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 27, 1998
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 6, 1998, there were 36,540,357 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 27, 1998 and December 27, 1997.............................3
Consolidated Statements of Operations
Three and six months ended June 27, 1998 and June 28, 1997 .....4
Consolidated Statements of Cash Flows
Six months ended June 27, 1998 and June 28, 1997 .............5
Notes to Consolidated Financial Statements ........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .....................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................16
Item 2. Changes in Securities.............................................16
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 6. Exhibits and Reports on Form 8-K .................................17
Signature ........................................................18
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 27, December 27,
1998 1997
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 15,513 $ 7,824
Accounts receivable, less reserves of $12,901 and $13,048,
respectively .......................................... 291,230 261,665
Inventories ............................................... 234,813 212,848
Deferred income taxes ..................................... 13,451 13,323
Other ..................................................... 45,968 39,396
--------- ---------
Total current assets .......................... 600,975 535,056
Property and equipment, net of accumulated depreciation and
amortization of $62,685 and $57,997, respectively ......... 59,185 54,449
Goodwill and other intangibles, net of accumulated
amortization of $14,338 and $10,395, respectively ......... 131,134 122,217
Investments and other ........................................ 44,990 29,472
--------- ---------
$ 836,284 $ 741,194
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 163,614 $ 129,806
Bank credit lines ......................................... 17,611 11,973
Accruals:
Salaries and related expenses ............................. 21,954 20,729
Merger and integration costs .............................. 12,980 17,056
Other ..................................................... 42,653 39,095
Current maturities of long-term debt ......................... 4,340 9,370
--------- ---------
Total current liabilities ..................... 263,152 228,029
Long-term debt ............................................... 124,154 93,192
Other liabilities ............................................ 8,264 6,550
--------- ---------
Total liabilities ............................. 395,570 327,771
--------- ---------
Minority interest ............................................ 2,085 2,225
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000; issued
36,144,367 and 35,146,892, respectively .............. 367 352
Additional paid-in capital ................................ 337,311 322,998
Retained earnings ......................................... 105,415 92,238
Treasury stock, at cost (62,479 shares) ................... (1,156) (1,156)
Accumulated other comprehensive income .................... (1,683) (1,609)
Deferred compensation ..................................... (1,625) (1,625)
--------- ---------
Total stockholders' equity .................... 438,629 411,198
--------- ---------
$ 836,284 $ 741,194
========= =========
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 27, June 28, June 27, June 28,
1998 1997 1998 1997
--------- --------- --------- ---------
(restated) (restated)
Net sales .................................................. $ 427,873 $ 373,434 $ 830,905 $ 712,483
Cost of sales .............................................. 293,754 262,502 575,295 501,514
--------- --------- --------- ---------
Gross profit ....................................... 134,119 110,932 255,610 210,969
Operating expenses:
Selling, general and administrative .................... 112,300 95,537 219,525 185,939
Merger and integration costs ........................... 8,536 1,826 12,400 4,353
--------- --------- --------- ---------
Operating income ................................... 13,283 13,569 23,685 20,677
Other income (expense):
Interest income ........................................ 1,419 1,444 3,131 2,981
Interest expense ....................................... (2,505) (1,012) (4,662) (2,032)
Other - net ............................................ (35) 69 45 (6)
--------- --------- --------- ---------
Income before taxes on income,
minority interest and equity in
earnings of affiliates ......................... 12,162 14,070 22,199 21,620
Taxes on income ............................................ 5,567 6,025 9,820 10,033
Minority interest in net losses of subsidiaries .............. (144) (115) (143) (129)
Equity in earnings of affiliates ........................... 474 381 655 331
--------- --------- --------- ---------
Net income ......................................... $ 7,213 $ 8,541 $ 13,177 $ 12,047
========= ========= ========= =========
Net income per common share:
Basic .................................................. $ 0.20 $ 0.25 $ 0.36 $ 0.35
========= ========= ========= =========
Diluted ................................................ $ 0.19 $ 0.24 $ 0.34 $ 0.34
========= ========= ========= =========
Weighted average shares outstanding:
Basic .................................................. 36,764 34,606 36,325 34,172
========= ========= ========= =========
