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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 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission file number 0-27078
HENRY SCHEIN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3136595
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 Duryea Road
Melville, New York
(Address of principal executive offices)
11747
(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 23, 2001 was
approximately $1,408,967,510.
As of March 23, 2001 42,216,255 shares of registrant's Common Stock, par
value $.01 per share, were outstanding.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
(December 30, 2000) are incorporated by reference in Part III hereof.
TABLE OF CONTENTS
Page
PART I Number
------
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 ................................... 18
ITEM 7A. Market Risks ..................................................... 27
ITEM 8. Financial Statements and Supplementary Data ...................... 29
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure .................................... 61
PART III
ITEM 10. Directors and Executive Officers of the Registrant ............... 61
ITEM 11. Executive Compensation ........................................... 61
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ... 61
ITEM 13. Certain Relationships and Related Transactions ................... 61
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
Exhibit Index .................................................... 65
PART I
ITEM 1. Business
Recent Developments
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.
Estimated annual cost savings from the restructuring plan are expected to
be approximately $20.0 million on a pre-tax basis ($12.0 million after taxes),
equating to approximately $0.29 per diluted share. The restructuring plan was
implemented over the last five months of 2000 and was substantially completed at
December 30, 2000.
For the year ended December 30, 2000, the Company has 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.
Business Dispositions
On November 27, 2000, the Company announced that one of its United Kingdom
subsidiaries had sold its software development business unit. In an ongoing
effort to enhance the focus of the Company's core distribution business in
Europe, certain practice management software systems were sold. The United
Kingdom subsidiary will continue to distribute such practice management systems,
but will no longer be responsible for development and technical support of the
systems.
The sale of this software development business unit resulted in a
non-recurring loss of approximately $1.6 million, or approximately $0.04 per
diluted share.
On October 23, 2000, the Company announced the sale of its 50% interest in
dental anesthetic manufacturer, HS Pharmaceutical Inc.("HS Pharmaceutical"),
which owns Novocol Pharmaceutical of Canada, Inc. ("Novocol"), to the then
current co-owner, Deproco, Inc. The Company incurred a non-recurring net charge
of approximately $1.9 million, or approximately $0.05 per diluted share in
connection with the sale. Novocol was an unconsolidated subsidiary and was the
Company's only manufacturing 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,
Mexico, the United Kingdom, The Netherlands, Belgium, Germany, France, the
Republic of Ireland, Austria, Spain, Israel, Australia and New Zealand, and
conducts its business principally 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
1
business units located primarily in Europe and the Pacific Rim, and
offer 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 2000, the Company's
healthcare distribution business sold products to over 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 more than 65 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, approximately 63,000
SKU's in Europe and approximately 26,000 SKU's in Australia, at published prices
that the Company believes are below those of many of its competitors. The
Company, through its technology business unit, offers various value-added
products and services such as practice management software. As of December 30,
2000, the Company sold over 36,000 dental practice management software systems,
more than any of its competitors.
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 2000, the Company distributed over 18.0 million pieces of direct
marketing materials (such as catalogs, facsimiles, flyers and order stuffers) to
approximately 650,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 730 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with approximately 1,200 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 in the United States, Canada, Europe and Australia 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.
Acquisition and Joint Venture Strategies
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
national 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 and joint ventures. 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 and joint
venture strategies include acquiring additional sales that will be channeled
through the Company's existing infrastructure, acquiring access to additional
product lines and acquiring regional distributors with networks of field sales
consultants and international expansion.
2
During the year ended December 30, 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 and corporate accounts; medical customers include office-based physician
practices, podiatrists, surgery centers, institutions, hospitals and
governmental agencies; and the Company's veterinary products are sold primarily
to 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
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 2000,
the AMA-sponsored service accounted for net sales of approximately $31.0
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 5.0% of net sales in 2000.
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,
3
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:
Direct Marketing. During 2000, the Company distributed over 18.0
million pieces of direct marketing material, including catalogs,
facsimiles, 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 450 pages and includes
approximately 39,000 SKU's. The number of catalogs and other 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 approximately
730 inbound and outbound telesales representatives who facilitate order
processing and generate new sales through direct and frequent contact
with customers. Inbound telesales representatives are responsible for
assisting customers in purchasing decisions as well as answering
product pricing and availability questions. In addition to assisting
customers, inbound telesales representatives also market complementary
or promotional products. The Company's telesales representatives
utilize on-line computer terminals to enter customer orders and to
access information about products, product availability, pricing,
promotions and customer buying history.
The Company utilizes outbound telesales representatives and programs to
better market its services to those customer accounts identified by the
Company as either being high volume or high order frequency accounts.
The Company's U.S. dental outbound telesales representatives accounted
for approximately $224.5 million of the Company's net sales in 2000.
The Company has approximately 250 medical and veterinary telesales
representatives, many of which make outbound calls in addition to
handling inbound telesales. Outbound telesales representatives strive
to manage long-term relationships with these customers through frequent
and/or regularly scheduled phone contact and personalized service.
