Third and Fourth of the Will of Jacob M. Schein; Stanley M. Bergman, the Trust established by Stanley M. Bergman under Trust Agreement dated September 15, 1994, Martin Sperber, the Trust established by Martin Sperber under Trust Agreement dated December 31, 1993, and the Trust established by Martin Sperber under Trust Agreement dated September 19, 1994 10.7 Agreement and Plan of Corporate Separation and Reorganization dated as of September 30, 1994 among Schein Holdings, Inc., the Company, the Estate of Jacob M. Schein, Marvin H. Schein, the Trust established by Marvin H. Schein under Trust Agreement dated December 31, 1993, the Trust established by Marvin H. Schein under Trust Agreement dated September 9, 1994, the Charitable Trust established by Marvin H. Schein under Trust Agreement dated September 12, 1994, Pamela Schein, the Trust established Article Fourth of the Will of Jacob M. Schein for the benefit of Pamela Schein and her issue under Trust Agreement dated September 29, 1994, Pamela Joseph, the Trust established by Pamela Joseph under Trust Agreement dated February 9, 1994, the Trust established by Pamela Joseph under Trust Agreement dated September 28, 1994 and the Trusts under Articles Third and Fourth of the Will of Jacob M. Schein 10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended and restated effective as of July 1, 1995** 10.9 Henry Schein, Inc. Amendment and Restatement of the Supplemental Executive Retirement Plan** 10.10 Henry Schein, Inc. Summary Executive Incentive Plan** 10.11 Consulting Agreement dated September 30, 1994 between the Company and Marvin H. Schein** 10.12 Employment Agreement dated as of January 1, 1992 between the Company and Stanley M. Bergman** 10.13 Amended and Restated Stock Issuance Agreement dated as of December 24, 1992 between the Company and Stanley M. Bergman** 10.14 Stock Issuance Agreements dated December 27, 1994 between the Company and various executive officers** 10.15 Agreement and Plan of Merger dated as of September 1, 1995, among Henry Schein, Inc., Schein Dental Equipment Corp., Marvin Schein and others 10.16 Stock Purchase Agreement dated August 25, 1995, by Henry Schein, Inc., PRN Medical, Inc. and its shareholders, and Florida Doctor Supply, Inc. and its shareholders 10.17 Restated Standard Indemnity Agreement dated February 8, 1993, as amended January 25, 1993, by and between Showa Denko America, Inc. and the Company 74
Exhibit No. Description Page No. - ----------- ----------- -------- 10.18 Guaranty Agreement by and between Showa Denko K.K. and the Company, relating to the Restated Standard Indemnity Agreement dated February 8, 1993, as amended January 25, 1993, by and between Showa Denko America, Inc. and the Company 10.19 Stock Issuance Agreements dated as of May 1, 1995 between the Company and executive officers 10.20 Agreement of Purchase and Sale of Assets dated February 28, 1996 by and among the Company, Benton Dental, Inc. and Modern Dental Concepts, Inc.+ 10.21 Credit Agreement dated as of December 8, 1994 between the Company and The Chase Manhattan Bank, N.A. 10.22 Loan Agreement dated May 5, 1995 by and between the Company and New York State Urban Development Corporation 10.23 Term Loan Agreement dated as of November 15, 1993 between Henry Schein Europe, Inc. and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. 10.24 Corporate Guarantee dated November 15, 1993 by the Company, Zahn Dental Co., Inc. Zahn Dental (Florida), Inc., Zahn Dental (Mass), Inc., Tri- State Medical Supply, Inc. and Zahn Holdings, Inc. with respect to the Term Loan dated as of November 15, 1993 between Henry Schein Europe, Inc. and Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. 