Diluted ................................................ 38,736 36,332 38,221 35,549
========= ========= ========= =========
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 27, June 28,
1998 1997
-------- --------
(restated)
Cash flows from operating activities:
Net income ................................................................ $ 13,177 $ 12,047
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 7,423 6,705
Provision (benefit) for losses on accounts receivable ................. (467) 2,259
Benefit from deferred income taxes .................................... 802 888
Undistributed earnings of affiliates .................................. (655) (331)
Stock issued to ESOP trust ............................................ -- 1,111
Provision (benefit) for merger and integration costs .................. (4,076) 807
Minority interest in net losses of subsidiaries ....................... (143) (129)
Other ................................................................. 201 61
Changes in assets and liabilities:
Increase in accounts receivable ....................................... (21,508) (21,992)
(Increase) decrease in inventories .................................... (18,218) 7,384
Increase in other current assets ...................................... (6,932) (2,408)
(Increase) decrease in accounts payable and accruals .................. 35,652 (20,949)
-------- --------
Net cash provided by (used in) operating activities ........................... 5,256 (14,547)
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (15,404) (7,063)
Business acquisitions, net of cash acquired ............................... (5,946) (13,128)
Other ..................................................................... (7,868) (759)
-------- --------
Net cash used in investing activities ......................................... (29,218) (20,950)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................................. -- 944
Principal payments on long-term debt ...................................... (8,411) (2,281)
Proceeds from issuance of stock upon exercise of options .................. 6,100 1,182
Proceeds from borrowings from banks ....................................... 34,282 14,250
Payments on borrowings from banks ......................................... (181) (773)
Purchase of treasury stock ................................................ -- (618)
Dividends paid by acquired company ........................................ -- (982)
Other ..................................................................... (139) (1,215)
-------- --------
Net cash provided by financing activities ..................................... 31,651 10,507
-------- --------
Net increase (decrease) in cash and cash equivalents .......................... 7,689 (24,990)
Cash and cash equivalents, beginning of period ................................ 7,824 45,814
-------- --------
Cash and cash equivalents, end of period ...................................... $ 15,513 $ 20,824
======== ========
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
acquisitions of Micro Bio-Medics, Inc. ("MBMI"), effective August 1, 1997 and
Sullivan Dental Products, Inc. ("Sullivan"), effective November 12, 1997,
which were accounted for under the pooling of interests method. 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
27, 1997. The Company follows the same accounting policies in preparation of
interim reports. The results of operations for the six months ended June 27,
1998 are not necessarily indicative of the results to be expected for the
fiscal year ending December 26, 1998 or any other period.
Note 2. Business Acquisitions
During the six months ended June 27, 1998, the Company completed two
acquisitions, and had two pending acquisitions, both of which have subsequently
closed (see Note 5). The 1998 completed acquisitions included one dental and one
medical supply company, with aggregate net sales for their most recently
completed fiscal year ends of approximately $32,000 and $29,000, respectively.
The two completed acquisitions, which were not material, were accounted for
under the pooling of interests method of accounting and have been included in
the consolidated financial statements from the beginning of the quarter in which
the acquisitions occurred. In connection with the medical supply company
acquisition, the Company issued 347,063 shares of its Common Stock with an
aggregate value of $14,000. In connection with the dental supply company
acquisition, the Company issued shares of a subsidiary, with rights equivalent
to those of the Company's Common Stock, which are exchangeable into 603,500
shares of the Company's Common Stock, at each shareholders' option, with an
aggregate value of $24,000.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 2. Business Acquisitions (Continued)
In connection with the acquisitions accounted for under the pooling of
interests method of accounting, the Company incurred certain merger and
integration costs during the three and six months ended June 27, 1998 and June
28, 1997, of approximately $8,500 and $12,400, and $1,800 and $4,400,
respectively. These costs consist primarily of compensation, investment
banking, legal, accounting and advisory fees, and other integration costs
associated with these and prior mergers. Net of taxes, for the three and six
months ended June 27, 1998 and June 28, 1997, merger and integration costs
were approximately $0.16 and $0.24 per share, and $0.04 and $0.11 per share,
respectively, on a diluted basis.
