UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended June 28, 1997
OR
__ 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)
Telephone Number (516) 843-5500
(Registrant's telephone number, including area code)
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
As of August 7, 1997, there were 27,350,241 shares of the Registrant's
Common Stock outstanding.
HENRY SCHEIN, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 28, 1997 and December 28, 1996.....................3
Consolidated Statements of Operations
Three and six months ended June 28, 1997
and June 29, 1996.......................................4
Consolidated Statements of Cash Flows
Six months ended June 28, 1997 and June 29, 1996.......5
Notes to Consolidated Financial Statements ................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ......17
Item 6. Exhibits and Reports on Form 8-K .........................17
Signature ................................................17
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 28, December 28,
1997 1996
-------- ------------
(unaudited) (restated)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 20,298 $ 43,750
Accounts receivable, less reserves of $9,659 and $7,373,
respectively...................................................... 163,327 140,813
Inventories ........................................................ 118,199 126,862
Deferred income taxes............................................... 7,056 6,189
Other .............................................................. 32,387 29,822
--------- ------------
Total current assets........................................ 341,267 347,436
Property and equipment, net of accumulated depreciation and
amortization of $42,838 and $39,751, respectively................... 40,503 37,571
Goodwill and other intangibles, net of accumulated
amortization of $4,934 and $3,659, respectively...................... 73,226 53,420
Investments and other ................................................. 29,757 29,023
---------- ------------
$ 484,753 $ 467,450
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 72,144 $ 88,268
Bank credit lines................................................... 7,395 6,716
Accruals:
Salaries and related expenses..................................... 12,464 11,041
Other............................................................. 27,248 28,375
Current maturities of long-term debt.............................. 12,244 8,461
--------- ------------
Total current liabilities................................... 131,495 142,861
Long-term debt......................................................... 41,581 24,569
Other liabilities ..................................................... 4,650 2,715
--------- ------------
Total liabilities .......................................... 177,726 170,145
--------- ------------
Minority interest...................................................... 2,448 5,289
--------- ------------
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000; issued
24,181,300 and 23,342,441, respectively .......................... 242 233
Additional paid-in capital ......................................... 256,648 254,198
Retained earnings ................................................. 50,547 39,311
Treasury stock, at cost 62,479 and 60,529 shares, respectively ..... (1,156) (1,090)
Foreign currency translation adjustment ............................ (1,702) (636)
--------- ------------
Total stockholders' equity ................................ 304,579 292,016
--------- ------------
$ 484,753 $ 467,450
========= ============
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
------------ --------- ------ -------
(restated) (restated)
Net sales......................................... $263,106 $197,256 $503,605 $ 384,595
Cost of sales..................................... 184,064 137,336 352,841 268,169
------- ------- ---------- ----------
Gross profit.............................. 79,042 59,920 150,764 116,426
Operating expenses:
Selling, general and administrative........... 68,393 52,744 133,175 104,140
Merger and integration costs ................. 1,826 -- 4,353 --
--------- ------------ ---------- --------------
Operating income ........................ 8,823 7,176 13,236 12,286
Other income (expense):
Interest income .............................. 340 763 868 1,172
Interest expense ............................. (850) (1,348) (1,703) (2,309)
Other - net .................................. 153 128 80 31
--------- ------------ ---------- --------------
Income before taxes on income,
minority interest and equity in
earnings of affiliates................. 8,466 6,719 12,481 11,180
Taxes on income .................................. 3,658 1,920 6,138 3,871
Minority interest in net income (loss) of
subsidiaries ................................. (115) 56 (129) (14)
Equity in earnings of affiliates ................ 381 361 331 497
--------- ---------- ---------- -------------
Net income ............................. $ 5,304 $ 5,104 $ 6,803 $ 7,820
======= ======== ======== ===========
Net income per common share ...................... $ 0.21 $ 0.28
======== ==========
Pro forma:
Historical net income ....................... $5,104 $ 7,820
Pro forma adjustments:
Provision for income taxes on
previously untaxed earnings of an
acquisition ............................ (430) (430)
--------- ----------
Pro forma net income ......................... $4,674 $ 7,390
========= ==========
Pro forma net income per common share $ 0.23 $ 0.37
========= ==========
Weighted average common and common
equivalent shares outstanding ............ 24,675 20,162 23,997 19,957
====== ========= ========== ==========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------------------
June 28, June 29,
1997 1996
------ --------
(restated)
Cash flows from operating activities:
