UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 29, 2001
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 135 Duryea Road
(State or other jurisdiction of Melville, New York
incorporation or organization) (Address of principal executive offices)
11-3136595 11747
(I.R.S. Employer Identification No.) (Zip Code)
Registrant's telephone number, including area code: (631) 843-5500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES: X NO:
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price as quoted on the NASDAQ National Market on March 15, 2002 was
approximately $1,867,354,000.
As of March 15, 2002 there were 42,917,608 shares of registrant's Common
Stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 29, 2001) are incorporated by reference in Part III hereof.
<page>
TABLE OF CONTENTS
Page
Number
PART I ------
ITEM 1. Business....................................................... 1
ITEM 2. Properties..................................................... 12
ITEM 3. Legal Proceedings.............................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................... 14
ITEM 6. Selected Financial Data........................................ 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
ITEM 7A. Market Risks................................................... 27
ITEM 8. Financial Statements and Supplementary Data.................... 28
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 60
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 60
ITEM 11. Executive Compensation......................................... 60
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. 60
ITEM 13. Certain Relationships and Related Transactions................. 60
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 60
Exhibit Index.................................................. 63
<page>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest distributor of healthcare products and services
to office-based healthcare practitioners in the combined North American and
European markets. The Company has operations in the United States, Canada, the
United Kingdom, The Netherlands, Belgium, Germany, France, Austria, Spain,
Australia and New Zealand, and conducts its business through two segments;
healthcare distribution and technology. These segments, which are operated as
individual business units, offer different products and services, albeit to the
same customer base. The healthcare distribution segment consists of the
Company's dental, medical, veterinary and international groups. The
international group is comprised of the Company's healthcare distribution
business units located primarily in Europe, and offers products and services to
dental, medical and veterinary customers located in their respective geographic
regions. The technology segment consists primarily of the Company's practice
management software business and certain other value-added products and services
which are distributed primarily to healthcare professionals in the North
American market.
The Company sells products and services to over 400,000 customers,
primarily dental practices and dental laboratories, as well as physician
practices, veterinary clinics and institutions. In 2001, the Company's
healthcare distribution business sold products to 75% of the estimated 110,000
dental practices in the United States. The Company believes that there is a
strong awareness of the "Henry Schein" name among office-based healthcare
practitioners due to its 70 years of experience in distributing healthcare
products. Through its comprehensive catalogs and other direct sales and
marketing programs, the Company offers its customers a broad product selection
of both branded and private brand products which includes in excess of 80,000
stock keeping units ("SKU's") in North America and approximately 63,000 SKU's in
Europe, at published prices that the Company believes are below those of its
major competitors. The Company, through its technology business unit, offers
various value-added products and services such as practice management software.
As of December 29, 2001, the Company had over 39,000 users of its dental
practice management software systems.
For further information on the Company's operating segments and operations
by geographic area, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in ITEM 7 and Note 12 to the Consolidated
Financial Statements.
During 2001, the Company distributed over 19.0 million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 650,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with over 700 telesales representatives
who facilitate order processing and generate sales through direct and frequent
contact with customers, and with over 1,250 field sales consultants, including
equipment sales specialists. The Company utilizes database segmentation
techniques to more effectively market its products and services to customers.
The Company continues to expand its management information systems and has
established strategically located distribution centers to enable it to better
serve its customers and increase its operating efficiency. The Company believes
that these investments, coupled with its broad product offerings, enable the
Company to provide its customers with a single source of supply for
substantially all their healthcare product needs and provide them with
convenient ordering and rapid, accurate and complete order fulfillment. The
Company estimates that approximately 99% of all orders in the United States and
Canada received before 5:00 p.m. are shipped on the same day the order is
received and approximately 99% of orders are received by the customer within two
days of placing the order. In addition, the Company estimates that approximately
99% of all items ordered in the United States and Canada are shipped without
back ordering.
1
ACQUISITION STRATEGY
The Company believes that there has been consolidation among healthcare
product distributors serving office-based healthcare practitioners in part to
address significant changes in the healthcare industry, including potential
healthcare reform, trends toward managed care, cuts in Medicare, consolidation
of healthcare distribution companies and collective purchasing arrangements and
that this trend will continue to create opportunities for the Company to expand
through acquisitions. In recent years, the Company has acquired a number of
companies engaged in businesses that are complementary to those of the Company.
The Company's acquisition strategy includes acquiring additional sales that will
be channeled through the Company's existing infrastructure, acquiring access to
additional product lines, acquiring regional distributors with networks of field
sales consultants and international expansion.
During the year ended December 29, 2001, the Company completed two
acquisitions, neither of which was considered material either individually or in
the aggregate. The two acquisitions were accounted for under the purchase method
of accounting.
During 2000, the Company completed three acquisitions, none of which were
considered material either individually or in the aggregate. Of the three
completed acquisitions, two were accounted for under the purchase method of
accounting and the remaining acquisition was accounted for under the pooling of
interests method of accounting. The Company issued 465,480 shares of its Common
Stock, with an aggregate value of approximately $7.9 million, in connection with
the pooling transaction.
During 1999, the Company completed nine acquisitions. These completed
acquisitions, which had aggregate net sales for 1998 of approximately $324.0
million, included (a) four international companies, (b) four medical supply
companies, and (c) one valued-added services company. Of the nine completed
acquisitions, eight were accounted for under the purchase method of accounting
and the remaining acquisition was accounted for under the pooling of interests
method of accounting.
The transactions completed under the purchase method of accounting have
been included in the consolidated financial statements from their respective
acquisition dates. The pooling transactions were not material and, accordingly,
prior period financial statements have not been restated. Results of the pooled
companies have been included in the consolidated financial statements from the
beginning of the quarter in which the acquisition occurred.
CUSTOMERS
The Company, through its healthcare distribution and technology businesses,
serves over 400,000 customers worldwide in the dental, medical and veterinary
markets. The Company's dental customers include office-based dental practices,
dental laboratories, universities, institutions, governmental agencies and large
group accounts; medical customers include office-based physician practices,
podiatrists, surgery centers, institutions, hospitals and governmental agencies;
and the Company's veterinary customers include office-based veterinarians
serving primarily small companion animals.
The Company believes that its healthcare distribution customers generally
order from two or more suppliers for their healthcare product needs, and often
use one supplier as their primary resource. The Company believes that its
customers generally place larger orders and order more frequently from their
primary suppliers. The Company estimates that it serves as a primary supplier to
less than 15% of its total customer base and believes it has an opportunity to
increase sales by increasing its level of business with those customers for
which it serves as a secondary supplier.
Over the past several years the Company has expanded its customer base to
include larger purchasing organizations, including certain dental laboratories,
institutions, government agencies, hospitals and surgery centers. More recently,
as cost-containment pressures have resulted in increased demand for low-cost
products and value-added services, the Company has targeted specific groups of
practices under common ownership, institutions and professional groups. For
2
example, the Company has an exclusive direct marketing agreement with an
American Medical Association ("AMA") sponsored service pursuant to which member
practitioners have access to the services' lower prices for products. In 2001,
the AMA-sponsored service accounted for net sales of approximately $32.5
million. These services, government institutions and agencies, hospitals and
other large or collective purchasers, require low-cost pricing and detailed
product and usage information and reporting. The Company believes it is well
situated to meet the needs of these customers, given its broad, low-cost product
offerings and its management information systems. No single customer accounted
for more than 2.0% of net sales in 2001.
SALES AND MARKETING
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through personal visits by field sales
representatives and frequent direct marketing contact, emphasize the Company's
broad product lines, competitive prices and ease of order placement. The key
elements of the Company's program in the United States are:
Field Sales Consultants
The Company has over 1,250 field sales consultants, including equipment
sales specialists, covering certain major North American and international
markets. These field sales consultants concentrate on attracting new customers
and increasing sales to customers who do not currently order a high percentage
of their total product needs from the Company. This strategy is designed to
complement the Company's direct marketing and telesales strategies and to enable
the Company to better market, service and support the sale of more sophisticated
products and equipment. Once a field sales consultant has established a
relationship with a customer, the consultant encourages the customer to use the
Company's automated ordering process or its telesales representatives for its
day-to-day needs. This simplifies the ordering process for the customer and
increases the effectiveness of the field sales consultant.
Direct Marketing
During 2001, the Company distributed over 19.0 million pieces of direct
marketing material, including catalogs, flyers, order stuffers and other
promotional materials to approximately 650,000 office-based healthcare
practitioners. The Company's principal U.S. dental consumable catalog, which is
issued annually, contains an average of over 475 pages and includes
approximately 46,000 SKU's. The number of catalogs and other direct marketing
materials received by each customer depends upon the market they serve as well
as their purchasing history. The Company's catalogs include detailed
descriptions and specifications of both branded and private brand products and
are utilized by healthcare practitioners as a reference source. By evaluating
its customers' purchasing patterns, area of specialty, past product selections
and other criteria, the Company identifies customers who may respond better to
specific promotions or products. To facilitate its direct marketing activities,
the Company maintains an in-house advertising department, which performs many
creative services, which the Company believes streamlines the production
process, provides greater flexibility and creativity in catalog production and
results in cost savings.
Telesales
The Company supports its direct marketing with over 700 inbound and
outbound telesales representatives who facilitate order processing and generate
new sales through direct and frequent contact with customers. Inbound telesales
representatives are responsible for assisting customers in purchasing decisions
as well as answering product pricing and availability questions. In addition to
assisting customers, inbound telesales representatives also market complementary
or promotional products. The Company's telesales representatives utilize on-line
computer terminals to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying history.
3
The Company utilizes outbound telesales representatives and programs to
better market its services to those customer accounts identified by the Company
as either being high volume or high order frequency accounts. Outbound telesales
representatives strive to manage long-term relationships with these customers
through frequent and/or regularly scheduled phone contact and personalized
service.
The Company's telesales representatives generally participate in an initial
two-week training course designed to familiarize the sales representative with
the Company's products, services and systems. In addition, generally all
telesales representatives attend periodic training sessions and special sales
programs and receive incentives, including monthly commissions.
CUSTOMER SERVICE
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Customers may place orders 24 hours a day using the Company's
computerized order entry systems known as ArubA(R) Windows, ArubA(R) eZ, or
ArubA(R) TouchTone (the Company's 24-hour automated phone service) and the
Internet at www.henryschein.com or www.sullivanschein.com.
The Company focuses on providing rapid and accurate order fulfillment and
high fill rates. The Company estimates that approximately 99% of all items
ordered in the United States and Canada are shipped without back ordering, and
that approximately 99% of all orders in the United States and Canada received
before 5:00 p.m. are shipped on the same day the order is received. In addition,
because the Company seeks to service a customer's entire order from the
distribution center nearest the customer's facility, approximately 99% of orders
are received within two days of placing the order. The Company continually
monitors its customer service through customer surveys, focus groups and daily
statistical reports. The Company maintains a liberal return policy to better
assure customer satisfaction with its products.
4
PRODUCTS
The following chart sets forth the principal categories of products offered
by the Company's healthcare distribution and technology businesses and certain
top selling types of products in each category, with the percentage of 2001
consolidated net sales in parenthesis:
- --------------------------------------------------------------------------------
HEALTHCARE DISTRIBUTION (97.2%)
- --------------------------------------------------------------------------------
-----------------------------------------
Dental Products (53.6%)
-----------------------------------------
Consumable Dental
Products and Small Large Dental Dental Laboratory
Equipment (40.9%) Equipment (9.7%) Products (3.0%)
- ------------------------- ----------------------- --------------------------
X-Ray Products; Infection Dental Chairs; Delivery Teeth; Composites; Gypsum;
Control; Handpieces; Units and Lights; Acrylics; Articulators;
Preventatives; X-Rays; and Equipment and Abrasives
Impression Materials; Repair
Composites and
Anesthetics
------------------------------------ -----------------------------------
Medical Products (39.8%) Veterinary Products (3.8%)
------------------------------------ -----------------------------------
Branded and Generic Pharmaceuticals; Branded and Generic
Surgical Products; Diagnostic Tests; Pharmaceuticals; Surgical Products;
Infection Control; X-Ray Products; and Dental Products
and Vitamins
- --------------------------------------------------------------------------------
TECHNOLOGY AND OTHER VALUE-ADDED PRODUCTS AND SERVICES (2.8%)
- --------------------------------------------------------------------------------
Software and Related Products and Other Value-Added Products, including
Financial Products and Continuing Education
The percentage of 2000 and 1999 net sales was as follows: consumable dental
products and small equipment, 43.5% and 45.2%, respectively; large dental
equipment, 9.7% and 9.7%, respectively; dental laboratory products, 3.0% and
3.0%, respectively; medical products, 36.9% and 35.2%, respectively; veterinary
products, 4.1% and 4.0%, respectively; and technology and other value-added
products and services, 2.8% and 2.9%, respectively.
Consumable Supplies and Equipment
The Company offers in excess of 80,000 SKU's to its customers in North
America, of which approximately 60,000 SKU's are offered to its dental
customers, approximately 28,000 are offered to its medical customers and
approximately 23,000 are offered to its veterinary customers. Over 40.0% of the
Company's products are offered to all three types of the Company's customers in
North America. The Company offers approximately 63,000 SKU's to its customers in
Europe. Approximately 7.4% of the Company's net sales in 2001 was from sales of
products offered under the Henry Schein private brand (i.e., products
manufactured by various third parties for distribution by the Company under the
Henry Schein(R) brand). The Company believes that the Henry Schein private brand
line of over 7,500 SKU's offered in the United States and Canada is one of the
most extensive in the industry. The Company updates its product offerings
regularly to meet its customers' changing needs.
The Company offers a repair service, ProRepair(R), which provides a one to
two day turnaround for hand pieces and certain small equipment. The Company also
provides in-office installation and repair services for large equipment in
certain North American and international markets. The Company had a total of 107
equipment sales and service centers open at the end of fiscal 2001.
5
Technology and Other Value-Added Products and Services
The Company sells practice management software systems to its dental and
veterinary customers. The Company has over 39,000 users of its Easy Dental(R)
and Dentrix software systems combined, and over 5,400 users of its AVImark(R)
veterinary software systems, as of the end of fiscal 2001. The Company's
practice management software products provide practitioners with patient
treatment history, billing, accounts receivable analysis and management, an
appointment calendar, electronic claims processing and word processing programs.
The Company provides technical support and conversion services from other
software. In addition, the Easy Dental(R) and Dentrix software systems allow
customers to connect with the Company's order entry management systems. The
Dentrix system is one of the most comprehensive clinically-based dental practice
management software packages in the United States. The Dentrix premium software
product complements Easy Dental(R), the Company's high-value practice management
system. The Company believes the combined software product offerings enhance its
ability to provide its customers with the widest array of system solutions to
help manage their practices.
The Company offers its customers assistance in managing their practices by
providing access to a number of financial services and products at rates that
the Company believes are lower than what they would be able to secure
independently. The Company's equipment leasing programs, which are administered
by third party providers, allow it to fulfill a wide variety of practitioner
financing needs. The Company also provides financing and consulting services for
all phases of the healthcare practice including start-up, expansion or
acquisition, and debt consolidation. The Company's patient financing program
provides its dental and veterinary customers a method for reducing receivables
and improving cash flow by providing patients access to financing. The Company
does not assume any financial obligation to its customers or their patients in
these programs.
Through an arrangement with one of the nation's largest bank credit card
processors, the Company offers electronic bankcard processing. The Company also
offers electronic insurance claims submission services for faster processing of
patient reimbursements, all through a third-party provider for a transaction
fee. The Company also offers practice management consulting services in selected
markets in the United States. None of these services, either individually or in
the aggregate represents a material source of revenue to the Company.
INFORMATION SYSTEMS
The Company's management information systems generally allow for
centralized management of key functions, including inventory and accounts
receivable management, purchasing, sales and distribution. A key attribute of
the Company's management information systems is the daily operating control
reports which allow managers throughout the Company to share information and
monitor daily progress relating to sales activity, gross profit, credit and
returns, inventory levels, stock balancing, unshipped orders, order fulfillment
and other operational statistics. The Company continually seeks to enhance and
upgrade its order processing information system. Additionally, in the United
States, the Company has installed an integrated information system for its large
dental equipment sales and service functions. Such systems centralize the
tracking of customers' equipment orders, as well as spare parts inventories and
repair services. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in ITEM 7.)
DISTRIBUTION
The Company distributes its products in the United States primarily from
its strategically located distribution centers in Eastern, Central, South
Western and Western United States. Customers in Canada are serviced from
distribution centers located in Eastern and Western Canada. The Company
6
maintains significant inventory levels of certain products in order to satisfy
customer demand for prompt delivery and complete order fulfillment of their
product needs. These inventory levels are managed on a daily basis with the aid
of the Company's sophisticated purchasing and stock status management
information systems. Once a customer's order is entered, it is electronically
transmitted to the distribution center nearest the customer's location and a
packing slip for the entire order is printed for order fulfillment. The
Company's automated freight manifesting and laser bar code scanning facilitates
the speed of the order fulfillment. The Company currently ships substantially
all of its orders in the United States by United Parcel Service. In certain
areas of the United States, the Company delivers its orders via contract
carriers. The Company's international distribution centers include locations in
the United Kingdom, France, Austria, The Netherlands, Belgium, Germany, and
Spain.
