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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 25, 1999
__ 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 20, 2000, was
approximately $611,880,465.
As of March 20, 2000, 40,792,031 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 25, 1999) are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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Number
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PART I
ITEM 1. Business .......................................................... 1
ITEM 2. Properties ........................................................ 12
ITEM 3. Legal Proceedings ................................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters ...................................................... 14
ITEM 6. Selected Financial Data ........................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 18
ITEM 7A. Market Risks ...................................................... 26
ITEM 8. Financial Statements and Supplementary Data ....................... 28
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ..................................... 58
PART III
ITEM 10. Directors and Executive Officers of the Registrant ................ 58
ITEM 11. Executive Compensation ............................................ 58
ITEM 12. Security Ownership of Certain Beneficial Owners and Management .... 58
ITEM 13. Certain Relationships and Related Transactions .................... 58
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 58
Exhibit Index ..................................................... 62
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PART I
ITEM 1. Business
General
The Company is the largest distributor of healthcare products and services
to office-based healthcare practitioners in the combined North American and
European markets. The Company has operations in the United States, Canada,
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 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 1999, 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 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
70,000 stock keeping units ("SKU's") in North America, approximately 60,000
SKU's in Europe and approximately 23,000 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 25,
1999, the Company sold over 33,000 dental practice management software
systems; more than any of its competitors.
For further information on the Company's operating segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in ITEM 7 and Note 11 to the Consolidated Financial Statements.
During 1999, the Company distributed over 14.O million pieces of direct
marketing materials (such as catalogs, flyers and order stuffers) to
approximately 650,000 office-based healthcare practitioners. The Company
supports its direct marketing efforts with approximately 800 telesales
representatives who facilitate order processing and generate sales through
direct and frequent contact with customers and with approximately 1,150 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. and 6:00 p.m., respectively, 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.
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Acquisition and Joint Venture Strategies
The Company believes that there has been consolidation among healthcare
products distributors serving office-based healthcare practitioners and that
this consolidation will continue to create opportunities for the Company to
expand through acquisitions and joint ventures. In recent years, the Company has
acquired or entered into agreements with a number of companies engaged in
businesses that are complementary to those of the Company. The Company's
acquisition and joint venture strategies include acquiring additional sales that
will be channeled through the Company's existing infrastructure, acquiring
access to additional product lines, acquiring regional distributors with
networks of field sales consultants and international expansion. During the year
ended December 25, 1999, the Company completed nine acquisitions. The 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.
During 1998, the Company acquired five companies, which had aggregate net
sales for 1997 of approximately $265.0 million, including (a) two dental supply
companies, the most significant of which was the H. Meer Dental Supply Co., Inc.
("Meer"); (b) two medical supply companies and (c) one international dental
supply company. Of the five completed acquisitions, four were accounted for
under the pooling of interests method of accounting, and the remaining
acquisition of a 50.1% interest was accounted for under the purchase method of
accounting.
During 1997, the Company acquired 24 healthcare distribution businesses.
The 1997 acquisitions, which had aggregate net sales for 1996 of approximately
$558.6 million, included (a) eleven dental supply companies, the most
significant of which was Sullivan Dental Products, Inc. ("Sullivan"); (b) four
medical supply companies, the most significant of which was Micro Bio-Medics,
Inc. ("MBMI"); (c) two international dental and three international medical
supply companies; (d) three technology and value-added product companies; the
most significant of which was Dentrix Dental Systems, Inc. ("Dentrix"); and (e)
certain assets and the business of IDE Interstate, Inc., a direct marketer of
healthcare products to dentists, doctors and veterinarians. Of the 24 completed
acquisitions, six were accounted for under the pooling of interests method, with
the remainder being accounted for under the purchase method of accounting
(fourteen for 100% ownership interest and three for majority ownership
interests).
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,
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and surgery centers. More recently, as cost-containment pressures have resulted
in increased demand for low-cost products and value-added services, the Company
has targeted specific groups of practices under common ownership, institutions
and professional groups. For example, the Company has an exclusive direct
marketing agreement with an American Medical Association ("AMA") sponsored
service and a veterinarian-sponsored service, pursuant to which member
practitioners have access to the services' lower priced products. In 1999, the
AMA-sponsored service and the veterinarian-sponsored purchasing service
accounted for net sales of over $39.7 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 1.0% of net
sales in 1999.
Sales and Marketing
The Company's sales and marketing efforts, which are designed to establish
and solidify customer relationships through personal visits by field sales
representatives and frequent direct marketing contact, emphasize the Company's
broad product lines, competitive prices and ease of order placement. The key
elements of the Company's program in the United States are:
Direct Marketing. During 1999, the Company distributed over 14.0 million
pieces of direct marketing material, including catalogs, flyers, order
stuffers and other promotional materials to approximately 650,000
office-based healthcare practitioners. The Company's principal U.S. dental
catalog, which is issued semi-annually, contains an average of over 450
pages and includes approximately 36,000 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
800 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 $205.6
million of the Company's net sales in 1999. 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
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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 1,150 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.
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, its computerized order entry system known as ArubA(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. and 6:00 p.m., respectively, are shipped on the same day the
order is received. In addition, because the Company seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, approximately 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
1999 consolidated net sales in parenthesis:
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HEALTHCARE DISTRIBUTION (96.8%)
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Dental Products (57.6%)
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Consumable Dental Products and Small
Equipment (44.9%) Dental Laboratory Products (3.0%) Large Dental Equipment (9.7%)
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X-Ray Products; Infection Control; Teeth; Composites; Gypsum; Acrylics; Dental Chairs; Units and Lights; X-Rays;
Handpieces; Preventatives; Impression Articulators; and Abrasives and Equipment Repair
Materials; Composites; and Anesthetics,
and Financial Products
Medical Products (35.2%) Veterinary Products (4.0%)
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Branded and Generic Branded and Generic
Pharmaceuticals; Surgical Pharmaceuticals; Surgical
Products; Diagnostic Tests; Products; and Dental Products
Infection Control; and Vitamins
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TECHNOLOGY AND OTHER VALUE-ADDED PRODUCTS AND SERVICES (3.2%)
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Software and Related Products; other value-added products
The percentage of 1998 and 1997 net sales was as follows: consumable
dental products and small equipment, 49.8% and 51.1%, respectively; dental
laboratory products, 3.6% and 3.3%, respectively; large dental equipment, 12.9%
and 13.6%, respectively; medical products, 28.5% and 26.7%, respectively;
veterinary products, 2.7% and 2.9%, respectively; and technology and value-added
products and services, 2.5% and 2.4%, respectively.
Consumable Supplies and Equipment
The Company offers in excess of 70,000 SKU's to its customers in North
America, of which approximately 55,000 SKU's are offered to its dental
customers, approximately 23,000 are offered to its medical customers and
approximately 22,000 are offered to its veterinary customers. Over 25% of the
Company's products are offered to all three types of the Company's customers in
North America. The Company offers approximately 60,000 SKU's and 23,000 SKU's to
its customers in Europe and Australia, respectively. Approximately 7.9% of the
Company's net sales in 1999 were from sales of products offered under the Henry
Schein private brand (i.e., products manufactured by various third parties and
HS Pharmaceutical for distribution by the Company under the Henry Schein(R)
brand). The Company believes that the Henry Schein private brand line of over
7,500 SKU's offered in the United States and Canada is one of the most
extensive in the industry. The Company also distributes certain generic
pharmaceuticals manufactured by HS Pharmaceutical, a 50%-owned affiliated
company. 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 115 centers open at the end of 1999.
The Company offers its customers assistance in managing their practices
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 a physician's practice
including practice start-up, practice acquisition and debt consolidation. The
patient financing program provides the Company's dental
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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 nations 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 23,500 and 9,900 units of its
Easy Dental(R) Plus and Dentrix software systems, respectively, as of the end of
fiscal 1999, and over 3,900 of its AVImark(R) veterinary software systems which
includes conversions. 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)
Plus 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) Plus, 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. 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 Operation" 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
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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, 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 2,000
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 1999, the Company's top 10 healthcare
distribution vendors and the Company's single largest vendor, accounted for
approximately 22.2% and 8.1%, 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, 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 with substantial sales such as
InfoCure Corporation, 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 ORBIS, Sirona Dental and the GACD Group, as well as
a large number of dental product distributors and manufacturers in Mexico, the
United Kingdom, The Netherlands, Belgium, Germany, France, the Republic of
Ireland, Austria, Spain, Portugal, Israel, Australia and New Zealand.
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Governmental Regulation
The Company's business is subject to requirements under various local,
state, Federal and foreign governmental laws and regulations applicable to the
manufacture and distribution of pharmaceuticals and medical devices. Among the
Federal laws with which the Company must comply are the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, and the Controlled
Substances Act. It is possible that the Company may be prevented from selling
manufactured products if the Company (including its 50%-owned affiliated
company, HS Pharmaceutical, which distributes and manufactures generic
pharmaceuticals) were to receive an adverse report following an inspection by
the Food and Drug Administration (the "FDA") or the Drug Enforcement
Administration, or if a competitor were to receive prior approval of new
products from the FDA. A violation of a law by HS Pharmaceutical could cause its
operations to be suspended. A suspension could have an adverse effect on the
Company's equity in earnings of affiliates and could cause the Company to seek
alternative sources of products manufactured by HS Pharmaceutical, possibly at
higher prices than currently paid by the Company. In response to a Warning
Letter from the FDA regarding its compliance with current Good Manufacturing
Practices (cGMP's) of its dental anesthetic products, HS Pharmaceutical
temporarily suspended the manufacture and shipment of these products to the
United States. In each of January and February 1999, HS Pharmaceutical
instituted a voluntary recall of approximately 240 batches, in the aggregate, of
dental anesthetic products sold in 1997 and 1998 under its name and certain
private labels. The Company's share of the net loss for 1999 of Henry Schein
Pharmaceutical was approximately $0.07 per share on a diluted basis. During the
fourth quarter of 1999, the FDA lifted its import ban and Henry Schein
Pharmaceutical resumed manufacturing and shipments of these products to the
United States.
The Federal Food, Drug, and Cosmetic Act generally regulates the
introduction, manufacture, advertising, labeling, packaging, storage, handling,
marketing and distribution of, and recordkeeping for, pharmaceuticals and
medical devices shipped in interstate commerce. The Prescription Drug Marketing
Act of 1987, which amended the Federal Food, Drug, and Cosmetic Act, establishes
certain requirements applicable to the wholesale distribution of prescription
drugs, including the requirement that wholesale drug distributors be registered
with the Secretary of Health and Human Services or licensed by each state in
which they conduct business in accordance with federally established guidelines
on storage, handling and record maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The Company
is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's dentist and physician customers
are subject to significant governmental regulation. There can be no assurance
that regulations that impact dentists' or physicians' practices will not have a
material adverse impact on the Company's business.
The Company believes that it is in substantial compliance with all of the
foregoing laws and the regulations promulgated thereunder and possesses all
material permits and licenses required for the conduct of its business.
Proprietary Rights
The Company holds trademarks relating to the "Henry Schein" name and logo,
as well, as certain other trademarks. Pursuant to certain agreements executed in
connection with a reorganization of the Company, both the Company and an
affiliated company, Schein Pharmaceutical, Inc., 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.
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Employees
As of December 25, 1999, the Company had over 6,500 full-time employees in
North America, Europe and Australia, including approximately 800 telesales
representatives, 1,150 field sales consultants, including equipment sales
specialists, 1,550 warehouse employees, 150 computer programmers and
technicians, 550 management employees and 2,300 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, 7
and 8 of this Form 10-K include information that is forward looking, such as the
Company's opportunities to increase sales through, among other things,
acquisitions; its exposure to fluctuations in foreign currencies; its
anticipated liquidity and capital requirements; 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 under "Competition" and "Government Regulation",
and below in ITEM 3 in "Legal Proceedings" and in ITEM 7 in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-K.
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.
9
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ ----------- ------------------------------------------------------------
<S> <C> <C>
Stanley M. Bergman ........... 50 Chairman, Chief Executive Officer, President and Director
Gerald A. Benjamin ........... 47 Executive Vice President - Chief Administive Officer and Director
James P. Breslawski .......... 46 Executive Vice President - President US Dental and Director
Leonard A. David ............. 51 Vice President - Human Resources and Special Counsel and Director
Diane Forrest .............. 53 Senior Vice President - Information Services and Chief Information Officer
Larry M. Gibson ............. 53 President - Practice Management Technologies Group
Michael Racioppi ............ 45 President - Medical Group
Mark E. Mlotek ............... 44 Senior Vice President, Corporate Business Development Group and Director
Steven Paladino ............. 42 Executive Vice President, Chief Financial Officer and Director
Michael Zack ................. 47 Senior Vice President - International Group
</TABLE>
Stanley M. Bergman has been Chairman, Chief Executive Officer and
President since 1989 and a director of the Company since 1982. Mr. Bergman held
the position of Executive Vice President of the Company and Schein
Pharmaceutical, Inc. from 1985 to 1989 and Vice President of Finance and
Administration of the Company from 1980 to 1985. Mr. Bergman is a certified
public accountant.