Net income.......................................................... $ 6,803 $ 7,820
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.................................... 4,591 3,570
Provision (benefit) for losses on accounts receivable ........... 2,106 (216)
Provision (benefit) for deferred income taxes ................... 888 (358)
Stock issued to ESOP Trust ...................................... 1,111 --
Undistributed earnings of affiliates............................. (331) (497)
Minority interest in net loss of subsidiaries ................... (129) (14)
Other ........................................................... 33 80
Changes in assets and liabilities:
Increase in accounts receivable.................................. (18,919) (18,381)
Decrease in inventories ......................................... 10,478 913
(Increase) decrease in other current assets ..................... (2,506) 337
Decrease in accounts payable and accruals ....................... (19,528) (9,168)
-------- ------------
Net cash used in operating activities.................................... (15,403) (15,914)
--------- -------------
Cash flows from investing activities:
Capital expenditures ................................................ (5,448) (5,363)
Business acquisitions, net of cash acquired.......................... (13,128) (6,963)
Other ............................................................... (67) (2,355)
----------- ------------
Net cash used in investing activities ................................... (18,643) (14,681)
-------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ............................ 12 846
Principal payments on long-term debt ................................ (1,865) (4,270)
Proceeds from issuance of stock...................................... -- 124,070
Proceeds from borrowings from banks ................................ 14,750 2,392
Payments on borrowings from banks .................................. (773) (5,894)
Purchase of treasury stock ......................................... (66) (144)
Other ............................................................... (1,464) (762)
------------ ---------------
Net cash provided by financing activities .............................. 10,594 116,238
------------ ----------
Net increase (decrease) in cash and cash equivalents ................... (23,452) 85,643
Cash and cash equivalents, beginning of period ......................... 43,750 8,882
----------- -------------
Cash and cash equivalents, end of period .............................. $ 20,298 $ 94,525
========== ===========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Henry Schein, Inc.
and its wholly-owned and majority-owned subsidiaries (collectively, the
"Company").
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth therein. These consolidated financial statements are condensed and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
financial statements include adjustments to give effect to the acquisition of
Dentrix Dental Systems, Inc. ("Dentrix"), effective February 28, 1997, which was
accounted for under the pooling of interests method. The consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K and 10-K/A for the year ended December 28, 1996. The Company
follows the same accounting policies in preparation of interim reports. The
results of operations for the six months ended June 28, 1997 are not necessarily
indicative of the results to be expected for the fiscal year ending December 27,
1997 or any other period.
Note 2. Business Acquisitions
During the year ended December 28, 1996, the Company acquired seventeen
healthcare distribution businesses. The 1996 acquisitions 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 $104,000, and were all accounted for using the purchase method of
accounting. Of these, fifteen were for majority ownership (100% in nine of the
transactions). The total amount of cash paid and promissory notes issued for
these acquisitions was approximately $33,423. The Company also issued 155,183
shares of common stock in 1996 in connection with two of these acquisitions.
Operations of these businesses have been included in the consolidated financial
statements from their respective acquisition dates. No single 1996 acquisition
was material.
During the six months ended June 28, 1997, the Company completed 11
acquisitions, and had four pending acquisitions, all of which have subsequently
closed (see Note 5). The 1997 completed acquisitions included three medical and
three dental supply companies, with aggregate net sales for their most recently
completed year ends of approximately $32,000 and $17,100, respectively, two
international dental supply companies with aggregate net sales of approximately
$5,300 and three technology and value-added product companies with aggregate net
sales of approximately $20,300. Of the 11 completed acquisitions, four were
accounted for under the pooling of interests method, with the remainder being
accounted for under the purchase method of accounting (six for 100% ownership
interests and one for a 60% ownership interest). The financial statements have
been restated to give retroactive effect to one of the pooling transactions
(Dentrix) as the remaining three transactions were not material and have been
included in the consolidated financial statements from the beginning of the
quarter in which the acquisitions occurred.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions (Continued)
The total amount of cash paid and promissory notes issued for the 1997 completed
acquisitions accounted for under the purchase method of accounting was
approximately $22,179. The excess of the acquisition costs over the fair value
of identifiable net assets acquired for these acquisitions will be amortized on
a straight-line basis over a period not to exceed 30 years.