PURCHASING
The Company believes that effective purchasing is a key element to
maintaining and enhancing its position as a low-cost provider of healthcare
products. The Company frequently evaluates its purchase requirements and
suppliers' offerings and prices in order to obtain products at the best possible
cost. The Company believes that its ability to make high volume purchases has
enabled it to obtain favorable pricing and terms from its suppliers. The Company
obtains its products for its North American distribution centers from over 2,300
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its
international distribution centers. In 2001, the Company's top 10 healthcare
distribution vendors and the Company's single largest vendor, accounted for
approximately 31.8% and 7.0%, respectively, of the Company's aggregate
purchases.
COMPETITION
The distribution and manufacture of healthcare supplies and equipment is
intensely competitive. Many of the healthcare distribution products the Company
sells are available to the Company's customers from a number of suppliers. In
addition, competitors of the Company could obtain exclusive rights from
manufacturers to market particular products. Manufacturers could also seek to
sell directly to end-users, and thereby eliminate the role of distributors, such
as the Company.
In the United States, the Company competes with other distributors, as well
as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added products and services. In the sale of its dental products, the
Company's principal national competitor is Patterson Dental Co. In addition, the
Company competes against a number of other distributors that operate on a
national, regional and local level. The Company's principal competitors in the
sale of medical products are PSS World Medical, Inc., the General Medical
division of McKesson Corp., and the Allegiance division of Cardinal Health Inc.,
which are national distributors. In the veterinary market, the Company's two
principal national competitors include The Butler Company and Burns Veterinary
Supply. The Company also competes against a number of regional and local medical
and veterinary distributors, as well as a number of manufacturers that sell
directly to physicians and veterinarians. With regard to the Company's practice
management software, the Company competes against numerous other firms,
including firms such as PracticeWorks, Inc., which targets dental practices and
Idexx Laboratories, Inc., which serves veterinary practices. The Company
believes that it competes in Canada substantially on the same basis as in the
United States.
The Company also faces intense competition internationally, where the
Company competes on the basis of price and customer service against several
large competitors, including Demedis, the GACD Group, the Pluradent Group and
Bilricay, as well as a large number of dental product distributors and
manufacturers in the United Kingdom, The Netherlands, Belgium, Germany, France,
Austria, and Spain.
7
Significant price reductions by the Company's competitors could result in a
similar reduction in the Company's prices as a consequence of its policy of
matching its competitors' lowest advertised prices. Any of these competitive
pressures may materially adversely affect operating results.
GOVERNMENTAL REGULATION
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act.
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and record keeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug, and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
PROPRIETARY RIGHTS
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well as certain other trademarks. Pursuant to certain agreements executed in
connection with a reorganization of the Company, both the Company and, Schein
Pharmaceutical, Inc. (which was acquired by Watson Pharmaceuticals, Inc. during
2000), a company engaged in the manufacture and distribution of multi-source
pharmaceutical products, are entitled to use the "Schein" name in connection
with their respective businesses, but Schein Pharmaceutical, Inc. is not
entitled to use the name "Henry Schein". The Company intends to protect its
trademarks to the fullest extent practicable.
EMPLOYEES
As of December 29, 2001, the Company had over 6,500 full-time employees,
including approximately 700 telesales representatives, 1,250 field sales
consultants, including equipment sales specialists, 1,325 warehouse employees,
250 computer programmers and technicians, 600 management employees and 2,375
office, clerical and administrative employees. The Company believes that its
relations with its employees are excellent.
8
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in ITEMS 1, 2, 3, 5,
7, 7A and 8 of this Form 10-K include information that is forward looking, such
as the Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; competitive product and pricing
pressures and the ability to gain or maintain share of sales in global markets
as a result of actions by competitors; and the results of legal proceedings. The
matters referred to in forward looking statements could be affected by the risks
and uncertainties involved in the Company's business. These risks and
uncertainties include, but are not limited to, the effect of economic and market
conditions, the impact of the consolidation of healthcare practitioners, the
impact of healthcare reform, opportunities for acquisitions and the Company's
ability to effectively integrate acquired companies, the acceptance and quality
of 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, 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 restriction 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 above in this ITEM 1 and below in ITEM 3, Legal Proceedings and in
ITEM 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations. Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph and
elsewhere in this Form 10-K.
The Company's principal executive offices are located at 135 Duryea
Road, Melville, New York 11747, and its telephone number is 631-843-5500. As
used in this Report, the term the "Company" refers to Henry Schein, Inc., a
Delaware corporation, and its subsidiaries, a 50%-owned company and predecessor,
unless otherwise stated.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, the Company files annual, quarterly, and
special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any document filed by the Company at
the SEC's public reference rooms located in New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The Company's SEC filings are also available to the
public from the SEC's Website at http://www.sec.gov.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company.
Name Age Position
- -------------------- --- -----------------------------------------------------
Stanley M. Bergman.. 52 Chairman, Chief Executive Officer, President and
Director
Gerald A. Benjamin.. 49 Executive Vice President, Chief Administrative Officer
and Director
James P. Breslawski. 48 Executive Vice President, President US Dental and
Director
Leonard A. David.... 53 Vice President - Human Resources and Special Counsel
and Director
Larry M. Gibson..... 55 Executive Vice President and Chief Technology Officer
Michael Racioppi.... 47 President - Medical Group
Mark E. Mlotek...... 46 Senior Vice President - Corporate Business Development
Group and Director
Steven Paladino..... 44 Executive Vice President, Chief Financial Officer
and Director
Michael Zack........ 49 Senior Vice President - International Group
STANLEY M. BERGMAN has been Chairman, Chief Executive Officer and President
since 1989 and a director of the Company since 1982. Mr. Bergman held the
position of Executive Vice President of the Company and Schein Pharmaceutical,
Inc. from 1985 to 1989 and Vice President of Finance and Administration of the
Company from 1980 to 1985. Mr. Bergman is a certified public accountant.
GERALD A. BENJAMIN has been Executive Vice President and Chief
Administrative Officer since February 2000. Prior to holding his current
position, Mr. Benjamin was Senior Vice President of Administration and Customer
Satisfaction since 1993, and has been a director of the Company since September
1994. Mr. Benjamin was Vice President of Distribution Operations of the Company
from 1990 to 1992 and Director of Materials Management of the Company from 1988
to 1990.
JAMES P. BRESLAWSKI has been Executive Vice President of the Company and
President of US Dental since 1990, with primary responsibility for the US Dental
Group, and a director of the Company since 1990. Between 1980 and 1990, Mr.
Breslawski held various positions with the Company, including Chief Financial
Officer, Vice President of Finance and Administration and Controller. Mr.
Breslawski is a certified public accountant.
LEONARD A. DAVID has been Vice President of Human Resources and Special
Counsel since January 1995. Mr. David held the office of Vice President, General
Counsel and Secretary from 1990 to 1995 and practiced corporate and business law
for eight years prior to joining the Company. Mr. David has been a director of
the Company since September 1994.
LARRY M. GIBSON has been Executive Vice President and Chief Technology
Officer since October 2000. Prior to holding his current position, Mr. Gibson
joined the Company as President of the Practice Management Technologies Group in
February 1997, concurrent with the acquisition of Dentrix Dental Systems, Inc.
("Dentrix"). Before joining the Company, Mr. Gibson was founder, Chairman and
CEO of Dentrix, started in 1980. Prior to his employment with Dentrix, Mr.
Gibson was employed by Weidner Communication Systems from 1978.
10
MICHAEL RACIOPPI has been President of the Medical Group since February
2000 and Interim President since September 1999. Prior to holding his current
position, Mr. Racioppi was Vice President of the Company since 1994, with
primary responsibility for the Medical Division, the marketing and merchandising
groups. Mr. Racioppi served as Vice President and as Senior Director, Corporate
Merchandising from 1992 to 1994. Before joining the Company in 1992, Mr.
Racioppi was employed by Ketchum Distributors Inc. as the Vice President of
Purchasing and Marketing.
MARK E. MLOTEK has been Senior Vice President of Corporate Business
Development Group since February 2000. Prior to holding his current position,
Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to 1999,
and became a director of the Company in September 1995. Prior to joining the
Company, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP, counsel
to the Company, specializing in mergers and acquisitions, corporate
reorganizations and tax law from 1989 to 1994.
STEVEN PALADINO has been Executive Vice President and Chief Financial
Officer since February 2000. Prior to holding his current position, Mr. Paladino
was Senior Vice President and Chief Financial Officer of the Company since 1993
and has been a director of the Company since 1992. From 1990 to 1992, Mr.
Paladino served as Vice President and Treasurer and from 1987 to 1990 served as
Corporate Controller of the Company. Before joining the Company, Mr. Paladino
was employed as a public accountant for seven years and most recently was with
the international accounting firm of BDO Seidman, LLP. Mr. Paladino is a
certified public accountant.
MICHAEL ZACK has been responsible for the International Group of the
Company since 1989. Mr. Zack was employed by Polymer Technology (a subsidiary of
Bausch & Lomb) as Vice President of International Operations from 1984 to 1989
and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to
1984.
11
ITEM 2. PROPERTIES
The Company owns or leases the following properties:
Approximate Lease
Own or Square Expiration
Property Location Lease Footage Date
- ------------------------ -------------------- ----- ---------- -------------
Corporate Headquarters.. Melville, NY (1) Lease 105,000 December 2005
Corporate Headquarters.. Melville, NY Lease 67,000 November 2005
Distribution Center..... Denver, PA Lease 413,000 February 2013
Distribution Center..... Pelham, NY (2) Lease 108,000 July 2007
Distribution Center..... Jacksonville, FL (3) Lease 136,000 December 2009
Distribution Center..... Secaucus, NJ Lease 138,000 November 2008
Distribution Center..... Indianapolis, IN (3) Own 287,000 N/A
Distribution Center..... Indianapolis, IN Lease 225,000 April 2002
Distribution Center..... West Allis, WI Lease 106,000 October 2011
Distribution Center..... Grapevine, TX Lease 132,000 July 2008
Distribution Center..... Sparks, NV Lease 115,000 June 2003
Distribution Center..... United Kingdom Lease 85,000 August 2005
Distribution Center..... Gallin, Germany Own 172,000 N/A
(1) The Company purchased this facility on January 10, 2002.
(2) The Company is subletting 66,500 square feet of this facility through July
2007.
(3) The Company was not utilizing these locations at December 29, 2001, however
the Company anticipates utilizing these facilities during 2002.
All of the properties listed in the table above are primarily used in the
Company's healthcare distribution segment.
The Company also leases distribution, office, showroom and sales space in
other locations including the United States, Canada, France, Germany, The
Netherlands, Belgium, Spain, Austria and the United Kingdom. One 50%-owned
company also leases space in the United States.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business. The Company has additional operating capacity at its listed
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of December 29, 2001, the
Company was named a defendant in approximately 72 product liability cases. Of
these claims, 56 involve claims made by healthcare workers who claim allergic
reaction relating to exposure to latex gloves. In each of these cases, the
Company acted as a distributor of both brand name and "Henry Schein" private
brand latex gloves, which were manufactured by third parties. To date, discovery
in these cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
12
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
In Texas District Court, Travis County, the Company and one of its
subsidiaries are defendants in a matter entitled Shelly E. Stromboe & Jeanne N.
Taylor, on Behalf of Themselves and All Other Similarly Situated vs. Henry
Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc., Case No. 98-00886.
This complaint alleges among other things, negligence, breach of contract, fraud
and violations of certain Texas commercial statutes involving the sale of
certain practice management software products sold prior to 1998 under the Easy
Dental(R) name. In October 1999, the Court, on motion, certified both a
Windows(R) Sub-Class and a DOS Sub-Class to proceed as a class action pursuant
to Tex. R.Civ. P.42. It is estimated that 5,000 Windows(R) customers and 15,000
DOS customers could be covered by the judge's ruling. In November of 1999, the
Company filed an interlocutory appeal of the District Court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the District Court's certification order. On January 5, 2001, the
Company filed a Petition for Review in the Texas Supreme Court asking this court
to find "conflicts jurisdiction" to permit review of the District Court's
certification order, which appeal is now pending. On April 5, 2001 the Texas
Supreme Court requested that the parties file briefs on the merits. On August
23, 2001, the Texas Supreme Court dismissed the Company's Petition for Review
based on lack of conflicts jurisdiction. The Company filed a motion for
rehearing on September 24, 2001 requesting that the Texas Supreme Court
reconsider and reverse its finding that it is without conflicts jurisdiction to
review the case. On November 8, 2001, the Texas Supreme Court granted the motion
for rehearing and withdrew its order of August 23, 2001. The Texas Supreme Court
heard oral argument on February 6, 2002. Pending a decision by the Supreme Court
on the Petition for Review, a trial on the merits, currently scheduled for July,
2002, will be stayed.
In February 2002, the Company was served with a summons and complaint in an
action commenced in the Superior Court of New Jersey, Law Division, Morris
County, entitled West Morris Pediatrics, P.A. v. Henry Schein, Inc., doing
business as Caligor, no. MRSL-421-02. The complaint by West Morris Pediatrics
purports to be on behalf of a nationwide class, but there has been no court
determination that the case may proceed as a class action. Plaintiff seeks to
represent a class of all physicians, hospitals and other healthcare providers
throughout New Jersey and across the United States. This complaint alleges,
among other things, breach of oral contract, breach of implied covenant of good
faith and fair dealing, violation of the New Jersey Consumer Fraud Act, unjust
enrichment, and conversion. The Company has not yet submitted its response to
this complaint. The Company intends to vigorously defend itself against this
claim, as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of fiscal 2001.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the high and
low reported sales prices of the Common Stock of the Company as reported on the
NASDAQ National Market System for each quarterly period in fiscal 2000 and 2001
and for the first quarter of fiscal 2002 through March 15, 2002.
High Low
--------- ---------
Fiscal 2000:
1st Quarter ........................................ $ 18.81 $ 10.75
2nd Quarter ........................................ $ 18.50 $ 13.12
3rd Quarter ........................................ $ 20.63 $ 13.31
4th Quarter ........................................ $ 36.50 $ 18.59
Fiscal 2001:
1st Quarter ........................................ $ 37.44 $ 27.19
2nd Quarter ........................................ $ 40.57 $ 29.84
3rd Quarter ........................................ $ 40.00 $ 31.61
4th Quarter ........................................ $ 41.50 $ 31.90
Fiscal 2002:
1st Quarter (Through March 15, 2002) ............... $ 46.11 $ 35.22
The Company's Common Stock is quoted through the NASDAQ National Market
tier of the NASDAQ Stock Market under the symbol "HSIC." On March 15, 2002,
there were approximately 757 holders of record of the Common Stock. On March 15,
2002, the last reported sales price was $43.51.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement, as well as a note
payable that was repaid in January 2002, limit the distribution of dividends
without the prior written consent of the lenders.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data, with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 29, 2001, set forth below has been derived from the
Company's consolidated financial statements. The selected financial data
presented below should be read in conjunction with the Financial Statements and
Supplementary Data in ITEM 8 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in ITEM 7. The Selected Operating
Data and Net Sales By Market Data presented below have not been audited.