Net sales of the Company and the two 1998 completed acquisitions for the six
months ended June 28, 1997 were $712,483 and $26,968, respectively. For the
three months ended March 28, 1998, the effective date of the 1998 completed
acquisitions, net sales of the Company and the two 1998 completed acquisitions
were $403,032 and $15,323, respectively.
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 3. Comprehensive Income
The Company adopted SFAS No. 130 Reporting Comprehensive Income, which
requires that all components of comprehensive income and total comprehensive
income be reported on one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners
(changes in paid-in capital) and distributions to owners (dividends). For
interim reporting purposes, SFAS 130 requires disclosure of total
comprehensive income.
Total comprehensive income for the three and six months ended June 27, 1998 and
June 28, 1997 is as follows:
Three Months Ended
----------------------
June 27, June 28,
1998 1997
-------- --------
Net income ....................................... $ 7,213 $ 8,541
Foreign currency translation adjustments ......... 244 (183)
-------- --------
Comprehensive income ............................. $ 7,457 $ 8,358
======== ========
Six Months Ended
----------------------
June 27, June 28,
1998 1997
-------- --------
Net income ....................................... $ 13,177 $ 12,047
Foreign currency translation adjustments ......... (74) (1,161)
-------- --------
Comprehensive income ............................. $ 13,103 $ 10,886
======== ========
Note 4. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings per
share follows (in thousands):
Three Six
Months Months
Ended Ended
------ ------
June 27, 1998
Basic * ...................................... 36,764 36,325
Effect of assumed conversion of
employee stock options ................... 1,972 1,896
------ ------
Diluted ...................................... 38,736 38,221
------ ------
June 28, 1997
Basic ...................................... 34,606 34,172
Effect of assumed conversion of
employee stock options ................... 1,726 1,377
------ ------
Diluted ...................................... 36,332 35,549
------ ------
* Includes shares which are exchangeable into 603,500 shares of the Company's
Common Stock (see Note 2).
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except share data)
(unaudited)
Note 5. Subsequent Events
On August 3, 1998, the Company entered into an Agreement and Plan of Merger
pursuant to which the H. Meer Dental Supply Company ("Meer") will merge into a
wholly-owned subsidiary of the Company upon the issuance of approximately
3,000,000 shares of the Company's Common Stock for all the then outstanding
shares of Meer, in a transaction which will be accounted for as a pooling of
interests. Meer is a full-service dental distributor serving dentists, dental
laboratories and institutions throughout the United States, and had fiscal 1997
net sales of approximately $180,000. This transaction is expected to close
within two weeks, although no assurances can be given in this regard.
Additionally, on August 7, 1998, the Company completed the sale of
Marus Dental International ("Marus"), the Company's dental equipment
manufacturing operation. Marus had 1997 net sales of approximately $25,000.
The operations of Marus were not material to the Company.
Subsequent to June 27, 1998, the Company released a Private Placement Memorandum
in which the Company is seeking approximately $100,000 in longer term financing
(financing with an average life of approximately ten years). The Company intends
to use the proceeds of the financing, if consummated, to pay down amounts owed
under its Revolving Credit facility, and for general corporate purposes.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Since December 27, 1997, the Company has completed two acquisitions, and had two
pending acquisitions, both of which have subsequently closed. The 1998 completed
acquisitions included one dental and one medical supply company, with aggregate
net sales for their most recently completed fiscal year ends of approximately
$61.0 million. The two completed acquisitions, which were not material, were
accounted for under the pooling of interests method of accounting and have been
included in the consolidated financial statements from the beginning of the
quarter in which the acquisitions occurred. In connection with the medical
supply company acquisition, the Company issued 347,063 shares of its Common
Stock with an aggregate value of $14.0 million. In connection with the dental
supply company acquisition, the Company issued shares of a subsidiary, with
rights equivalent to thsoe of the Company's Common Stock, which are
exchangeable into 603,500 shares of the Company's Common Stock, at each
shareholders' option, with an aggregate value of $24.0 million.