The Company also issued 1,916,866 shares of common stock in connection with the
four pooling transactions, the most significant of which was with Dentrix. On
February 28, 1997, all of the common stock of Dentrix, a leading provider of
clinically-based dental practice management systems, with net sales of
approximately $10,200, was acquired in exchange for 1,070,000 shares of the
Company's common stock.
In connection with the acquisitions accounted for under the pooling of interests
method of accounting, during the six and three months ended June 28, 1997, the
Company incurred certain merger and integration costs of approximately $4,353
and $1,826, respectively. Net of taxes, for the six and three months ended June
28, 1997, merger and integration costs were approximately $0.17 and $0.06 per
share, respectively. Merger and integration costs consist primarily of
investment banking, legal, accounting and advisory fees, as well as certain
other integration costs associated with these mergers.
Operations of the 1997 completed acquisitions, accounted for under the purchase
method of accounting, have been included in the consolidated financial
statements from their respective acquisition dates. These acquisitions, together
with the immaterial pooling transactions, had net sales for the six months ended
June 29, 1996 of approximately $26,522.
Additionally, pursuant to a shareholders' agreement, certain minority
shareholders of a subsidiary of the Company exercised their option to sell their
shares in the subsidiary to the Company. The value of the shares put to the
Company was approximately $11,800, of which approximately $3,200 was paid for in
cash, with the remainder payable over two years in equal annual installments. No
single acquisition completed in the six months ended June 28, 1997 was material.
The summarized unaudited pro forma results of operations set forth below for the
six months ended June 28, 1997 and June 29, 1996 assume the acquisitions,
completed in 1996 and the first half of 1997, which were accounted for under the
purchase and pooling methods of accounting, occurred as of the beginning of each
of these periods.
Six Months Ended
----------------------------------
June 28, June 29,
1997 1996
------------- --------------
Net sales.................................................. $ 514,697 $ 431,881
Net income................................................. 6,343 8,114
Pro forma net income, reflecting the Dentrix tax adjustment
in 1996, and adjustment in 1997 to exclude merger and
integration costs, net of taxes........................ 10,376 7,684
Pro forma net income per common share...................... $ 0.42 $ 0.37
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(unaudited)
Note 2 - Business Acquisitions (Continued)
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.
Net sales of the Company and Dentrix for the six months ended June 28, 1996 was
$380,081 and $4,514, respectively. For the two months ended February 28, 1997,
the effective date of the Dentrix acquisition, Dentrix's net sales were $1,842.
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") was merged
into a wholly-owned subsidiary of the Company. As a result of the transaction,
which was approved by the Boards of Directors of MBMI and the Company, and
MBMI's shareholders on August 1, 1997, each outstanding share of MBMI's common
stock was exchanged at a fixed rate of 0.62 of a share of the Company's common
stock. The acquisition of MBMI will be accounted for under the pooling of
interests method of accounting.
MBMI distributes medical supplies to physicians and hospitals in the New York
metropolitan area, as well as to healthcare professionals in sports medicine,
emergency medicine, school health, industrial safety, government and laboratory
markets nationwide. MBMI had net sales of approximately $150,000 and net income
of approximately $1,700 for its fiscal year ended November 30, 1996.
The following summarized pro forma unaudited results of operations combines the
results of the Company and MBMI assuming the acquisition of MBMI occurred on
December 30, 1995.
Six Months Ended
------------------------------------------
June 28, June 29,
1997 1996
--------- -----
Net sales........................................................... $ 581,431 $ 450,823
Net income ........................................................ 7,482 8,274
Pro forma net income, reflecting the Dentrix tax adjustment in 1996,
and adjustment in 1997 to exclude merger and integration costs,
net of taxes...................................................... 11,515 7,844
Pro forma net income per common share............................... $ 0.42 $ 0.34
On August 3, 1997, the Company entered into a definitive merger agreement with
Sullivan Dental Products, Inc. ("Sullivan") (Nasdaq:SULL) pursuant to which the
Company will acquire Sullivan in a stock-for-stock merger. The merger is
intended to be accounted for as a pooling of interests and is expected to be
tax-free to Sullivan's shareholders. Under the terms of the agreement, which has
been approved by the Board of Directors of each company, outstanding shares of
Sullivan will be exchanged at a fixed rate of 0.735 of a share of the Company's
common stock for each Sullivan share in a transaction valued at approximately
$318,000 based on the Company's closing stock price on Friday, August 1, 1997.