Years ended
----------------------------------------------------------------------------
December 29, December 30, December 25, December 26, December 27,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(In thousands, except per share and selected operating data)
Statements of Operations Data:
Net sales .......................................... $ 2,558,243 $ 2,381,721 $ 2,284,544 $ 1,922,851 $ 1,698,862
Gross profit ....................................... 699,324 647,901 608,596 523,831 442,842
Selling, general and administrative
expenses ...................................... 551,574 520,288 489,364 427,635 380,233
Merger and integration costs (1) ................... -- 585 13,467 56,666 50,779
Restructuring costs (2) ............................ -- 14,439 -- -- --
Operating income ................................... 147,750 112,589 105,765 39,530 11,830
Interest income .................................... 10,078 6,279 7,777 6,964 7,353
Interest expense ................................... (17,324) (20,409) (23,593) (12,050) (7,643)
Other - net ........................................ (153) (1,925) (166) 1,570 1,375
Other income (expense) - net ....................... (7,399) (16,055) (15,982) (3,516) 1,085
Income before taxes on income,
minority interest and equity
in earnings (losses) of affiliates ............ 140,351 96,534 89,783 36,014 12,915
Taxes on income .................................... 51,930 36,150 35,589 20,325 17,670
Minority interest in net income (loss)
of subsidiaries ............................... 1,462 1,757 1,690 145 (430)
Equity in earnings (losses) of affiliates .......... 414 (1,878) (2,192) 783 2,141
Net income (loss) .................................. 87,373 56,749 50,312 16,327 (2,184)
Net income (loss) per common share:
Basic ......................................... $ 2.06 $ 1.38 $ 1.24 $ 0.42 $ (0.06)
Diluted ....................................... $ 2.01 $ 1.35 $ 1.21 $ 0.39 $ (0.06)
Weighted average shares outstanding:
Basic ......................................... 42,366 41,244 40,585 39,305 37,531
Diluted ....................................... 43,545 42,007 41,438 41,549 37,531
15
Years ended
--------------------------------------------------------------------------------
December 29, December 30, December 25, December 26, December 27,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(In thousands, except per share and selected operating data)
Pro Forma Data (3):
Pro forma net income (loss) .................. $ -- $ -- $ -- $ 13,748 $ (1,778)
Pro forma net income (loss) per
common share
Basic ................................... $ -- $ -- $ -- $ 0.35 $ (0.05)
Diluted ................................. $ -- $ -- $ -- $ 0.33 $ (0.05)
Pro forma average shares outstanding:
Basic ................................... -- -- -- 39,305 37,531
Diluted ................................. -- -- -- 41,549 37,531
Selected Operating Data:
Number of orders shipped ..................... 7,891,000 8,280,000 7,979,000 6,718,000 6,064,000
Average order size ........................... $ 324 $ 288 $ 286 $ 286 $ 280
Net Sales by Market Data:
Healthcare Distribution:
Dental (4) .............................. $ 1,106,580 $ 1,073,889 $ 1,047,259 $ 1,085,717 $ 999,671
Medical ................................. 929,825 794,880 715,210 515,276 441,110
Veterinary .............................. 52,744 56,421 52,050 48,492 40,852
International (5) ....................... 398,071 389,946 403,137 230,792 181,278
----------- ----------- ----------- ----------- -----------
Total Healthcare Distribution ......... 2,487,220 2,315,136 2,217,656 1,880,277 1,662,911
Technology (6) ............................... 71,023 66,585 66,888 42,574 35,951
----------- ----------- ----------- ----------- -----------
$ 2,558,243 $ 2,381,721 $ 2,284,544 $ 1,922,851 $ 1,698,862
=========== =========== =========== =========== ===========
Balance Sheet data:
Working capital .............................. $ 489,909 $ 423,547 $ 428,429 $ 403,592 $ 312,916
Total assets ................................. 1,385,428 1,231,068 1,204,102 962,040 803,946
Total debt ................................... 261,417 276,693 363,624 209,451 148,685
Minority interest ............................ 6,786 7,996 7,855 5,904 2,225
Stockholders' equity ......................... 680,457 579,060 517,867 463,034 424,223
(1) Merger and integration costs consist primarily of investment banking,
legal, accounting and advisory fees, compensation, write-off of duplicate
management information systems, other assets and the impairment of goodwill
arising from acquired businesses integrated into the Company's medical and
dental businesses, as well as certain other integration costs incurred
primarily in connection with the 1998 acquisition of H. Meer Dental Supply
Co., Inc. ("Meer") and the 1997 acquisitions of Sullivan Dental Products,
Inc., Micro Bio-Medics, Inc. and Dentrix Dental Systems, Inc., which were
accounted for under the pooling of interests method of accounting. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisition Strategy" in ITEM 7 and the Financial Statements
and Supplementary Data in ITEM 8.
(2) Restructuring costs consist primarily of employee severance costs,
including severance pay and benefits of approximately $7.2 million,
facility closing costs, primarily lease termination and asset write-off
costs of approximately $4.4 million and professional and consulting fees
directly related to the restructuring plan of approximately $2.8 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Plan of Restructuring" in ITEM 7 and the Financial
Statements and Supplementary Data in ITEM 8.
(3) Reflects the provision for income tax (expense) recoveries on previously
untaxed earnings of Meer as an S Corporation of $(0.6) million and $0.4
million for 1998 and 1997, respectively, and the pro forma elimination of a
net deferred tax asset arising from Meer's conversion from an S Corporation
to a C Corporation of $2.0 million in 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisition
Strategy" in ITEM 7 and the Financial Statements and Supplementary Data in
ITEM 8.
(4) Dental consists of the Company's dental business in the United States and
Canada.
(5) International consists of the Company's business (primarily dental) outside
the United States and Canada, primarily in Europe.
(6) Technology consists of the Company's practice management software business
and certain other value-added products and services, which are distributed
primarily to healthcare professionals in the North American market.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto included in ITEM 8 herein.
GENERAL
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the consolidated financial statements, included
elsewhere in this annual report on Form 10-K, includes a summary of the
significant accounting policies and methods used in the preparation of the
Company's consolidated financial statements.
The Company believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the Company's
financial statements:
Revenue Recognition
Sales are recorded when products are shipped or services are rendered to
customers, as the Company generally has no significant post delivery
obligations, the product price is fixed and determinable, collection of the
resulting receivable is probable and product returns are reasonably estimable.
Revenues derived from post contract customer support for practice management
software is deferred and recognized ratably over the period in which the support
is to be provided, generally one-year. Revenues from freight charged to
customers are recognized when products are shipped. Provisions for discounts,
rebates to customers, customer returns and other adjustments are provided for in
the period the related sales are recorded based upon historical data.
Management's Estimates
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, the Company evaluates estimates, including
those related to sales provisions, as described above, volume purchase rebates,
income taxes, bad debts, inventory reserves, intangible assets and
contingencies. The Company bases it estimates on historical data, when
available, experience, and on various other assumptions that are believed to be
reasonable under the circumstances, the combined results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
Goodwill and Other Intangible Assets
At December 29, 2001, the Company has recorded approximately $288.0 million
in goodwill and other intangible assets, net of accumulated amortization,
primarily related to acquisitions made in 2001 and prior years. The
recoverability of these assets is subject to an impairment test based on the
estimated fair value of the underlying businesses. (See "Effect of Recently
Issued Accounting Standards").
17
PLAN OF RESTRUCTURING
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this world-wide initiative included the
elimination of approximately 300 positions, including open positions, or
approximately 5% of the total workforce, throughout all levels within the
organization. The restructuring plan was substantially completed at December 30,
2000.
For the year ended December 30, 2000, the Company incurred one-time
restructuring costs of approximately $14.4 million, ($9.3 million after taxes),
or approximately $0.22 per diluted share, consisting primarily of; employee
severance costs, including severance pay and benefits of approximately $7.2
million, facility closing costs, primarily lease termination and asset write-off
costs of approximately $4.4 million, and outside professional and consulting
fees directly related to the restructuring plan of approximately $2.8 million.
ACQUISITION STRATEGY
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part, to address significant
changes in the healthcare industry, including potential healthcare reform,
trends toward managed care, cuts in Medicare, consolidation of healthcare
distribution companies and collective purchasing arrangements.
During the year ended December 29, 2001, the Company completed the
acquisition of two healthcare distribution businesses, which included the
purchase of the remaining 50% interest of an affiliate. Neither of these
purchases was considered material either individually or in the aggregate. The
two transactions were accounted for under the purchase method of accounting and
have been included in the consolidated financial statements from their
respective acquisition dates.
During the year ended December 30, 2000, the Company completed the
acquisition of two healthcare distribution businesses and one technology
business, none of which were considered material either individually or in the
aggregate. Of the three completed acquisitions, two were accounted for under the
purchase method of accounting and the remaining acquisition was accounted for
under the pooling of interests method of accounting. The Company issued 465,480
shares of its Common Stock, with an aggregate value of approximately $7.9
million in connection with the pooling transaction. The transactions completed
under the purchase method of accounting have been included in the consolidated
financial statements from their respective acquisition dates. The pooling
transaction was not material and, accordingly, prior period financial statements
have not been restated. Results of the acquired company have been included in
the consolidated financial statements from the beginning of the second quarter
of 2000.
During the year ended December 25, 1999, the Company completed the
acquisition of eight healthcare distribution businesses and one technology
business. The completed acquisitions included General Injectables and Vaccines,
Inc. ("GIV"), and the international dental, medical and veterinary healthcare
distribution businesses of Heiland Holding GmbH (the "Heiland Group"). GIV,
which had 1998 net sales of approximately $120.0 million, is a leading
independent direct marketer of vaccines and other injectable products to
office-based practitioners in the United States. The Heiland Group, the largest
direct marketer of healthcare supplies to office-based practitioners in Germany,
had 1998 net sales of approximately $130.0 million. The acquisition agreements
for GIV provides for additional cash consideration of up to $6.0 million per
year through 2004, not to exceed $22.5 million in total, to be paid if certain
profitability targets are met. The remaining seven acquisitions had combined net
sales of approximately $74.0 million for 1998. Six of the acquisitions were
accounted for under the purchase method of accounting, while the remaining
18
acquisition was accounted for under the pooling of interests method of
accounting. Results of operations of the business acquisitions accounted for
under the purchase method of accounting have been included in the consolidated
financial statements commencing with the acquisition dates. The total cash
purchase price paid for the acquisitions accounted for under the purchase method
of accounting was approximately $137.2 million. The Company issued 189,833
shares of its Common Stock with an aggregate market value of $6.4 million in
connection with the pooling transaction. The pooling transaction was not
material and, accordingly, prior period financial statements have not been
restated. Results of the acquired company have been included in the consolidated
financial statements from the beginning of the quarter in which the acquisition
occurred.
In connection with the 2000 and 1999 acquisitions, the Company incurred
certain merger and integration costs of approximately $0.6 million and $13.5
million, respectively. Net of taxes, merger and integration costs were
approximately $0.01 and $0.23 per share, on a diluted basis, respectively.
Merger and integration costs for the healthcare distribution and technology
segments were $0.0 million and $0.6 million for 2000 and $13.5 million and $0.0
million for 1999, respectively. Merger and integration costs consist primarily
of investment banking, legal, accounting and advisory fees, severance,
impairment of goodwill arising from acquired businesses integrated into the
Company's medical and dental businesses, as well as certain other integration
costs associated with these mergers.
Excluding the merger, integration, and restructuring costs of $9.9 million
after tax and losses of $3.5 million after tax on disposals of (i) a United
Kingdom practice management software development business unit, and (ii) the
sale of a 50% interest in a dental anesthetic manufacturer, in 2000, and the
merger and integration costs of $9.5 million after tax in 1999, pro forma net
income and pro forma net income per common share, on a diluted basis, would have
been $70.1 million, and $1.67, respectively, for the year ended December 30,
2000, and $59.8 million and $1.44, respectively, for the year ended December 25,
1999.
19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, Net Sales, Gross
Profit and Adjusted Operating Profit, excluding merger and integration, and
restructuring costs (in thousands), by business segment for the years ended
2001, 2000, and 1999. Percentages are calculated on related net sales.
2001 2000 1999
------------------ ------------------ ------------------
Net Sales by Segment Data:
Healthcare distribution:
Dental (1) .................. $1,106,580 43.2% $1,073,889 45.1% $1,047,259 45.8%
Medical ..................... 929,825 36.3% 794,880 33.4% 715,210 31.3%
Veterinary .................. 52,744 2.1% 56,421 2.4% 52,050 2.3%
International (2) ........... 398,071 15.6% 389,946 16.4% 403,137 17.6%
---------- ------ ---------- ------ ---------- ------
Total healthcare distribution 2,487,220 97.2% 2,315,136 97.2% 2,217,656 97.1%
Technology (3) ................... 71,023 2.8% 66,585 2.8% 66,888 2.9%
---------- ------ ---------- ------ ---------- ------
Total ....................... $2,558,243 100.0% $2,381,721 100.0% $2,284,544 100.0%
========== ====== ========== ====== ========== ======
Gross Profit by Segment Data:
Healthcare distribution .......... $ 649,469 26.1% $ 601,036 26.0% $ 563,107 25.4%
Technology ....................... 49,855 70.2% 46,865 70.4% 45,489 68.0%
---------- ---------- ----------
Total ....................... $ 699,324 27.3% $ 647,901 27.2% $ 608,596 26.6%
========== ====== ========== ====== ========== ======
Adjusted Operating Profit
(excluding merger and
integration, and
restructuring costs) by
Segment Data:
Healthcare distribution (4) ...... $ 123,767 5.0% $ 102,953 4.4% $ 93,934 4.2%
Technology (5) ................... 23,983 33.8% 24,660 37.0% 25,298 37.8%
---------- ---------- ----------
Total ....................... $ 147,750 5.8% $ 127,613 5.4% $ 119,232 5.2%
========== ====== ========== ====== ========== ======
(1) Dental consists of the Company's dental business in the United States and
Canada.
(2) International consists of the Company's business (primarily dental) outside
the United States and Canada, primarily in Europe.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services, which are distributed
primarily to healthcare professionals in the North American market.
(4) Excludes merger and integration, and restructuring costs of $0.0 million,
$14.1 million, and $13.5 million in 2001, 2000, and 1999, respectively.
(5) Excludes merger and integration, and restructuring costs of $0.0 million,
$1.0 million, and $0.0 million in 2001, 2000, and 1999, respectively.
2001 COMPARED TO 2000
The company reports financial results on a 52-53 week basis and, as such,
the 2000 fiscal year included an additional week. For the year ended December
29, 2001, net sales increased $176.5 million, or 7.4%, to $2,558.2 million in
2001 from $2,381.7 million in 2000. On a comparable basis (excluding the
additional week in 2000), net sales growth was approximately 8.7%. Of the $176.5
million increase, approximately $172.1 million, or 97.5%, represented a 7.4%
(8.7% on a comparable basis) increase in the Company's healthcare distribution
business. As part of this increase, approximately $135.0 million represented a
17.0% (18.6% on a comparable basis) increase in its medical business, $32.7
million represented a 3.0% (4.0% on a comparable basis) increase in its dental
business, $8.1 million represented a 2.1% (3.5% on a comparable basis) increase
in the Company's international business, and $(3.7) million represented a 6.5%
(5.2% on a comparable basis) decrease in the Company's veterinary business. The
increase in medical net sales was primarily attributable to increased sales to
core physicians' office and alternate care markets. In the dental market, the
20
increase in net sales was primarily due to increased account penetration. In the
international market, the increase in net sales was primarily due to increased
account penetration in Germany, France, and the United Kingdom, somewhat offset
by unfavorable exchange rates to the U.S. dollar. Had net sales for the
international market been translated at the same exchange rates in 2000, net
sales would have increased by 5.8%. In the veterinary market, the decrease in
net sales was primarily due to the loss of a product line. The remaining
increase in 2001 net sales was due to the technology business, which increased
$4.4 million, or 6.7% (7.6% on a comparable basis), to $71.0 million for 2001,
from $66.6 million for 2000. The increase in technology and value-added product
net sales was primarily due to increased sales of technology products and
related services.
Gross profit increased by $51.4 million, or 7.9%, to $699.3 million in
2001, from $647.9 million in 2000. Gross profit margin increased by 0.1% to
27.3% from 27.2% in the prior year. Healthcare distribution gross profit
increased by $48.4 million, or 8.1%, to $649.4 million in 2001, from $601.0
million in 2000. Healthcare distribution gross profit margin increased by 0.1%,
to 26.1%, from 26.0% in the prior year primarily due to changes in sales mix.
Technology gross profit increased by $3.0 million, or 6.4%, to $49.9 million in
2001, from $46.9 million in 2000. Technology gross profit margin decreased by
0.2%, to 70.2%, from 70.4% in the prior year primarily due to changes in sales
mix.
Selling, general and administrative expenses increased by $31.3 million, or
6.0%, to $551.6 million in 2001 from $520.3 million in 2000. Selling and
shipping expenses increased by $23.5 million, or 7.6%, to $334.1 million in 2001
from $310.6 million in 2000. As a percentage of net sales, selling and shipping
expenses increased 0.1% to 13.1% in 2001 from 13.0% in 2000. General and
administrative expenses increased $7.8 million, or 3.7%, to $217.5 million in
2001 from $209.7 million in 2000. As a percentage of net sales, general and
administrative expenses decreased 0.3% to 8.5% in 2001 from 8.8% in 2000. The
decrease was primarily due to reductions in expenses associated with the
Company's restructuring program.
Other income (expense) - net decreased by $(8.7) million, to $(7.4) million
in 2001 from $(16.1) million for 2000, due primarily to higher interest income
on long-term loans receivable and short-term investments, higher finance charge
income on trade accounts receivable, lower interest expense due to reductions in
long-term debt and bank credit line balances and lower interest rates, and in
2000, the nonrecurring loss of $1.6 million after tax on the sale of the
Company's software development unit in the United Kingdom.
Equity in earnings (losses) of affiliates increased $2.3 million to $0.4
million in 2001 from $(1.9) million in 2000. The increase is primarily due to a
nonrecurring net loss of $1.9 million during the fourth quarter of 2000 from the
sale of the Company's interest in HS Pharmaceutical, Inc. ("H.S.
Pharmaceutical").
For 2001, the Company's effective tax rate was 37.0%. The difference
between the Company's effective tax rate and the Federal statutory rate relates
primarily to state income taxes.
For 2000, the Company's effective tax rate was 37.4%. 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 37.3%. The difference
between the Company's effective tax rate and the Federal statutory rate relates
primarily to state income taxes.