Gerald A. Benjamin has been Executive Vice President, 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 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
<PAGE>
Diane Forrest has been Senior Vice President of Information Services and
Chief Information Officer since 1994. Prior to joining the Company, Ms. Forrest
was employed by Tambrands Inc. as Vice President of Information Services from
1987 to 1994, KPMG Peat Marwick as Senior Manager in the management consulting
division from 1982 to 1987 and Nabisco Brands, Inc. as Corporate Manager of
Manufacturing Systems from 1978 to 1982.
Larry M. 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
<PAGE>
ITEM 2. Properties
The Company owns or leases the following properties:
<TABLE>
<CAPTION>
Approximate
Property Location Own or Lease Square Footage Lease Expiration Date
-------- -------- ------------ -------------- ---------------------
<S> <C> <C> <C> <C>
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 Lease 120,000 April 2001
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
</TABLE>
(1) The Company is subletting 66,500 square feet of this facility through
July 2007.
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 Canada.
The Company believes that its properties are generally in good condition,
are well maintained, and are generally suitable and adequate to carry on the
Company's business. The Company has additional operating capacity at its listed
facilities.
ITEM 3. Legal Proceedings
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 25,
1999, the Company was named a defendant in approximately fifty such cases. Of
these product liability claims, thirty-eight 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 the financial viability of the
manufacturer and insurer.
In addition, the Company is subject to other claims, suits and complaints,
which arise in the course of the Company's 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
12
<PAGE>
the sale of certain practice management software products sold prior to 1998
under the Easy Dental name. In October 1999, the Court, on motion, certified
both a Windows 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 customers and
15,000 DOS customers could be covered by the judge's ruling. The Company has
filed an appeal of the Court's determination, during which time 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 to
cover all future claims or will be available in adequate amounts or at a
reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. The Company intends to vigorously defend all such
claims, suits and complaints. In the opinion of the Company, all such pending
matters are covered by insurance or are of such kind, or involve such amounts,
as would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
ITEM 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 1999.
13
<PAGE>
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 1998 and 1999
and for the first quarter of fiscal 2000 through March 20, 2000.
High Low
---- ---
Fiscal 1998:
1st Quarter ............................................ $ 41.00 $ 29.25
2nd Quarter ............................................ $ 46.25 $ 37.00
3rd Quarter ............................................ $ 51.13 $ 31.00
4th Quarter ............................................ $ 40.38 $ 24.75
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 (Through March 20, 2000) ................... $ 18.81 $ 10.75
The Company's Common Stock is quoted through the NASDAQ National Market
tier of the NASDAQ Stock Market under the symbol "HSIC". On March 20, 2000,
there were approximately 893 holders of record of the Common Stock. On March 20,
2000, the last reported sales price was $15.00.
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
<PAGE>
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 25, 1999 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.
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------
December 25, December 26, December 27, December 28, December 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .......................................... $ 2,285,700 $ 1,921,685 $ 1,698,496 $ 1,374,343 $ 1,090,936
Gross profit ....................................... 698,356 601,824 510,398 412,755 339,320
Selling, general and administrative
expenses ...................................... 579,124 505,628 447,789 369,642 306,347
Merger and integration costs (1) ................... 13,467 56,666 50,779 - -
Special management compensation (2) ................ - - - - 20,797
Operating income.................................... 105,765 39,530 11,830 43,113 12,176
Other income (expense) - net........................ (15,982) (3,516) 1,085 2,829 (3,921)
Income before taxes on income,
minority interest and equity in
earnings (losses) of affiliates 89,783 36,014 12,915 45,942 8,255
Taxes on income .................................... 35,589 20,325 17,670 18,606 10,823
Minority interest in net income(loss)
of subsidiaries ............................... 1,690 145 (430) 246 509
Equity in earnings (losses) of affiliates .......... (2,192) 783 2,141 1,595 1,537
Net income (loss) .................................. 50,312 16,327 (2,184) 28,685 (1,540)
Net income (loss) per common share:
Basic ......................................... $ 1.24 $ 0.42 $ (0.06) $ 0.85 $ (0.06)
Diluted ....................................... $ 1.21 $ 0.39 $ (0.06) $ 0.81 $ (0.06)
Weighted average shares outstanding:
Basic ......................................... 40,585 39,305 37,531 33,714 25,719
Diluted ....................................... 41,438 41,549 37,531 35,202 25,719
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------
December 25, December 26, December 27, December 28, December 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Pro Forma Data (3):
Pro forma operating income ......................... $ 32,973
Pro forma net income (loss) ........................ $ 13,748 $ (1,778) $ 29,023 $ 17,936
Pro forma net income (loss) per common share:
Basic ......................................... $ 0.35 $ (0.05) $ 0.86 $ 0.70
Diluted ....................................... $ 0.33 $ (0.05) $ 0.82 $ 0.66
Pro forma average shares outstanding:
Basic ......................................... 39,305 37,531 33,714 25,719
Diluted ....................................... 41,549 37,531 35,202 27,005
Selected Operating Data:
Number of orders shipped .......................... 7,979,000 6,718,000 6,064,000 5,127,000 4,571,000
Average order size ................................ $ 286 $ 286 $ 280 $ 268 $ 239
Net Sales by Market Data:
Healthcare Distribution:
Dental (4) ................................... $1,049,634 $1,083,994 $ 999,456 $ 819,721 $ 675,457
Medical ...................................... 712,707 515,728 441,015 341,329 245,439
Veterinary ................................... 52,286 48,307 40,843 35,329 29,330
International (5) ............................ 404,186 230,999 181,239 146,999 107,703
------------ ------------ ------------ ------------ ------------
Total Healthcare Distribution .............. 2,218,813 1,879,028 1,662,553 1,343,378 1,057,929
Technology (6) .................................... 66,887 42,657 35,943 30,965 33,007
------------ ------------ ------------ ------------ ------------
$2,285,700 $1,921,685 $1,698,496 $1,374,343 $1,090,936
============ ============ ============ ============ ============
Balance Sheet data(at period end):
Working capital ................................... $ 428,429 $ 403,592 $ 312,916 $ 290,482 $ 188,303
Total assets ...................................... 1,204,102 962,040 803,946 668,239 481,701
Total debt ........................................ 363,624 209,451 148,685 59,404 79,498
Minority interest ................................. 7,855 5,904 2,225 5,289 4,547
Stockholders' equity .............................. 517,867 463,034 424,223 408,877 238,041
</TABLE>
(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 Meer and the 1997
acquisitions of Sullivan, MBMI and 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) Includes: non-cash special management compensation charges of $17.5 million
arising from final mark-to-market adjustments (reflecting an increase in
estimated market value from 1994 to the initial public offering price of
$16.00 per share) for stock grants made to an executive officer of the
Company in 1992 and other stock issuances made to certain other senior
management of the Company (because of certain repurchase features which
expired with the initial public offering), an approximate $2.8 million
non-cash special management compensation charge (also based on the initial
public offering price of $16.00 per share) relating to compensatory options
granted in 1995, and a cash payment of $0.5 million for additional income
taxes resulting from such stock issuances.
(3) Reflects the pro forma elimination of special charges incurred in 1995 for
special management compensation of $20.8 million, arising from a
reorganization, and the related tax effects of $1.2 million and provision
for income taxes on previously untaxed earnings of Dentrix as an S
Corporation of $1.2 million, and $0.5 million for 1996 and 1995,
respectively, and provision for income tax (expense) recoveries on
previously untaxed earnings of Meer as an S Corporation of $(0.6) million,
$0.4 million, $1.5 million, and $0.3 million for 1998, 1997, 1996, and 1995,
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
16
<PAGE>
$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.
(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
<PAGE>
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 notes
thereto included herein.
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 25, 1999, the Company completed nine
acquisitions. 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 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 provides for additional consideration of $5.4
million based upon sales of new products, as defined. 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 pooling transaction was
not material and has been included in the consolidated financial statements from
the beginning of the quarter in which the acquisition occurred. 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.
During the year ended December 26, 1998, the Company completed five
acquisitions. The 1998 completed acquisitions included two dental supply
companies, the most significant of which was 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 financial statements were restated to give
retroactive effect to the Meer transaction, as the remaining three pooling
transactions were not material and have been 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.
18
<PAGE>
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 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.
During the year ended December 27, 1997, the Company acquired in pooling
of interests transactions, all of the outstanding common stock of (i) Sullivan,
a distributor of consumable dental supplies and equipment, (ii) MBMI, a
distributor of medical supplies and (iii) Dentrix, a leading provider of
clinically-based dental practice management systems. Prior to its acquisition of
the company, Dentrix elected to be treated as an S Corporation under the
Internal Revenue Code, and accordingly, its earnings were not subject to
taxation at the corporate level. Pro forma adjustments have been made to reflect
a provision for income taxes on such previously untaxed earnings for each period
presented.
In addition to these three acquisitions, the Company completed 21 other
acquisitions including; three medical and ten dental supply companies with
aggregate net sales for 1996 of approximately $32.0 million and $41.8 million,
respectively; two international dental and three international medical supply
companies with aggregate net sales for 1996 of approximately $5.3 million and
$18.3 million, respectively; two technology and other value-added product
companies with aggregate net sales for 1996 of approximately $10.1 million; and
certain assets and the business of IDE Interstate, Inc., a direct marketer of
healthcare products to dentists, doctors and veterinarians with net sales for
1996 of approximately $50.0 million.
Of the twenty four 1997 completed acquisitions, six were accounted for
under the pooling of interests method of accounting, with the remainder being
accounted for under the purchase method of accounting (fifteen for 100%
ownership interests and three for majority ownership interests). The financial
statements were restated to give retroactive effect to three of the pooling
transactions (Sullivan, MBMI and Dentrix) 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.
Operations of the 1997 completed acquisitions, accounted for under the purchase
method of accounting, were included in the consolidated financial statements
from their respective acquisition dates.
In connection with the 1999, 1998 and 1997 acquisitions, the Company
incurred certain merger and integration costs of approximately $13.5 million,
$56.7 million and $50.8 million, respectively. Net of taxes, merger and
integration costs were approximately $0.23, $1.06 and $1.08 per share, on a
diluted basis, respectively. Merger and integration costs for the healthcare
distribution and technology segments were $13.5 million and $0.0 million for
1999, $55.7 million and $1.0 million for 1998 and $43.9 million and $6.9 million
for 1997, respectively. Merger and integration costs consist primarily of
investment banking, legal, accounting and advisory fees, compensation,
impairment of goodwill arising from acquired businesses integrated into the
Company's medical and dental businesses, as well as certain other integration
costs associated with these mergers.
19
<PAGE>
Excluding the merger and integration costs, and including pro forma
adjustments, pro forma net income and pro forma net income per common share, on
a diluted basis, would have been $59.8 million and $1.44, respectively, for the
year ended December 25, 1999, $57.8 million and $1.39, respectively, for the
year ended December 26, 1998, and $41.0 million and $1.03, respectively, for the
year ended December 27, 1997.
The Company is a party to a number of claims, suits and complaints arising
in the ordinary course of business, as described in "Legal Proceedings". In the
opinion of the Company, all such pending matters are covered by insurance or are
of such kind, or involve such amounts, as would not have a material adverse
effect on the financial statements of the Company if disposed of unfavorably.
Results of Operations
The following table sets forth for the periods indicated net sales, gross
profit and operating profit, excluding merger and integration costs, (IN
THOUSANDS) by business segment for the years ended 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales by Segment Data:
Healthcare distribution:
Dental (1) ....................... $1,049,634 45.9 % $1,083,994 56.4 % $ 999,456 58.8 %
Medical .......................... 712,707 31.2 515,728 26.9 441,015 26.0
Veterinary ....................... 52,286 2.3 48,307 2.5 40,843 2.4
International (2) ................ 404,186 17.7 230,999 12.0 181,239 10.7
--------------- ----------- --------------- --------- ---------------- -----------
Total healthcare distribution 2,218,813 97.1 1,879,028 97.8 1,662,553 97.9
Technology (3) ...................... 66,887 2.9 42,657 2.2 35,943 2.1
--------------- ----------- --------------- --------- ---------------- -----------
Total .......................... $2,285,700 100.0 % $1,921,685 100.0 % $1,698,496 100.0 %
=============== =========== =============== ========= ================ ===========
Gross Profit by Segment Data:
Healthcare distribution ............ $ 652,651 29.4 % $ 568,071 30.2 % $ 484,704 29.2 %
Technology ......................... 45,705 68.3 33,753 79.1 25,694 71.5
--------------- ----------- --------------- --------- ---------------- -----------
Total ......................... $ 698,356 30.6 % $ 601,824 31.3 % $ 510,398 30.1 %
=============== =========== =============== ========= ================ ===========
<CAPTION>
Adjusted Operating Profit (excluding merger
and integration costs) by Segment Data:
<S> <C> <C> <C> <C> <C> <C>
Healthcare distribution (4) ... $ 93,934 4.2 % $ 79,871 4.3 % $ 48,881 2.9 %
Technology (5) ................ 25,298 37.8 16,325 38.3 13,728 38.2
--------------- ----------- --------------- --------- ---------------- -----------
Total ......................... $ 119,232 5.2 % $ 96,196 5.0 % $ 62,609 3.7 %
=============== =========== =============== ========= ================ ===========
</TABLE>
- --------------
(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 costs of $13.5 million, $55.7 million and
$43.9 million in 1999, 1998 and 1997, respectively.