The Company's telesales representatives generally participate in an
initial two-week training course designed to familiarize the sales
representative with the Company's products, services and systems. In
addition, generally all telesales representatives attend periodic
training sessions and special sales programs and receive incentives,
including monthly commissions.
Field Sales Consultants. The Company has approximately 1,200 field
sales consultants, including equipment sales specialists, covering
certain major North American, European and Pacific Rim 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.
4
Customer Service
A principal element of the Company's customer service approach is to offer
an order entry process that is convenient, easy and flexible. Customers
typically place orders with one of the Company's experienced telesales
representatives. Orders may also be placed 24-hours a day by fax, mail,
Internet, using the Company's computerized order entry systems known as
ArubA(R), ArubAWeb(R) or ArubA(R) TouchTone (the Company's 24-hour automated
phone service).
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.
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 2000
consolidated net sales in parenthesis:
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE DISTRIBUTION (97.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------
Dental Products (56.2%)
-----------------------------------------
Consumable Dental Products and Small
Equipment (43.5%) Dental Laboratory Products (3.0%) Large Dental Equipment (9.7%)
- ----------------------------------------- ----------------------------------------- -----------------------------------------
X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Acrylics; Dental Chairs; Delivery Units and Lights;
Handpieces; Preventatives; Impression Articulators; and Abrasives X-Rays; and Equipment Repair
Materials; Composites; Anesthetics; and
Financial Products
Medical Products (36.9%) Veterinary Products (4.1%)
- ----------------------------------------- -----------------------------------------
Branded and Generic Pharmaceuticals; Branded and Generic Pharmaceuticals;
Surgical Products; Diagnostic Tests; Surgical Products; and Dental Products
Infection Control; and Vitamins
- ------------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY AND OTHER VALUE-ADDED PRODUCTS AND SERVICES (2.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
Software and Related Products; other Value-Added Products
The percentage of 1999 and 1998 net sales was as follows: consumable dental
products and small equipment, 45.2% and 50.1%, respectively; dental laboratory
products, 3.0% and 3.6%, respectively; large dental equipment, 9.7% and 12.9%,
respectively; medical products, 35.2% and 28.5%, respectively; veterinary
products, 4.0% and 2.7%, respectively; and technology and value-added products
and services, 2.9% and 2.2%, respectively.
5
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 35.0% 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 and 26,000 SKU's to
its customers in Europe and Australia, respectively. Approximately 7.8% of the
Company's net sales in 2000 were 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 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 markets in North America, Europe and the Pacific Rim. The Company had a
total of 104 centers open at the end of 2000.
The Company offers its customers assistance in managing their practices by
providing access to a number of financial services and products at rates which
the Company believes are lower than what they would be able to secure
independently. The Company's equipment leasing programs 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
patient financing program provides the Company's dental and veterinary customers
a method for reducing receivables and improving cash flow by providing patients
access to financing. 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, cheaper processing of patient reimbursements, all through a third-party
provider for a transaction fee. The Company does not assume any financial
obligation to its customers or their patients in these programs. The Company
also offers practice management consulting services in selected markets in the
United States.
Technology and Other Value-Added Products and Services
The Company sells practice management software systems to its dental
and veterinary customers. The Company sold over 25,000 and 11,500 units of its
Easy Dental(R) and Dentrix software systems, including conversions,
respectively, and over 4,500 units of its AVImark(R) veterinary software
systems, as of the end of fiscal 2000. The Company's practice management
software products provide practitioners with patient treatment history, billing
and 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.
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.
6
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 Conditions 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
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 European and Pacific Rim distribution centers include
locations in the United Kingdom, the Republic of Ireland, France, The
Netherlands, Germany, Spain, Israel, Australia and New Zealand.
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 5,000
suppliers of name brand products; in addition, the Company has established
relationships with numerous local vendors to obtain products for its European
and Pacific Rim distribution centers. In 2000, the Company's top 10 healthcare
distribution vendors and the Company's single largest vendor, accounted for
approximately 27.1% and 6.3%, 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. Significant price reductions by the Company's competitors
could result in a similar reduction in the Company's prices as a consequence of
its policy of matching its competitors' lowest advertised prices. Any of these
competitive pressures may materially adversely affect operating results.
In the United States, the Company competes with other distributors, as
well as several major manufacturers of dental, medical and veterinary products,
primarily on the basis of price, breadth of product line, customer service and
value-added services and products. In the sale of its dental products,
7
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. and the General Medical
division of McKesson HBOC, 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 Practice Works, 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,
the Republic of Ireland, Austria, Spain, Israel, Mexico, Australia and New
Zealand.
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 recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug, and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
8
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
Pharmaceuticals, Inc. which was acquired by Watson Pharmaceutical, 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 30, 2000, the Company had over 6,250 full-time employees in
North America, Europe and Australia, including approximately 730 telesales
representatives, 1,200 field sales consultants, including equipment sales
specialists, 1,320 warehouse employees, 150 computer programmers and
technicians, 500 management employees and 2,350 office, clerical and
administrative employees. None of the Company's employees are represented by a
collective bargaining agreement. The Company believes that its relations with
its employees are excellent.
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, 50%-owned companies 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
9
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.