2000 COMPARED TO 1999
Net sales increased $97.2 million, or 4.3%, to $2,381.7 million in 2000
from $2,284.5 million in 1999. Of the $97.2 million increase, approximately
$97.5 million, or 100.3%, represented a 4.4% increase in the Company's
healthcare distribution business. As part of this increase, approximately $79.7
million represented a 11.1% increase in its medical business, $26.6 million
represented a 2.5% increase in its dental business, $4.4 million represented a
8.4% increase in the Company's veterinary business, and $(13.2) million
represented a 3.3% decrease in the Company's international business. The
increase in medical net sales was primarily attributable to increased sales to
core physicians' office and alternate care markets. In the dental market, the
21
increase in net sales was primarily due to increased account penetration. In the
veterinary market, the increase in net sales was primarily due to increased
account penetration. In the international market, the decrease in net sales was
primarily due to unfavorable exchange rate translation adjustments. Had net
sales for the international market been translated at the same exchange rates in
1999, net sales would have increased by 8.4%. The remaining decrease in 2000 net
sales was due to the technology business, which decreased $(0.3) million, or
0.3%, to $66.6 million for 2000, from $66.9 million for 1999. The decrease in
technology and value-added product net sales was primarily due to a decrease in
practice management software sales, which was exceptionally strong in 1999
primarily due to Year 2000 conversions.
Gross profit increased by $39.3 million, or 6.5%, to $647.9 million in
2000, from $608.6 million in 1999. Gross profit margin increased by 0.6% to
27.2% from 26.6% last year. Healthcare distribution gross profit increased by
$37.9 million, or 6.7%, to $601.0 million in 2000, from $563.1 million in 1999.
Healthcare distribution gross profit margin increased by 0.6%, to 26.0%, from
25.4% last year primarily due to changes in sales mix. Technology gross profit
increased by $1.4 million, or 3.0%, to $46.9 million in 2000, from $45.5 million
in 1999. Technology gross profit margin increased by 2.4%, to 70.4%, from 68.0%
last year also primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $30.9 million, or
6.3%, to $520.3 million in 2000 from $489.4 million in 1999. Selling and
shipping expenses increased by $9.7 million, or 3.2%, to $310.6 million in 2000
from $300.9 million in 1999. As a percentage of net sales, selling and shipping
expenses decreased 0.2% to 13.0% in 2000 from 13.2% in 1999. This decrease was
primarily due to improvement in the Company's distribution efficiencies
resulting from the leveraging of the Company's distribution infrastructure.
General and administrative expenses increased $21.2 million, or 11.2%, to $209.7
million in 2000 from $188.5 million in 1999, primarily as a result of
acquisitions. As a percentage of net sales, general and administrative expenses
increased 0.5% to 8.8% in 2000 from 8.3% in 1999.
Other income (expense) - net changed by $(0.1) million, to $(16.1) million
for the year ended December 30, 2000 from $(16.0) million for 1999 primarily due
to the non-recurring loss of approximately $1.6 million, or approximately $0.04
per diluted share, from the sale of the Company's software development unit in
the United Kingdom and lower interest income on accounts receivable balances,
offset by a decrease in interest expense resulting from a decrease in average
borrowings.
Equity in losses of affiliates decreased $0.3 million or 13.6%, to $(1.9)
million in 2000 from $(2.2) million in 1999. The net decrease is primarily due
to increased earnings from an affiliate offset by a non-recurring net loss of
approximately $1.9 million, or approximately $0.05 per diluted share from the
sale of the Company's interest in HS Pharmaceutical during the fourth quarter of
2000.
For 2000, the Company's effective tax rate was 37.4%. 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 37.3%. 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.
For 1999, the Company's effective tax rate was 39.6%. 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 38.3%. 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.
22
SEASONALITY
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, timing of purchases, special promotional campaigns, fluctuations in
exchange rates associated with international operations and adverse weather
conditions.
EURO CONVERSION
Effective January 1, 2000, 11 of the 15 member countries of the European
Union adopted the Euro as their common legal currency. On that date, the
participating countries established fixed Euro conversion rates between their
existing sovereign currencies and the Euro. The participating countries now
issue sovereign debt exclusively in Euro, and have re-denominated outstanding
sovereign debt. The authority to direct monetary policy for the participating
countries, including money supply and official interest rates for the Euro, is
now exercised by the new European Central Bank.
Beginning on January 1, 2002, Euro banknotes were put into circulation.
There was a changeover period of two months during which there was dual
circulation - where both Euro and national currencies were used together.
Following the changeover period, the national currencies were completely
replaced by the Euro.
During 2001, the Company successfully converted all of their European
information systems in order to achieve timely Euro information system and
product readiness, so as to conduct transactions in the Euro, in accordance with
implementation schedules as they are established by the European Commission. The
costs of these changes were not material to the Company and are included as part
of operating expenses for 2001.
E-COMMERCE
Traditional healthcare supply and distribution relationships are being
challenged by electronic on-line commerce solutions. The Company's distribution
business is characterized by rapid technological developments and intense
competition. The rapid evolution of on-line commerce will require continuous
improvement in performance, features and reliability of Internet content and
technology by the Company, particularly in response to competitive offerings.
Through the Company's proprietary technologically based suite of products,
customers are offered a variety of competitive alternatives. The Company's
tradition of reliable service, proven name recognition, and large customer base
built on solid customer relationships makes it well situated to participate
fully in this rapidly growing aspect of the distribution business. The Company
is exploring ways and means of improving and expanding its Internet presence and
will continue to do so. In January 2001, the Company announced the unveiling of
a new website (http://www.henryschein.com), which includes an array of
value-added features. As part of this effort, the Company also launched
http://www.sullivanschein.com website for its office-based dental practitioner
customers.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
23
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(A) In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassify, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of FAS 142.
Certain of the Company's business combinations effected prior to June 30,
2001 were accounted for using both the pooling-of-interests and purchase
methods. The pooling-of-interests method does not result in the recognition of
acquired goodwill or other intangible assets. As a result, the adoption of FAS
141 and FAS 142 will not have any effect with respect to the Company's prior
transactions that were accounted for under the pooling-of-interests method.
However, all future business combinations will be accounted for under the
purchase method, which may result in the recognition of goodwill and other
intangible assets. With respect to the Company's business combinations that were
effected prior to June 30, 2001, using the purchase method of accounting, the
net carrying amounts of the resulting goodwill and other intangible assets as of
December 29, 2001 were $280.0 million and $8.0 million, respectively.
Amortization expense during the year ended December 29, 2001 was $12.9 million
of which $11.6 million was amortization of goodwill and $1.3 million was
amortization of other intangibles. The Company has estimated that the impact of
not amortizing goodwill on the results of operations will be an increase of
approximately $0.17 per diluted share in 2002. The Company is still determining
the reporting units to be used for its goodwill impairment testing, and
accordingly, has not determined the impact, if any, from the results of such
testing.
(B) In August 2001, the FASB issued FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS 144"). This statement
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121") and amends
Accounting Principles Board Opinion No. 30, Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. FAS 144 retains the
fundamental provisions of FAS 121 for recognition and measurement of impairment,
but amends the accounting and reporting standards for segments of a business to
be disposed of. FAS 144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of FAS 144 generally are to be applied prospectively.
The Company believes that the adoption of FAS 144 will not have a material
impact on the Company's financial position or results of operations.
24
RISK MANAGEMENT
The Company has operations in the United States, Canada, the United
Kingdom, The Netherlands, Belgium, Germany, France, Austria, Spain, Australia
and New Zealand. Substantially all of the Company's operations endeavor to
protect their financial results by using foreign currency forward contracts to
hedge intercompany debt and the foreign currency payments to foreign vendors.
The total U.S. dollar equivalent of all foreign currency forward contracts
hedging debt and the purchase of merchandise from foreign vendors was $44.1
million and $2.6 million, respectively, as of the end of fiscal 2001. As of
December 29, 2001 the fair value of these contracts, which are determined by
quoted market prices and expire through November 2002, was not material. For the
year ended December 29, 2001, the Company recognized an immaterial loss relating
to its foreign currency forward contracts.
The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company has experienced negative
translation adjustments of approximately $5.7 million and $7.8 million in 2001
and 2000, respectively, which adjustments were reflected in the balance sheet as
a component of stockholders' equity. The cumulative translation adjustment at
the end of 2001 showed a net negative translation adjustment of $23.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) capital
expenditures, (b) repayments on bank borrowings, (c) working capital needs
resulting from increased sales, special inventory forward buy-in opportunities
and (d) acquisitions. Since sales tend to be 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 its operations, its revolving credit facilities, private placement loans
and stock issuances.
Net cash provided by operating activities for the year ended December 29,
2001 of $190.9 million resulted primarily from net income of $87.4 million,
non-cash charges of approximately $54.2 million, and a net increase in operating
items of working capital of approximately $49.3 million. The increase in working
capital was primarily due to an increase in accounts payable and accruals of
$55.1 million, a $8.8 million decrease in other current assets, and a $3.2
million decrease in accounts receivable, offset by a $17.8 million increase in
inventories. The Company's accounts receivable days sales outstanding ratio
improved to 53.52 days for the period ending December 29, 2001 from 57.07 days
for the period ending December 30, 2000. The Company's inventory turns improved
to 6.93 inventory turns for the period ending December 29, 2001 from 6.28
inventory turns for the period ending December 30, 2000. The Company anticipates
future increases in working capital requirements as a result of its continued
sales growth, extended payment terms and special inventory forward buy-in
opportunities.
Net cash used in investing activities for the year ended December 29, 2001
of $55.1 million resulted primarily from cash used for capital expenditures of
$46.1 million, of which $10.2 million was for the Company's new mid-west
distribution center, and business acquisitions of $8.6 million. During the past
three years, the Company has invested $110.4 million in the development of new
computer systems, and for new and existing operating facilities. In the coming
year, the Company expects to invest in excess of $50 million in capital projects
to modernize and expand its facilities and infrastructure computer systems, and
integrate operations.
Net cash provided by financing activities for the year ended December 29,
2001 of $0.4 million resulted primarily from proceeds from the issuance of stock
upon exercise of stock options of $14.2 million, offset primarily by net
25
payments on borrowings from banks of $10.8 million and net payments on long-term
debt of $2.9 million.
Certain holders of minority interests in acquired entities have the right
at certain times to require the Company to acquire their interest at fair value
pursuant to a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of December 29, 2001 of $193.4
million consist of bank balances and investments in money market funds. These
investments have staggered maturity dates, none of which exceed three months,
and have a high degree of liquidity since the securities are actively traded in
public markets.
The Company entered into an amended revolving credit facility on August 15,
1997 that increased its main credit facility to $150.0 million and extended the
facility termination date to August 15, 2002. There were no borrowings under the
credit facility at December 29, 2001. The Company expects to renew the revolving
line of credit prior to its scheduled termination in August 2002. The Company
also has one uncommitted bank line of $15.0 million, of which no amounts have
been borrowed against at December 29, 2001.
On June 30, 1999 and September 25, 1998, the Company completed private
placement transactions under which it issued $130.0 million and $100.0 million,
respectively, in Senior Notes, the proceeds of which were used respectively, for
the permanent financing of its acquisitions of GIV and the Heiland Group, as
well as repaying and retiring a portion of four uncommitted bank lines and to
pay down amounts owed under its revolving credit facility. The $130.0 million
notes come due on June 30, 2009 and bear interest at a rate of 6.94% per annum.
Principal payments totaling $20.0 million are due annually starting September
25, 2006 on the $100.0 million notes and bear interest at a rate of 6.66% per
annum. Interest on both notes is payable semi-annually. Certain of the Company's
subsidiaries have credit facilities that totaled $39.9 million at December 29,
2001 under which $4.0 million had been borrowed.
The aggregate purchase price of the acquisitions completed during 1999,
including the acquisition of the minority interests of two subsidiaries, was
approximately $139.0 million, payable $132.6 million in cash and $6.4 million in
stock. The acquisitions of GIV and the Heiland Group were funded by the
Company's revolving credit agreement and various short-term borrowings entered
into in January 1999. Existing borrowing lines primarily funded the remaining
cash portion of the purchases.
The following table shows the Company's contractual obligations related to
fixed and variable rate long-term debt as well as lease obligations (See Notes 9
and 14(a) to the Consolidated financial statements):
Payments due by period (in thousands)
Total < 1 year 1 - 3 years 4 - 5 years > 5 years
-------- -------- ----------- ----------- ---------
Contractual obligations:
Long term debt ............................ $255,252 $ 14,392 $ 2,543 $ 21,222 $217,095
Capital lease obligations ................. 2,140 831 562 227 520
Operating lease obligations ............... 106,558 19,866 32,387 24,138 30,167
-------- -------- -------- -------- --------
Total ..................................... $363,950 $ 35,089 $ 35,492 $ 45,587 $247,782
======== ======== ======== ======== ========
The Company believes that its cash and cash equivalents of $193.4 million
as of December 29, 2001, its ability to access public and private debt and
equity markets, and the availability of funds under its existing credit
26
agreements will provide it with sufficient liquidity to meet its currently
foreseeable short-term and long-term capital needs.
ITEM 7A. MARKET RISKS
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in foreign currency exchange
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce these risks by utilizing financial instruments, pursuant to Company
policies.
Forward Foreign Currency Contracts
The value of certain foreign currencies as compared to the U.S. dollar may
affect the Company's financial results. Changes in exchange rates may positively
or negatively affect the Company's revenues (as expressed in U.S. dollars),
gross margins, operating expenses, and retained earnings. Where the Company
deems it prudent, it engages in hedging programs aimed at limiting, in part, the
impact of currency fluctuations. Using primarily forward exchange contracts, the
Company hedges those transactions that, when remeasured according to accounting
principles generally accepted in the United States, may impact its statement of
income. From time to time, the Company purchases short-term forward exchange
contracts to protect against currency exchange risks associated with the
ultimate repayment of intercompany loans due from the Company's international
subsidiaries and the payment of merchandise purchases to foreign vendors. As of
December 29, 2001, the Company had outstanding foreign currency forward
contracts aggregating $46.7 million, of which $44.1 million related to
intercompany debt and $2.6 million related to the purchase of merchandise from
foreign vendors. The contracts hedge against currency fluctuations of British
Pounds ($24.1 million), Euros ($21.1 million) Australian dollars ($1.3 million),
and New Zealand dollars ($0.2 million). As of December 29, 2001 the fair value
of these contracts, which are determined by quoted market prices and expire
through November 2002, was not material. For the year ended December 29, 2001,
the Company recognized an immaterial loss relating to its foreign currency
forward contracts.
These hedging activities provide only limited protection against currency
exchange risks. Factors that could impact the effectiveness of the Company's
programs include volatility of the currency markets, and availability of hedging
instruments. All currency contracts that are entered into by the Company are
components of hedging programs and are entered into for the sole purpose of
hedging an existing or anticipated currency exposure, not for speculation.
Although the Company maintains these programs to reduce the impact of changes in
currency exchange rates, when the U. S. dollar sustains a strengthening position
against currencies in which the Company sells products and services, or a
weakening exchange rate against currencies in which the Company incurs costs,
the Company's revenues or costs are adversely affected.
Interest Rates
The Company is exposed to risk from changes in interest rates from
borrowings under certain variable bank credit lines and loan agreements. The
Company has fixed rate debt of $130.0 million at 6.94% and $100.0 million at
6.66%. If the remaining outstanding debt at December 29, 2001 of $31.4 million
was the average balance for the following twelve month period and the Company
experienced a 1% increase in average interest rates, the interest expense for
that period would have increased by $0.3 million. Based upon current economic
conditions, the Company does not believe interest rates will increase
substantially in the near future. As a result, the Company does not believe it
is necessary to hedge its exposure against potential future interest rate
increases.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
Page
----
Report of Independent Certified Public Accountants......................... 29
Consolidated Financial Statements:
Balance Sheets as of December 29, 2001 and December 30, 2000......... 30
Statements of Income and Comprehensive Income for the years ended
December 29, 2001, December 30, 2000, and December 25, 1999. 31
Statements of Stockholders' Equity for the years ended December 29,
2001, December 30, 2000 and December 25, 1999............... 32
Statements of Cash Flows for the years ended December 29, 2001,
December 30, 2000 and December 25, 1999..................... 33
Notes to Consolidated Financial Statements........................... 34
Report of Independent Certified Public Accountants......................... 62
Schedule II - Valuation and Qualifying Accounts, for the years ended
December 29, 2001, December 30, 2000, and December 25, 1999.. 67
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry
Schein, Inc. and Subsidiaries as of December 29, 2001 and December 30, 2000, and
the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 29, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Henry
Schein, Inc. and Subsidiaries at December 29, 2001 and December 30, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 2001 in conformity with accounting principles
generally accepted in the United States of America.