(5) Excludes merger and integration costs of $1.0 million and $6.9 million in
1998 and 1997, respectively.
20
<PAGE>
1999 Compared to 1998
Net sales increased $364.0 million, or 18.9%, to $2,285.7 million in 1999
from $1,921.7 million in 1998. Of the $364.0 million increase, approximately
$339.8 million, or 93.4%, represented an 18.1% increase in the Company's
healthcare distribution business. As part of this increase, approximately $197.0
million represented a 38.2% increase in its medical business, $173.2 million
represented a 75.0% increase in its international business, $4.0 million
represented a 8.2% increase in the Company's veterinary business, and $(34.4)
million represented a 3.2% decrease in the Company's dental business. The
increase in medical net sales is 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 $24.2 million, or 56.8%, to $66.9 million for 1999, from $42.7 million
for 1998. The increase in technology and value-added product sales was primarily
due to increased practice management software sales and an acquisition.
Gross profit increased by $96.6 million, or 16.1%, to $698.4 million in
1999, from $601.8 million in 1998. Gross profit margin for healthcare
distribution decreased by 0.7% to 30.6% from 31.3% last year. Healthcare
distribution gross profit increased by $84.6 million, or 14.9%, to $652.7
million in 1999, from $568.1 million in 1998. Gross profit margin decreased by
0.8%, to 29.4%, from 30.2% last year primarily due to sales mix and lower
manufacturers rebates as a result of reduced annual sales. Technology gross
profit increased by $11.9 million, or 35.2%, to $45.7 million in 1999, from
$33.8 million in 1998. Technology gross profit margin decreased by 10.8% to
68.3% from 79.1% last year primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $73.5 million,
or 14.5%, to $579.1 million in 1999 from $505.6 million in 1998. Selling and
shipping expenses increased by $42.2 million, or 12.1%, to $390.6 million in
1999 from $348.4 million in 1998. As a percentage of net sales, selling and
shipping expenses decreased 1.0% to 17.1% in 1999 from 18.1% 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 $31.3 million, or
19.9%, to $188.5 million in 1999 from $157.2 million in 1998, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses remained constant at 8.2% in 1999 and 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 $(2.2) million in 1999 from $0.8 million in 1998. The decline was due to
reduced earnings from an affiliate totaling approximately $1.3 million, net of
taxes, due to a temporary cessation of production of anesthetic products
produced by HS Pharmaceutical. HS Pharmaceutical is an affiliated company, which
is accounted for under the equity method. On September 23, 1999, the FDA issued
clearance to 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
21
<PAGE>
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 tax rate, excluding merger and
integration costs and the Meer tax adjustment, and the Federal statutory rate
relates primarily to state income taxes.
1998 Compared to 1997
Net sales increased $223.2 million, or 13.1%, to $1,921.7 million in 1998
from $1,698.5 million in 1997. Of the $223.2 million increase, approximately
$216.5 million or 97.8% represented a 13.0% increase in the Company's healthcare
distribution business. As part of this increase, approximately $84.5 million
represented a 8.5% increase in the Company's dental business, $74.7 million
represented a 16.9% increase in its medical business, $49.8 million represented
a 27.5% increase in its international business and $7.5 million represented a
18.3% increase in the Company's veterinary business. The increase in dental net
sales was primarily the result of the continuing favorable impact of the
Company's integrated sales and marketing approach (which coordinates the efforts
of its field sales consultants with its direct marketing and telesales
personnel), continued success in the Company's target marketing programs and
purchase acquisitions, offset in part by a reduction in dental equipment sales
resulting from the Company's disposal of its equipment manufacturing subsidiary,
Marus Dental International ("Marus"), in August 1998 and estimated sales erosion
on the Meer acquisition. The increase in medical net sales is primarily
attributable to sales to hospitals, acquisitions and the benefits of a new
telesales structure, partially offset by a decline in sales to renal dialysis
centers. In the first quarter of 1998 the Company's largest renal dialysis
customer, Renal Treatment Centers, Inc. ("RTC"), was acquired by Total Renal
Care, Inc. which is not a customer of the Company. In March of 1998, RTC stopped
purchasing Epogen from the Company, but continues to purchase other products.
During fiscal year 1997, the Company's sales of Epogen to RTC amounted to $38.7
million. In the international market, the increase in net sales was due to
increased account penetration in France, the United Kingdom and Spain and
acquisitions, primarily in Germany, the United Kingdom and The Netherlands. In
the veterinary market, the increase in net sales was primarily due to increased
account penetration with core accounts and veterinary groups. Excluding net
sales of Marus and RTC in both periods, as well as the estimated sales erosion
on the Meer acquisition, healthcare distribution net sales would have grown by
16.1% in 1998 over 1997. The remaining increase in 1998 net sales was due to the
technology business, which increased $6.7 million or 18.7% to $42.7 million for
1998, from $35.9 million for 1997. The increase in technology and value-added
product sales was primarily due to increased practice management software sales.
22
<PAGE>
Gross profit increased by $91.4 million, or 17.9%, to $601.8 million in
1998, from $510.4 million in 1997. Gross profit margin increased by 1.2% to
31.3% from 30.1% last year. Healthcare distribution gross profit increased by
$83.4 million or 17.2% to $568.1 million in 1998, from $484.7 million in 1997.
Healthcare distribution gross profit margin increased by 1.0% to 30.2% from
29.2% last year primarily due to sales mix. Technology gross profit increased by
$8.1 million or 31.5% to, $33.8 million in 1998, from $25.7 million in 1997.
Technology gross profit margin increased by 7.6% to 79.1% from 71.5% last year
primarily due to increased sales volume of software systems.
Selling, general and administrative expenses increased by $57.8 million,
or 12.9%, to $505.6 million in 1998 from $447.8 million in 1997. Selling and
shipping expenses increased by $37.1 million, or 11.9%, to $348.4 million in
1998 from $311.3 million in 1997. As a percentage of net sales, selling and
shipping expenses decreased 0.2% to 18.1% in 1998 from 18.3% in 1997. This
decrease was primarily due to leveraging of the Company's distribution
infrastructure. General and administrative expenses increased $20.7 million, or
15.2%, to $157.2 million in 1998 from $136.5 million in 1997, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses increased 0.2% in 1998, to 8.2% from 8.0% in 1997.
Other income (expense) - net decreased by $4.6 million, to $(3.5) million
for the year ended December 26, 1998 from $1.1 million for 1997 due to an
increase in interest expense resulting from an increase in average borrowings
and lower imputed interest income on long term accounts receivable balances.
Equity in earnings of affiliates decreased $1.3 million or 61.9% to $0.8
million in 1998 from $2.1 million in 1997. The decline is the result of the
reduced earnings in the fourth quarter of an affiliate due to a voluntary recall
of anesthetic products produced by Novocol.
23
<PAGE>
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 tax rate, excluding merger and
integration costs and the Meer tax adjustment, and the Federal statutory rate
relates primarily to state income taxes.
For, 1997 the Company's effective tax rate was 136.8%. On a pro forma
basis, adjusting for assumed tax benefits arising from the losses of Meer as an
S Corporation, and 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 39.7%. The difference between the effective tax rate (excluding
merger and integration costs) and the Federal statutory rate relates primarily
to state income taxes.
Year 2000
During the fourth quarter of 1999 the Company completed its company-wide
program to prepare its computer systems, applications and software products for
the year 2000. The cost of this program was approximately $2.5 million, with
approximately $1.7 million representing incremental costs to the Company.
Subsequent to December 31, 1999, the Company has not experienced any year 2000
problems either internally or from suppliers or other outside sources that had
an adverse impact on the Company's operations or financial condition. The
Company has no reason to believe that year 2000 failures will materially affect
it in the future. However, since it may take several additional months before it
is known whether the Company or suppliers, vendors or customers may have
undergone year 2000 problems, no assurances can be given that the Company will
not experience losses or disruptions due to year 2000 computer-related problems.
The Company will continue to monitor the operation of its software products,
computers and microprocessor-based devices for any year 2000 problems.
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 Euros, and have re-denominated
outstanding sovereign debt. The authority to direct monetary policy for the
participating coutnries, including money supply and official interest rates for
the Euro, is now exercised by the new European Central Bank.
In 1998, the Company established a Euro Task Force to address its
information system, 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.
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". In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for transactions entered into for quarters in the fiscal year
beginning 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. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its results of
operations and financial position.
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 margins by using foreign currency
forward contracts to hedge the estimated foreign currency payments to foreign
vendors. The total U.S. dollar equivalent of all foreign currency forward
contracts hedging debt and the purchase and sale of merchandise was $10.8
million as of the 1999 fiscal year end.
24
<PAGE>
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 $8.3 million and $0.4 million in 1999
and 1998, respectively, which adjustments were reflected in the balance sheet as
an adjustment to stockholders' equity. The cumulative translation adjustment at
the end of 1999 showed a net negative translation adjustment of $10.4 million.
The Company has a Canadian subsidiary which purchases in U.S. dollars,
some of the products it sells locally in Canadian dollars. In order to minimize
its exposure to fluctuations in U.S. dollar/Canadian dollar exchange rates, the
Company, in November and December 1999, entered into foreign currency forward
contracts with major international banks to fix the exchange rate at which it
buys some of its year 2000 U.S. dollar denominated products. Under these
agreements, the Company has obligations to buy approximately $4.0 million U.S.
dollars at predetermined fixed rates. The Company anticipates entering into new
such contracts in the normal course of business.
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.
The Company had entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.21% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in December 2003 and November 2004.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund (a)
repayments on bank borrowings, (b) acquisitions, (c) capital expenditures, and
(d) 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 have been strongest during the fourth
quarter and special inventory forward buy-in opportunities are most prevalent
just before the end of the year, the Company's working capital requirements have
been generally higher from the end of the third quarter to the end of the first
quarter of the following year. The Company has financed its business primarily
through its revolving credit facilities, private placement loans and stock
issuances.
Net cash provided by operating activities for the year ended December 25,
1999 of $48.0 million resulted primarily from net income of $50.3 million,
increased by non-cash charges relating primarily to depreciation and
amortization of $28.3 million, offset by a net use of working capital of $36.8
million. The use of working capital was primarily due to a decrease in accounts
payable and other accrued expenses of $33.4 million, and an $22.3 million
increase in accounts receivable resulting primarily from increased net sales and
a decrease in the percentage of customers who make payment with their orders,
offset in part by an $12.1 million decrease in inventories, and a $6.8 million
decrease in other current assets. The Company anticipates future uses of working
capital as a result of its continued sales growth, and special inventory forward
buy-in opportunities.
Net cash used in investing activities for the year ended December 25, 1999
of $164.1 million resulted primarily from cash used to make acquisitions of
$132.6 million and capital expenditures of $34.5 million. During the past three
years, the Company has invested $89.9 million in the development of new computer
systems, and expenditures for new and existing operating facilities. In the
coming year, the
25
<PAGE>
Company expects to invest in excess of $25.0 million per year in capital
projects to modernize and expand its facilities and infrastructure systems and
integrate operations.
Net cash provided by financing activities for the year ended December 25,
1999 of $121.9 million resulted primarily from cash proceeds from borrowings and
issuance of stock of approximately $283.6 million offset primarily by debt
repayments of approximately $161.7 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 25, 1999 of $26.0
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 $53.7 million at December 25, 1999. The Company also has one
uncommitted bank line totaling $15.0 million, none of which had been borrowed at
December 25, 1999. 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 Heiland, 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 for 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 $53.2 million at
December 25, 1999 under which $41.5 million had been borrowed.
The aggregate purchase price of the acquisitions completed during 1999,
including the acquisition of the minority interests of two subsidiaries, was
approximately $139.0 million, payable $132.6 million in cash and $6.4 million in
stock. The acquisitions of GIV and the Heiland Group were funded by the
Company's revolving credit agreement and various short-term borrowings entered
into in January 1999. Existing borrowing lines primarily funded the remaining
cash portion of the purchases.
The Company believes that its cash and cash equivalents of $26.0 million
as of December 25, 1999, 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.
The value of the U.S. dollar affects 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
26
<PAGE>
contracts, the Company hedges those transactions that, when remeasured according
to generally accepted accounting principles, impact the income statement. From
time to time, the Company purchases short-term forward exchange contracts to
protect against currency exchange risks associated with the anticipated revenue
of the Company's international subsidiaries. As of December 25, 1999, the
Company has outstanding foreign currency forward contracts aggregating $10.8
million related to debt and the purchase and sale of merchandise. The contracts
hedge against currency fluctuations of Deutsche Mark ($0.8 million), British
Pounds ($8.2 million), Swiss Francs ($0.5 million) and Australian dollars ($1.3
million). At December 25, 1999, the Company had net deferred losses from foreign
currency forward contracts of $0.3 million. The contracts expire at various
dates through February 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.