The merger is expected to close in the fourth quarter of 1997 and is subject to
Hart-Scott-Rodino, each company's shareholder approval, and other customary
closing conditions. The Company anticipates recording a non-recurring charge
related to the transaction in the fourth quarter of 1997.
Sullivan had net sales for the year ended December 31, 1996 and the six months
ended June 30, 1997 of approximately $242,000 and $128,000, respectively.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(unaudited)
Note 3. Public Offering
On June 21, 1996, the Company sold 3,734,375 shares and certain of its
stockholders sold 2,812,000 shares of common stock of the Company in a public
offering (the "Offering") at a price to the public of $35.00 per share, netting
proceeds to the Company, after underwriting discounts and expenses, of
approximately $124,070. Proceeds from the Offering were used to (i) repay
$34,600 outstanding under the Company's revolving credit agreement, (ii) finance
1996 acquisitions totaling $32,540 and (iii) repay a $2,400 note payable
incurred in connection with a 1995 acquisition; the remaining proceeds have been
used for working capital needs and for general corporate purposes.
Note 4. Supplemental Net Income per Share
Supplemental net income per share for the six months ended June 29, 1996 was
$0.38. For this calculation, the weighted average number of common shares
includes the shares assumed to provide the proceeds, at the Offering price (See
Note 3), needed to retire average revolving credit borrowings and other debt for
the period from the beginning of the year (or the date the debt was incurred) to
the respective retirement date. The supplemental net income excludes financing
and interest expenses of the debt.
Note 5. Subsequent Events
As of June 28, 1997, the Company had six pending acquisitions, including MBMI
(which closed on August 1, 1997) and three international medical supply
companies (which all closed in July 1997). The three international medical
supply companies had combined net sales for 1996 of approximately $17,800.
Additionally, the Company has entered into an agreement to acquire certain
assets and the business of IDE Interstate, Inc., a direct marketer of healthcare
products to dentists, doctors and veterinarians with net sales for 1996 of
approximately $50,000. This transaction is subject to certain closing conditions
and is expected to be completed in the third quarter of 1997.
On August 3, 1997, the Company entered into the Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Sullivan Dental Products, Inc.
("Sullivan") will merge into a wholly-owned subsidiary of the Company upon the
exchange of 0.735 shares of the Company's common stock for each outstanding
share of Sullivan stock. The Merger Agreement which has been approved by the
board of directors of each company, is subject to Hart-Scott-Rodino, each
company's shareholder approval, and other customary closing conditions. The
Company will record a non-recurring charge when the transaction closes, which it
expects to occur in the fourth quarter of 1997.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)
(unaudited)
Note 5. Subsequent Events (Continued)
Sullivan distributes consumable dental supplies to dentists using a marketing
strategy which combines personal visits by sales representatives with a catalog
of approximately 12,000 competitively priced items. Sullivan also sells,
installs and services dental equipment through 52 sales and service centers
located throughout the U.S. Sullivan had net sales of approximately $242,000 and
earnings of approximately $8,700 for its year ended December 31, 1996.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Since December 28, 1996, the Company completed 11 acquisitions, and had four
pending acquisitions, of which all have subsequently closed. The 1997 completed
acquisitions included three medical and three dental supply companies, with
aggregate net sales for their most recently completed year ends of approximately
$32.0 million and $17.1 million, respectively, two international dental supply
companies with aggregate net sales of approximately $5.3 million and three
technology and value-added product companies with aggregate net sales of
approximately $20.3 million. Of the 11 completed acquisitions, four were
accounted for under the pooling of interests method, with the remainder being
accounted for under the purchase method of accounting (six for 100% ownership
interests and one for a 60% ownership interest). The financial statements have
been restated to give retroactive effect to one of the pooling transactions
(Dentrix) as the remaining three were not material and have been included in the
consolidated financial statements from the beginning of the quarter in which the
acquisition occurred.
Operations of the 1997 completed acquisitions, accounted for under the purchase
method of accounting, have been included in the consolidated financial
statements from their respective acquisition dates. These acquisitions, together
with the immaterial pooling transactions, had net sales for the six months ended
June 29, 1996 of approximately $26.5 million. No single acquisition completed in
the six months ended June 28, 1997 was material.