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 ....... 51 Chairman, Chief Executive Officer, President and Director
Gerald A. Benjamin ....... 48 Executive Vice President, Chief Administrative Officer and
Director
James P. Breslawski ...... 47 Executive Vice President, President US Dental and Director
Leonard A. David ......... 52 Vice President - Human Resources and Special Counsel and
Director
Larry M. Gibson ......... 54 Chief Technology Officer and Executive Vice President
Michael Racioppi ........ 46 President - Medical Group
Mark E. Mlotek ........... 45 Senior Vice President - Corporate Business Development
Group and Director
Steven Paladino .......... 43 Executive Vice President, Chief Financial Officer and Director
Michael Zack ............. 48 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.
10
Larry M. Gibson has been Chief Technology Officer and Executive Vice
President 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. 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.
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:
Property Location Own or Lease Approximate Square Footage Lease Expiration Date
- --------------------------- ------------------------- ----------------- ---------------------------- --------------------------
Corporate Headquarters .... Melville, NY Lease 172,000 December 2005
Distribution Center ....... Denver, PA Lease 413,000 December 2007
Distribution Center ....... Pelham, NY (1) Lease 108,000 July 2007
Distribution Center ....... Syosset, NY (2) Lease 120,000 April 2001
Distribution Center ....... Jacksonville, FL (2) Lease 136,000 December 2009
Distribution Center ....... Secaucus, NJ Lease 138,000 November 2008
Distribution Center ....... Indianapolis, IN Lease 225,000 June 2001
Distribution Center ....... West Allis, WI Lease 108,000 November 2011
Distribution Center ....... Grapevine, TX Lease 132,000 July 2008
Distribution Center ....... Sparks, NV Lease 115,000 June 2002
Distribution Center ....... United Kingdom Lease 85,000 August 2005
Distribution Center ....... Gallin, Germany Own 172,000 N/A
(1) The Company is subletting 66,500 square feet of this facility through
July 2007.
(2) The Company was not utilizing these locations at December 30, 2000.
These properties are primarily used in the Company's healthcare
distribution segment.
The Company also leases distribution, office, showroom and sales space in
other locations in the United States, Canada, France, Germany, the Republic of
Ireland, The Netherlands, Spain, Australia, New Zealand, Mexico, Israel and the
United Kingdom. Two 50%-owned companies also lease space in the United States
and Belgium.
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 manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of the end of
fiscal 2000, the Company was named a defendant in approximately 68 such cases.
Of these product liability claims, 52 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.
12
In addition, the Company is subject to other claims, suits and complaints
arising in the course of the Company business. 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. During the
appeal of the class certification, a trial on the merits is stayed. 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
the Company is provided indemnification by the manufacturer of the product.
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 have a material adverse effect on 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 2000.
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 1999 and 2000
and for the first quarter of fiscal 2001 through March 23, 2001.
High Low
---------------- ----------------
Fiscal 1999:
1st Quarter ............................................................................. $ 46.88 $ 24.00
2nd Quarter ............................................................................. $ 35.00 $ 19.56
3rd Quarter ............................................................................. $ 32.13 $ 13.25
4th Quarter ............................................................................. $ 15.38 $ 10.38
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 (Through March 23, 2001) .......................................... $ 34.27 $ 27.19
The Company's Common Stock is quoted through the NASDAQ National Market
tier of the NASDAQ Stock Market under the symbol "HSIC." On March 23, 2001,
there were approximately 870 holders of record of the Common Stock. On March 23,
2001, the last reported sales price was $33.38.
Dividend Policy
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future; it intends to retain its earnings to finance
the expansion of its business and for general corporate purposes. Any payment of
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to payment of dividends and
other factors. The Company's revolving credit agreement and the note issued in
connection with an acquisition in The Netherlands limit the distributions of
dividends without the prior written consent of the lenders.
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 30, 2000 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 Consolidated Financial
Statements and related notes thereto in ITEM 8 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in ITEM 7. The
Selected Operating Data and Net Sales By Market Data presented below have not
been audited.
Certain prior year amounts have been reclassified to conform the current year's
presentation as discussed in the Consolidated Financial Statements and related
notes thereto in ITEM 8.