10.25 Joint and Several Guarantee dated February 7, 1995 by the Company in favor of Banque Nationale de Paris 10.26 Joint and Several Guarantee dated February 7, 1995 by the Company in favor of Banque Francaise du Commerce Exterieur 10.27 Guarantee dated March 1, 1996 by the Company in favor of Deutsche Bank AG+ 10.28 Lease Agreement dated December 22, 1995 by and between Dugan Realty, L.L.C. and the Company+ 10.29 Commercial Guaranty dated August 1, 1994 by the Company in favor of the Mid-City National Bank 10.30 Discretionary Line of Credit dated August 18, 1995 between PNC Bank, Delaware and one of the Company's 50% owned companies 10.31 Discretionary Line of Credit Demand Note dated August 18, 1995 in favor of one of the Company's 50% owned companies 10.32 Loan Agreement dated March 30, 1992 between the Royal Bank of Scotland plc, Henry Schein U.K. Holdings Limited and BDG U.K. Holdings Limited 10.33 Loan Agreement dated January 28, 1994 between the Royal Bank of Scotland plc, Henry Schein U.K. Holdings Limited and Dental Express (Supplies) Limited 10.34 Credit Agreement dated June 5, 1995 among Canadian Imperial Bank of Commerce and one of the Company's 50% owned companies 10.35 Master Lease Agreement dated as of February 28, 1991 between General Electric Capital Corporation and the Company 10.36 Master Lease Agreement dated December 2, 1994 between Chase Equipment Leasing, Inc. and the Company 10.37 Software License Agreement dated as of June 20, 1995 between the Company and XcelleNet, Inc. 10.38 Software License Agreement dated as of October 31, 1994, as amended, between J.D. Edwards & Company 75
Exhibit No. Description Page No. - ----------- ----------- -------- 10.39 Software Update Agreement dated as of October 31, 1994, as amended, between J.D. Edwards & Company 10.40 Software Services Agreement dated as of October 31, 1994, as amended, between J.D. Edwards & Company 10.41 Lease dated December 3, 1990 between WRC Properties, Inc. and the Company 10.42 Lease dated March 2, 1992 between Vista Distribution Center, Inc. and the Company 10.43 Lease dated as of September 30, 1993, as amended October 14, 1993 and May 23, 1995, by and between Broad Hollow Realty Co. and the Company 10.44 Lease dated April 27, 1995 by Lyndean Investments Limited to Kent Dental Limited and Henry Schein U.K. Holdings Limited 10.45 Lease dated October 23, 1994 between Georg and Pia Netzhammer and Henry-Schein Dentina GmbH (English translation and original version) 10.46 Lease dated January 11, 1995 between Lyndean Investments Limited, Kent Dental Limited and Henry Schein U.K. Holdings Limited 10.47 Stock Purchase Agreement dated as of August 18, 1995 among the Company, the Mark Family Partnership and others 10.48 Group Purchasing Program Agreement dated March 31, 1994, as amended June 26, 1995, by and between AMA Resources, Inc. and the Company 10.49 Hospital Supply Purchase Agreement dated as of November 10, 1994 between Veterinary Centers of America, Inc. and the Company 10.50 Award of Contract to the Company dated April 14, 1995 by Department of the Army 10.51 Sales Agent Agreement dated March 1, 1995 by and between Merck & Co., Inc. and the Company 10.52 Supply Agreement dated March 20, 1991 10.53 Shareholders' Agreement dated March 20, 1991 10.54 Non-Negotiable Promissory Note dated March 20, 1991 from the Company to N-Tech 10.55 Guaranty dated March 20, 1991 by the Company and others in favor of N-Tech, Inc. 10.56 Demand Debenture dated December 20, 1988 from one of the Company's 50% owned companies to Canadian Imperial Bank of Commerce 10.57 Pledge Agreement dated December 20, 1988 of one of the Company's 50% owned companies to Canadian Imperial Bank of Commerce 10.58 Shareholders' Agreement dated as of December 1, 1990 by and among the shareholders of Henry Schein Espana, S.A. 10.59 Shareholders' Agreement dated as of April 1, 1991 between the shareholders of Schein-Dentina, B.V. (English translation) 10.60 Put and Call Option Agreement dated August 29, 1991 between Schein International (Europe) Inc. and the shareholders of Henry Schein U.K. Holdings Limited 10.61 Deed of Guarantee dated August 29, 1991 between Henry Schein, Inc. and the shareholders of Henry Schein U.K. Holdings Limited 10.62 Stock Purchase Agreement dated November 1, 1992 among SSN Healthcare Supply, Inc., the Company, Tri-State Medical Supply, Inc. and a shareholder 10.63 Stock Purchase and Shareholders' Agreement dated March 19, 1993 by and among S.A. Hospithera and Henry Schein Europe, Inc. 76