Included in the pending transactions are two agreements and plans of merger
between the Company and: (i) MBMI, which closed on August 1, 1997, pursuant to
which MBMI merged into a wholly-owned subsidiary of the Company upon the
exchange of 0.62 shares of the Company's common stock for each share of MBMI
common stock, and (ii) Sullivan, entered into on August 3, 1997, pursuant to
which Sullivan will also merge into a wholly-owned subsidiary of the Company
upon the exchange of 0.735 shares of the Company's common stock for each
outstanding share of Sullivan stock.
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. Sullivan distributes consumable dental supplies to dentists using a
marketing strategy which combines personal visits by sales representatives with
a catalog of approximately 12,000 competitively priced items. Sullivan also
sells, installs and services dental equipment through 52 sales and service
centers located throughout the U.S. Sullivan had net sales of approximately
$242.0 million and earnings of approximately $8.7 million for its year ended
December 31, 1996.
The completion of the Sullivan transaction is subject to the satisfaction of
customary closing conditions, including Hart-Scott-Rodino and, among others,
each company's shareholder approval. The transaction is expected to be completed
in the fourth quarter of 1997, although no assurances can be given in this
regard. For a more complete description of the terms of the Sullivan merger
agreement, reference is made to the Exhibits of this Form 10-Q. The Company
expects to file a
11
Registration Statement on Form S-4 with the Securities and Exchange Commission
with respect to the securities to be issued in connection with the Sullivan
merger.
In connection with the acquisitions accounted for under the pooling of interests
method of accounting, during the six and three months ended June 28, 1997, the
Company incurred certain merger and integration costs of approximately $4.4
million and $1.8 million, respectively. Net of taxes, for the six and three
months ended June 28, 1997, merger and integration costs were approximately
$0.17 and $0.06 per share, respectively. Merger and integration costs consist
primarily of investment banking, legal, accounting and advisory fees, as well as
certain other integration costs associated with these mergers.
Excluding the merger and integration costs, net income and net income per common
share would have been $10.8 million and $0.45, respectively, for the six months
ended June 28, 1997, and $6.8 million and $0.28, respectively, for the three
months then ended.
Through the six months ended June 28, 1997, the Company used United Parcel
Services of America, Inc. ("UPS") for delivery of substantially all domestic
orders. Effective August 4, 1997 the Teamsters Union commenced a strike against
UPS, thereby substantially reducing UPS's ability to fulfill the shipments of
its customers' orders. While UPS continues to fulfill deliveries for some of its
customers' orders, and has stated that it intends to give priority service to
the delivery of medical supplies, there can be no assurance that the service
levels UPS can provide will be adequate to meet the Company's needs.
Accordingly, the Company has made arrangements for alternative means of
delivery.
While the Company cannot reasonably determine the impact the UPS workers' strike
may have on its customers' ordering habits, or on delivery times, the
alternative means of delivery the Company has provided for will cost
incrementally more than would otherwise have been incurred if UPS were to
fulfill substantially all of the Company's domestic order requirements. Due to
the uncertainty of the length and severity of the strike, the Company cannot
reasonably determine the impact the UPS workers' strike will have on the
Company.
RESULTS OF OPERATIONS
Three Months Ended June 28, 1997 compared to Three Months Ended June 29, 1996
Net sales increased $65.8 million, or 33.4%, to $263.1 million for the three
months ended June 28, 1997 from $197.3 million for the three months ended June
29, 1996. The Company estimates that approximately 17.3% of the increase was due
to internal growth, while the remaining 16.1% was due to acquisitions. Of the
$65.8 million increase, approximately $26.1 million represented a 24.6% increase
in the Company's dental business, $24.1 million represented a 58.3% increase in
its medical business, $9.2 million represented a 27.6% increase in its
international business, $1.1 million represented a 12.3% increase in the
Company's veterinary business, and $5.3 million represented a 69.8% increase in
its technology business. The increase in dental net sales was primarily the
result of the continuing favorable impact of the Company's integrated sales and
marketing approach (which coordinates the efforts of its field sales consultants
with its direct marketing and telesales personnel), acquisitions, continued
success in the Company's target marketing programs and increased sales in the
large dental equipment market. The increase in medical net sales was primarily
due to acquisitions, increased net sales to renal dialysis centers and net sales
to customers enrolled in the AMA Purchase Link program. In the international
market, the increase in net sales was due equally to acquisitions and increased
unit volume growth. Unfavorable exchange rate translation adjustments resulted
in a net sales decrease of approximately $1.6 million. Had net sales for the
international market been translated at the same exchange rates in effect during
1996, net sales would have increased by an additional 4.6%. In the veterinary
market, the increase in net sales was primarily due to increased account
penetration with corporate accounts. The increase in technology sales was
primarily due to 1997 acquisitions.