Included in the pending transactions is an agreement and plan of merger between
the Company and the H. Meer Dental Supply Company ("Meer"), which was announced
on August 3, 1998, pursuant to which Meer will merge into a wholly-owned
subsidiary of the Company upon the issuance of approximately 3,000,000 shares of
the Company's Common Stock for all the then outstanding shares of Meer, in a
transaction which will be accounted for as a pooling of interests. Meer is a
full-service dental distributor serving dentists, dental laboratories and
institutions throughout the United States, and had fiscal 1997 net sales of
approximately $180.0 million. This transaction is expected to close within two
weeks, although no assurances can be given in this regard.
The remaining pending transaction includes the acquisition of 50.1% of the
dental division of an international combined dental, medical and veterinary
distribution business, with fiscal 1997 net sales of approximately $16.0
million, which was completed on June 29, 1998 and which will be accounted for as
a purchase transaction.
In connection with the acquisitions accounted for under the pooling of
interests method of accounting, during the three and six months ended June 27,
1998 and June 28, 1997, the Company incurred certain merger and integration
costs of approximately $12.4 million and $8.5 million, and $4.4 million and
$1.8 million, respectively. Net of taxes, for the three and six months ended
June 27, 1998 and June 28, 1997, merger and integration costs were
approximately $0.16 and $0.24, and $0.04 and $0.11, per share, respectively,
on a diluted basis. Merger and integration costs consist primarily of
compensation, investment banking, legal, accounting and advisory fees, and
other integration costs associated with these and prior mergers.
Excluding the merger and integration costs, net income and net income per
common share would have been $22.2 million and $0.58 and $16.1 million and
$0.45, respectively for the six months ended June 27, 1998 and June 28, 1997,
and $13.5 million and $0.35 and $10.0 million and $0.28, respectively for the
three months ended June 27, 1998 and June 28, 1997.
On August 7, 1998, the Company completed the sale of Marus Dental
International ("Marus"), the Company's dental equipment manufacturing
operation. Marus had 1997 net sales of approximately $25.0 million. The
operations of Marus were not material to the Company.
10
RESULTS OF OPERATIONS
Three Months Ended June 27, 1998 compared to Three Months Ended June 28, 1997
Net sales increased $54.5 million, or 14.6%, to $427.9 million for the three
months ended June 27, 1998 from $373.4 million for the three months ended June
28, 1997. Of the $54.5 million increase, approximately $32.5 million,
represented a 16.1% increase in the Company's dental business, $11.6 million
represented a 10.7% increase in its medical business, $10.8 million represented
a 25.5% increase in its international business, $2.1 million represented a 20.9%
increase in the Company's veterinary business, offset by a $2.5 million, or
21.2% decrease in its technology and value-added product 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), and continued success of the Company's targeted marketing programs,
offset in part by a reduction in dental equipment sales resulting from the
Company's disposal of its equipment manufacturing subsidiary, Marus Dental
International. The increase in medical net sales is primarily attributable to
sales to hospitals, acquisitions, and the benefits of a new telesales structure,
partially offset by a decline in sales to the Company's largest renal dialysis
customer, Renal Treatment Centers, Inc., ("RTC"). In the international market,
the increase in net sales was due to acquisitions, primarily in Germany, the
United Kingdom and The Netherlands, and increased account penetration in France,
United Kingdom and Spain. Unfavorable exchange rate translation adjustments
reduced the net increase in the international market by approximately $0.8
million. Had net sales for the international market been translated at the same
exchange rates in effect during the second quarter of 1997, net sales would have
increased by an additional 1.8%. In the veterinary market, the increase in net
sales was primarily due to increased account penetration with core accounts and
veterinary groups. The decrease in technology and value-added product sales was
primarily due to the shipment of an Easy Dental software enhancement product in
the second quarter of 1997 with no corresponding enhancement shipped in the
second quarter of 1998. Excluding net sales of Marus and RTC, in both periods,
net sales would have grown by 20.3% in 1998 over 1997.