As of December 25, 1999, the Company had $13.0 million outstanding in
interest rate swaps. These swaps are used to convert floating rate debt relating
to the Company's revolving credit agreement, to fixed rate debt to reduce the
Company's exposure to interest rate fluctuations. The net result was to
substitute a weighted averaged fixed interest rate of 7.2% for the variable
LIBOR rate on $13.0 million of the Company's debt. The swaps expire in December
2003 and December 2004. Under the interest rate environment during the year
ended December 25, 1999, the net fair value of the Company's interest rate swap
agreements resulted in a recognized loss of approximately $0.3 million.
27
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ................................................................ 29
Consolidated Financial Statements:
Balance Sheets as of December 25, 1999 and December 26, 1998 ................................................. 30
Statements of Operations and Comprehensive Income for the years ended
December 25, 1999, December 26, 1998 and December 27, 1997 ......................................... 31
Statements of Stockholders' Equity for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997 ............................................................ 32
Statements of Cash Flows for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997 ............................................................ 33
Notes to Consolidated Financial Statements .................................................................. 34
Report of Independent Certified Public Accountants ................................................................ 60
Schedule II - Valuation and Qualifying Account, years ended December 25, 1999,
December 26, 1998, and December 27, 1997 .................................................................... 61
</TABLE>
All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.
28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Henry
Schein, Inc. and Subsidiaries as of December 25, 1999 and December 26, 1998, 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 25, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Henry
Schein, Inc. and Subsidiaries at December 25, 1999 and December 26, 1998, and
the results of their operations and cash flows for each of the three years in
the period ended December 25, 1999 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
New York, New York
February 25, 2000
29
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 25, December 26,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 26,019 $ 28,222
Accounts receivable, less reserves of $20,391, and $20,136, respectively....... 388,063 338,121
Inventories ................................................................... 285,590 270,008
Deferred income taxes ......................................................... 15,520 14,532
Prepaid expenses and other .................................................... 63,617 53,646
------------- ------------
Total current assets ..................................................... 778,809 704,529
Property and equipment, net ........................................................ 86,627 67,646
Goodwill and other intangibles, net ................................................ 295,113 148,428
Investments and other .............................................................. 43,553 41,437
------------- ------------
$ 1,204,102 $ 962,040
============= ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable .............................................................. $ 198,983 $ 169,860
Bank credit lines ............................................................. 41,527 19,372
Accruals:
Salaries and related expenses ............................................ 31,188 29,675
Merger and integration costs ............................................. 10,093 21,992
Other .................................................................... 64,710 50,404
Current maturities of long-term debt .......................................... 3,879 9,634
------------- ------------
Total current liabilities ................................................ 350,380 300,937
Long-term debt ..................................................................... 318,218 180,445
Other liabilities .................................................................. 9,782 11,720
------------- ------------
Total liabilities ........................................................ 678,380 493,102
------------- ------------
Minority interest .................................................................. 7,855 5,904
------------- ------------
Commitments and contingencies ......................................................
Stockholders' equity:
Common stock, $.01 par value, authorized 120,000,000,
issued: 40,768,306 and 40,250,936, respectively .......................... 407 402
Additional paid-in capital .................................................... 361,757 348,119
Retained earnings ............................................................. 167,809 119,064
Treasury stock, at cost, 62,479 shares ........................................ (1,156) (1,156)
Accumulated comprehensive loss ................................................ (10,359) (2,057)
Deferred compensation ......................................................... (591) (1,338)
------------- ------------
Total stockholders' equity ............................................... 517,867 463,034
------------- ------------
$ 1,204,102 $ 962,040
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ............................................................... $ 2,285,700 $ 1,921,685 $ 1,698,496
Cost of sales ........................................................... 1,587,344 1,319,861 1,188,098
------------ ------------ ------------
Gross profit ....................................................... . 698,356 601,824 510,398
Operating expenses:
Selling, general and administrative ................................ 579,124 505,628 447,789
Merger and integration costs ....................................... 13,467 56,666 50,779
------------ ------------ ------------
Operating income .............................................. 105,765 39,530 11,830
Other income (expense):
Interest income .................................................... 7,777 6,964 7,353
Interest expense ................................................... (23,593) (12,050) (7,643)
Other - net ........................................................ (166) 1,570 1,375
------------ ------------ ------------
Income before taxes on income, minority interest and equity
in earnings (losses) of affiliates ...................... 89,783 36,014 12,915
Taxes on income ......................................................... 35,589 20,325 17,670
Minority interest in net income (loss) of subsidiaries .................. 1,690 145 (430)
Equity in earnings (losses) of affiliates ............................... (2,192) 783 2,141
------------ ------------ ------------
Net income (loss) ....................................................... $ 50,312 $ 16,327 $ (2,184)
Net income (loss) ....................................................... $ 50,312 $ 16,327 $ (2,184)
Other comprehensive income (loss):
Foreign currency translation adjustment ............................ (8,302) (448) (973)
------------ ------------ ------------
Other comprehensive income (loss) ....................................... $ 42,010 $ 15,879 $ (3,157)
============ ============ ============
Net income (loss) per common share:
Basic .............................................................. $ 1.24 $ 0.42 $ (0.06)
============ ============ ============
Diluted ............................................................ $ 1.21 $ 0.39 $ (0.06)
============ ============ ============
Weighted average common shares outstanding:
Basic .............................................................. 40,585 39,305 37,531
Diluted ............................................................ 41,438 41,549 37,531
Pro forma:
Historical net income (loss) ....................................... $ 16,327 $ (2,184)
Pro forma adjustment:
Elimination of deferred tax benefit arising from conversion of
an acquisition from S Corporation to a C Corporation ..... (2,000) -
Income tax (expense) benefit related to aquired
S Corporation ............................................ (579) 406
------------ ------------
Pro forma net income (loss) ............................................. $ 13,748 $ (1,778)
============ ============
Pro forma net income (loss) per common share:
Basic .............................................................. $ 0.35 $ (0.05)
============ ============
Diluted ............................................................ $ 0.33 $ (0.05)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
$.01 Par Value Paid-in Retained
Shares Amount Capital Earnings
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, December 28, 1996 as previously reported ......................... 36,619,516 $366 $ 316,771 $ 96,278
Retained earnings of three companies acquired under the pooling of
interests method, not deemed material in the aggregate ............... __ __ __ 5,899
Adjustment to change the fiscal year end of the three companies aquired
under the pooling of interests method ................................ __ __ __ 2,037
Net loss .................................................................. __ __ __ (2,184)
Dividends paid by pooled companies ........................................ __ __ __ (2,442)
Shares issued for acquisitions ............................................ 906,401 9 2,945 __
Issuance of restricted stock .............................................. 44,846 __ __ __
Treasury shares issued for acquisitions (246,960 shares) ................. __ __ __ __
Purchase of treasury stock (30,507 shares) ............................... __ __ __ __
Shares reacquired from a prior years acquisition (2,339 shares) .......... __ __ __ __
Treasury shares retired ................................................... (5,644) __ (95) __
Accumulated comprehensive loss ............................................ __ __ __ __
Shares issued by pooled company ........................................... 171,714 1 2,875 __
Shares issued to ESOP trust ............................................... 44,122 __ 1,150 __
Shares issued for stock options, including tax benefit .................... 339,617 5 4,998 __
---------- ------- ---------- ----------
Balance, December 27, 1997 ................................................ 38,120,572 381 328,644 99,588
Retained earnings of three companies aquired under the pooling of
interests method, not deemed material in the aggregate ............... __ __ __ 5,161
Net income ................................................................ __ __ __ 16,327
Dividends paid by pooled companies ........................................ __ __ __ (2,012)
Shares issued for acquisitions ............................................ 1,124,469 11 2,110 __
Shares issued to ESOP trust ............................................... 34,720 __ 1,311 __
Amortization of restricted stock .......................................... __ __ __ __
Accumulated comprehensive loss ............................................ __ __ __ __
Shares issued for stock options and warrants, including tax benefit ....... 971,175 10 16,054 __
---------- ------- ---------- ----------
Balance, December 26, 1998 ................................................ 40,250,936 402 348,119 119,064
Deficit of one company aquired under the pooling of
interests method, not deemed material in the aggregate ............... __ __ __ (1,567)
Net income ................................................................ __ __ __ 50,312
Shares issued for acquisitions, net ....................................... 189,833 2 1,900 __
Shares issued to ESOP trust ............................................... 101,233 1 1,766 __
Amortization of restricted stock .......................................... __ __ __ __
Accumulated comprehensive loss ............................................ __ __ __ __
Shares issued for stock options and warrants, including tax benefit ....... 226,304 2 9,972 __
---------- ------- ---------- ----------
Balance, December 25, 1999 ................................................ 40,768,306 $407 $ 361,757 $ 167,809
========== ======= ========== ==========
<CAPTION>
Accumulated Total
Treasury Comprehensive Deferred Stockholders'
Stock Loss Compensation Equity
-------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 28, 1996 as previously reported ......................... $ (3,902) $ (636) $ - $ 408,877
Retained earnings of three companies acquired under the pooling of
interests method, not deemed material in the aggregate ............... __ __ __ 5,899
Adjustment to change the fiscal year end of the three companies aquired
under the pooling of interests method ................................ __ __ __ 2,037
Net loss .................................................................. __ __ __ (2,184)
Dividends paid by pooled companies ........................................ __ __ __ (2,442)
Shares issued for acquisitions ............................................ __ __ __ 2,954
Issuance of restricted stock .............................................. __ __ (1,625) (1,625)
Treasury shares issued for acquisitions (246,960 shares) ................. 3,303 __ __ 3,303
Purchase of treasury stock (30,507 shares) ............................... (618) __ __ (618)
Shares reacquired from a prior years acquisition (2,339 shares) .......... (34) __ __ (34)
Treasury shares retired ................................................... 95 __ __ -
Accumulated comprehensive loss ............................................ __ (973) __ (973)
Shares issued by pooled company ........................................... __ __ __ 2,876
Shares issued to ESOP trust ............................................... __ __ __ 1,150
Shares issued for stock options, including tax benefit .................... __ __ __ 5,003
---------- ------- ---------- ----------
Balance, December 27, 1997 ................................................ (1,156) (1,609) (1,625) 424,223
Retained earnings of three companies aquired under the pooling of
interests method, not deemed material in the aggregate ............... __ __ __ 5,161
Net income ................................................................ __ __ __ 16,327
Dividends paid by pooled companies ........................................ __ __ __ (2,012)
Shares issued for acquisitions ............................................ __ __ __ 2,121
Shares issued to ESOP trust ............................................... __ __ __ 1,311
Amortization of restricted stock .......................................... __ __ 287 287
Accumulated comprehensive loss ............................................ __ (448) __ (448)
Shares issued for stock options and warrants, including tax benefit ....... __ __ __ 16,064
---------- ------- ---------- ----------
Balance, December 26, 1998 ................................................ (1,156) (2,057) (1,338) 463,034
Deficit of one company aquired under the pooling of interests
method, not deemed material in the aggregate ......................... __ __ __ (1,567)
Net income ................................................................ __ __ __ 50,312
Shares issued for acquisitions, net ....................................... __ __ __ 1,902
Shares issued to ESOP trust ............................................... __ __ __ 1,767
Amortization of restricted stock .......................................... __ __ 747 747
Accumulated comprehensive loss ............................................ __ (8,302) __ (8,302)
Shares issued for stock options and warrants, including tax benefit ....... __ __ __ 9,974
--------- --------- --------- ---------
Balance, December 25, 1999 ................................................ $ (1,156) $ (10,359) $ (591) $ 517,867
========= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ 50,312 $ 16,327 $ (2,184)
Adjustments to reconcile net income (loss) to net cash provided .........
by (used in) operating activities: .................................