Gross profit increased by $19.1 million, or 31.9%, to $79.0 million for the
three months ended June 28, 1997 from $59.9 million for the three months ended
June 29, 1996, while gross profit margin decreased to 30.0% from 30.4%. The
$19.1 million increase in gross profit was primarily due to increased sales
volume and acquisitions. The decrease in gross profit margin was primarily due
to lower technology sales as a percentage of total net sales and other sales mix
changes.
12
Selling, general and administrative expenses increased by $15.7 million, or
29.8%, to $68.4 million for the three months ended June 28, 1997 from $52.7
million for the three months ended June 29, 1996. Selling and shipping expenses
increased by $9.1 million, or 25.2% to $45.2 million for the three months ended
June 28, 1997 from $36.1 million for the three months ended June 29, 1996. As a
percentage of net sales, selling and shipping expenses decreased 1.1% to 17.2%
for the three months ended June 28, 1997 from 18.3% for the three months ended
June 29, 1996. This decrease was primarily due to leveraging of the Company's
distribution infrastructure, partially offset by an increase in selling
expenses. General and administrative expenses increased $6.6 million, or 39.8%,
to $23.2 million for the three months ended June 28, 1997 from $16.6 million for
the three months ended June 29, 1996, primarily as a result of acquisitions. As
a percentage of net sales, general and administrative expenses increased 0.4% to
8.8% for the three months ended June 28, 1997 from 8.4% for the three months
ended June 29, 1996.
Other income (expense)-net increased by $0.1 million, or 20.0%, to ($0.4)
million for the three months ended June 28, 1997 from ($0.5) million for the
three months ended June 29, 1996. This increase was primarily due to a decrease
in average borrowings, which were partially paid off with proceeds from the
Company's follow-on offering in June 1996, combined with an increase in imputed
interest income arising from non-interest bearing extended payment term sales.
For the three months ended June 28, 1997, the Company's effective tax rate was
43.2%. Excluding merger and integration costs, substantially all of which are
not deductible for income tax purposes, the Company's effective tax rate would
have been 38.7%. The difference between the effective tax rate and the federal
statutory rate relates primarily to state income taxes. For the three months
ended June 29, 1996, the Company's effective rate was 28.6%, and on a pro forma
basis was 35.0%, which was lower than the federal statutory rate primarily due
to the restructuring of certain foreign subsidiaries, thereby allowing the
utilization of their losses, offset by the effects of state income taxes.
Six Months Ended June 28, 1997 compared to Six Months Ended June 29, 1996
Net sales increased $119.0 million, or 30.9%, to $503.6 million for the six
months ended June 28, 1997 from $384.6 million for the six months ended June 29,
1996. The Company estimates that overall approximately 16.0% of the increase was
due to internal growth, while the remaining 14.9% was due to acquisitions. Of
the $119.0 million increase, approximately $57.6 million represented a 28.8%
increase in the Company's dental business, $40.0 million represented a 49.1%
increase in its medical business, $13.6 million represented a 19.6% increase in
its international business, and $2.6 million represented a 14.5% increase in the
Company's veterinary business and $5.2 million represented a 33.4% increase in
its technology business. The increase in dental net sales was primarily the
result of the continuing favorable impact of the Company's integrated sales and
marketing approach (which coordinates the efforts of its field sales consultants
with its direct marketing and telesales personnel), acquisitions, continued
success in the Company's target marketing programs and increased sales in the
large dental equipment market. The increase in medical net sales was primarily
due to acquisitions, increased net sales to renal dialysis centers and net sales
to customers enrolled in the AMA Purchase Link program. In the international
market, the increase in net sales was due equally to acquisitions and increased
unit volume growth. Unfavorable exchange rate translation adjustments resulted
in a net sales decrease of approximately $2.9 million dollars. Had net sales for
the international market been translated at the same exchange rates in effect
during 1996, net sales would have increased by an additional 4.2 %. In the
veterinary
13
market, the increase in net sales was primarily due to increased account
penetration with corporate accounts. The increase in technology sales was
primarily due to 1997 acquisitions.