Gross profit increased by $23.2 million, or 20.9%, to $134.1 million for the
three months ended June 27, 1998, from $110.9 million for the three months
ended June 28, 1997. Gross profit margin increased by 1.6% to 31.3% from 29.7%
last year, with improvements primarily in technology and value-added product
margins and to a lesser extent, medical, dental and veterinary margins.
Selling, general and administrative expenses increased by $16.8 million, or
17.6%, to $112.3 million for the three months ended June 27, 1998 from $95.5
million for the three months ended June 27, 1997. Selling and shipping
expenses increased by $11.7 million, or 18.0%, to $76.7 million for the three
months ended June 27, 1998 from $65.0 million for the three months ended June
28, 1997. As a percentage of net sales, selling and shipping expenses
increased 0.5% to 17.9% for the three months ended June 27, 1998 from 17.4%
for the three months ended June 28, 1997. The increase was primarily due to
higher selling expenses attributable to payroll, as a result of opening new
warehouse facilities, higher freight costs and advertising expenditures.
General and administrative expenses increased $5.1 million, or 16.7%, to $35.6
million for the three months ended June 27, 1998 from $30.5 million for the
three months ended June 28, 1997, primarily as a result of acquisitions. As a
percentage of net sales, general and administrative expenses increased 0.1% to
8.3% for the three months ended June 27, 1998 from 8.2% for the three months
ended June 28, 1997.
11
Other income (expense) - net decreased by $1.6 million, to ($1.1) million for
the three months ended June 27, 1998, compared to $0.5 million for the three
months ended June 28, 1997 due to an increase in interest expense resulting
from an increase in average borrowings.
Equity in earnings of affiliates increased $0.1 million to $0.5 million for
the three months ended June 27, 1998 from $0.4 million for the three months
ended June 28, 1997. This increase was primarily due to increased sales volume
and improved margins for the products sold by an unconsolidated 50%-owned
company.
For the three months ended June 27, 1998 the Company's effective tax rate was
45.8%. Excluding merger and integration costs, the majority of which are not
deductible for income tax purposes, the Company's effective tax rate would
have been 38.0%. For the three months ended June 28, 1997, the Company's
effective tax rate was 42.8%. Excluding merger and integration costs, the
Company's effective tax rate for the three months ended June 28, 1997 would
have been 39.9%. The difference between the Company's effective tax rate
(excluding merger and integration costs), and the Federal statutory rate
relates primarily to state income taxes.
Six Months Ended June 27, 1998 compared to Six Months Ended June 28, 1997
Net sales increased $118.4 million, or 16.6%, to $830.9 million for the six
months ended June 27, 1998 from $712.5 million for the six months ended June 28,
1997. Of the $118.4 million increase, approximately $60.2 million represented a
15.5% increase in the Company's dental business, $31.7 million represented a
15.7% increase in its medical business, $22.4 million represented a 27.0%
increase in its international business, $4.1 million represented a 20.3%
increase in the Company's increase in its veterinary business. Technology and
value-added product net sales were consistent with the prior period. 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), and continued success of the Company's targeted
marketing programs, offset in part by a reduction in dental equipment sales
resulting from the Company's disposal of its equipment manufacturing
subsidiary, Marus. The increase in medical net sales is primarily attributable
to sales to hospitals, acquisitions, and the benefits of a new telesales
structure, partially offset by a decline in sales to renal dialysis centers. In
the first quarter of 1998 the Company's largest renal dialysis customer, Renal
Treatment Centers, Inc., was acquired by Total Renal Care, Inc. which
currently is not a customer of the Company. In March of this year, RTC stopped
purchasing Epogen from the Company, but continues to purchase other products.