Depreciation and amortization ...................................... 28,273 19,984 15,730
Provision for losses and allowances on accounts receivable.......... 255 4,379 3,857
Stock issued to ESOP trust ......................................... 1,767 1,311 1,150
Provision (benefit) for deferred income taxes ...................... 13 185 (3,920)
Write-off of equipment and intangibles ............................. 415 13,500 8,600
Undistributed (earnings) losses of affiliates ...................... 2,192 (783) (2,141)
Minority interest in net income (loss) of subsidiaries ............. 1,690 145 (430)
Other .............................................................. (129) 178 221
Changes in assets and liabilities (net of acquisitions):
Increase in accounts receivable .................................... (22,258) (48,947) (50,711)
Decrease (increase) in inventories ................................. 12,102 (34,533) (19,939)
Decrease (increase) in other current assets ........................ 6,786 (12,143) (5,241)
(Decrease) increase in accounts payable and accruals ............... (33,414) 43,090 13,139
------------ ------------ ------------
Net cash provided by (used in) operating activities .......................... 48,004 2,693 (41,869)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures .................................................... (34,549) (33,521) (21,862)
Business acquisitions, net of cash acquired ............................. (132,552) (13,883) (42,267)
Proceeds from sale of fixed assets ...................................... 8,583 8,121 -
Other ................................................................... (5,557) (9,416) (6,173)
------------ ------------ ------------
Net cash used in investing activities ........................................ (164,075) (48,699) (70,302)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................................ 131,211 129,717 19,040
Principal payments on long-term debt .................................... (14,873) (49,192) (14,795)
Proceeds from issuance of stock ......................................... 12,487 10,956 5,306
Proceeds from borrowing from banks ...................................... 139,924 112,344 73,582
Purchase of treasury stock .............................................. - - (618)
Payments on borrowings from banks ....................................... (146,877) (139,503) (1,177)
Distributions to stockholders ........................................... - (2,012) (2,442)
Other ................................................................... 40 105 (730)
------------ ------------ ------------
Net cash provided by financing activities .................................... 121,912 62,415 78,166
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ......................... 5,841 16,409 (34,005)
Effect of exchange rate changes on cash ...................................... (8,044) - -
------------ ------------ ------------
Cash and cash equivalents, beginning of year ................................. 28,222 11,813 45,818
------------ ------------ ------------
Cash and cash equivalents, end of year ....................................... $ 26,019 $ 28,222 $ 11,813
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Note 1-Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Henry
Schein, Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates, which are greater than 20%
and less than or equal to 50% owned, are accounted for under the equity method.
All material intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the
last Saturday of December. Fiscal years ended December 25, 1999, December 26,
1998 and December 27, 1997 all consisted of 52 weeks.
Revenue Recognition
Sales are recorded when products are shipped or services are rendered
except for revenues derived from post contract customer support for practice
management software which is deferred and recognized ratably over the period in
which the support is to be provided.
Inventories
Inventories consist substantially of finished goods and are valued at the
lower of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:
Years
---------
Buildings and improvements ..................... 40
Machinery and warehouse equipment .............. 5-10
Furniture, fixtures and other .................. 3-10
Computer equipment and software ................ 5-8
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.
34
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 1-Significant Accounting Policies-(Continued)
Taxes on Income
The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a
consolidated Federal income tax return with its 80% or greater owned
subsidiaries.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows were
not material for the years ended December 26, 1998 and December 27, 1997.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the accumulated comprehensive loss account in stockholders' equity.
Gains and losses resulting from foreign currency transactions are included in
earnings, except for certain hedging transactions (see below).
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the basis of the transaction when it is
completed.
In order to manage interest rate exposure, the Company has entered into
interest rate swap agreements to exchange variable rate debt into fixed rate
debt without the exchange of the underlying principal amounts. Net payments or
receipts under the agreements are recorded as adjustments to interest expense.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for
long-term debt approximates fair value because certain of the underlying
instruments are at variable rates, which are repriced frequently. The remaining
portion of long-term debt approximates fair value because the interest
approximates current market rates for financial instruments with similar
maturities and terms.
35
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 1-Significant Accounting Policies--(Continued)
Acquisitions
The net assets of businesses purchased are recorded at their fair value at
the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 30 years. Certain acquisitions
provide for contingent consideration, primarily cash, to be paid in the event
certain financial performance targets are satisfied over periods typically not
exceeding three years from the date of acquisition. The Company's policy is to
record a liability for such amounts when it becomes probable that targets will
be met.
Long-Lived Assets
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. In
connection with certain acquisitions, the Company has determined that certain
long-lived assets have been impaired (see Note 6).
Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation."
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of stock
options.
Comprehensive Income
Comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are excluded from net income as
these amounts are recorded directly as an adjustment to stockholders' equity.
The Company's comprehensive income is comprised of foreign currency translation
adjustments.
36
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
New Accounting Pronouncements
Note 1-Significant Accounting Policies--(Continued)
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". In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for transactions entered into for quarters in the fiscal year
beginning 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. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its results of
operations and financial position.
Note 2-Earnings Per Share
A reconciliation of shares used in calculating basic and diluted earnings
per share follows (in thousands):
<TABLE>
<CAPTION>
Years ended
----------------------------------------------
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic .............................. 40,585 39,305 37,531
Effect of assumed conversion of
employee stock options ........ 853 2,244 -
------------ ------------ ------------
Diluted ............................ 41,438 41,549 37,531
============ ============ ============
</TABLE>
Options to purchase approximately 2,485,000, 772,000 and 4,135,000 shares
of common stock at prices ranging from $24.56 to $46.00, $39.88 to $46.00 and
$4.21 to $36.18 per share were outstanding during portions of 1999, 1998, and
1997, respectively, but were not included in the computation of diluted earnings
per share for each of the respective years because they were anti-dilutive.
37
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 3-Property and Equipment Net
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Land ....................................................... $ 1,257 $ 795
Buildings and leasehold improvements ....................... 37,543 25,626
Machinery and warehouse equipment .......................... 24,117 26,102
Furniture, fixtures and other .............................. 25,430 22,362
Computer equipment and software ............................ 58,982 46,517
----------------- ------------------
147,329 121,402
Less accumulated depreciation and amortization ............ 60,702 53,756
----------------- ------------------
Net property and equipment ................................. $ 86,627 $ 67,646
================= ==================
</TABLE>
Equipment held under capital leases amounted to approximately $2,541 and
$1,195 as of December 25, 1999 and December 26, 1998 (See Note 13(b)).
Note 4-Goodwill and Other Intangibles, Net
Goodwill and other intangibles consist of the following:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Goodwill ..................................................... $ 314,353 $ 155,976
Other ........................................................ 12,116 10,575
----------------- ------------------
326,469 166,551
Less accumulated amortization ................................ 31,356 18,123
----------------- ------------------
$ 295,113 $ 148,428
================= ==================
</TABLE>
Goodwill represents the excess of the purchase price of acquisitions over
the fair value of identifiable net assets acquired. During 1999, the increase in
goodwill was primarily due to eight acquisitions, including the purchase of six
companies which totaled approximately $149,166 which included $38,972 of
acquired goodwill, the minority interests of two subsidiaries, which totaled
approximately $1,272 and additional purchase price consideration of
approximately $7,939 for one current year and five prior year acquisitions.
Other intangibles include covenants not to compete, computer programming costs,
customer lists and deferred acquisition costs. In connection with certain
acquisitions, the Company has determined that the goodwill of certain
acquisitions was impaired in 1998 (see Note 6).
38
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 5-Investments and Other
Investments and other consist of:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Investments in unconsolidated affiliates ..................... $ 12,852 $ 12,856
Long term notes receivable ................................... 19,770 16,599
Other ........................................................ 10,931 11,982
----------------- ------------------
$ 43,553 $ 41,437
================= ==================
</TABLE>
The Company's investments are predominately 50% owned unconsolidated
affiliates consisting of various companies involved in the healthcare
distribution business and HS Pharmaceutical, Inc., which manufactures and
distributes generic pharmaceuticals. As of December 25, 1999, the Company's
investments in unconsolidated affiliates were $3,246 more than the Company's
proportionate share of the underlying equity of these affiliates. This amount,
which has been treated as goodwill, is being amortized over 30 years and charged
to equity in the operating results of these companies. As of December 25, 1999,
approximately $7,364 of the Company's retained earnings represented
undistributed earnings of affiliates. Combined financial data for substantially
all of these companies are as follows:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Current assets ............................................ $ 46,233 $ 51,683
Total assets .............................................. 71,619 76,238
Liabilities ............................................... 56,154 57,356
Stockholders' equity ...................................... 15,465 18,882
</TABLE>
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales .............................................. $ 112,746 $ 114,788 $ 98,954
Operating income (loss)................................. (3,530) 2,589 7,303
Net income (loss)....................................... (5,230) 541 4,841
</TABLE>
39
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 6-Business Acquisitions
The Company has completed the acquisition of 38 healthcare distribution
and technology businesses between 1997 and 1999, the most significant of which
were; (i) in transactions accounted for under the purchase method of accounting
during 1999; General Injectables and Vaccines, Inc. ("GIV") through the purchase
of all of the outstanding common stock of Biological Popular Culture, Inc., a
leading independent direct marketer of vaccines and other injectables to office
based practitioners throughout the United States; and the Heiland Group GmbH
("Heiland"), the largest direct marketer of healthcare supplies to the medical,
dental, and veterinarian office-based practitioners, in Germany; and (ii) in
transactions accounted for under the pooling of interests method of accounting
during 1998 and 1997, respectively; the H. Meer Dental Supply Co., Inc, ("Meer")
a distributor of consumable dental supplies and equipment with sales and service
centers located throughout the United States; Sullivan Dental Products, Inc.
("Sullivan"), distributor of consumable dental supplies and dental equipment
with 52 sales and service centers located throughout the United States; Micro
Bio-Medics, Inc. ("MBMI"), a distributor of medical supplies to physicians and
hospitals as well as to other healthcare professionals nationwide; and Dentrix
Dental Systems, Inc. ("Dentrix"), a leading provider of clinically-based dental
practice management systems.
GIV and Heiland had 1998 net sales of approximately $120,000 and $130,000,
respectively. The purchase price and resultant goodwill, which is being
amortized over 20 years, for these acquisitions was approximately $65,000 and
$47,400, and $60,400 and $55,800, respectively (see Note 8(a)). The acquisition
agreements for GIV and Heiland provide for additional consideration of up to
$20,000 per year through 2004, not to exceed $75,000 in total, and $3,900 per
year through 2001, respectively, to be paid if certain sales and profitability
targets are met. The GIV acquisition agreement also provides for additional
consideration of $5,400 based upon sales of new products, as defined.
Pursuant to the respective merger agreements for Meer, Sullivan, MBM and
Dentrix, which were completed on August 14, 1998, November 12, 1997, August 1,
1997 and February 28, 1997, the Company issued approximately 2,974,000,
7,594,900, 3,231,400 and 1,070,000 shares of its Common Stock with aggregate
market values (on their respective closing dates) of approximately $132,700,
$266,800, $122,800 and $29,400, respectively, and assumed and exchanged all
options to purchase Sullivan and MBMI stock for options to purchase 1,192,000
and 1,117,000, respectively, of the Company's Common Stock. Prior to its
acquisition by the Company, Meer elected to be taxed as an S Corporation under
the Internal Revenue Code. Accordingly, the current taxable income or loss of
Meer was attributable to its shareholders. Since its acquisition, Meer has been
taxed as a regular corporation. For the years ended December 26, 1998 and
December 27, 1997, pro forma adjustments have been made to the restated
statements of operations to reflect the income tax provisions and recoveries
that would have been provided for had Meer been subject to income taxes in prior
years.
40
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 6-Business Acquisitions--(Continued)
Additionally, during 1999, the Company acquired six other companies, which
had total sales in 1998 of approximately $74,000, that were accounted for under
the purchase method of accounting. The total purchase price of the six companies
acquired was approximately, $11,800 and the resulting goodwill of $8,266 is
being amortized over 30 years. The Company also acquired one company which is
being accounted for under the pooling of interests method of accounting which
was not material. In connection with this acquisition, the Company issued
189,833 shares of its Common Stock with an aggregate market value of $6.4
million.
During 1998, the Company acquired four other businesses, with aggregate
net sales for 1997 of approximately $85,000, three of which were accounted for
under the pooling of interests method of accounting, with the remaining
acquisition of a 50.1% ownership interest being accounted for under the purchase
method of accounting. The total amount of cash paid (for the purchased
businesses) and the value of the Company's Common Stock issued in connection
with three of these acquisitions was approximately $6,800 and approximately
$18,400, respectively. In connection with one of the acquisitions, 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
$24,000.
During 1997, the Company acquired 21 other businesses, three of which were
accounted for under the pooling of interests method of accounting, with the
remainder being accounted for under the purchase method of accounting (15 for
100% ownership interests and three for majority ownership interests). The total
amount of cash paid and promissory notes issued, and the value of the Company's
Common Stock issued in connection with these acquisitions was $40,798 and
$34,000, respectively.
The financial statements have been restated to give retroactive effect to
the Meer, Sullivan, MBMI and Dentrix transactions only, as the remaining
pooling transactions were not material and have been included in the
consolidated financial statements from the beginning of the quarter in which the
acquisitions occurred. Results of operations of the business acquisitions
accounted for under the purchase method of accounting had been included in the
consolidated financial statements commencing with their respective acquisition
dates.
During 1997, pursuant to a shareholders' agreement, certain minority
shareholders of a subsidiary of the Company exercised their option to sell their
shares in the subsidiary to the Company. The value of the shares put to the
Company was approximately $11,800, of which approximately $3,200 was paid for in
cash, with the remainder payable over two years in equal annual installments.