Years Ended
----------------------------------------------------------------------------------------
December 30, December 25, December 26, December 27, December 28,
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ----------------- ---------------
(In thousands, except per share and selected operating data)
Statements of Operations Data:
Net sales ................................ $ 2,381,721 $ 2,284,544 $ 1,922,851 $ 1,698,862 $ 1,374,639
Gross profit ............................. 647,901 608,596 523,831 442,842 358,092
Selling, general and administrative
expenses ............................ 520,288 489,364 427,635 380,233 314,979
Merger and integration costs (1) ......... 585 13,467 56,666 50,779 -
Restructuring costs (2) .................. 14,439 - - - -
Operating income ......................... 112,589 105,765 39,530 11,830 43,113
Interest income .......................... 6,279 7,777 6,964 7,353 7,139
Interest expense ......................... (20,409) (23,593) (12,050) (7,643) (5,487)
Other - net .............................. (1,925) (166) 1,570 1,375 1,177
Other income (expense) - net ............. (16,055) (15,982) (3,516) 1,085 2,829
Income before taxes on income,
minority interest and
equity in earnings (losses) of
millions ............................ 96,534 89,783 36,014 12,915 45,942
Taxes on income .......................... 36,150 35,589 20,325 17,670 18,606
Minority interest in net income (loss)
of subsidiaries ..................... 1,757 1,690 145 (430) 246
Equity in earnings (losses) of
affiliates .......................... (1,878) (2,192) 783 2,141 1,595
Net income (loss) ........................ 56,749 50,312 16,327 (2,184) 28,685
Net income (loss) per common share:
Basic ............................... $ 1.38 $ 1.24 $ 0.42 $ (0.06) $ 0.85
Diluted ............................. $ 1.35 $ 1.21 $ 0.39 $ (0.06) $ 0.81
Weighted average shares outstanding:
Basic ............................... 41,244 40,585 39,305 37,531 33,714
Diluted ............................. 42,007 41,438 41,549 37,531 35,202
15
Years Ended
----------------------------------------------------------------------------------------
December 30, December 25, December 26, December 27, December 28,
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ----------------- ---------------
(In thousands, except per share and selected operating data)
Pro Forma Data (3):
Pro forma net income (loss) .............. $ 13,748 $ (1,778) $ 29,023
Pro forma net income (loss) per
common share
Basic ............................... $ 0.35 $ (0.05) $ 0.86
Diluted ............................. $ 0.33 $ (0.05) $ 0.82
Pro forma average shares outstanding:
Basic ............................... 39,305 37,531 33,714
Diluted ............................. 41,549 37,531 35,202
Selected Operating Data:
Number of orders shipped ................. 8,280,000 7,979,000 6,718,000 6,064,000 5,127,000
Average order size ....................... $ 288 $ 286 $ 286 $ 280 $ 268
Net Sales by Market Data:
Healthcare Distribution:
Dental (4) .......................... $ 1,073,889 $ 1,047,259 $ 1,085,717 $ 999,671 $ 819,898
Medical ............................. 794,880 715,210 515,276 441,110 341,403
Veterinary .......................... 56,421 52,050 48,492 40,852 35,336
International (5) ................... 389,946 403,137 230,792 181,278 147,031
---------------- ---------------- ---------------- ----------------- ---------------
Total Healthcare Distribution ..... 2,315,136 2,217,656 1,880,277 1,662,911 1,343,668
Technology (6) ........................... 66,585 66,888 42,574 35,951 30,971
---------------- ---------------- ---------------- ----------------- ---------------
$ 2,381,721 $ 2,284,544 $ 1,922,851 $ 1,698,862 $ 1,374,639
================ ================ ================ ================= ===============
Balance Sheet data:
Working capital .......................... $ 423,547 $ 428,429 $ 403,592 $ 312,916 $ 290,482
Total assets ............................. 1,231,068 1,204,102 962,040 803,946 668,239
Total debt ............................... 276,693 363,624 209,451 148,685 59,404
Minority interest ........................ 7,996 7,855 5,904 2,225 5,289
Stockholders' equity ..................... 579,060 517,867 463,034 424,223 408,877
(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., ("Dentrix")
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 and Joint Ventures
Strategies" in ITEM 7 and the Consolidated Financial Statements and related
notes thereto 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
Consolidated Financial Statements and related notes thereto in ITEM 8.
(3) Reflects the provision for income taxes on previously untaxed earnings of
Dentrix as an S Corporation of $1.2 million for 1996, and provision for
income tax (expense) recoveries on previously untaxed earnings of Meer as
an S Corporation of $(0.6) million, $0.4 million, and $1.5 million for
1998, 1997 and 1996, 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 and
Joint Ventures Strategies" in ITEM 7 herein.
(4) Dental consists of the Company's dental business in the United States and
Canada.
16
(5) International consists of the Company's business (primarily dental) outside
the United States and Canada, primarily Europe and Australia.
(6) Technology consists of the Company's practice management software business
and certain other value-added products and services.
17
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.
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.
Estimated annual cost savings from the restructuring plan are expected to
be approximately $20.0 million on a pre-tax basis ($12.0 million after taxes),
equating to approximately $0.29 per diluted share. The restructuring plan was
implemented over the last five months of 2000 and was substantially completed
at December 30, 2000.
For the year ended December 30, 2000, the Company has 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.
Business Dispositions
On November 27, 2000, the Company announced that one of its United Kingdom
subsidiaries had sold its software development business unit. In an ongoing
effort to enhance the focus of the Company's core distribution business in
Europe, certain practice management software systems were sold. The United
Kingdom Subsidiary will continue to distribute such practice management systems,
but will no longer be responsible for development and technical support of the
systems.
The sale of this practice management software development business unit
resulted in a non-recurring loss of approximately $1.6 million, or approximately
$0.04 per diluted share.