BDO SEIDMAN, LLP
New York, New York
March 1, 2002
29
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 29, December 30,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 193,367 $ 58,362
Accounts receivable, less reserves of $31,929 and $27,556, respectively 363,700 371,668
Inventories ........................................................... 291,231 276,473
Deferred income taxes ................................................. 25,751 21,001
Prepaid expenses and other ............................................ 52,922 60,900
----------- -----------
Total current assets ............................................. 926,971 788,404
Property and equipment, net ................................................ 117,980 94,663
Goodwill and other intangibles, net ........................................ 288,004 292,018
Investments and other ...................................................... 52,473 55,983
----------- -----------
$ 1,385,428 $ 1,231,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 263,190 $ 216,535
Bank credit lines ..................................................... 4,025 4,390
Accruals:
Salaries and related expenses .................................... 41,602 39,830
Merger, integration, and restructuring costs ..................... 5,867 13,735
Acquisition earnout payments ..................................... 26,800 15,500
Other expenses ................................................... 80,355 68,788
Current maturities of long-term debt .................................. 15,223 6,079
----------- -----------
Total current liabilities ........................................ 437,062 364,857
Long-term debt ............................................................. 242,169 266,224
Other liabilities .......................................................... 18,954 12,931
----------- -----------
Total liabilities ................................................ 698,185 644,012
----------- -----------
Minority interest .......................................................... 6,786 7,996
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000,
issued and outstanding 0 and 0, respectively ..................... -- --
Common stock, $.01 par value, authorized 120,000,000,
issued: 42,745,204 and 41,946,284, respectively .................. 427 419
Additional paid-in capital ............................................ 393,047 373,413
Retained earnings ..................................................... 312,402 225,029
Treasury stock, at cost, 62,479 shares ................................ (1,156) (1,156)
Accumulated comprehensive loss ........................................ (23,922) (18,179)
Deferred compensation ................................................. (341) (466)
----------- -----------
Total stockholders' equity ....................................... 680,457 579,060
----------- -----------
$ 1,385,428 $ 1,231,068
=========== ===========
See accompanying notes to consolidated financial statements.
30
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Years ended
------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Net sales ........................................................... $ 2,558,243 $ 2,381,721 $ 2,284,544
Cost of sales ....................................................... 1,858,919 1,733,820 1,675,948
----------- ----------- -----------
Gross profit ................................................... 699,324 647,901 608,596
Operating expenses:
Selling, general and administrative ............................ 551,574 520,288 489,364
Merger and integration costs ................................... -- 585 13,467
Restructuring costs ............................................ -- 14,439 --
----------- ----------- -----------
Operating income .......................................... 147,750 112,589 105,765
Other income (expense):
Interest income ................................................ 10,078 6,279 7,777
Interest expense ............................................... (17,324) (20,409) (23,593)
Other - net .................................................... (153) (1,925) (166)
----------- ----------- -----------
Income before taxes on income, minority interest and equity
in earnings (losses) of affiliates ................... 140,351 96,534 89,783
Taxes on income ..................................................... 51,930 36,150 35,589
Minority interest in net income of subsidiaries ..................... 1,462 1,757 1,690
Equity in earnings (losses) of affiliates ........................... 414 (1,878) (2,192)
----------- ----------- -----------
Net income .......................................................... $ 87,373 $ 56,749 $ 50,312
=========== =========== ===========
Net income .......................................................... $ 87,373 $ 56,749 $ 50,312
Other comprehensive income (loss):
Foreign currency translation adjustment ........................ (5,743) (7,820) (8,302)
----------- ----------- -----------
Comprehensive income ................................................ $ 81,630 $ 48,929 $ 42,010
=========== =========== ===========
Net income per common share:
Basic .......................................................... $ 2.06 $ 1.38 $ 1.24
=========== =========== ===========
Diluted ........................................................ $ 2.01 $ 1.35 $ 1.21
=========== =========== ===========
Weighted average common shares outstanding:
Basic .......................................................... 42,366 41,244 40,585
Diluted ........................................................ 43,545 42,007 41,438
See accompanying notes to consolidated financial statements.
31
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
$.01 Par Value Additional
-------------- Paid-in Retained
Shares Amount Capital Earnings
---------- ------ --------- ---------
Balance, December 26, 1998 .......................................... 40,250,936 $ 402 $ 348,119 $ 119,064
Deficit of one company acquired under the
pooling of interests method, not deemed material ................. __ __ __ (1,567)
Net income .......................................................... __ __ __ 50,312
Shares issued for acquisitions ...................................... 189,833 2 1,900 __
Shares issued to ESOP trust ......................................... 101,233 1 1,766 __
Amortization of restricted stock .................................... __ __ __ __
Foreign currency translation loss ................................... __ __ __ __
Shares issued upon exercise of stock options by employees,
including tax benefit of $5,974 ............................. 226,304 2 9,972 __
---------- ----- --------- ---------
Balance, December 25, 1999 .......................................... 40,768,306 407 361,757 167,809
Retained earnings of one company acquired under the
pooling of interests method, not deemed material ................. __ __ __ 471
Net income .......................................................... __ __ __ 56,749
Shares issued for acquisitions ...................................... 465,480 5 423 __
Shares issued to ESOP trust ......................................... 121,253 1 2,192 __
Amortization of restricted stock .................................... __ __ __ __
Foreign currency translation loss ................................... __ __ __ __
Shares issued upon exercise of stock options by employees,
including tax benefit of $2,758 ............................. 591,245 6 9,041 __
---------- ----- --------- ---------
Balance, December 30, 2000 .......................................... 41,946,284 419 373,413 225,029
Net income .......................................................... __ __ __ 87,373
Shares issued to ESOP trust ......................................... 61,997 1 2,224 __
Amortization of restricted stock .................................... __ __ __ __
Foreign currency translation loss ................................... __ __ __ __
Shares issued upon exercise of stock options by employees,
including tax benefit of $3,262 ............................. 736,923 7 17,410 __
---------- ----- --------- ---------
Balance, December 29, 2001 .......................................... 42,745,204 $ 427 $ 393,047 $ 312,402
========== ===== ========= =========
Accumulated Total
Treasury Comprehensive Deferred Stockholders'
Stock Loss Compensation Equity
-------- ------------ ------------ ------------
Balance, December 26, 1998 .......................................... $ (1,156) $ (2,057) $ (1,338) $ 463,034
Deficit of one company acquired under the
pooling of interests method, not deemed material ................. __ __ __ (1,567)
Net income .......................................................... __ __ __ 50,312
Shares issued for acquisitions ...................................... __ __ __ 1,902
Shares issued to ESOP trust ......................................... __ __ __ 1,767
Amortization of restricted stock .................................... __ __ 747 747
Foreign currency translation loss ................................... __ (8,302) __ (8,302)
Shares issued upon exercise of stock options by employees,
including tax benefit of $5,974 ............................. __ __ __ 9,974
-------- ---------- -------- ---------
Balance, December 25, 1999 .......................................... (1,156) (10,359) (591) 517,867
Retained earnings of one company acquired under the
pooling of interests method, not deemed material ................. __ __ __ 471
Net income .......................................................... __ __ __ 56,749
Shares issued for acquisitions ...................................... __ __ __ 428
Shares issued to ESOP trust ......................................... __ __ __ 2,193
Amortization of restricted stock .................................... __ __ 125 125
Foreign currency translation loss ................................... __ (7,820) __ (7,820)
Shares issued upon exercise of stock options by employees,
including tax benefit of $2,758 ............................. __ __ __ 9,047
-------- ---------- -------- ---------
Balance, December 30, 2000 .......................................... (1,156) (18,179) (466) 579,060
Net income .......................................................... __ __ __ 87,373
Shares issued to ESOP trust ......................................... __ __ __ 2,225
Amortization of restricted stock .................................... __ __ 125 125
Foreign currency translation loss ................................... __ (5,743) __ (5,743)
Shares issued upon exercise of stock options by employees,
including tax benefit of $3,262 ............................. __ __ __ 17,417
-------- ---------- -------- ---------
Balance, December 29, 2001 .......................................... $ (1,156) $ (23,922) $ (341) $ 680,457
======== ========== ======== =========
See accompanying notes to consolidated financial statements.
32
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended
---------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ -----------
Cash flows from operating activities:
Net income .............................................................. $ 87,373 $ 56,749 $ 50,312
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................... 35,642 33,762 28,273
Provision for losses and allowances on trade and other receivables 7,988 7,165 255
Stock issued to ESOP trust ....................................... 2,225 2,193 1,767
Provision (benefit) for deferred income taxes .................... 292 (1,335) 13
Undistributed (earnings) losses of affiliates .................... (414) 1,878 2,192
Minority interest in net income of subsidiaries .................. 1,462 1,757 1,690
Write-off of equipment, intangibles and other .................... 7,067 701 286
Changes in operating assets and liabilities
(net of purchase acquisitions):
Decrease (increase) in accounts receivable ....................... 3,194 5,186 (22,258)
(Increase) decrease in inventories ............................... (17,850) 4,630 12,102
Decrease (increase) in other current assets ...................... 8,808 (4,628) 6,786
Increase (decrease) in accounts payable and accruals ............. 55,124 44,936 (24,925)
--------- --------- ---------
Net cash provided by operating activities .................................... 190,911 152,994 56,493
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................................... (46,127) (29,743) (34,549)
Business acquisitions, net of cash acquired
of $228, $0, and $11,092 ........................................... (8,588) (6,838) (132,552)
Proceeds from sale of fixed assets ...................................... -- -- 8,583
Other ................................................................... (355) (9,645) (5,557)
--------- --------- ---------
Net cash used in investing activities ........................................ (55,070) (46,226) (164,075)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................................ 10,166 -- 131,211
Principal payments on long-term debt .................................... (13,042) (5,147) (14,873)
Proceeds from issuance of stock upon exercise
of stock options by employees ...................................... 14,155 6,283 3,998
Proceeds from borrowing from banks ...................................... 1,988 9,714 139,924
Payments on borrowings from banks ....................................... (12,740) (89,047) (146,877)
Other ................................................................... (156) 346 40
--------- --------- ---------
Net cash provided by (used in) financing activities .......................... 371 (77,851) 113,423
--------- --------- ---------
Net increase in cash and cash equivalents .................................... 136,212 28,917 5,841
Effect of exchange rate changes on cash and cash equivalents ................. (1,207) 3,426 (8,044)
Cash and cash equivalents, beginning of year ................................. 58,362 26,019 28,222
--------- --------- ---------
Cash and cash equivalents, end of year ....................................... $ 193,367 $ 58,362 $ 26,019
========= ========= =========
See accompanying notes to consolidated financial statements.
33
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Henry Schein,
Inc. and all of its wholly owned and majority-owned subsidiaries (collectively
the "Company"). Investments in unconsolidated affiliates, which are greater than
or equal to 20% and less than or equal to 50% owned, are accounted for under the
equity method. All intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations and cash flows on a 52-53 week basis
ending on the last Saturday of December. The fiscal year ended December 29, 2001
consisted of 52 weeks. The fiscal year ended December 30, 2000 consisted of 53
weeks. The fiscal year ended December 25, 1999 consisted of 52 weeks.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered to
customers, as the Company generally has no significant post delivery
obligations, the product price is fixed and determinable, collection of the
resulting receivable is probable and product returns are reasonably estimable.
Revenues derived from post contract customer support for practice management
software are deferred and recognized ratably over the period in which the
support is to be provided, generally one-year. Revenues from freight charged to
customers are recognized when products are shipped. Provisions for discounts,
rebates to customers, customer returns and other adjustments are provided for in
the period the related sales are recorded based on historical data.
Direct Shipping and Handling Costs
Freight and other direct shipping costs are included in "Cost of sales".
Direct handling costs, which represent primarily direct compensation costs of
employees who pick, pack and otherwise prepare, if necessary, merchandise for
shipment to the Company's customers are reflected in "Selling, general and
administrative" expenses. These costs were approximately $21,200, $17,700, and
$15,700 for the years ended 2001, 2000, and 1999, respectively.
Advertising
The Company generally expenses advertising and promotional costs as
incurred. Total advertising and promotional expenses were approximately $14,300,
$13,900, and $12,600 for fiscal years ended 2001, 2000, and 1999, respectively.
34
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Inventories
Inventories consist substantially of finished goods and are valued at the
lower of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
-----
Buildings and improvements ......... 40
Machinery and warehouse equipment... 5-10
Furniture, fixtures and other ...... 3-10
Computer equipment and software .... 3-8
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.
Capitalized software costs consist of costs to purchase and develop
software. The Company capitalizes certain incurred software development costs in
accordance with the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). Costs incurred
during the application-development stage for software bought and further
customized by outside vendors for the Company's use and software developed by a
vendor for the Company's proprietary use have been capitalized. Costs incurred
for the Company's own personnel who are directly associated with software
development are also capitalized.
Taxes on Income
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a
consolidated Federal income tax return with its 80% or greater owned
subsidiaries.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents.
35
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the accumulated comprehensive loss account in stockholders' equity.
Gains and losses resulting from foreign currency transactions are included in
earnings.
Derivative Financial Instruments
On December 31, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities", as amended, and interpreted, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. The impact of
adopting FAS 133 on the Company's Statement of Income and Balance Sheet was not
material.
The Company uses derivatives to reduce its exposure to fluctuations in
foreign currencies. Derivative products, specifically foreign currency forward
contracts, are used to hedge the foreign currency market exposures underlying
certain inter-company debt and certain forecasted transactions with foreign
vendors. The Company does not enter such contracts for speculative purposes.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk are recognized
in earnings in the current period. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the exposure of
variability in expected future cash flows that would be attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of Accumulated comprehensive loss (a
component of stockholders' equity) and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The
remaining gain or loss on the derivative instrument, if any (i.e., the
ineffective portion and any portion of the derivative instrument excluded from
the assessment of effectiveness) is recognized in earnings in the current
period. For derivative instruments not designated as hedging instruments,
changes in their fair values are recognized in earnings, as a component of
Other-net.
Acquisitions
The net assets of businesses purchased are recorded at their fair value at
the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in Goodwill. Certain
acquisitions provide for contingent consideration, primarily cash, to be paid in
the event certain financial performance targets are satisfied over future
periods. The Company's policy is to record a liability and adjust the
acquisition price for such amounts when the targets are met.
36
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets are written down to fair value.
Stock-Based Compensation
The Company accounts for its stock option awards to employees under the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. The Company makes pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied as required by Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation".
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of stock
options.
Comprehensive Income
Comprehensive income includes net income and revenues, expenses, gains and
losses that, under generally accepted accounting principles, are excluded from
net income as these amounts are recorded directly as an adjustment to
stockholders' equity. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair value because certain of the underlying instruments are at
variable rates, which are repriced frequently. The remaining portion of
long-term debt approximates fair value because the interest approximates current
market rates for financial instruments with similar maturities and terms.
New Accounting Pronouncements
(A) In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and
Other Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
37
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassify, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of FAS 142.
Certain of the Company's business combinations effected prior to June 30,
2001 were accounted for using both the pooling-of-interests and purchase
methods. The pooling-of-interests method does not result in the recognition of
acquired goodwill or other intangible assets. As a result, the adoption of FAS
141 and FAS 142 will not have any effect with respect to the Company's prior
transactions that were accounted for under the pooling-of-interests method.
However, all future business combinations will be accounted for under the
purchase method, which may result in the recognition of goodwill and other
intangible assets. With respect to the Company's business combinations that were
effected prior to June 30, 2001, using the purchase method of accounting, the
net carrying amounts of the resulting goodwill and other intangible assets as of
December 29, 2001 were approximately $280,000 and $8,000, respectively.
Amortization expense during the year ended December 29, 2001 was $12,900 of
which $11,600 was amortization of goodwill and $1,300 was amortization of other
intangibles. The Company has estimated that the impact of not amortizing
goodwill on the results of operations will be an increase of approximately $0.17
per diluted share in 2002. The Company is still determining the reporting units
to be used for its goodwill impairment testing, and accordingly, has not
determined the impact, if any, from the results of such testing.
(B) In August 2001, the FASB issued FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS 144"). This statement
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121") and amends
Accounting Principles Board Opinion No. 30, Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. FAS 144 retains the
fundamental provisions of FAS 121 for recognition and measurement of impairment,
but amends the accounting and reporting standards for segments of a business to
be disposed of. FAS 144 is effective for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of FAS 144 generally are to be applied prospectively.
The Company believes that the adoption of FAS 144 will not have a material
impact on the Company's financial position or results of operations.
38
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share data)
NOTE 2--EARNINGS PER SHARE
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Years ended
----------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Basic ......................... 42,366 41,244 40,585
Effect of assumed conversion of
employee stock options ... 1,179 763 853
------ ------ ------
Diluted ....................... 43,545 42,007 41,438
====== ====== ======
Options to purchase approximately 1,114, 3,011, and 2,485 shares of common
stock at prices ranging from $35.50 to $46.00, $19.73 to $46.00, and $24.56 to
$46.00 per share that were outstanding during 2001, 2000, and 1999,
respectively, were not included in the computation of diluted earnings per share
for each of the respective years because the options' exercise prices exceeded
the fair market value of the Company's common stock.
NOTE 3--PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
December 29, December 30,
2001 2000
------------ ------------
Land ............................................ $ 3,540 $ 1,257
Buildings and leasehold improvements ............ 52,257 42,744
Machinery and warehouse equipment ............... 24,016 21,909
Furniture, fixtures and other ................... 27,096 24,888
Computer equipment and software ................. 101,894 76,999
-------- --------
208,803 167,797
Less accumulated depreciation and amortization .. 90,823 73,134
-------- --------
Net property and equipment ...................... $117,980 $ 94,663
======== ========
The net book value of equipment held under capital leases amounted to
approximately $1,081 and $2,165 as of December 29, 2001 and December 30, 2000,
respectively (See Note 14(b)).