Exhibit No. Description Page No. - ----------- ----------- -------- 10.64 Agreement dated March 19, 1993 by and among S.A. Hospithera N.V., Henry Schein Europe Inc., and S.A. Henry Schein Hospithera N.V. 10.65 Supply Agreement dated as of March 15, 1993 between Henry Schein B.V. and S.A. Henry Schein Hospithera N.V. 10.66 Put and Call Option Agreement dated July 1, 1993 between P.W. White Holdings Limited and Henry Schein Europe Inc. 10.67 Shareholders' Agreement dated July 1, 1993 between the shareholders of Henry Schein UK Holdings Ltd. 10.68 Consortium Agreement dated July 1, 1993 between the shareholders of Henry Schein UK Holdings Ltd. 10.69 Guarantee dated July 1, 1993 between the Company and P.W. White Holdings Limited 10.70 Restructuring Agreement dated July 30, 1993 by and among the Company, Dental Plan, Inc., and certain of its employees 10.71 Share Purchase Agreement dated as of November 17, 1993 by and among Henry Schein B.V. and Johannes Cornelis van den Braak 10.72 Asset Purchase and Business Development Agreement dated May 23, 1994 among the Company, Chicago Medical Equipment Company, and its principal stockholder, Universal Footcare Holdings Corp., Universal Footcare Products, Inc. and Universal Footcare Sales Co., L.L.C. 10.73 Sales Service Agreement dated as of August 1, 1994 between Universal Footcare Products, Inc. and Universal Footcare Sales Co., L.L.C. 10.74 Unanimous Shareholders Agreement dated August 4, 1994 among Henry Schein Canada Inc., the Company, 972704 Ontario Inc. and its shareholders, and Consolidated Dental Ltd. 10.75 Share Purchase Agreement dated June 27, 1994 by and between the shareholders of Henry Schein France S.A. 10.76 Shareholders Agreement dated January 1, 1995 among SSN Healthcare Supply, Inc., South Jersey Medical Supply Co., Inc., South Jersey Surgical Supply Co., Inc., and its shareholders 10.77 Shareholders Agreement dated as of January 24, 1995 by and among the shareholders of Dentisoft, Inc. 10.78 Purchase Agreement dated as of June 14, 1995 among The Veratex Corporation, the Company and HSI Michigan Corp. 10.79 Form of Henry Schein, Inc. Non-Employee Director Stock Option Plan +** 10.80 Supply Agreement made as of July 7, 1995 between Tidi Products, Inc. and the Company 10.81 Agreement Subject to Conditions Precedent dated July 21, 1995 between Henry Schein Europe Inc., Henry Schein France S.A., Gerard Ifker, Didier Cochet, Frederic Ladet, Jean-Hugues Lelievre and Christophe Morales (English Translation) 10.82 Put and Call Option Agreement dated June 9, 1995 between William Roger Killiner and Henry Schein U.K. Holdings Limited 10.83 Put and Call Option Agreement dated June 9, 1995 between Anthony Alan Anderson and Henry Schein U.K. Holdings Limited. 10.84 Agreement of Purchase and Sale of Assets dated as of July 1, 1995 by and among Precision Dental Specialties, Inc. and its shareholders, PDS Acquisition Corp., and the Company 10.85 Shareholders Agreement dated as of July 1, 1995 by and among Precision Dental Specialties, Inc. and its shareholders, PDS Acquisition Corp., and the Company 10.86 Agreement dated January 1, 1995 between Henry Schein (UK) Holdings Ltd. and The Royal Bank of Scotland plc 77
Exhibit No. Description Page No. - ----------- ----------- -------- 10.87 Agreement dated March 4, 1993 between Henry Schein (UK) Holdings Ltd. and The Royal Bank of Scotland plc 10.88 Loan Agreement dated November 16, 1993 between Henry Schein B.V. and others and Crediet-en-Effectenbank N.V. (English translation and original version) 10.89 Multicurrency Credit Policy between Henry Schein Espana, S.A. and others and Banco Popular Espanol, S.A. (English translation and original version) 10.90 Amended and Restated Credit Agreement (the "Amended Credit Agreement") dated as of July 5, 1995 among the Company, The Chase Manhattan Bank, N.A., Natwest Bank, N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A. "Rabobank Nederland", New York Branch and European American Bank (previously Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Commission File No. 33-96528)) 10.91 First Amendment to the Amended Credit Agreement dated December 15, 1995 among the Company, The Chase Manhattan Bank, N.A., Natwest Bank, N.A., Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A. "Rabobank Nederland", New York Branch and European American Bank+ 10.92 Agreement and Plan of Merger dated March 7, 1997 between the Company and Micro Bio-Medics, Inc. 11.1 Statement re: computation of per share income (loss)+ 21.1 List of Subsidiaries of the Registrant 23.1 Consent of BDO Seidman, LLP+ 27.1 Financial Data Schedules+ - -------------- + Filed herewith ** Indicates management contract or compensatory plan or arrangement. 78