On October 23, 2000, the Company announced the sale of its 50% interest in
dental anesthetic manufacturer, HS Pharmaceutical Inc. ("HS Pharmaceutical"),
which owns Novocol Pharmaceutical of Canada, Inc. ("Novocol"), to the then
current co-owner, Deproco, Inc. The Company incurred a non-recurring net charge
of approximately $1.9 million, or approximately $0.05 per diluted share, in
connection with the sale. Novocol was an unconsolidated subsidiary and was the
Company's only manufacturing business.
Acquisition and Joint Venture Strategies
The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements.
During the year ended December 30, 2000, the Company completed the
acquisition of two healthcare distribution 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
18
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 and one technology business. The
completed acquisitions included General Injectables and Vaccines, Inc. ("GIV"),
through the purchase of all of the outstanding common stock of Biological &
Popular Culture, Inc., 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 and the Heiland Group provide for additional cash consideration of up to
$20.0 million per year through 2004, not to exceed $75.0 million in total, and
$3.9 million per year through 2001, respectively, to be paid if certain sales
and profitability targets are met. The GIV acquisition agreement also provided
for additional cash consideration of $4.1 million based upon sales of new
products, as defined; of which 1.2 million was paid during fiscal 2000. 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 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 excess of the acquisition costs over the fair value of identifiable
assets will be amortized on a straight-line basis over 30 years. 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.
During the year ended December 26, 1998, the Company completed the
acquisition of five healthcare distribution businesses. The 1998 completed
acquisitions included two dental supply companies, the most significant of which
was H. Meer Dental Supply Co., Inc. ("Meer"), a leading full-service dental
distributor serving dentists, dental laboratories and institutions throughout
the United States, with 1997 annual net sales of approximately $180.0 million.
Combined, Meer and the other dental company had approximately $212.0 million in
aggregate net sales for 1997. The completed acquisitions also included two
medical supply companies with aggregate net sales for 1997 of approximately
$37.0 million, and one international dental distribution business with 1997 net
sales of approximately $16.0 million. Of the five completed acquisitions, four
(including Meer) were accounted for under the pooling of interests method, and
the remaining acquisition of a 50.1% interest was accounted for under the
purchase method of accounting. The historical financial statements were restated
to give retroactive effect only to the Meer transaction, as the remaining three
pooling transactions were not material and were included in the consolidated
financial statements from the beginning of the quarter in which the acquisitions
occurred. Results of operations of the business acquisition accounted for under
the purchase method of accounting have been included in the consolidated
financial statements commencing with the acquisition date.
The Company issued 2,973,680 shares, 347,063 shares and 121,000 shares of
its Common Stock, with an aggregate value of approximately $151.1 million in
connection with three of the 1998 pooling transactions. Prior to its acquisition
by the Company, Meer elected to be treated as an S Corporation under the
Internal Revenue Code, and accordingly, was not subject to taxation at the
corporate level. Pro
19
forma adjustments have been made to reflect a provision for income taxes for
each period presented and the elimination of a deferred tax benefit arising from
Meer's conversion from the S Corporation to a C Corporation.
Additionally, in connection with one of the 1998 dental supply company
acquisitions accounted for under the pooling of interests method of accounting,
the Company issued shares of a subsidiary, with rights equivalent to those of
the Company's Common Stock, which are exchangeable into 603,500 shares of the
Company's Common Stock, at each shareholders' option, and had an aggregate value
of approximately $24.0 million. The total cash purchase price for the 1998
acquisition accounted for under the purchase method of accounting was
approximately $6.8 million. The excess of the acquisition costs over the fair
value of identifiable net assets acquired are being amortized on a straight-line
basis over 30 years.
In connection with the 2000, 1999 and 1998 acquisitions, the Company
incurred certain merger and integration costs of approximately $0.6 million,
$13.5 million and $56.7 million, respectively. Net of taxes, merger and
integration costs were approximately $0.01, $0.23, and $1.06 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, $13.5 million and $0.0 million for 1999 and $55.7 million and $1.0 million
for 1998, respectively. Merger and integration costs consist primarily of
investment banking, legal, accounting and advisory fees, severance, impairment
of goodwill arising from acquired busineses integrated into the Company's
medical and dental businesses, as well as certain other integration costs
associated with these mergers.
Excluding the merger and integration costs and restructuring costs, and
the losses on the disposals of HS Pharmaceutical and the United Kingdom software
development business unit, and including pro forma adjustments, 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, $59.8 million and $1.44, respectively, for the year ended December 25,
1999 and $57.8 million and $1.39, respectively, for the year ended December 26,
1998.
20
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
2000, 1999 and 1998. Percentages are calculated on related net sales.
Certain prior year amounts have been reclassified to conform the current year's
presentation as discussed in the Consolidated Financial Statements and related
notes thereto in ITEM 8.