The Company has incurred certain direct costs in connection with the
aforementioned acquisitions accounted for under the pooling of interests method
of accounting and the integration of these and certain other acquired businesses
into the Company's infrastructure. These costs, which have been classified as
merger and integration costs are as follows:
41
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 6-Business Acquisitions-(Continued)
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Direct transaction costs (1) ........................................ $ 4,032 $ 7,100 $ 13,300
----------------- ----------------- -----------------
Integration costs:
Severance and other direct costs ............................... 3,437 12,366 9,879
Costs associated with the closure of distribution centers (2) .. 5,583 15,400 7,100
Long-lived asset write-off and impairment (3) .................. 415 13,500 8,600
Signing bonuses (4) ............................................ - 8,300 11,900
----------------- ----------------- -----------------
Total integration costs ................................... 9,435 49,566 37,479
----------------- ----------------- -----------------
Total merger and integration costs ............................. $ 13,467 $ 56,666 $ 50,779
================= ================= =================
</TABLE>
- ----------------------------------------------------
(1) Primarily investment banking and professional fees, including $3,533
related to Meer in 1999 (primarily legal fees resulting from the
acquisition).
(2) Primarily rent and consulting fees.
(3) Consists of write-offs of duplicate management information systems, other
assets and goodwill of $3,724 in 1998 (primarily associated with the
consolidation of the dental business under one national infrastructure)
and $4,000 in 1997 (primarily associated with the consolidation of the
medical business under one national infrastructure). The reduction in
goodwill was based on the expected loss of customers and resulting
decrease in cashflows derived from such customers on a pre-acquisition
basis.
(4) Signing bonuses and stay pay packages to sales force and certain senior
management directly related to the mergers.
The following table shows amounts paid and charged against the merger and
integration accrual.
<TABLE>
<CAPTION>
Applied
Balance at Against Adjustments
Beginning of Long-Lived to Reflect Balance at
Period Provision Payments Assets(1) Actual Costs End of Period
------------ ---------- -------- ---------- ------------ -------------
Year ended December 27, 1997:
<S> <C> <C> <C> <C> <C> <C>
Severance and other direct costs ........... $ -- $ 9,879 $ (3,008) $ -- -- $ 6,871
Direct transaction and other
integration costs ......................... -- 40,900 (23,975) (6,740) -- 10,185
-------- -------- --------- --------- -------- --------
$ -- $ 50,779 $(26,983) $ (6,740) $ -- $ 17,056
======== ======== ========= ========= ======== ========
Year ended December 26, 1998:
Severance and other direct costs ........... $ 6,871 $ 12,366 $(11,294) $ -- $ -- $ 7,943
Direct transaction and other
integration costs ......................... 10,185 44,300 (31,185) (9,251) -- 14,049
-------- -------- --------- --------- -------- --------
17,056 $ 56,666 $(42,479) $ (9,251) $ -- $ 21,992
======== ======== ========= ========= ======== ========
Year ended December 25, 1999:
Severance and other costs .................. $ 7,943 $ 4,721 $ (9,686) $ -- $ (1,284) $ 1,694
Direct transaction and other
integration costs ......................... 14,049 8,340 (9,156) (6,524) 1,690 8,399
-------- -------- --------- --------- -------- --------
$ 21,992 $ 13,061 $(18,842) $ (6,524) $ 406 $ 10,093
======== ======== ========= ========= ======== ========
</TABLE>
(1) to reflect specific write-offs relating to amounts previously provided.
42
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 6-Business Acquisitions-(Continued)
As a result of the acquisitions and integration of these and certain other
businesses into the Company's infrastructure 870 employees were terminated
through December 25, 1999. Of the 870 terminated employees, 129 received
severance payments during 1997, 502 received severance payments during 1998,
206 received severance payments during 1999 and 33 were owed severance at
December 25, 1999.
The summarized unaudited pro forma results of operations set forth below
for 1999 and 1998 assume the acquisitions, which were accounted for under the
purchase method of accounting, occurred as of the beginning of each of these
periods.
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Net sales ................................................................ $ 2,290,230 $ 2,278,755
Net income (1) .......................................................... $ 50,353 $ 11,657
Net income per common share:
Basic ............................................................... $ 1.24 $ 0.30
Diluted ............................................................. $ 1.22 $ 0.28
Pro forma net income, reflecting adjustment for income
tax expense on previously untaxed earnings
of Meer ............................................................. $ 9,078
Pro forma net income per common share:
Basic ............................................................... $ 0.23
Diluted ............................................................. $ 0.22
</TABLE>
- --------------
(1)Includes merger and integration costs of approximately $13,467 and the
related tax benefit of $3,983 in 1999 and $56,666 and related tax benefit of
$12,591 in 1998, respectively.
Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because the pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings or potential sales erosion that may result from the Company's
integration efforts.
43
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 7-Bank Credit Lines
At December 25, 1999, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $53,241 expiring through
December 2002. Borrowings of $41,527 under these credit lines at interest rates
ranging from 3.93% to 8.25% were collateralized by accounts receivable,
inventory and property and equipment with an aggregate net book value of $85,269
at December 25, 1999.
Note 8--Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Private Placement Loans (a) ............................................... $ 230,000 $ 100,000
Borrowings under Revolving Credit Agreement (b) ........................... 53,664 68,969
Notes payable for business acquisitions (c) ............................... 2,436 6,937
Notes payable to banks, interest variable (7.5% at
December 25, 1999), payable in quarterly installments ranging
from $19 to $24 through 2016, secured by inventory
and accounts receivable in the amount of $35,870 ..................... 25,208 4,050
Mortgage payable to bank in quarterly installments of $13
interest at 4.4% through 2013, collateralized by a building with a net
book value of $1,039 and various notes and loans payable with interest,
in varying installments through 2007, uncollateralized ............... 7,338 7,692
Capital lease obligations in various installments through
fiscal 2006; interest at 6.5% to 10% or varies with
prime rate ........................................................... 3,451 2,431
----------------- ------------------
Total ..................................................................... 322,097 190,079
Less current maturities ................................................... 3,879 9,634
----------------- ------------------
Total long-term debt ...................................................... $ 318,218 $ 180,445
================= ==================
</TABLE>
(a) Private Placement Loans
On June 30, 1999, the Company completed a private placement transaction under
which it issued $130,000 in Senior Notes, the proceeds of which were used for
the permanent financing of its acquisitions of GIV and Heiland, as well
as repaying and retiring a portion of four uncommitted bank lines. The notes
come due on June 30, 2009 and bear interest at a rate of 6.94% per annum.
Interest is payable semi-annually.
On September 25, 1998, the Company completed a private placement transaction
under which it issued $100,000 in Senior Notes, the proceeds of which were used
to pay down amounts owed under its revolving credit facility. Principal payments
totaling $20,000 are due annually starting September 25, 2006 through 2010. The
notes bear interest at a rate of 6.66% per annum. Interest is payable
semi-annually.
44
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 8-Long-Term Debt--(Continued)
(b) Revolving Credit Agreement
On August 15, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum available borrowings
to $150,000 from $100,000 and extended the term of the agreement to August 15,
2002. The interest rate on any borrowings under the agreement is based on prime
or LIBOR as defined in the agreement, which were 8.50%, and 6.19%, respectively,
at December 25, 1999. The borrowings outstanding at December 25, 1999 were at
interest rates ranging from 4.25% to 6.94%. The agreement provides for a sliding
scale fee ranging from 0.1% to 0.3%, based upon certain financial ratios, on any
unused portion of the commitment. The agreement also provides, among other
things, that the Company will maintain, on a consolidated basis, as defined, a
minimum tangible net worth; current, cash flow, and interest coverage ratios; a
maximum leverage ratio; and contains restrictions relating to annual dividends
in excess of $500, guarantees of subsidiary debt, investments in subsidiaries,
mergers and acquisitions, liens, capital expenditures, certain changes in
ownership and employee and shareholder loans.
(c) Notes Payable for Business Acquisitions
In May 1997, a subsidiary of the Company entered into a term loan for
$8,299 to acquire the remaining minority interests of a foreign subsidiary. The
loan is denominated in British Pounds, and interest is payable quarterly at
5.5%. In 1998 the Company paid $4,478 and the remaining amount due was paid
during 1999.
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 is payable quarterly at a rate of
5.28% per annum, plus a margin. The agreement also provides for the same
financial covenants and restrictions as the revolving credit agreement.
As of December 25, 1999, the aggregate amounts of long-term debt maturing
in each of the next five years are as follows: 2000 - $3,879; 2001 - $5,648;
2002 - $65,923; 2003 - $2,524; 2004 - $2,020.
Note 9--Taxes on Income
Taxes on income are based on income before taxes on income, minority
interest and equity in earnings (losses) of affiliates as follows:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic ......................................................... $ 84,877 $ 31,959 $ 10,785
Foreign .......................................................... 4,906 4,055 2,130
----------------- ----------------- -----------------
Total ....................................................... $ 89,783 $ 36,014 $ 12,915
================= ================= =================
</TABLE>
45
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 9-Taxes on Income--(Continued)
The provision for taxes on income was as follows:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current tax expense:
U.S. Federal ................................................ $ 28,137 $ 15,339 $ 18,019
State and local ............................................. 5,579 1,412 2,455
Foreign ..................................................... 1,860 3,389 1,116
----------------- ----------------- -----------------
Total current .......................................... 35,576 20,140 21,590
================= ================= =================
Deferred tax expense (benefit):
U.S. Federal ................................................ 954 657 (3,954)
State and local ............................................. (1,338) 304 (78)
Foreign ..................................................... 397 (776) 112
----------------- ----------------- -----------------
Total deferred ......................................... 13 185 (3,920)
----------------- ----------------- -----------------
Total provision ........................................ $ 35,589 $ 20,325 $ 17,670
================= ================= =================
</TABLE>
The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- ------------------
<S> <C> <C>
Current deferred tax assets:
Inventory, premium coupon redemptions and accounts receivable
valuation allowances ............................................... $ 8,062 $ 6,645
Uniform capitalization adjustments to inventories ....................... 3,979 2,613
Other accrued liabilities ............................................... 3,479 5,274
----------------- -----------------
Total current deferred tax asset ................................... 15,520 14,532
----------------- -----------------
Non-current deferred tax asset (liability):
Property and equipment .................................................. (4,659) (3,581)
Provision for other long-term liabilities ............................... (2,769) (2,721)
Net operating loss carryforward ......................................... 91 91
Net operating losses of foreign subsidiaries ............................ 3,672 2,482
----------------- -----------------
Total non-current deferred tax liability ........................... (3,665) (3,729)
Valuation allowance for non-current deferred tax assets ............ (3,697) (2,549)
----------------- -----------------
Net non-current deferred tax liabilities ..................................... (7,362) (6,278)
----------------- -----------------
Net deferred tax asset ....................................................... $ 8,158 $ 8,254
================= =================
</TABLE>
The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior years to realize the tax benefit for deductible
temporary differences. The non-current deferred liability is included in Other
liabilities on the Consolidated Balance Sheets.
46
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 9-Taxes on Income--(Continued)
At December 25, 1999, the Company has net operating loss carryforwards for
Federal income tax purposes of $718, which are available to offset future
Federal taxable income through 2010. Foreign net operating losses totaled
$9,919 at December 25, 1999. Such losses can be utilized against future foreign
income. These losses expire between 2000 and 2005, with $1,573 expiring in 2000.
The tax provisions differ from the amount computed using the Federal
statutory income tax rate as follows:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Provision at Federal statutory rate ................................ $ 31,425 $ 12,741 $ 4,877
State income taxes, net of Federal income tax effect ............... 2,757 1,109 1,630
Net foreign and domestic losses for which no tax
benefits are available ........................................ 196 386 167
Foreign income taxed at other than the Federal
statutory rate ................................................ 38 17 (2)
Deferred tax benefit arising from termination of
S Corporation election of an acquired company ................ - (2,000) -
Tax effect of S Corporation ....................................... - (579) 406
Non-deductible merger and integration costs ........................ 1,329 8,814 10,752
Other .............................................................. (156) (163) (160)
----------------- ----------------- -----------------
Income tax provision ............................................... $ 35,589 $ 20,325 $ 17,670
================= ================= =================
</TABLE>
Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been and
will continue to be reinvested. These earnings could become subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the foreign subsidiaries. It is not practicable to determine the amount
of additional tax, if any, that might be payable on the foreign earnings;
however, the Company believes that foreign tax credits would substantially
offset any U.S. tax. At December 25, 1999, the cumulative amount of reinvested
earnings was approximately $9,790.
Note 10--Financial Instruments and Credit Risk Concentrations
(a) Financial Instruments
To reduce its exposure to fluctuations in foreign currencies and interest
rates, the Company is party to foreign currency forward contracts and interest
rate swaps with major financial institutions.
While the Company is exposed to credit loss in the event of nonperformance
by the counter parties of these contracts, the Company does not anticipate
nonperformance by the counter parties. The Company does not require collateral
or other security to support these financial instruments.