39
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 4--GOODWILL AND OTHER INTANGIBLES, NET
Goodwill and other intangibles, net consist of the following:
Estimated December 29, December 30,
Lives 2001 2000
---------- ------------ ------------
Goodwill....................... 30 years $ 326,473 $ 319,625
Other.......................... 3- 5 years 17,473 16,812
--------- ---------
343,946 336,437
Less accumulated amortization.. 55,942 44,419
--------- ---------
$ 288,004 $ 292,018
========= =========
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of identifiable net assets acquired. During 2001, the increase in
goodwill was primarily due to additional purchase price consideration of
approximately $13,300 for a prior year acquisition, net of an impairment loss
related to the healthcare distribution business. Other intangibles include
covenants not-to-compete, customer lists and deferred financing costs.
NOTE 5--INVESTMENTS AND OTHER
Investments and other consist of the following:
December 29, December 30,
2001 2000
------------ ------------
Long-term notes receivables (1) .............. $ 41,214 $ 39,028
Investments in unconsolidated affiliates ..... 4,201 4,791
Other ........................................ 7,058 12,164
-------- --------
$ 52,473 $ 55,983
======== ========
- ----------
(1) Long-term notes receivables include various notes due arising from the sale
of certain businesses of approximately $22,251 in 2001 and $21,700 in 2000.
The Company's investment as of December 29, 2001, is a 50% interest in an
unconsolidated affiliate, which is involved in the healthcare distribution
business. In the fourth quarter of fiscal 2000, the Company sold its 50%
interest in HS Pharmaceutical Inc. ("HS Pharmaceutical"), a manufacturer and
distributor of generic pharmaceuticals, which resulted in a non-recurring net
loss of $1,925 which is included in Equity in earnings (losses) of affiliates.
40
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS
During the year ended December 29, 2001, the Company completed the
acquisition of two healthcare distribution businesses, which included the
purchase of the remaining 50% interest of an affiliate. Neither of these
purchases was considered material either individually or in the aggregate. The
two transactions were accounted for under the purchase method of accounting and
have been included in the consolidated financial statements from their
respective acquisition dates.
In 2000, the Company completed the acquisition of two healthcare
distribution businesses and one technology business, none of which were
considered material either individually or in the aggregate. Of the three
completed acquisitions, two were accounted for under the purchase method of
accounting and the remaining acquisition was accounted for under the pooling of
interests method of accounting. The Company issued 465,480 shares of its Common
Stock, with an aggregate value of approximately $7,900 in connection with the
pooling transaction. The transactions completed under the purchase method of
accounting have been included in the consolidated financial statements from
their respective acquisition dates. The pooling transaction was not material and
accordingly, prior period financial statements have not been restated. Results
of the acquired company have been included in the consolidated financial
statements from the beginning of the second quarter of 2000.
In 1999, the Company completed the acquisition of eight healthcare
distribution businesses and one technology business, the most significant of
which were transactions accounted for under the purchase method of accounting;
General Injectables and Vaccines, Inc. ("GIV") (on December 30, 1998), a leading
independent direct marketer of vaccines and other injectables to office based
practitioners throughout the United States; and the Heiland Group GmbH
("Heiland") (on December 31, 1998), the largest direct marketer of healthcare
supplies to the medical, dental, and veterinarian office-based practitioners in
Germany.
GIV and Heiland had 1998 net sales of approximately $120,000 and $130,000,
respectively. The purchase price and resultant goodwill, which was being
amortized over 30 years, for these acquisitions was approximately $65,000 and
$47,400 for GIV, and $60,400 and $55,800 for Heiland, respectively (see Note 9
(a)). The acquisition agreements for GIV provide for additional cash
consideration of up to $6,000 per year through 2004, not to exceed $22,500 in
total, to be paid if certain profitability targets are met.
Additionally, during 1999, the Company acquired six other companies, which
had total sales in 1998 of approximately $74,000 that were accounted for under
the purchase method of accounting. Results of operations of the business
acquisitions accounted for under the purchase method of accounting have been
included in the financial statements commencing with the acquisition dates. The
total purchase price of the six companies acquired was approximately, $11,800.
The Company also acquired one company, which is being accounted for under the
pooling of interests method of accounting, which was not material. In connection
with this acquisition, the Company issued 189,833 shares of its Common Stock
with an aggregate market value of $6,400. The pooling transaction was not
material and accordingly prior period financial statements have not been
restated. Results of the pooling transaction acquisition have been included in
the consolidated financial statements from the beginning of the quarter in which
the acquisition occurred.
Summarized unaudited pro forma results of operations for the acquisitions
completed during fiscal 2001 and 2000, which were accounted for under the
purchase method of accounting, are not presented as the impact of reflecting the
Company's results of operations which assumed the acquisitions occurred as of
the beginning of the fiscal 2000 is not material.
41
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS-(CONTINUED)
The Company incurred certain direct costs in connection with the
aforementioned acquisitions accounted for under the pooling of interests method
of accounting including, in 1998, the H. Meer Dental Supply Co. Inc. ("Meer"), a
distributor of consumable dental supplies, and the integration of these and
certain other acquired businesses into the Company's infrastructure. These
costs, which have been classified as merger and integration costs, are as
follows:
Years ended
-----------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Direct transaction / merger costs (1) .................................. $ -- $ 585 $4,032
------ ----- --------
Integration costs:
Severance and other direct costs .................................. -- -- 3,437
Costs associated with the closure of distribution centers (2)...... -- -- 5,583
Long-lived asset write-off and impairment ......................... -- -- 415
------ ----- --------
Total integration costs ...................................... -- -- 9,435
------ ----- --------
Total merger and integration costs ................................ $ -- $ 585 $ 13,467
====== ===== ========
- ----------
<fn>
(1) Primarily investment banking and professional fees, including $3,533
related to Meer in 1999 (primarily legal fees resulting from the
acquisition).
(2) Primarily rent and consulting fees.
</fn>
42
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 6--BUSINESS ACQUISITIONS-(CONTINUED)
The following table shows the activity in the merger and integration
accruals:
Applied Adjustments
Balance at Against to Reflect Balance
Beginning Long-Lived Actual at End
of Year Provision Payments Assets (1) Cost of Year
---------- --------- ---------- ----------- ----------- -------
Year ended December 25, 1999:
Severance and other direct costs... $ 7,943 $ 4,721 $ (9,686) $ - $ (1,284) $ 1,694
Direct transaction and other
integration costs............ 14,049 8,340 (9,156) (6,524) 1,690 8,399
-------- -------- --------- -------- --------- --------
$ 21,992 $ 13,061 $ (18,842) $ (6,524) $ 406 $ 10,093
======== ======== ========= ======== ========= ========
Year ended December 30, 2000:
Severance and other direct costs... $ 1,694 $ - $ (947) $ - $ - $ 747
Direct transaction and other
integration costs............ 8,399 585 (4,844) - - 4,140
-------- -------- --------- -------- --------- --------
$ 10,093 $ 585 $ (5,791) $ - $ - $ 4,887
======== ======== ========= ======== ========= ========
Year ended December 29, 2001:
Severance and other direct costs... $ 747 $ - $ (382) $ - $ - $ 365
Direct transaction and other
integration costs............ 4,140 - (1,957) - - 2,183
-------- -------- --------- -------- --------- --------
$ 4,887 $ - $ (2,339) $ - $ - $ 2,548
======== ======== ========= ======== ========= ========
- ----------
<fn>
(1) To reflect specific write-offs relating to amounts previously provided.
</fn>
As a result of the acquisitions and integration of these and certain other
businesses into the Company's infrastructure, 870 employees were terminated
through December 25, 1999. Of the 870 terminated employees, 206 received
severance during 1999, 37 received severance during 2000, 11 received severance
during 2001, and 1 was owed severance at December 29, 2001.
NOTE 7--PLAN OF RESTRUCTURING
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this worldwide initiative included the
elimination of approximately 300 positions, including open positions, or about
5% of the total workforce, throughout all levels within the organization.
For the year ended December 30, 2000, the Company incurred one-time
restructuring costs of approximately $14,439 ($9,270 after taxes), consisting of
employee severance pay and benefits, facility closing costs representing
primarily lease termination and asset write-off costs, and outside professional
and consulting fees directly related to the restructuring plan.
43
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 7--PLAN OF RESTRUCTURING-(CONTINUED)
The following table shows amounts expensed and paid for restructuring costs
that were incurred and accrued in 2000:
Balance at Adjustments Balance at
December 30, to Reflect December 29,
2000 Payments Actual Cost 2001
------------ -------- ----------- ------------
Severance costs (1) .................... $ 4,007 $(4,106) $ 732 $ 633
Facility closing costs (2) ............. 3,684 (1,278) 239 2,645
Other professional and consulting costs. 1,157 (145) (971) 41
------- ------- ------- -------
$ 8,848 $(5,529) $ - $ 3,319
======= ======= ======= =======
- ----------
<fn>
(1) Represents salaries and related benefits for employees separated from the
Company.
(2) Represents costs associated with the closing of certain equipment branches
(primarily lease termination costs) and property and equipment write-offs.
</fn>
For the year ended December 30, 2000, 284 employees separated from the
Company and received severance payments in 2000. During 2001, 104 of these
employees received severance payments, and 6 were owed severance pay and
benefits at December 29, 2001. These employees were from nearly all functional
areas of the Company's operations.
NOTE 8--BANK CREDIT LINES
At December 29, 2001, certain subsidiaries of the Company had available
various short-term bank credit lines totaling approximately $39,850, expiring
through January 2004. Borrowings of $4,025 under these credit lines, bear
interest rates ranging from 4.00% to 7.25%, and were collateralized by accounts
receivable, inventory and property and equipment with an aggregate net book
value of $83,110 at December 29, 2001.
44
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 9--LONG-TERM DEBT
Long-term debt consists of:
Years ended
--------------------------
December 29, December 30,
2001 2000
------------ ------------
Private Placement Loans (a) .................................... $230,000 $230,000
Borrowings under Revolving Credit Agreement (b) ................ -- 10,660
Notes payable to banks, interest at 4.49% to 6.94%,
payable in quarterly installments ranging from $59 to $63
through 2019, semi-annual installments of $452 through 2002
and a lump sum payment of $5,423 on January 1, 2002 ....... 21,091 21,517
Various loans payable with interest, in varying
installments through 2010, uncollateralized ............... 2,517 5,682
Note payable, interest payable quarterly
at 5.28% plus a margin; balance due on January 1, 2002 ... 1,644 1,984
Capital lease obligations in various installments through
fiscal 2010; interest at 6.0% to 10.1% or varies with
prime rate (see Note 14 (b)) .............................. 2,140 2,460
-------- --------
Total .......................................................... 257,392 272,303
Less current maturities ........................................ 15,223 6,079
-------- --------
Total long-term debt ........................................... $242,169 $266,224
======== ========
(a) Private Placement Loans
On June 30, 1999, the Company completed a private placement transaction
under which it issued $130,000 in Senior Notes, the proceeds of which were used
for the permanent financing of its acquisitions of GIV and Heiland, as well as
repaying and retiring a portion of four uncommitted bank lines. The notes come
due on June 30, 2009 and bear interest at a rate of 6.94% per annum. Interest is
payable semi-annually.
On September 25, 1998, the Company completed a private placement
transaction under which it issued $100,000 in Senior Notes, the proceeds of
which were used to pay down amounts owed under its revolving credit facility.
Principal payments totaling $20,000 are due annually starting September 25, 2006
through 2010. The notes bear interest at a rate of 6.66% per annum. Interest is
payable semi-annually.
(b) Revolving Credit Agreement
On August 15, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum available borrowings
to $150,000 from $100,000 and extended the term of the agreement to August 15,
2002. The interest rate on any borrowings under the agreement is based on prime,
or LIBOR, as defined in the agreement, which were 4.75%, and 4.84%,
respectively, at December 29, 2001. There were no borrowings outstanding at
December 29, 2001. The agreement provides for a sliding scale fee ranging from
0.1% to 0.3%, based upon certain financial ratios, on any unused portion of the
commitment. The agreement also provides, among other things, that the Company
will maintain, on a consolidated basis, as defined, a minimum tangible net
worth, current cash flow, and interest coverage ratios, a maximum leverage
ratio, and contains restrictions relating to annual dividends in excess of $500,
guarantees of subsidiary debt, investments in subsidiaries, mergers and
acquisitions, liens, capital expenditures, certain changes in ownership and
45
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 9--LONG-TERM DEBT--(CONTINUED)
employee and shareholder loans. The Company expects to renew the revolving line
of credit prior to its scheduled termination in August 2002.
As of December 29, 2001, the aggregate amounts of long-term debt maturing
in each of the next five years are as follows: 2002 - $15,223; 2003 - $1,895;
2004 - $1,210; 2005 - $703; 2006 - $20,746.
NOTE 10--TAXES ON INCOME
Taxes on income are based on income before taxes on income, minority
interest and equity in earnings (losses) of affiliates as follows:
Years ended
---------------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Domestic ................ $ 140,675 $ 102,777 $ 84,877
Foreign ................. (324) (6,243) 4,906
--------- --------- ---------
Total .............. $ 140,351 $ 96,534 $ 89,783
========= ========= =========
The provision (benefit) for taxes on income was as follows:
Years ended
------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Current tax expense:
U.S. Federal ................. $ 46,225 $ 33,989 $ 28,137
State and local .............. 3,806 2,882 5,579
Foreign ...................... 1,607 614 1,860
-------- -------- --------
Total current ........... 51,638 37,485 35,576
-------- -------- --------
Deferred tax expense (benefit):
U.S. Federal ................. (162) (1,046) 954
State and local .............. 234 90 (1,338)
Foreign ...................... 220 (379) 397
-------- -------- --------
Total deferred .......... 292 (1,335) 13
-------- -------- --------
Total provision ......... $ 51,930 $ 36,150 $ 35,589
======== ======== ========
46
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 10--TAXES ON INCOME--(CONTINUED)
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
Years ended
---------------------------
December 29, December 30,
2001 2000
------------ ------------
Current deferred tax assets:
Inventory, premium coupon redemptions and
accounts receivable valuation allowances ................... $ 14,433 $ 11,824
Uniform capitalization adjustments to inventories ............... 3,578 3,750
Other accrued liabilities ....................................... 7,740 5,427
-------- --------
Total current deferred tax asset ........................... 25,751 21,001
-------- --------
Non-current deferred tax asset (liability):
Property and equipment .......................................... (12,402) (8,459)
Provision for other long-term liabilities ....................... (5,198) (3,001)
Net operating loss carryforward ................................. 150 156
Net operating losses of foreign subsidiaries .................... 2,697 2,863
-------- --------
Total non-current deferred tax liability ................... (14,753) (8,441)
Valuation allowance for non-current deferred tax assets (1) (1,850) (2,686)
-------- --------
Net non-current deferred tax liabilities ........................ (16,603) (11,127)
-------- --------
Net deferred tax asset ............................................... $ 9,148 $ 9,874
======== ========
- ----------
<fn>
(1) Primarily relates to operating losses of foreign subsidiaries.
</fn>
The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior years to realize the tax benefit for deductible
temporary differences. The non-current deferred liability is included in Other
liabilities on the Consolidated Balance Sheets.
At December 29, 2001, the Company has net operating loss carryforwards for
Federal income tax purposes of $389, which are available to offset future
Federal taxable income through 2010. Foreign net operating losses totaled $8,096
at December 29, 2001. Such losses can be utilized against future foreign income.
These losses expire between 2002 and 2011 with $1,674 expiring in 2002.
47
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 10--TAXES ON INCOME--(CONTINUED)
The tax provisions differ from the amount computed using the Federal
statutory income tax rate as follows:
Years ended
------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Provision at Federal statutory rate .................. $ 49,122 $ 33,785 $ 31,425
State income taxes, net of Federal income tax effect.. 2,626 1,874 2,757
Net foreign losses for which no tax benefits
are available ................................... 597 1,009 196
Foreign income taxed at other than the Federal
statutory rate .................................. (6) 448 38
Reduction in valuation allowance ..................... (210) (1,011) --
Non-deductible merger and integration costs .......... -- 205 1,329
Other ................................................ (199) (160) (156)
-------- -------- --------
Income tax provision ................................. $ 51,930 $ 36,150 $ 35,589
======== ======== ========
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been and
will continue to be reinvested. These earnings could become subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the foreign subsidiaries. It is not practicable to determine the amount
of additional tax, if any, that might be payable on the foreign earnings;
however, the Company believes that foreign tax credits would substantially
offset any U.S. tax. At December 29, 2001, the cumulative amount of reinvested
earnings was approximately $6,073.
NOTE 11--FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
(a) Financial Instruments
To reduce its exposure to fluctuations in foreign currencies, the Company
is party to foreign currency forward contracts with major financial
institutions, which are used to hedge the foreign currency market exposures
underlying certain inter-company debt and certain forecasted transactions with
foreign vendors.