Gross profit increased by $34.4 million, or 29.5%, to $150.8 million for the six
months ended June 28, 1997 from $116.4 million for the six months ended June 29,
1996, while gross profit margin decreased to 29.9% from 30.3%. The $34.4 million
increase in gross profit was primarily due to increased sales volume and
acquisitions. The decrease in gross profit margin was primary due to lower
technology sales as a percentage of total net sales and other sales mix changes.
Selling, general and administrative expenses increased by $29.1 million, or
28.0%, to $133.2 million for the six months ended June 28, 1997 compared to
$104.1 million for the six months ended June 29, 1996. Selling and shipping
expenses increased by $17.3 million, or 24.5%, to $87.9 million for the six
months ended June 28, 1997 from $70.6 million for the six months ended June 29,
1996. As a percentage of net sales, selling and shipping expenses decreased 0.9%
to 17.5% for the six months ended June 28, 1997 from 18.4% for the six months
months ended June 29, 1996. This decrease was primarily due to leveraging of the
Company's distribution infrastructure, partially offset by an increase in
selling expenses. General and administrative expenses increased $11.8 million,
or 35.2%, to $45.3 million for the six months ended June 28, 1997 from $33.5
million for the six months ended June 29, 1996, primarily as a result of
acquisitions. As a percentage of net sales, general and administrative expenses
increased 0.3% to 9.0% for the six months ended June 28, 1997 from 8.7% for the
six months ended June 29, 1996.
Other income (expense)-net decreased by $0.3 million, or 27.3%, to ($0.8)
million for the six months ended June 28, 1997 from ($1.1) million for the six
months ended June 29, 1996. This decrease was primarily due to a decrease in
average borrowings, which were partially paid off with proceeds from the
Company's follow-on offering in June 1996, combined with an increase in imputed
interest income arising from non-interest bearing extended payment term sales.
For the six months ended June 28, 1997, the Company's effective tax rate was
49.2%. Excluding merger and integration costs, substantially all of which are
not deductible for income tax purposes, the Company's effective tax rate would
have been 38.4%. The difference between the effective tax rate and the federal
statutory rate relates primarily to state income taxes. For the six months ended
June 29, 1996, the Company's effective rate was 34.6%, and on a pro forma basis
was 38.5%, which was higher than the federal statutory rate is primarily due to
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products and special inventory forward buy-in opportunities, (b) capital
expenditures, and (c) acquisitions. Since sales have traditionally been
strongest during the fourth quarter and special inventory forward buy-in
opportunities have traditionally been most prevalent just before the end of the
year, the Company's working capital requirements are 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 revolving credit
facilities and stock issuances.
Net cash used in operating activities for the six months ended June 28, 1997 of
$15.4 million resulted primarily from a net increase in working capital of $30.5
million offset, in part, by net
14
income adjusted for non-cash charges relating primarily to depreciation and
amortization of $15.1 million. The increase in working capital was primarily due
to (i) a decrease in accounts payable and other accrued expenses of $19.5
million resulting primarily from payments to vendors for inventory purchased as
part of the Company's year-end inventory forward buy-in program and, (ii) a
$18.9 million increase in accounts receivable resulting from increased sales and
extended payment terms, (iii) a $2.5 million increase in other current assets.
offset by, (i) a $10.5 million decrease in inventory. The Company anticipates
future increases in working capital as a result of its continued sales growth.
Net cash used in investing activities for the six months ended June 28, 1997 of
$18.6 million resulted primarily from cash outlays for acquisitions of $13.1
million and capital expenditures of $5.4 million. Capital expenditures is
comparable with the prior year period as the Company continues developing new
computer systems as well as incurring expenditures for additional 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 six months ended June 28, 1997
of $10.6 million resulted primarily from net borrowings on bank credit lines
partially offset by net payments on long-term debt. 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 interest 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.
Pursuant to a shareholders' agreement, certain minority shareholders of a
subsidiary of the Company exercised their option to sell their shares in the
subsidiary to the Company. The value of the shares put to the Company was
approximately $11.8 million, of which approximately $3.2 million was paid for in
cash, with the remainder payable over two years in equal annual installments.
The Company's cash and cash equivalents as of June 28, 1997 of $20.3 million are
invested primarily in short-term bank deposits. These investments have staggered
maturity dates, none greater than three months, and have a high degree of
liquidity since the securities are actively traded in public markets.