47
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 10-Financial Instruments and Credit Risk Concentrations--(Continued)
As of December 25, 1999, the Company had outstanding foreign currency
forward contracts aggregating $10,800 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of Deutsche
Mark ($800), British Pounds ($8,200), Swiss Francs ($500) and Australian dollars
($1,300). At December 25, 1999, the Company had net deferred losses from foreign
currency forward contracts of $322. The contracts expire at various dates
through February 2001.
As of December 25, 1999, the Company had $13,000 outstanding in interest
rate swaps. These swaps are used to convert floating rate debt relating to the
Company's revolving credit agreement, 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
$13,000 of the Company's debt. The swaps expire in December 2003 and December
2004. Under the interest rate environment during the year ended December 25,
1999, the net fair value of the Company's interest rate swap agreements resulted
in a recognized loss of $263.
(b) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments. The Company places its
short-term cash investments with high credit quality financial institutions and,
by policy, limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to a large customer base and its dispersion across different types
of healthcare professionals and geographic areas. The Company maintains an
allowance for losses based on the expected collectability of all receivables.
Included in Accounts receivable at December 25, 1999 and December 26, 1998 is
$3,998 and $10,791, respectively, related to Easy Dental(R) Plus software sales
with non-interest bearing extended payment terms. Total unamortized discounts at
December 25, 1999 and December 26, 1998 amounted to $348 and $293 based on an
imputed interest rate of 8.50% and 7.75%, respectively. Included in interest
income for the years ended December 25, 1999, December 26, 1998 and December 27,
1997 was approximately $45, $737 and $1,216, respectively, of imputed interest
relating to these non-interest bearing extended payment term receivables.
Note 11-Segment and Geographic Data
The Company has two reportable segments: healthcare distribution and
technology. The healthcare distribution segment which is comprised of the
Company's dental, medical, veterinary and international business groups,
distributes healthcare products (primarily consumable) and services to office
based healthcare practitioners and professionals in the combined North American,
European and the Pacific Rim markets. 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 accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates segment
performance based on operating income.
The Company's reportable segments are strategic business units that offer
different products and services, albeit to the same customer base. Most of the
technology business was acquired as a unit, and the management at the time of
acquisition was retained. The following table presents information about the
Company's business segments:
48
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 11-Segment and Geographic Data--(Continued)
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Sales:
Healthcare distribution (1):
Dental ........................................................ $ 1,049,634 $ 1,083,994 $ 999,456
Medical ....................................................... 712,707 515,728 441,015
Veterinary .................................................... 52,286 48,307 40,843
International (2) ............................................. 404,186 230,999 181,239
----------------- ----------------- -----------------
Total healthcare distribution ............................ 2,218,813 1,879,028 1,662,553
Technology (3) ..................................................... 66,887 42,657 35,943
----------------- ----------------- -----------------
$ 2,285,700 $ 1,921,685 $ 1,698,496
================= ================= =================
</TABLE>
- --------------
(1)Consists of consumable products, small equipment, laboratory products, large
dental equipment, branded and generic pharmaceuticals, surgical products,
diagnostic tests, infection control and vitamins.
(2)Consists of products sold in Dental, Medical and Veterinary groups in
European and Pacific Rim markets.
(3)Consists of practice management software and other value-added products and
services.
49
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 11-Segment and Geographic Data--(Continued)
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating Income:
Healthcare distribution (includes merger and integration costs of
$13,467, $55,688 and $43,911, respectively) ................... $ 80,467 $ 24,183 $ 4,970
Technology (includes merger integration costs of $0, $978
and $6,868 respectively) ...................................... 25,298 15,347 6,860
----------------- ----------------- -----------------
Total .............................................................. $ 105,765 $ 39,530 $ 11,830
================= ================= =================
Interest Income:
Healthcare distribution ............................................ $ 7,811 $ 6,198 $ 6,011
Technology ......................................................... 1,534 1,373 1,417
----------------- ----------------- -----------------
Total .............................................................. $ 9,345 $ 7,571 $ 7,428
================= ================= =================
Interest Expense:
Healthcare distribution ............................................ $ 24,785 $ 12,585 $ 7,632
Technology ......................................................... 376 72 86
----------------- ----------------- -----------------
Total .............................................................. $ 25,161 $ 12,657 $ 7,718
================= ================= =================
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
Total Assets:
Healthcare distribution ............................................ $ 1,134,312 $ 935,573 $ 769,258
Technology ......................................................... 110,563 42,371 41,844
----------------- ----------------- -----------------
Total .............................................................. $ 1,244,875 $ 977,944 $ 811,102
================= ================= =================
Depreciation and Amortization:
Healthcare distribution ............................................ $ 26,355 $ 19,341 $ 15,071
Technology ......................................................... 1,918 643 659
----------------- ----------------- -----------------
Total .............................................................. $ 28,273 $ 19,984 $ 15,730
================= ================= =================
Capital Expenditures:
Healthcare distribution ............................................ $ 32,639 $ 32,664 $ 21,514
Technology ......................................................... 1,910 857 348
----------------- ----------------- -----------------
Total .............................................................. $ 34,549 $ 33,521 $ 21,862
================= ================= =================
</TABLE>
50
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 11-Segment and Geographic Data--(Continued)
The following table reconciles segment totals to consolidated totals as of,
and for the years ending December 25, 1999, December 26, 1998 and December 27,
1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total Assets:
Total assets for reportable segments .............................. $ 1,244,875 $ 977,944 $ 811,102
Receivables due from healthcare distribution segment .............. (40,773) (15,904) (7,156)
----------------- ----------------- -----------------
Consolidated total assets .................................... $ 1,204,102 $ 962,040 $ 803,946
================= ================= =================
Interest Income:
Total interest income for reportable segments ..................... $ 9,345 $ 7,571 $ 7,428
Interest on receivables due from healthcare distribution segment .. (1,369) (566) (75)
Interest on receivables due from technology segment ............... (199) (41) -
----------------- ----------------- -----------------
Total consolidated interest income ........................... $ 7,777 $ 6,964 $ 7,353
================= ================= =================
Interest Expense:
Total interest expense for reportable segments .................... $ 25,161 $ 12,657 $ 7,718
Interest on payables due to healthcare distribution segment ....... (199) (41) -
Interest on payables due to technology segment .................... (1,369) (566) (75)
----------------- ----------------- -----------------
Total consolidated interest expense .......................... $ 23,593 $ 12,050 $ 7,643
================= ================= =================
</TABLE>
The following table presents information about the Company by geographic area
as of, and for the years ending December 25, 1999, December 26, 1998 and
December 27, 1997. There were no material amounts of sales or transfers among
geographic areas and there were no material amounts of United States export
sales.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------- -------------- -----------------
Net Sales Long-Lived Assets Net Sales Long-Lived Assets Net Sales Long-Lived Assets
------------ ----------------- ------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
North America ........ $1,904,924 $ 249,524 $ 1,710,968 $ 174,917 $ 1,533,096 $ 163,418
Europe ............... 352,385 124,664 200,066 34,021 165,400 30,584
Pacific Rim .......... 28,391 7,552 10,651 7,136 - -
------------ ----------- ------------- ----------- ------------- -----------
Consolidated Total ... $2,285,700 $ 381,740 $ 1,921,685 $ 216,074 $ 1,698,496 $ 194,002
============ =========== ============= =========== ============= ===========
</TABLE>
Note 12-Employee Benefit Plans
(a) Stock Compensation Plan
The Company established the 1994 Stock Option Plan for the benefit of certain
employees. As amended in May 1999, pursuant to this plan the Company may issue
up to approximately 5,180,000 shares of its Common Stock. The Plan provides for
two classes of options: Class A options and Class B options. A maximum of
237,897 shares of Common Stock may be covered by Class A options. Both incentive
and non-qualified stock options may be issued under the Plan.
51
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 12-Employee Benefit Plans--(Continued)
In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the Company's
initial public offering which was on November 3, 1995. The exercise price of
all Class B options issued has been equal to the market price on the date of
grant and accordingly no compensation cost has been recognized. Substantially
all Class B options become exercisable up to the tenth anniversary of the date
of issuance, subject to acceleration upon termination of employment.
On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1999, 1998 and 1997, 13,000, 3,000 and 2,000 options, respectively
were granted to certain non-employee directors at exercise prices which were
equal to the market price on the date of grant.
Additionally, in 1997 as a result of the Company's acquisition of Sullivan
and MBMI, the Company assumed their respective stock option plans (the "Assumed
Plans"). Options granted under the Assumed Plans are exercisable for up to ten
years from the date of grant at prices not less than the fair market value of
the respective acquirees' common stock at the date of grant, on a converted
basis.
A summary of the status of the Company's two fixed stock option plans and
the Assumed Plans, and the related transactions for the years ended December 25,
1999, December 26, 1998 and December 27, 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ -------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year .................... 4,434,173 $ 25.89 4,134,577 $ 18.19 2,713,255 $ 11.68
Granted ......................... 1,447,935 17.35 1,339,362 39.01 1,758,918 27.45
Exercised ....................... (226,304) 36.22 (971,175) 10.95 (279,363) 12.60
Forfeited ....................... (216,464) 36.76 (68,591) 30.80 (58,233) 23.25
------------ ------------ -----------
Outstanding at end
of year .................... 5,439,340 $ 23.53 4,434,173 $ 25.89 4,134,577 $ 18.19
============ ============ ===========
Options exercisable at
year end ................... 3,593,439 $ 23.62 2,725,828 $ 19.63 2,755,010 $ 13.24
Weighted-average fair
value of options
granted during the year .. $ 9.85 $ 17.17 $ 17.68
</TABLE>
52
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 12-Employee Benefit Plans--(Continued)
The following table summarizes information about stock options outstanding
at December 25, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------- ------------------ ----------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
$ 4.21 to $ 16.00 1,929,322 5.2 $ 11.46 1,204,031 $ 11.23
$16.13 to $ 27.00 1,662,580 7.3 22.20 1,143,753 22.38
$29.00 to $ 46.00 1,847,438 8.0 37.34 1,245,655 36.75
---------- ----------
5,439,340 6.7 $ 23.53 3,593,439 $ 23.62
========== ==========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company and its acquired
subsidiaries had accounted for its employee stock options under the fair value
method of FAS 123. The weighted average fair value of options granted during
1999, 1998 and 1997 was $9.85, $17.17 and $17.68, respectively. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, risk-free interest rates of 5.6% for 1999 and 5.5% for 1998 and
1997; volatility factor of the expected market price of the Company's Common
Stock of 45.8% for 1999 and 30% for 1998 and 1997, and a weighted-average
expected life of the option of 10 years.
Under the accounting provisions of FAS 123, the Company's net income
(loss) and earnings (loss) per share for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997 would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net income (loss) ........................................................... $ 43,012 $ 9,615 $ (15,014)
Net income (loss) per common share:
Basic .................................................................. $ 1.06 $ 0.24 $ (0.40)
Diluted ................................................................ $ 1.04 $ 0.23 $ (0.40)
Net income (loss), reflecting special adjustments (1) ....................... $ 7,036 $ (14,608)
Net income (loss), per common share to reflect special adjustments (1):
Basic .................................................................. $ 0.18 $ (0.39)
Diluted ................................................................ $ 0.17 $ (0.39)
</TABLE>
- ---------------------------------
(1) Special adjustments include adjustments for income tax provisions and
benefits on previously untaxed losses of Meer.
53
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 12-Employee Benefit Plans--(Continued)
(b) Profit Sharing Plans
Prior to April 1, 1998, the Company had qualified contributory and
noncontributory 401(k) and profit sharing plans, respectively, for eligible
employees. As of April 1, 1998, the Company's profit sharing plan was merged
into its 401(k) plan. Assets of the profit sharing plan are now held in
self-directed accounts within the 401(k) plan. Contributions to the plans were
determined by the Board of Directors and charged to operations during 1999, 1998
and 1997 amounted to $6,517, $6,033 and $5,300, respectively.
(c) Employee Stock Ownership Plan (ESOP)
In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplemented the
Company's Profit Sharing Plan. Charges to operations related to this plan were
$2,283, $1,400 and $1,226 for 1999, 1998 and 1997, respectively. Under this
plan, the Company issued 101,233 and 34,720 shares of the Company's Common Stock
to the trust in 1999 and 1998 to satisfy the 1998 and 1997 contribution. The
Company expects to fund the 1999 contribution in 2000 with shares of the
Company's Common Stock. As of April 1, 1998 the Company's ESOP was merged into
its 401(k) plan. Shares of the Company's Common Stock are held in trust by the
401(k) plan.
(d) Supplemental Executive Retirement Plan
In 1994, the Company instituted an unfunded non-qualified supplemental
executive retirement plan for eligible employees. The increase in value which
was charged to operations, were $617, $283 and $112 for 1999, 1998 and 1997,
respectively.
Note 13-Commitments and Contingencies
(a) Operating Leases
The Company leases facilities and equipment under noncancelable operating
leases expiring through 2011. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
Future minimum annual rental payments under the noncancelable leases at
December 25, 1999 are as follows:
2000 ................................................... $ 24,637
2001 ................................................... 20,987
2002 ................................................... 16,818
2003 ................................................... 13,653
2004 ................................................... 12,339
Thereafter ............................................. 33,430
--------
Total minimum lease payments ........................... $121,864
========
Total rental expense for 1999, 1998 and 1997 was $25,798, $19,130, and $19,537,
respectively.