As of December 29, 2001, the Company had outstanding foreign currency
forward contracts aggregating $46,732, of which, $44,077 related to
inter-company debt and $2,655 related to the purchase and sale of merchandise
from foreign vendors. The contracts hedge against currency fluctuations of
British Pounds ($24,145), Euros ($21,071), Australian dollars ($1,294), and New
Zealand dollars ($222). As of December 29, 2001, the fair value of these
contracts, which are determined by quoted market prices and expire through
November 2002, was not material. For the year ended December 29, 2001, the
Company recognized an immaterial loss relating to its foreign currency forward
contracts.
While the Company is exposed to credit loss in the event of nonperformance
by the counter parties of these contracts, the Company does not anticipate
nonperformance by the counter parties. The Company does not require collateral
or other security to support these financial instruments.
48
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS--(CONTINUED)
(b) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments. The Company places its
short-term cash investments with high credit quality financial institutions and,
by policy, limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its dispersion across different types
of healthcare professionals and geographic areas. The Company maintains an
allowance for losses based on the expected collectability of all receivables.
NOTE 12--SEGMENT AND GEOGRAPHIC DATA
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment, which is comprised of the
Company's dental, medical, veterinary and international business groups,
distributes healthcare products (primarily consumable) and services to
office-based healthcare practitioners and professionals in the combined North
American and international markets. Products, which are similar for each
business group, are maintained and distributed from strategically located
distribution centers. The technology segment consists primarily of the Company's
practice management software business and certain other value-added products and
services that are distributed primarily to healthcare professionals in the North
American market.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on operating income.
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained. The following table presents information about the
Company's business segments:
Years ended
-------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Net Sales:
Healthcare distribution (1):
Dental ........................................ $ 1,106,580 $ 1,073,889 $ 1,047,259
Medical ....................................... 929,825 794,880 715,210
Veterinary .................................... 52,744 56,421 52,050
International (2) ............................. 398,071 389,946 403,137
----------- ----------- -----------
Total healthcare distribution............. 2,487,220 2,315,136 2,217,656
Technology (3) ..................................... 71,023 66,585 66,888
----------- ----------- -----------
Total ......................................... $ 2,558,243 $ 2,381,721 $ 2,284,544
=========== =========== ===========
- ----------
<fn>
(1) Consists of consumable products, small equipment, laboratory products,
large dental equipment, branded and generic pharmaceuticals, surgical
products, diagnostic tests, infection control and vitamins.
(2) Consists of products sold in Dental, Medical and Veterinary markets,
primarily in Europe.
(3) Consists of practice management software and other value-added products and
services, which are distributed primarily to healthcare professionals in
the North American market.
</fn>
49
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 12--SEGMENT AND GEOGRAPHIC DATA--(CONTINUED)
Years ended
--------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Operating Income:
Healthcare distribution (includes merger and integration and
restructuring costs of $0, $14,081, and $13,467, respectively) .. $ 123,767 $ 88,872 $ 80,467
Technology (includes merger and integration and restructuring
costs of $0, $943, and $0, respectively) ........................ 23,983 23,717 25,298
---------- ---------- ----------
Total ................................................................ $ 147,750 $ 112,589 $ 105,765
========== ========== ==========
Interest Income:
Healthcare distribution .............................................. $ 9,435 $ 5,231 $ 7,811
Technology ........................................................... 2,619 4,424 1,534
---------- ---------- ----------
Total ................................................................ $ 12,054 $ 9,655 $ 9,345
========== ========== ==========
Interest Expense:
Healthcare distribution .............................................. $ 18,574 $ 22,611 $ 24,785
Technology ........................................................... 726 1,174 376
---------- ---------- ----------
Total ................................................................ $ 19,300 $ 23,785 $ 25,161
========== ========== ==========
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Total Assets:
Healthcare distribution .............................................. $1,355,681 $1,188,098 $1,134,312
Technology ........................................................... 88,590 97,058 110,563
---------- ---------- ----------
Total ................................................................ $1,444,271 $1,285,156 $1,244,875
========== ========== ==========
Depreciation and Amortization:
Healthcare distribution .............................................. $ 34,080 $ 32,465 $ 26,355
Technology ........................................................... 1,562 1,297 1,918
---------- ---------- ----------
Total ................................................................ $ 35,642 $ 33,762 $ 28,273
========== ========== ==========
Capital Expenditures:
Healthcare distribution .............................................. $ 45,289 $ 28,344 $ 32,639
Technology ........................................................... 838 1,399 1,910
---------- ---------- ----------
Total ................................................................ $ 46,127 $ 29,743 $ 34,549
========== ========== ==========
50
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 12--SEGMENT AND GEOGRAPHIC DATA--(CONTINUED)
The following table reconciles segment totals to consolidated totals as of,
and for the years ended December 29, 2001, December 30, 2000, and December 25,
1999:
2001 2000 1999
----------- ----------- -----------
Total Assets:
Total assets for reportable segments ........................... $ 1,444,271 $ 1,285,156 $ 1,244,875
Receivables due from healthcare distribution segment ........... (57,685) (46,494) (36,593)
Receivables due from technology segment ........................ (1,158) (7,594) (4,180)
----------- ----------- -----------
Consolidated total assets ................................. $ 1,385,428 $ 1,231,068 $ 1,204,102
=========== =========== ===========
Interest Income:
Total interest income for reportable segments .................. $ 12,054 $ 9,655 $ 9,345
Interest on receivables due from healthcare distribution segment (1,737) (2,887) (1,369)
Interest on receivables due from technology segment ............ (239) (489) (199)
----------- ----------- -----------
Total consolidated interest income ........................ $ 10,078 $ 6,279 $ 7,777
=========== =========== ===========
Interest Expense:
Total interest expense for reportable segments ................. $ 19,300 $ 23,785 $ 25,161
Interest on payables due to healthcare distribution segment .... (239) (489) (199)
Interest on payables due to technology segment ................. (1,737) (2,887) (1,369)
----------- ----------- -----------
Total consolidated interest expense ....................... $ 17,324 $ 20,409 $ 23,593
=========== =========== ===========
The following table presents information about the Company by geographic
area as of, and for the years ended December 29, 2001, December 30, 2000, and
December 25, 1999. Revenues by geographic area are based on the respective
locations of the Company's subsidiaries. No individual country, except for the
United States, generated net sales greater than 10% of consolidated net sales.
There were no material amounts of sales or transfers among geographic areas and
there were no material amounts of United States export sales.
2001 2000 1999
------------------------ ------------------------ ------------------------
Long-Lived Long-Lived Long-Lived
Net Sales Assets Net Sales Assets Net Sales Assets
---------- ---------- ---------- ---------- ---------- ----------
North America ....... $2,179,645 $ 296,858 $2,010,398 $ 271,188 $1,899,188 $ 249,524
Europe and other .... 378,598 109,126 371,323 115,493 385,356 132,216
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Total... $2,558,243 $ 405,984 $2,381,721 $ 386,681 $2,284,544 $ 381,740
========== ========== ========== ========== ========== ==========
The Company's subsidiary located in Germany had long-lived assets of
$71,825, $77,995, and $88,050 at December 29, 2001, December 30, 2000, and
December 25, 1999, respectively.
51
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 13--STOCKHOLDERS' EQUITY
(a) Common Stock Purchase Rights
On November 30, 1998, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"), and declared a dividend under the
Rights Plan of one common stock purchase right (a "Right") on each outstanding
share of the Company's Common Stock. Until the occurrence of certain events,
each share of Common Stock that is issued will also have a Right attached to it.
The Rights provide, in substance, that should any person or group acquire 15% or
more of the outstanding Common Stock of the Company after the date of adoption
of the Rights Plan, each Right, other than Rights held by the acquiring person
or group, would entitle its holder to purchase a certain number of shares of
Common Stock for 50% of the then-current market value of the Common Stock.
Unless a 15% acquisition has occurred, the Company may redeem the Rights at any
time prior to the termination date of the Rights Plan. This Right to purchase
the Common Stock at a discount will not be triggered by a person's or group's
acquisition of 15% or more of the Common Stock pursuant to a tender or exchange
offer which is for all outstanding shares at a price and on terms that the Board
of Directors determines (prior to acquisition) to be adequate and in the
stockholders' best interests. In adition, this Right will not be triggered by
the positions of existing shareholders.
Certain business combinations with an acquiring person or its affiliates
will trigger an additional feature of the Rights. Each Right, (other than Rights
held by the acquiring person or group), will entitle its holder to purchase a
certain number of shares of the Common Stock of the acquiring person at a price
equal to 50% of the market value of such shares at the time of exercise.
Initially, the Rights will be attached to, and trade with, the certificates
representing the Company's outstanding shares of Common Stock and no separate
certificates representing the Rights will be distributed. The Rights will become
exercisable only if a person or group acquires, (or commences a tender or
exchange offer for), 15% or more of the Company's Common Stock.
The Board of Directors may, at its option redeem all but not less than all
of the then outstanding Rights at a redemption price of $0.01 per Right at any
time prior to the earlier of (a) any person or group acquiring 15% or more of
the Company's Common Stock or (b) the final expiration date of November 30,
2008.
(b) Stock Options
The Company established the 1994 Stock Option Plan for the benefit of
certain employees. As amended in June 2001, pursuant to this plan the Company
may issue up to approximately 4,445,000 shares of its Common Stock. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of Common Stock may be covered by Class A options.
Both incentive and non-qualified stock options may be issued under the Plan.
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the Company's
initial public offering which was on November 3, 1995. The exercise price of all
Class B options issued has been equal to the market price on the date of grant
and accordingly no compensation cost has been recognized. Substantially all
Class B options become exercisable up to the tenth anniversary of the date of
issuance, subject to acceleration upon termination of employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
52
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 13--STOCKHOLDERS' EQUITY - (CONTINUED)
10 years, of each option is determined by the plan committee at the time of the
grant. During 2001, 2000, and 1999, 12,000, 0, and 13,000, options,
respectively, were granted to certain non-employee directors at exercise prices,
which were equal to the market price on the date of grant.
Additionally, in 1997 as a result of the Company's acquisition of Sullivan
Dental Products Inc. and Micro Bio-Medics, Inc., the Company assumed their
respective stock option plans (the "Assumed Plans"). Options granted under the
Assumed Plans of 1,218,000 and 1,117,000, respectively are exercisable for up to
ten years from the date of grant at prices not less than the fair market value
of the respective acquirees' common stock at the date of grant, on a converted
basis.
A summary of the status of the Company's two fixed stock option plans and
the Assumed Plans, and the related transactions is presented below:
Years ended
-------------------------------------------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning
of year ........... 4,650,722 $ 24.59 5,439,340 $ 23.53 4,434,173 $ 25.89
Granted ................ 883,600 28.73 93,500 14.77 1,447,935 17.35
Exercised .............. (736,923) 19.21 (591,245) 11.00 (226,304) 36.22
Forfeited .............. (151,128) 30.26 (290,873) 29.39 (216,464) 36.76
--------- --------- ---------
Outstanding at end
of year ........... 4,646,271 $ 26.04 4,650,722 $ 24.59 5,439,340 $ 23.53
========= ========= =========
Options exercisable at
year end .......... 3,722,164 $ 26.53 3,708,213 $ 25.98 3,593,439 $ 23.62
========= ========= =========
The following table summarizes information about stock options outstanding
at December 29, 2001:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
Range of Exercise Prices
$ 4.21 to $ 16.00 1,117,524 6.5 $ 12.05 875,127 $ 12.00
$ 16.13 to $ 27.00 1,128,233 6.2 $ 22.46 1,081,265 $ 22.49
$ 28.63 to $ 35.71 1,387,390 7.9 $ 30.69 756,019 $ 32.36
$ 36.08 to $ 46.00 1,013,124 6.4 $ 39.09 1,009,753 $ 39.10
--------- ---------
4,646,271 6.8 $ 26.04 3,722,164 $ 26.53
========= =========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
53
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 13--STOCKHOLDERS' EQUITY - (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company and its acquired
subsidiaries had accounted for its employee stock options under the fair value
method of FAS 123. The weighted average fair value of options granted during
2001, 2000, and 1999 was $17.05, $8.85, and $9.85, respectively. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2001,
2000, and 1999: risk-free interest rates of 5.0% for 2001, 6.3% for 2000, and
5.6% for 1999; volatility factor of the expected market price of the Company's
Common Stock of 48.0% for 2001, 45.1% for 2000, and 45.8% for 1999, assumed
dividend yield of 0% for all years and a weighted-average expected life of the
option of 10 years.
Under the accounting provisions of FAS 123, the Company's net income and
net income per common share would have been adjusted to the pro forma amounts
indicated below:
Years ended
------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Net income ........................ $ 80,728 $ 48,630 $ 43,012
Net income per common share:
Basic ........................ $ 1.91 $ 1.18 $ 1.06
Diluted ...................... $ 1.85 $ 1.16 $ 1.04
(c) Employee Benefit Plans
Employee Stock Ownership Plan (ESOP)
In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplements the
Company's Profit Sharing Plan, whereby a percentage, as defined, of the profit
sharing allocation granted to eligible employees is provided in shares of the
Company's Common Stock. Charges to operations related to this plan were $2,378,
$2,537, and $2,283 for 2001, 2000, and 1999, respectively, based on the
prevailing market price of the Company's Common Stock on the date of issuance.
Under this plan, the Company issued 61,997, 121,253, and 101,233 shares of the
Company's Common Stock to the trust in 2001, 2000, and 1999, to satisfy the
2000, 1999, and 1998 contribution, respectively. The Company expects to fund the
2001 accrued contribution in 2002 with shares of the Company's Common Stock. As
of April 1, 1998 the Company's ESOP was merged into its 401(k) plan. Shares of
the Company's Common Stock are held in trust by the 401(k) plan.
Profit Sharing Plan
Prior to April 1, 1998, the Company had qualified contributory and
noncontributory 401(k) and profit sharing plans, respectively, for eligible
employees. As of April 1, 1998, the Company's profit sharing plan was merged
into its 401(k) plan. Assets of the profit sharing plan are now held in
self-directed accounts within the 401(k) plan. Contributions to the plans were
determined by the Board of Directors and charged to operations during 2001,
2000, and 1999 amounted to $4,099, $7,305, and $6,517, respectively.
54
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 13--STOCKHOLDER'S EQUITY -- (CONTINUED)
The Company provides a matching 401(k) contribution of 100% of the
participants' contributions with respect to the first 7% of the employees' base
compensation. Forfeitures attributable to participants who leave the Company
before becoming fully vested are used by the Company to reduce the matching
contribution.
Supplemental Executive Retirement Plan
In 1994, the Company instituted an unfunded non-qualified supplemental
executive retirement plan for eligible employees. The increases in plan value
that were charged to operations, were $426, $360, and $617 for 2001, 2000, and
1999, respectively.
NOTE 14--COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2013. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 29, 2001 are as follows:
2002.......................... $ 19,866
2003.......................... 17,087
2004.......................... 15,300
2005.......................... 13,591
2006.......................... 10,547
Thereafter.................... 30,167
---------
Total minimum lease payments.. $ 106,558
=========
The future minimum annual rental payments exclude the rent obligations
associated with the corporate headquarters as the Company purchased this
facility on January 10, 2002.
Total rental expense for 2001, 2000, and 1999 was $26,085, $29,730, and
$25,798, respectively.
55
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 14--COMMITMENTS AND CONTINGENCIES --(CONTINUED)
(b) Capital Leases
The Company leases certain equipment under capital leases. The following is
a schedule of approximate future minimum annual lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at December 29, 2001:
2002 ................................................ $ 919
2003 ................................................ 556
2004 ................................................ 262
2005 ................................................ 163
2006 ................................................ 154
Thereafter .......................................... 585
-------
Total minimum lease payments ........................ 2,639
Less: Amount representing interest at 6.0% to 10.1%.. (499)
-------
$ 2,140
=======
(c) Litigation
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of December 29, 2001, the
Company was named a defendant in approximately 72 product liability cases. Of
these claims, 56 involve claims made by healthcare workers who claim allergic
reaction relating to exposure to latex gloves. In each of these cases, the
Company acted as a distributor of both brand name and "Henry Schein" private
brand latex gloves, which were manufactured by third parties. To date, discovery
in these cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
In Texas District Court, Travis County, the Company and one of its
subsidiaries are defendants in a matter entitled Shelly E. Stromboe & Jeanne N.
Taylor, on Behalf of Themselves and All Other Similarly Situated vs. Henry
Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc., Case No. 98-00886.
This complaint alleges among other things, negligence, breach of contract, fraud
and violations of certain Texas commercial statutes involving the sale of
certain practice management software products sold prior to 1998 under the Easy
Dental(R) name. In October 1999, the Court, on motion, certified both a
Windows(R) Sub-Class and a DOS Sub-Class to proceed as a class action pursuant
to Tex. R.Civ. P.42. It is estimated that 5,000 Windows(R) customers and 15,000
DOS customers could be covered by the judge's ruling. In November of 1999, the
Company filed an interlocutory appeal of the District Court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the District Court's certification order. On January 5, 2001, the
Company filed a Petition for Review in the Texas Supreme Court asking this court
to find "conflicts jurisdiction" to permit review of the District Court's
certification order, which appeal is now pending. On April 5, 2001 the Texas
Supreme Court requested that the parties file briefs on the merits.