During fiscal year 1997, the Company's sales of Epogen to RTC amounted to $38.7
million. In the international market, the increase in net sales was due to
acquisitions, primarily in Germany, the United Kingdom and The Netherlands, and
increased account penetration in France, United Kingdom and Spain. Unfavorable
exchange rate translation adjustments reduced the net increase in the
international market by approximately $2.8 million. Had net sales for the
international market been translated at the same exchange rates in effect during
the first half of 1997, net sales would have increased by an additional 3.3%. In
the veterinary market, the increase in net sales was primarily due to increased
account penetration with core accounts and veterinary groups. Excluding net
sales of Marus and RTC, in both periods, net sales would have grown by 19.9% in
1998 over 1997.
Gross profit increased by $44.6 million, or 21.1%, to $255.6 million for the
six months ended June 27, 1998, from $211.0 million for the six months ended
June 28, 1997. Gross profit margin increased by 1.2% to 30.8% from 29.6% last
year, with improvements primarily in technology and value-added product
margins and to a lesser extent, medical, dental and veterinary margins.
12
Selling, general and administrative expenses increased by $33.6 million, or
18.1%, to $219.5 million for the six months ended June 27, 1998 from $185.9
million for the six months ended June 28, 1997. Selling and shipping expenses
increased by $22.9 million, or 18.2%, to $148.5 million for the six months
ended June 27, 1998 from $125.6 million for the six months ended June 28,
1997. As a percentage of net sales, selling and shipping expenses increased
0.3% to 17.9% for the six months ended June 27, 1998 from 17.6% for the six
months ended June 28, 1997. The increase was primarily due to higher selling
expenses attributable to payroll, as a result of opening new warehouse
facilities, higher freight costs and advertising expenditures. General and
administrative expenses increased $10.7 million, or 17.7%, to $71.0 million
for the three months ended June 27, 1998 from $60.3 million for the six months
ended June 28, 1997, primarily as a result of acquisitions. As a percentage of
net sales, general and administrative expenses remained unchanged at 8.5%.
Other income (expense) - net decreased by $2.4 million, to ($1.5) million for
the six months ended June 27, 1998, compared to $0.9 million for the six
months ended June 28, 1997 due to an increase in interest expense resulting
from an increase in average borrowings, partially offset by an increase in
interest income from finance charges and imputed interest arising from
non-interest bearing extended payment term sales.
Equity in earnings of affiliates increased $0.4 million to $0.7 million for
the six months ended June 27, 1998 from $0.3 million for the six months ended
June 28, 1997. This increase was primarily due to increased sales volume and
improved margins for the products sold by an unconsolidated 50%- owned
company.
For the six months ended June 27, 1998 the Company's effective tax rate was
44.2%. Excluding merger and integration costs, the majority of which are not
deductible for income tax purposes, the Company's effective tax rate would
have been 38.0%. For the six months ended June 28, 1997, the Company's
effective tax rate was 46.4%. Excluding merger and integration costs, the
Company's effective tax rate for the six months ended June 28, 1997 would have
been 38.0%. The difference between the Company's effective tax rate (excluding
merger and integration costs), and the Federal statutory rate relates
primarily to state income taxes.
Year 2000
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000, as well as identify
critical third parties which the Company relies upon to operate its business
to assess their readiness for the year 2000. The year 2000 issue arises from
the widespread use of computer programs that rely on two-digit date codes to
perform computations or decision-making functions. The Company expects to
incur internal payroll costs as well as consulting costs and other expenses
related to infrastructure and facilities enhancements necessary to prepare for
the Company's systems for the year 2000. Management estimates that the cost of
this program will be between $2.0 million and $3.0 million, with approximately
$1.5 million representing incremental costs to the Company. There can be no
assurance that the systems of other companies which the Company's systems rely
upon will be timely converted, or that such failure to convert by another
company would not have a material adverse effect on the Company's systems and
results of operations.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on
various products, special inventory forward buy-in opportunities, and to fund
initial start-up inventory requirements for new distribution centers, (b)
acquisitions and (c) capital expenditures. Since sales have been strongest
during the fourth quarter and special inventory forward buy-in opportunities
are most prevalent just before the end of the year, the Company's working
capital requirements have been generally higher from the end of the third
quarter to the end of the first quarter of the following year. The Company has
financed its business primarily through revolving credit facilities and stock
issuances.