The Company entered into an amended revolving credit facility on January 31,
1997 that increased its main credit facility from $65.0 million to $100.0
million, extended the facility termination to January 30, 2002 and reduced the
interest rate on the Company's borrowings under the facility. Borrowings under
the credit facility were $31.3 million at June 28, 1997. Certain of the
Company's subsidiaries have revolving credit facilities that total approximately
$11.0 million under which $7.4 million have been borrowed at June 28, 1997.
The Company believes that its cash and cash equivalents, 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.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This report contains forward-looking statements
based on current expectations that 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,
15
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 the risks described from time to
time in the Company's reports to the Securities and Exchange Commission, which
include the Company's Annual Report on Form 10-K/A for the year ended December
28, 1996. Subsequent written or oral statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements in this Form 10-Q and those in the Company's reports
previously filed with the Securities and Exchange Commission.
16
PART II. OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockhholders held on May 22, 1997, the
stockholders of the Company took the following actions:
(i) Re-elected the following individuals to the Company's Board of Directors:
Stanley M. Bergman (20,381,615 shares voting for; 259,401 shares voting
aganist)
James P. Breslawski (20,382,215 shares voting for; 258,801 shares voting
aganist)
Gerald A. Benjamin (20,381,215 shares voting for; 259,801 shares voting
aganist)
Leonard A. David (20,382,215 shares voting for; 258,801 shares voting
aganist)
Mark E. Mlotek (20,382,215 shares voting for; 258,801 shares voting
aganist)
Steven Paladino (20,381,215 shares voting for; 259,801 shares voting
aganist)
Barry J. Alperin (20,381,115 shares voting for; 259,901 shares voting
aganist)
Pamela Joseph (20,379,515 shares voting for; 261,501 shares voting
aganist)
Donald J. Kabat (20,382,315 shares voting for; 258,701 shares voting
aganist)
Marvin H. Schein (20,381,215 shares voting for; 259,801 shares voting
aganist)
Irving Shafran (20,382,515 shares voting for; 258,501 shares voting
aganist)
(ii) Amended the Company's By-laws to permit the directors to fill vacancies
that arise from time to time and to eliminate the provision preventing
the Board from amending or repealing By-laws adopted by the stockholders
(15,945,841 shares voting for; 3,016,084 shares voting against; 9,930
shares abstaining; 1,669,161 broker non-votes).
(iii) Amended the Company's 1994 Stock Option Plan to increase the number of
shares issuable under the Plan by 1,600,000 shares and to increase the
maximum number of shares subject to options that may be granted to a
participant in any fiscal year of the Company (17,860,742 shares voting
for; 1,144,361 shares voting against; 13,081 shares abstaining; 1,622,832
broker non-votes).
(iv) Ratified the selection of BDO Seidman, LLP as the Company's independent
auditors for the year ended December 27, 1997 (20,616,611 shares voting
for; 13,060 shares voting against; 4,345 shares abstaining).
The Annual Meeting was reconvened on June 10, 1997, at which time a vote
was taken on a proposed amendment to the Company's Certificate of
Incorporation to eliminate the provision providing for a maximum number of
directors, to provide authority for the Board to establish from time to
time the number of directors, to eliminate the provision preventing the
Board from amending or repealing By-laws adopted by the Stockholders and
to eliminate certain supermajority voting requirements failed to receive
the necessary 80% supermajority vote (15,819,575 shares voting for;
3,184,160 shares voting against; 9,930 shares abstaining; 1,669,161 broker
non-votes).
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits.
10.95 The Agreement and Plan of Merger by and among the Company, HSI
Acquisition Corp. and Sullivan Dental Products, Inc. dated
August 3, 1997.
10.96 The Irrevocable Proxy and Termination Rights Agreement between
the Company and certain shareholders of Sullivan Dental
Products, Inc. dated August 3, 1997.
11.1 Computation of Earnings per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 28, 1997, the Company filed a
Current Report on Form 8-K, dated June 24, 1997, to restate its
Selected Financial Data, Management's Discussion and Analysis
of Financial Condition and Results of Operations and financial
statements and related exhibits, previously included in Form
10-K/A, to reflect the acquisition of all of the common stock
of Dentrix Systems, Inc., effective February 28, 1997, which
was accounted for under the "pooling of interests" method of
accounting.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HENRY SCHEIN, INC.
(Registrant)
Dated: August 12, 1997 By:/s/ Steven Paladino
----------------------
Steven Paladino
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
17