2000 1999 1998
---------------------------- -------------------------- ---------------------------
Net Sales by Segment Data:
Healthcare distribution:
Dental (1) ..................... $ 1,073,889 45.1 % $1,047,259 45.8 % $1,085,717 56.5 %
Medical ........................ 794,880 33.4 715,210 31.3 515,276 26.8
Veterinary ..................... 56,421 2.4 52,050 2.3 48,492 2.5
International (2) .............. 389,946 16.4 403,137 17.6 230,792 12.0
---------------- ---------- --------------- ---------- --------------- ----------
Total healthcare distribution 2,315,136 97.2 2,217,656 97.1 1,880,277 97.8
Technology (3) ...................... 66,585 2.8 66,888 2.9 42,574 2.2
---------------- ---------- --------------- ---------- --------------- ----------
Total .......................... $ 2,381,721 100.0 % $2,284,544 100.0 % $1,922,851 100.0 %
================ ========== =============== ========== =============== ==========
Gross Profit by Segment Data:
Healthcare distribution ............ $ 601,036 26.0 % $ 563,107 25.4 % $ 490,442 26.1 %
Technology .......................... 46,865 70.4 % 45,489 68.0 % 33,389 78.4 %
---------------- --------------- ---------------
Total .......................... $ 647,901 27.2 % $ 608,596 26.6 % $ 523,831 27.2 %
================ =============== ===============
Adjusted Operating Profit
(excluding merger and integration,
and restructuring costs) by
Segment Data:
Healthcare distribution (4) ......... $ 102,953 4.4 % $ 93,934 4.2 % $ 79,871 4.3 %
Technology (5) ...................... 24,660 37.0 % 25,298 37.8 % 16,325 38.3 %
---------------- --------------- ---------------
Total .......................... $ 127,613 5.4 % $ 119,232 5.2 % $ 96,196 5.0 %
================ =============== ===============
(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, and Australia.
(3) Technology consists of the Company's practice management software business
and certain other value-added products and services.
(4) Excludes merger and integration, and restructuring costs of $14.1 million,
$13.5 million and $55.7 million in 2000, 1999 and 1998, respectively.
(5) Excludes merger and integration, and restructuring costs of $1.0 million,
$0.0 million and $1.0 million in 2000, 1999, and 1998 respectively.
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
increase in net sales was primarily due to increased account penetration. In
21
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 increase 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 the 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.
1999 Compared to 1998
Net sales increased $361.7 million, or 18.8%, to $2,284.5 million in 1999
from $1,922.8 million in 1998. Of the $361.7 million increase, approximately
$337.4 million, or 93.3%, represented a 17.9% increase in the Company's
healthcare distribution business. As part of this increase, approximately $200.0
million represented a 38.8% increase in its medical business, $172.3 million
represented a 74.7%
22
increase in its international business, $3.5 million represented a 7.3% increase
in the Company's veterinary business, and $(38.4) million represented a 3.5%
decrease in the Company's dental business. The increase in medical net sales was
primarily attributable to telesales and direct marketing activities,
acquisitions, and increased sales to hospitals. In the international market, the
increase in net sales was primarily due to acquisitions in Germany and the
United Kingdom, and increased account penetration in the United Kingdom,
Belgium, Spain and France. In the veterinary market, the increase in net sales
was primarily due to increased account penetration. The decrease in dental net
sales was primarily due to sales erosion related to the Meer acquisition and a
reduction in dental equipment sales. The remaining increase in 1999 net sales
was due to the technology business, which increased $24.3 million, or 57.0%, to
$66.9 million for 1999, from $42.6 million for 1998. The increase in technology
and value-added product net sales was primarily due to increased practice
management software sales and an acquisition.
Gross profit increased by $84.8 million, or 16.2%, to $608.6 million in
1999, from $523.8 million in 1998. Gross profit margin decreased by 0.6% to
26.6% from 27.2% last year. Healthcare distribution gross profit increased by
$72.7 million, or 14.8%, to $563.1 million in 1999, from $490.4 million in 1998.
Healthcare distribution gross profit margin decreased by 0.7%, to 25.4%, from
26.1% last year primarily due to changes in sales mix and lower manufacturers
rebates as a result of reduced annual sales. Technology gross profit increased
by $12.1 million, or 36.2%, to $45.5 million in 1999, from $33.4 million in
1998. Technology gross profit margin decreased by 10.4%, to 68.0%, from 78.4%
last year primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $61.8 million, or
14.4%, to $489.4 million in 1999 from $427.6 million in 1998. Selling and
shipping expenses increased by $30.4 million, or 11.2%, to $300.9 million in
1999 from $270.5 million in 1998. As a percentage of net sales, selling and
shipping expenses decreased 0.9% to 13.2% in 1999 from 14.1% in 1998. 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 $31.4 million, or
20.0%, to $188.5 million in 1999 from $157.1 million in 1998, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses increased 0.1% to 8.3% in 1999 from 8.2% in 1998.
Other income (expense) - net changed by $12.5 million, to $(16.0) million
for the year ended December 25, 1999 from $(3.5) million for 1998 due to an
increase in interest expense resulting from an increase in average borrowings
and to a lesser extent an increase in interest rates, offset by higher interest
income on notes receivable and accounts receivable balances.
Equity in earnings (losses) of affiliates decreased $3.0 million or 375%,
to a loss of $(2.2) million in 1999 from income of $0.8 million in 1998. The
decline was due to reduced earnings from HS Pharmaceutical, which is accounted
for under the equity method; totaling approximately $1.3 million, net of taxes,
due to a temporary cessation of production of anesthetic products. On September
23, 1999, the FDA issued clearance for HS Pharmaceutical to resume production of
its anesthetic products for shipment into the United States. HS Pharmaceutical
resumed limited production and shipment of its products in the fourth quarter of
1999.