Net cash provided by operating activities for the six months ended June 27,
1998 of $5.3 million resulted primarily from net income of $13.2 million,
adjusted for non-cash changes of $3.1 million, offset by an increase in
operating items of working capital of $11.0 million. The increase in working
capital was primarily due to (i) a $21.5 million increase in accounts
receivable, (ii) a $18.2 million increase in inventory, and (iii) a $6.9
million increase in other current assets, offset by (iv) a decrease in
accounts payable and other accrued expenses of $35.6 million resulting
primarily from payments to vendors for inventory purchased as part of the
Company's year-end inventory forward buy-in program. 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 27, 1998 of
$29.2 million resulted primarily from cash outlays for capital expenditures of
$15.4 million, increase in loans to unconsolidated affiliates and other of $7.9
million and net cash paid for acquisitions of $5.9 million. The increased amount
of capital expenditures over the comparable prior year period was due to
expenditures for additional operating facilities, as well as the development of
new computer systems. The Company expects that it will invest in excess of $30.0
million during the year ending December 26, 1998, including approximately $10.0
million to $12.0 million relating to the consolidation and integration of
facilities and systems as a result of recent acquisitions. Thereafter, the
Company expects to invest in excess of $20.0 million per year in capital
projects to modernize and expand its facilities and infrastructure systems and
integrate operations.
Net cash provided by financing activities for the six months ended June 27,
1998 of $31.7 million resulted primarily from net borrowings on bank credit
lines of $34.3 million, offset primarily by repayments on other long-term
debt.
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.
The Company's cash and cash equivalents as of June 27, 1998 of $15.5 million
consist of bank balances and money market funds. 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's main credit facility is a $150.0 million revolving credit
facility which has a termination date of August 15, 2002. Borrowings under the
credit facility were $108.2 million at June 27, 1998. Certain of the Company's
subsidiaries have revolving credit facilities that total approximately $35.3
million under which $17.6 million have been borrowed at June 27, 1998.
Subsequent to June 27, 1998, the Company released a Private Placement Memorandum
in which the Company is seeking approximately $100.0 million in longer term
financing (financing with an average life of approximately ten years). The
Company intends to use the proceeds of the financing, if consummated, to pay
down amounts owed under its Revolving Credit facility, and for general corporate
purposes.
The Company believes that its cash and cash equivalents, its anticipated cash
flow from operations, its ability to access private and public debt and equity
markets, and the availability of funds under its existing credit agreements
will provide it with liquidity sufficient to meet its short and long-term
capital needs.
14
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information in this Form 10-Q contains
information that is forward looking, such as the Company's opportunities to
increase sales through, among other things, acquisitions; its exposure to
fluctuations in foreign currencies; its anticipated liquidity and capital
requirements; competitive product and pricing pressures and the ability to
gain or maintain share of sales in global markets as a result of actions by
competitors; and the results of legal proceedings. The matters referred to in
forward looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact
of the consolidation of healthcare practitioners, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to
effectively integrate acquired companies, the acceptance and quality of
software products, acceptance and ability to manage operations in foreign
markets, the ability to maintain favorable supplier arrangements and
relationships, possible disruptions in the Company's computer systems or
telephone systems, the Company's ability and its customers' and suppliers'
ability to replace, modify or upgrade computer programs in ways that
adequately address the Year 2000 issue, possible increases in shipping rates
or interruptions in shipping service, the level and volatility of interest
rates and currency values, economic and political conditions in international
markets, including civil unrest, government changes and restrictions on the
ability to transfer capital across borders, the impact of current or pending
legislation, regulation and changes in accounting standards and taxation
requirements, environmental laws in domestic and foreign jurisdictions, as
well as certain other risks described in this Form 10-Q. 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 described in this Form
10-Q.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the first quarter of 1998, the Company became involved in a dispute
with Premier Laser Systems, Inc. ("PLS") involving the alleged purchase of
certain products distributed by PLS. The Company does not believe that this
dispute will have a material adverse effect on the Company.