56
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 14--COMMITMENTS AND CONTINGENCIES --(CONTINUED)
On August 23, 2001, the Texas Supreme Court dismissed the Company's
Petition for Review based on lack of conflicts jurisdiction. The Company filed a
motion for rehearing on September 24, 2001 requesting that the Texas Supreme
Court reconsider and reverse its finding that it is without conflicts
jurisdiction to review the case. On November 8, 2001, the Texas Supreme Court
granted the motion for rehearing and withdrew its order of August 23, 2001. The
Texas Supreme Court heard oral argument on February 6, 2002. Pending a decision
by the Supreme Court on the Petition for Review, a trial on the merits,
currently scheduled for July, 2002, will be stayed.
In February 2002, the Company was served with a summons and complaint in an
action commenced in the Superior Court of New Jersey, Law Division, Morris
County, entitled West Morris Pediatrics, P.A. v. Henry Schein, Inc., doing
business as Caligor, no. MRSL-421-02. The complaint by West Morris Pediatrics
purports to be on behalf of a nationwide class, but there has been no court
determination that the case may proceed as a class action. Plaintiff seeks to
represent a class of all physicians, hospitals and other healthcare providers
throughout New Jersey and across the United States. This complaint alleges,
among other things, breach of oral contract, breach of implied covenant of good
faith and fair dealing, violation of the New Jersey Consumer Fraud Act, unjust
enrichment, and conversion. The Company has not yet submitted its response to
this complaint. The Company intends to vigorously defend itself against this
claim, as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
(d) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2006 (except for a lifetime consulting agreement with a principal
stockholder which provides for initial compensation of $283 per year, increasing
$25 every fifth year beginning in 2002). The agreements provide for varying base
aggregate annual payments of approximately $4,946 per year, which decrease
periodically to approximately $867 per year. In addition, some agreements have
provisions for incentive and additional compensation.
57
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes amounted to the following:
Years ended
------------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Interest............ $ 17,541 $ 19,810 $ 19,528
Income taxes........ $ 37,222 $ 28,219 $ 23,266
The fair value of assets acquired through business acquisitions is
indicated in the following table:
Years ended
------------------------------------------
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Fair value of assets
acquired, excluding cash ........ $ 10,074 $ 6,838 $239,278
Less liabilities assumed
and created upon acquisition .... 1,486 -- 106,726
-------- -------- --------
Net cash paid ........................ $ 8,588 $ 6,838 $132,552
======== ======== ========
58
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
NOTE 16--QUARTERLY INFORMATION (UNAUDITED)
The following presents certain unaudited quarterly financial data:
Quarters ended
---------------------------------------------------
March 31, June 30, September 29, December 29,
2001 2001 2001 2001
--------- -------- ------------- ------------
Net Sales ................................ $593,895 $606,285 $659,774 $698,289
Gross profit ............................. 159,357 166,892 178,856 194,219
Operating income ......................... 27,583 35,272 41,875 43,020
Net income ............................... 14,132 20,910 25,195 27,136
Net income per share:
Basic ............................... $ 0.34 $ 0.49 $ 0.59 $ 0.64
Diluted ............................. $ 0.33 $ 0.48 $ 0.58 $ 0.62
Quarters ended
---------------------------------------------------
March 25, June 24, September 23, December 30,
2000 2000 2000 2000
--------- -------- ------------- ------------
Net Sales ................................ $554,139 $568,631 $603,319 $655,632
Gross profit ............................. 149,116 158,815 161,951 178,019
Operating income ......................... 23,477 30,982 28,944 29,186
Net income ............................... 11,398 16,381 16,238 12,732
Net income per share:
Basic ............................... $ 0.28 $ 0.40 $ 0.39 $ 0.31
Diluted ............................. $ 0.28 $ 0.39 $ 0.39 $ 0.30
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, timing of purchases, special promotional campaigns, fluctuations in
exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 2000, the Company recorded non-recurring
after tax losses on business disposals relating to the sale of its United
Kingdom practice management software development business unit and sale of its
50% interest in dental anesthetic manufacturer, HS Pharmaceutical of
approximately $1,600 and $1,900, respectively. Restructuring charges of
approximately $5,400 and $9,000 pretax ($3,400 and $5,900, after taxes) were
recorded in the third and fourth quarters of 2000, respectively. Merger and
integration charges of approximately $600 were recorded in the first quarter of
2000.
Diluted earnings per share calculations for each quarter include the effect
of stock options, when dilutive to the quarter's average number of shares
outstanding for each period, and therefore the sum of the quarters may not
necessarily be equal to the full year earnings per share amount.
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 2002
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Company's definitive 2002 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
from the Company's definitive 2002 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the Company's definitive 2002 Proxy Statement to be filed pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as a part
of this report are listed on the index on page 28.
2. Financial Statement
Schedules Schedule II No other schedules are required.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
None.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Melville, State of New York, on March 19, 2002.
Henry Schein, Inc.
By: /s/ STANLEY M. BERGMAN
Stanley M. Bergman Chairman,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
- ----------------------- --------------------------------------- --------------
/s/ STANLEY BERGMAN Chairman, Chief Executive Officer, March 19, 2002
- ----------------------- President and Director
Stanley M. Bergman (principal executive officer)
/s/ STEVEN PALADINO Executive Vice President, Chief March 19, 2002
- ----------------------- Financial Officer and Director
Steven Paladino (principal financial and accounting
officer)
/s/ JAMES P. BRESLAWSKI Director March 19, 2002
- -----------------------
James P. Breslawski
/s/ GERALD A. BENJAMIN Director March 19, 2002
- -----------------------
Gerald A. Bejamin
/s/ LEONARD A. DAVID Director March 19, 2002
- -----------------------
Leonard A. David
/s/ MARK. E. MLOTEK Director March 19, 2002
- -----------------------
Mark E. Mlotek
/s/ BARRY ALPERIN Director March 19, 2002
- -----------------------
Barry Alperin
/s/ PAMELA JOSEPH Director March 19, 2002
- -----------------------
Pamela Joseph
/s/ DONALD J. KABAT Director March 19, 2002
- -----------------------
Donald J. Kabat
/s/ PHILIP LASKAWY Director March 19, 2002
- -----------------------
Philip Laskawy
/s/ NORMAN MATTHEWS Director March 19, 2002
- -----------------------
Norman Matthews
/s/ MARVIN H. SCHEIN Director March 19, 2002
- -----------------------
Marvin H. Schein
/s/ IRVING SHAFRAN Director March 19, 2002
- -----------------------
Irving Shafran
61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Henry Schein, Inc.
Melville, New York
The audits referred to in our report dated March 1, 2002 relating to the
consolidated financial statements of Henry Schein, Inc. and subsidiaries, which
is contained in ITEM 8 of the Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based upon our
audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
March 1, 2002
New York, New York
62
Exhibit No. Description Page No.
================================================================================
Unless otherwise indicated, exhibits are incorporated by reference to the
correspondingly numbered exhibits in the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528).
3.1 Form of Amended and Restated Articles of Incorporation.
3.2 Amendments dated November 12, 1997 to Amended and Restated
Articles of Incorporation (Incorporated by reference to Exhibit
3.3 to HSI's Annual Report on Form 10-K for the fiscal year ended
December 27, 1997).
3.3 Amendment dated June 16, 1998 to Amended and Restated Articles of
Incorporation (Incorporated by reference to Exhibit 3.3 to Henry
Schein, Inc.'s Registration on Form S-3, Reg. No. 333-59793).
3.4 Form of By-laws.
3.5 Amendments to Amended and Restated By-laws adopted July 15,
1997.(Incorporated by reference to Exhibit 3.3 to Henry Schein,
Inc.'s Registration Statement on Form S-4, Reg. No. 33-36081).
10.1 Amended and Restated HSI Agreement (the "HSI Agreement"),
effective as of February 16, 1994, among the Company, Marvin H.
Schein, the Trust established by Marvin H. Schein under Trust
Agreement dated September 9, 1994, the Charitable Trust
established by Marvin H. Schein under Trust Agreement dated
September 12, 1994, the Estate of Jacob M. Schein, the Trusts
established by Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994, the Trust established by Martin
Sperber under Trust Agreement dated September 19, 1994, the Trust
established by Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Pamela Schein, Pamela Joseph, Martin Sperber,
Stanley M. Bergman, Steven Paladino and James P. Breslawski
(collectively, the "HSI Parties").
10.2 HSI Registration Rights Agreement dated September 30, 1994, among
the Company, Pamela Schein, the Trust established by Pamela
Joseph under Trust Agreement dated February 9, 1994, Marvin H.
Schein, the Trust established by Marvin H. Schein under Trust
Agreement dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated September 19, 1994,
the Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, Martin Sperber, the Trust
established by Martin Sperber under Trust Agreement dated
September 19, 1994, Stanley M. Bergman and the Trust.
10.3 Letter Agreement dated September 30, 1994 to the Company from
Marvin H. Schein, Pamela Joseph, and Pamela Schein.
10.4 Release to the HSI Agreement dated September 30, 1994.
10.5 Separation Agreement dated as of September 30, 1994 by and
between the Company, Schein Pharmaceutical, Inc. and Schein
Holdings, Inc.
63
Exhibit No. Description Page No.
================================================================================
10.6 Restructuring Agreement dated September 30, 1994 among Schein
Holdings, Inc., the Company, the Estate of Jacob M. Schein,
Marvin H. Schein, the Trust established by Marvin H. Schein under
Trust Agreement dated December 31, 1993, the Trust established by
Marvin H. Schein under Trust Agreement dated September 9, 1994,
the Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, Pamela Schein, Pamela Joseph,
the Trust established by Pamela Joseph under Trust Agreement
dated February 9, 1994 the Trusts under Articles Third and
Fourth of the Will of Jacob M. Schein; Stanley M. Bergman, the
Trust established by Stanley M. Bergman under Trust Agreement
dated September 15, 1994, Martin Sperber, the Trust established
by Martin Sperber under Trust Agreement dated December 31, 1993,
and the Trust established by Martin Sperber under Trust Agreement
dated September 19, 1994.
10.7 Agreement and Plan of Corporate Separation and Reorganization
dated as of September 30, 1994 among Schein Holdings, Inc., the
Company, the Estate of Jacob M. Schein, Marvin H. Schein, the
Trust established by Marvin H. Schein under Trust Agreement dated
December 31, 1993, the Trust established by Marvin H. Schein
under Trust Agreement dated September 9, 1994, the Charitable
Trust established by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, the Trust established Article
Fourth of the Will of Jacob M. Schein for the benefit of Pamela
Schein and her issue under Trust Agreement dated September 29,
1994, Pamela Joseph, the Trust established by Pamela Joseph under
Trust Agreement dated February 9, 1994, the Trust established by
Pamela Joseph under Trust Agreement dated September 28, 1994 and
the Trusts under Articles Third and Fourth of the Will of Jacob
M. Schein.
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended and
restated effective as of June 6, 2001.**
10.9 Henry Schein, Inc. Amendment and Restatement of the Supplemental
Executive Retirement Plan. **
10.11 Consulting Agreement dated September 30, 1994 between the
Company and Marvin H. Schein.**
10.13 Amended and Restated Stock Issuance Agreement dated as of
December 24, 1992 between the Company and Stanley M. Bergman.**
10.14 Stock Issuance Agreements dated December 27, 1994 between the
Company and various executive officers.**
64
Exhibit No. Description Page No.
================================================================================
10.15 Form of Henry Schein, Inc. Non-Employee Director Stock Option
Plan.**
10.16 Amended Credit Agreement dated December 15, 1995 among the
Company, The Chase Manhattan Bank, N.A., Cooperatieve Centrale
Raiffeisen Boerenleenbank, B.A. , New York Branch, Natwest Bank,
"Rabobank Nederland", N.A. and European American Bank
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (Commission File No. 33-96528)).
10.17 First Amendment to the Amended Credit Agreement dated December
15, 1995 among the Company, The Chase Manhattan Bank, N.A.,
Natwest Bank, N.A., Rabobank Nederland, and European American
Bank.
10.18 Amendments to the Company's 1994 Stock Option Plan effective as
of July 15, 1997.
10.19 Revolving Credit Agreement (the ("Credit Agreement") dated as of
January 31, 1997 among the Company, The Chase Manhattan Bank,
Fleet Bank, N.A., Cooperatieve Centrale Raiffeisen
Boerenleenbank, B.A., "Rabobank Nederland", New York Branch and
European American Bank (Incorporated by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-1
Commission File No. 33-96528)).
10.20 Employment Agreement dated March 7, 1997, between Bruce J. Haber
and the Company (Incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-30615)).
10.21 Termination of Employment Agreement, dated March 7, 1997 as
revised, between Bruce J. Haber and the Company (Incorporated by
reference to Exhibit 10.92 to the Company's Registration
Statement on Form S-4 (Registration No. 333-30615)).
10.22 Amendment dated as of June 30, 1997 to Credit Agreement
(Incorporated by reference to Exhibit 10.103 to the Company's
Registration Statement on Form S-4 (Commission File No.
333-36081)).
10.23 Amendment No. 2 and Supplement to Revolving Credit Agreement,
dated August 15, 1997 (Incorporated by reference to Exhibit
10.104 to the Company's Registration Statement on Form S-4
(Commission File No. 333-36081)).
10.24 Lease Agreement dated December 23, 1997, between First
Industrial Pennsylvania, L.P. and the Company (Incorporated by
reference to Exhibit 10.103 to the Company's 1998 Annual Report
on Form 10K).
10.25 Amendment dated as of May 15, 1998 to Credit Agreement
(Incorporated by reference to Exhibit 10.108 to the Company's
Quarterly Report on Form 10Q for the quarter ended June 27,
1998).
10.26 Henry Schein Inc., Senior Executive Group 2002 Performance
Incentive Plan Summary. **+
10.27 Stock Purchase Agreement by and among the Company, New River
Management Company, L.L.C., Chiron Corporation and Biological &
Popular Culture Inc., dated as of December 8, 1998 (Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated December 31, 1998).
65
Exhibit No. Description Page No.
================================================================================
10.28 Amendment No. 1, dated as of December 30, 1998, to the Stock
Purchase Agreement by and among the Company, New River Management
Company, L.L.C., Chiron Corporation and Biological & Popular
Culture Inc., dated as of December 8, 1998. (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated December 31, 1998).
10.29 Rights Agreement dated as of November 30, 1998, between the
Company, and Continental Stock Transfer and Trust Co.
(Incorporated by reference to Exhibit to the Company's Current
Report on Form 8-K, dated November 30, 1998).
10.30 Form of the Note Purchase Agreements between the Company and the
Purchasers listed on Schedule A thereto relating to an aggregate
of $130,000,000 in principal amount of the Company's 6.94% Senior
Notes due June 30, 2009 (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 26, 1999).
10.31 Form of Change in Control Agreements dated July 1, 2001 between
the Company and Gerald Benjamin, James Breslawski, Leonard David,
Mark Mlotek, Steven Paladino, Michael Racioppi and Michael Zack,
respectively. **+
10.32 Employment Agreement dated as of January 1, 2000 between the
Company and Stanley M. Bergman. **
10.33 Form of Change in Control Agreement dated July 1, 2001 between
the Company and Larry Gibson. **+
10.34 Form of Note Purchase Agreements between the Company and the
Purchasers listed on Schedule A thereto relating to an aggregate
of $100,000,000 in principal amount of the Company's 6.66% Senior
Notes due July 15, 2010 (Incorporated by reference to Exhibit
10.111 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 26, 1998).
21.1 List of Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP +
- ----------
+ Filed herewith
**Indicates management contract or compensatory plan or agreement
66
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- ------------------------------------------------ -------- -------- -------- --------
Additions
----------
Balance at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- ------------------------------------------------ ---------- ---------- ---------- ----------
Year ended December 25, 1999:
Allowance for doubtful accounts............ $ 13,207 $ 4,861 $ (5,268) $ 12,800
Other accounts receivable allowances (1)... 6,929 1,127 (465) 7,591
-------- -------- -------- --------
$ 20,136 $ 5,988 $ (5,733) $ 20,391
======== ======== ======== ========
Year ended December 30, 2000:
Allowance for doubtful accounts............ $ 12,800 $ 10,065 $ (4,834) $ 18,031
Other accounts receivable allowances (1)... 7,591 2,095 (161) 9,525
-------- -------- -------- --------
$ 20,391 $ 12,160 $ (4,995) $ 27,556
======== ======== ======== ========
Year ended December 29, 2001:
Allowance for doubtful accounts............ $ 18,031 $ 8,850 $ (4,479) $ 22,402
Other accounts receivable allowances (1)... 9,525 1,152 (1,150) 9,527
-------- -------- -------- --------
$ 27,556 $ 10,002 $ (5,629) $ 31,929
======== ======== ======== ========
- ----------
(1) Primarily allowance for sales returns.
67