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.
For 1998 the Company's effective tax rate was 56.4%. Excluding merger and
integration costs, the majority of which are not deductible for income tax
purposes, and including a proforma tax adjustment for Meer on previously untaxed
earnings as an S Corporation, combined with the elimination of a net deferred
tax asset arising from Meer's conversion from an S Corporation to a C
Corporation, the Company's effective tax rate would have been 38.3%. The
difference between the Company's effective
23
tax rate, excluding merger and integration costs and the Meer tax adjustment,
and the Federal statutory rate relates primarily to state income taxes.
Euro Conversion
Effective January 1, 1999, 11 of the 15 member countries of the European
Union have 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 Euro now trades on currency
exchanges and is available for non-cash transactions. 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 and coins will be put into
circulation. There will be a changeover period of two months where there will be
dual circulation - where both Euro and national currencies will be used
together. Following the changeover period, the national currencies will be
completely replaced by the Euro.
The Company is currently addressing the impact of the Euro on its
information systems, as well as, product and customer concerns. The Company
expects 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 Company does not
anticipate that the costs of the overall effort will have a material adverse
impact on future results.
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
www.SullivanSchein.com 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.
Effect of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 is required for
transactions entered into by the Company after December 30, 2000. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of the hedge transaction and the type of hedge
transaction. The ineffective portion of all hedges will be recognized in
earnings.
24
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("FAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" which amended FAS 133. The amendments in FAS 138 address
certain implementation issues and relate to such matters as the normal purchases
and normal sales exception, the definition of interest rate risk, hedging
recognized foreign currency denominated assets and liabilities, and intercompany
derivatives.
Effective December 31, 2000, the Company will adopt FAS 133 and FAS 138.
The initial impact of adoption on the Company's financial statements will be
recorded in the first quarter of 2001 and will not be material. The ongoing
effect of adoption on the Company's consolidated financial statements will be
determined each quarter by several factors, including the specific hedging
instruments in place and their relationships to hedged items, as well as market
conditions at the end of each period.
Risk Management
The Company has operations in the United States, Canada, Mexico, the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland,
Austria, Spain, Israel, 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 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 $51.2 million and $6.8 million, respectively, as of the
end of fiscal 2000. The contracts expire at various dates through 2001.
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 $7.8 million and $8.3 million in 2000
and 1999, respectively, which adjustments were reflected in the balance sheet as
a component of stockholders' equity. The cumulative translation adjustment at
the end of 2000 showed a net negative translation adjustment of $18.2 million.
In October 1997, the Company entered into a Netherlands Guilder (NLG) loan
in the amount of 6.5 million NLG. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary. The NLG loan calls for periodic payments and a balloon payment of
4.1 million NLG in January 2002.
Interest Rate Swaps and Cap
As of December 30, 2000, the Company had approximately $17.8 million
outstanding in interest rate swaps. These swaps are used to convert $13.0
million of floating rate debt relating to the Company's revolving credit
agreement and $4.8 million relating to a Deutsche Mark floating rate debt of
DM10.0 million, to fixed rate debt to reduce the Company's exposure to interest
rate fluctuations. The net result was to substitute a weighted average fixed
interest rate of 7.2% for the variable LIBOR rate on $13.0 million and a 5.3%
fixed interest rate for the variable EURIBOR for the Deutsche Mark loan of the
Company's debt. The swaps expire in December 2003, December 2004 and April 2005.
Under the interest rate environment during the year ended December 30, 2000, the
Company's interest rate swap agreements resulted in additional interest expense
of approximately $0.1 million. In addition, the Company has an interest rate cap
of 5.5% on a Deutsche Mark floating rate debt of DM6.3 million (approximately
$3.0 million).
Liquidity and Capital Resources
Historically, the Company's principal capital requirements have been to
fund capital expenditures acquisitions, and working capital needs resulting from
increased sales, special inventory forward buy-in opportunities and to fund
initial start-up inventory requirements for new distribution centers. 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
25
from the end of the third quarter to the end of the first quarter of the
following year. In 2000, the Company's operating cash flow has increase
significantly due to increased profitability and better management of networking
capital. The Company has financed its business primarily through its revolving
credit facilities, private placement loans and stock issuances. The Company
continues to make capital expenditures as it invests in its infrastructure,
however debt reduction has also been a major use of cash.
Net cash provided by operating activities for the year ended December 30,
2000 of $153.0 million resulted primarily from net income of $56.7 million,
increased by non-cash charges, relating primarily to depreciation and
amortization of $33.8 million, and net cash flow from working capital of
approximately $50.1 million. The increase of working capital was primarily due
to an increase in accounts payable and other accrued expenses of $44.9 million,
a $5.2 million decrease in accounts receivable, and a $4.6 million decrease in
inventories, offset by a $4.6 million increase in other current assets.