The Company is subject to claims, suits and complaints about its products,
such as those involving governmental regulations, negligence and torts, which
arise in the ordinary course of the Company's business. One complaint, which
alleges negligence and breach of contract involving the sale of software
products by one of the Company's subsidiaries, has requested class action
certification. The Company intends to vigorously defend all such claims, suits
and complaints. In the opinion of the Company, all such pending matters are
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.
Item 2. Changes In Securities
In connection with one of the 1998 completed acquisitions, a subsidiary of the
Company issued 558,000 Class A non-voting exchangeable preferred shares and
45,500 Class B non-voting exchangeable preferred shares, for all the outstanding
shares of the acquiree. The Class A and Class B non-voting exchangeable
preferred shares are exchangeable by their holders into an equivalent number of
the Company's Common Stock. In connection with the same acquisition, the Company
issued to a voting trustee four shares of the Company's special voting preferred
stock, which special voting preferred stock entitles each holder of Class A and
Class B non-voting exchangeable preferred shares to excercise, through the
voting trustee, a number of votes with respect to matters voted on by the
stockholders of the Company equal to the number of Class A and Class B
non-voting exchangeable preferred shares held by such holder.
Subsequently, all of the Class B non-voting exchangeable preferred shares were
exchanged for 45,500 shares of the Company's Common Stock. The Class A
non-voting exchangeable preferred shares have been treated as if exchanged into
558,000 shares of the Company's Common Stock, since they cannot be disposed of
in any other manner than exchange into the Company's Common Stock.
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Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 27 1998, 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 (31,490,966 shares voting for; 60,257 shares withheld)
James P. Breslawski (31,491,316 shares voting for; 59,907 shares withheld)
Gerald A. Benjamin (31,490,896 shares voting for; 60,327 shares withheld)
Leonard A. David (31,490,358 shares voting for; 60,865 shares withheld)
Mark E. Mlotek (31,490,558 shares voting for; 60,665 shares withheld)
Steven Paladino (31,491,190 shares voting for; 60,033 shares withheld)
Barry J. Alperin (31,490,816 shares voting for; 60,407 shares withheld)
Pamela Joseph (31,489,706 shares voting for; 61,517 shares withheld)
Donald J. Kabat (31,490,706 shares voting for; 60,517 shares withheld)
Marvin H. Schein (31,490,219 shares voting for; 61,004 shares withheld)
Irving Shafran (31,490,554 shares voting for; 60,669 shares withheld)
Bruce Haber (31,490,896 shares voting for; 60,327 shares withheld)
Robert Sullivan (31,486,266 shares voting for; 64,957 shares withheld)
(ii) Amended the Company's By-laws to increase, by 60,000,000, the number
of shares of common stock the Company's authorized to issue
(31,144,443 shares voting for; 372,870 shares voting against; 33,910
shares abstaining).
(iii) Amended the Company's 1994 Stock Option Plan to increase the number of
shares issuable under the Plan by 1,650,000 shares (29,697,002 shares
voting for; 1,816,048 shares voting against; 64,173 shares abstaining).
(iv) Ratified the selection of BDO Seidman, LLP as the Company's independent
auditors for the year ended December 26, 1998 (31,664,665 shares voting
for; 11,998 shares voting against; 24,560 shares abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.108 Amendment No. 5 dated as of May 15, 1998 to Credit Agreement
(filed herein).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
17
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)
By: /s/ Steven Paladino
---------------------------
STEVEN PALADINO
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: August 11, 1998
18