Net cash used in investing activities for the year ended December 30, 2000
of $46.2 million resulted primarily from cash used for capital expenditures and
acquisitions (primarily contingent consideration arising from acquisition
completed in prior periods) of $29.7 million and $6.8 million, respectively.
During the past three years, the Company has invested $97.8 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 $45.0
million in capital projects to modernize and expand its facilities and
infrastructure systems, and integrate operations.
Net cash used in financing activities for the year ended December 30, 2000
of $77.9 million resulted primarily from net debt repayments of $84.5 million,
offset primarily by proceeds from the issuance of stock upon exercise of stock
options of $6.3 million.
Certain holders of minority interests in acquired entities or ventures have
the right at certain times to require the Company to acquire their interest at
either fair market value or a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of December 30, 2000 of $58.4
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). These investments have staggered maturity
dates, none of which exceed three months, and have a high degree of liquidity
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. Borrowings under the credit
facility were $10.7 million at December 30, 2000. The Company also has two
uncommitted bank lines totaling $30.0 million, none of which had been borrowed
against at December 30, 2000. 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 is payable semi-annually.
Certain of the Company's subsidiaries have credit facilities that totaled $52.3
million at December 30, 2000 under which $4.4 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.
26
The Company believes that its cash and cash equivalents of $58.4 million
as of December 30, 2000, its ability to access public and private debt and
equity markets, and the availability of funds under its existing credit
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
operations. 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 30, 2000, the Company had outstanding foreign currency forward
contracts aggregating $58.0 million, of which $51.2 million related to
intercompany debt and $6.8 million related to the purchase of merchandise from
foreign vendors. The contracts hedge against currency fluctuations of Australian
dollars ($0.4 million), Canadian dollars ($13.9 million), Deutsche Mark ($11.9
million), Euro ($0.1 million), French Francs ($9.2 million) British Pounds
($14.2 million), Netherland Guilders ($2.5 million), Swiss Francs ($0.7
million), Belgium Francs ($2.0 million) and Spanish Pesetas ($3.1 million). At
December 30, 2000, the Company had net deferred losses from foreign currency
forward contracts of approximately $0.4 million. The contracts expire at various
dates through 2001.
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 Rate Swaps and Cap
As of December 30, 2000, the Company had approximately $17.8 million
outstanding in interest rate swaps. These swaps are used to convert $13.0
million of floating rate debt relating to the Company's revolving credit
agreement and $4.8 million relating to a Deutsche Mark floating rate debt of
DM10.0 million to fixed rate debt to reduce the Company's exposure to interest
rate fluctuations. The net result was to substitute a weighted average fixed
interest rate of 7.2% for the variable LIBOR rate on $13.0 million and 5.3%
fixed interest rate for the variable EURIBOR for the Deutsche Mark loan of the
Company's debt. The swaps expire in December 2003, December 2004 and April 2005.
Under the interest rate environment during the year ended December 30, 2000, the
Company's interest rate swap agreements resulted in additional expense of
approximately $0.1 million.
27
In addition, the Company has an interest rate cap of 5.5% on a Deutsche Mark
floating rate debt of DM 6.3 million (approximately $3.0 million).
The Company is exposed to risk from changes in interest rates from
borrowings under certain variable bank credit lines and loan agreements. If the
outstanding balance at December 30, 2000 of $46.7 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 $0.5 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.
28
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
Page
---------------
Report of Independent Certified Public Accountants ..................................................... 30
Consolidated Financial Statements:
Balance Sheets as of December 30, 2000 and December 25, 1999 ...................................... 31
Statements of Operations and Comprehensive Income for the years ended
December 30, 2000, December 25, 1999 and December 26, 1998 .............................. 32
Statements of Stockholders' Equity for the years ended December 30, 2000,
December 25, 1999 and December 26, 1998 ................................................. 33
Statements of Cash Flows for the years ended December 30, 2000,
December 25, 1999 and December 26, 1998 ................................................. 34
Notes to Consolidated Financial Statements ....................................................... 35
Report of Independent Certified Public Accountants ..................................................... 63
Schedule II - Valuation and Qualifying Accounts, for the years ended December
30, 2000, December 25, 1999 and December 26, 1998 ........................................ 64
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.
29
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 30, 2000 and December 25, 1999, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 30, 2000. 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 30, 2000 and December 25, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
BDO SEIDMAN, LLP
New York, New York
March 1, 2001
30
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 30, December 25,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 58,362 $ 26,019
Accounts receivable, less reserves of $27,556 and $20,391, respectively ............. 371,668 388,063
Inventories ................................................................................ 276,473 285,590
Deferred income taxes ...................................................................... 21,001 15,520
Prepaid expenses and other ................................................................. 60,900 63,617
------------ ------------
Total current assets .................................................................. 788,404 778,809
Property and equipment, net ..................................................................... 94,663 86,627
Goodwill and other intangibles, net ............................................................. 292,018 295,113
Investments and other ........................................................................... 55,983 43,553
------------ ------------
$ 1,231,068 $ 1,204,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................... $ 216,535 $ 198,983
Bank credit lines .......................................................................... 4,390 41,527
Accruals:
Salaries and related expenses .........................................................