54
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 13-Commitments and Contingencies --(Continued)
(b) Capital Leases
The Company leases certain equipment under capital leases. The following
is a schedule by years of approximate future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at December 25, 1999.
2000 ................................................... $ 1,188
2001 ................................................... 797
2002 ................................................... 414
2003 ................................................... 333
2004 ................................................... 259
Thereafter ............................................. 1,329
--------
Total minimum lease payments ........................... 4,320
Less: Amount representing interest at 6.5% to 10% ...... (869)
--------
$ 3,451
========
(c) Litigation
The manufacture or distribution of certain products by the Company
involves a risk of product liability claims, and from time to time the Company
is named as a defendant in products liability cases as a result of its
distribution of pharmaceutical and other healthcare products. As of December 25,
1999, the Company was named a defendant in approximately fifty such cases. Of
these product liability claims, thirty-eight 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 the financial viability of the
manufacturer and insurer.
In addition, the Company is subject to other claims, suits and complaints,
which arise in the course of the Company's 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 name. In October 1999, the
Court, on motion, certified both a Windows 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 customers and 15,000 DOS customers could be covered by the judge's
ruling. The Company has filed an appeal of the Court's determination, during
which time 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.
55
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 13-Commitments and Contingencies--(Continued)
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 by indemnification by the manufacturer of the product. There
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will be available in adequate amounts or at a
reasonable cost, or that indemnification agreements will provide adequate
protection for the Company. The Company intends to vigorously defend all such
claims, suits and complaints. In the opinion of the Company, all such pending
matters are covered by insurance or are of such kind, or involve such amounts,
as would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.
(d) Employment, Consulting and Noncompete Agreements
The Company has employment, consulting and noncompete agreements expiring
through 2004 (except for a lifetime consulting agreement with a principal
stockholder which provides for initial compensation of $283 per year, increasing
$25 every fifth year beginning in 2002). The agreements provide for varying base
aggregate annual payments of approximately $4,337 per year which decrease
periodically to approximately $424 per year. In addition, some agreements have
provisions for incentive and additional compensation.
Note 14-Supplemental Cash Flow Information
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest ................................................... $ 19,528 $ 10,047 $ 8,354
Income taxes ............................................... $ 23,266 $ 15,420 $ 13,055
</TABLE>
In conjunction with business acquisitions, the Company used cash as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Fair value of assets
acquired, excluding cash .............................. $ 239,278 $ 22,725 $ 74,035
Less liabilities assumed
and created upon acquisition .......................... 106,726 8,842 31,768
----------- ---------- ----------
Net cash paid .............................................. $ 132,552 $ 13,883 $ 42,267
=========== ========== ==========
</TABLE>
56
<PAGE>
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Note 15-Quarterly Information (Unaudited)
The following presents certain unaudited quarterly financial data:
<TABLE>
<CAPTION>
Quarters ended
-------------------------------------------------------------------------------
March 27, 1999 June 26, 1999 September 25, 1999 December 25, 1999
---------------- --------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net Sales ................................... $ 536,335 $ 559,310 $ 578,794 $ 611,261
Gross profit ................................ 163,417 174,050 173,964 186,925
Operating income ............................ 21,445 26,778 26,519 31,023
Net income .................................. 9,913 13,337 11,523 15,539
Net income per share:
Basic .................................. $ 0.25 $ 0.33 $ 0.28 $ 0.38
Diluted ................................ $ 0.24 $ 0.32 $ 0.28 $ 0.38
<CAPTION>
Quarters ended
-------------------------------------------------------------------------------
March 28, 1998 June 27, 1998 September 26, 1998 December 26, 1998
---------------- --------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net Sales ................................... $ 450,342 $ 475,992 $ 492,631 $ 502,720
Gross profit ................................ 136,707 149,583 153,699 161,835
Operating income ............................ 10,937 14,312 4,828 9,453
Net income .................................. 6,113 7,822 2,306 86
Net income per share:
Basic .................................. $ 0.16 $ 0.20 $ 0.06 $ 0.00
Diluted ................................ $ 0.15 $ 0.19 $ 0.06 $ 0.00
</TABLE>
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, the release of software enhancements, timing of purchases, special
promotional campaigns, fluctuations in exchange rates associated with
international operations and adverse weather conditions. Diluted earnings per
share calculations for each quarter include the effect of stock options, when
dilutive to the quarter's average number of shares outstanding for each period,
and therefore the sum of the quarters may not necessarily be equal to the full
year earnings per share amount.
During the fourth quarter of 1998, the Company incurred incremental costs
totaling approximately $400 and reduced earnings from an affiliate totaling
approximately $1,300 net of taxes due to a voluntary recall of anesthetic
products produced by an affiliated company which is accounted for under the
equity method.
57
<PAGE>
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K and the information set
forth under the caption "Election of Directors" in the Company's definitive 2000
Proxy Statement to be filed pursuant to Regulation 14A is incorporated herein by
reference.
ITEM 11. Executive Compensation
The information required by this item is hereby incorporated by reference
from the Company's definitive 2000 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference
from the Company's definitive 2000 Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference
from the Company's definitive 2000 Proxy Statement to be filed pursuant to
Regulation 14A.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of the Company filed as a part of
this report are listed on the index on page 28.
2. Financial Statement Schedules
None.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are
listed in the Exhibit List immediately preceding the exhibits.
(b) Reports on Form 8-K
None.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Melville, State of New York, on March 24, 2000.
Henry Schein, Inc.
By: /s/ STANLEY M. BERGMAN
Stanley M. Bergman
Chairman, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- ------------------------------------ ----------------------------------------------------- ---------------------
<S> <C> <C>
/s/ STANLEY BERGMAN Chairman, Chief Executive Officer, and March 24, 2000
- ------------------------------------
Stanley M. Bergman President (principal executive officer)
/s/ STEVEN PALADINO Executive Vice President, Chief Financial Officer March 24, 2000
- ------------------------------------
Steven Paladino and Director (principal financial and accounting
officer)
/s/ JAMES P. BRESLAWSKI Director March 24, 2000
- ------------------------------------
James P. Breslawski
/s/ GERALD A. BENJAMIN Director March 24, 2000
- ------------------------------------
Gerald A. Bejamin
/s/ LEONARD A. DAVID Director March 24, 2000
- ------------------------------------
Leonard A. David
/s/ MARK. E. MLOTEK Director March 24, 2000
- ------------------------------------
Mark E. Mlotek
/s/ BARRY ALPERIN Director March 24, 2000
- ------------------------------------
Barry Alperin
/s/ PAMELA JOSEPH Director March 24, 2000
- ------------------------------------
Pamela Joseph
/s/ DONALD J. KABAT Director March 24, 2000
- ------------------------------------
Donald J. Kabat
/s/ MARVIN H. SCHEIN Director March 24, 2000
- ------------------------------------
Marvin H. Schein
/s/ IRVING SHAFRAN Director March 24, 2000
- ------------------------------------
Irving Shafran
</TABLE>
59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Henry Schein, Inc.
Melville, New York
The audits referred to in our report dated February 25, 2000 relating to the
consolidated financial statements of Henry Schein, Inc. and subsidiaries, which
is contained in Item 8 of the Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based upon our
audits.
In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.
BDO SEIDMAN, LLP
February 25, 2000
New York, New York
<PAGE>
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------- ---------- ----------- ------------ ----------------
Add
-----------
Balance at Charged to
beginning costs and Balance at end
Description of period expenses Deductions of period
- ---------------------------------------------------- ---------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Year ended December 27, 1997:
Allowance for doubtful accounts................ $ 6,692 $ 4,321 $ (1,544) $ 9,469
Other accounts receivable allowances (1)....... 3,443 2,010 -- 5,453
-------- -------- -------- --------
$ 10,135 $ 6,331 $ (1,544) $ 14,922
======== ======== ======== ========
Year ended December 26, 1998:
Allowance for doubtful accounts................ $ 9,469 $ 4,326 $ (588) $ 13,207
Other accounts receivable allowances (1)....... 5,453 2,955 (1,479) 6,929
-------- -------- -------- --------
$ 14,922 $ 7,281 $ (2,067) $ 20,136
======== ======== ======== ========
Year ended December 25, 1999:
Allowance for doubtful accounts................ $ 13,207 $ 4,861 $ (5,268) $ 12,800
Other accounts receivable allowances (1)....... 6,929 1,127 (465) 7,591
-------- -------- -------- --------
$ 20,136 $ 5,988 $ (5,733) $ 20,391
======== ======== ======== ========
</TABLE>
(1) Primarily allowance for sales returns
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
=========== =========== ========
Unless otherwise indicated, exhibits are incorporated by reference to the
correspondingly numbered exhibits in the Company's Registration Statement on
Form S-1 (Commission File No. 33-96528)
<S> <C>
3.1 Form of Amended and Restated Articles of Incorporation
3.2 Form of By-laws
10.1 Amended and Restated HSI Agreement (the "HSI Agreement"),
effective as of February 16, 1994, among the Company, Marvin H.
Schein, the Trust established by Marvin H. Schein under Trust
Agreement dated September 9, 1994, the Charitable Trust
established by Marvin H. Schein under Trust Agreement dated
September 12, 1994, the Estate of Jacob M. Schein, the Trusts
established by Articles Third and Fourth of the Will of Jacob M.
Schein, the Trust established by Pamela Joseph under Trust
Agreement dated February 9, 1994, the Trust established by Martin
Sperber under Trust Agreement dated September 19, 1994, the Trust
established by Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Pamela Schein, Pamela Joseph, Martin Sperber,
Stanley M. Bergman, Steven Paladino and James P. Breslawski
(collectively, the "HSI Parties")
10.2 HSI Registration Rights Agreement dated September 30, 1994, among
the Company, Pamela Schein, the Trust established by Pamela Joseph
under Trust Agreement dated February 9, 1994, Marvin H. Schein,
the Trust established by Marvin H. Schein under Trust Agreement
dated December 31, 1993, the Trust established by Marvin H. Schein
under Trust Agreement dated September 19, 1994, the Charitable
Trust established by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Martin Sperber, the Trust established by
Martin Sperber under Trust Agreement dated September 19, 1994,
Stanley M. Bergman and the Trust
10.3 Letter Agreement dated September 30, 1994 to the Company from
Marvin H. Schein, Pamela Joseph, and Pamela Schein
10.4 Release to the HSI Agreement dated September 30, 1994
10.5 Separation Agreement dated as of September 30, 1994 by and between
the Company, Schein Pharmaceutical, Inc. and Schein Holdings, Inc.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
=========== =========== ========
<S> <C>
10.6 Restructuring Agreement dated September 30, 1994 among Schein
Holdings, Inc., the Company, the Estate of Jacob M. Schein, Marvin
H. Schein, the Trust established by Marvin H. Schein under Trust
Agreement dated December 31, 1993, the Trust established by Marvin
H. Schein under Trust Agreement dated September 9, 1994, the
Charitable Trust established by Marvin H. Schein under Trust
Agreement dated September 12, 1994, Pamela Schein, Pamela Joseph,
the Trust established by Pamela Joseph under Trust Agreement dated
February 9, 1994; the Trusts under Articles Third and Fourth of
the Will of Jacob M. Schein; Stanley M. Bergman, the Trust
established by Stanley M. Bergman under Trust Agreement dated
September 15, 1994, Martin Sperber, the Trust established by
Martin Sperber under Trust Agreement dated December 31, 1993, and
the Trust established by Martin Sperber under Trust Agreement
dated September 19, 1994
10.7 Agreement and Plan of Corporate Separation and Reorganization
dated as of September 30, 1994 among Schein Holdings, Inc., the
Company, the Estate of Jacob M. Schein, Marvin H. Schein, the
Trust established by Marvin H. Schein under Trust Agreement dated
December 31, 1993, the Trust established by Marvin H. Schein under
Trust Agreement dated September 9, 1994, the Charitable Trust
established by Marvin H. Schein under Trust Agreement dated
September 12, 1994, Pamela Schein, the Trust established Article
Fourth of the Will of Jacob M. Schein for the benefit of Pamela
Schein and her issue under Trust Agreement dated September 29,
1994, Pamela Joseph, the Trust established by Pamela Joseph under
Trust Agreement dated February 9, 1994, the Trust established by
Pamela Joseph under Trust Agreement dated September 28, 1994 and
the Trusts under Articles Third and Fourth of the Will of Jacob M.
Schein
10.8 Henry Schein, Inc. 1994 Stock Option Plan, as amended and restated
effective as of July 1, 1995**
10.9 Henry Schein, Inc. Amendment and Restatement of the Supplemental
Executive Retirement Plan **
10.11 Consulting Agreement dated September 30, 1994 between the Company
and Marvin H. Schein**
10.13 Amended and Restated Stock Issuance Agreement dated as of December
24, 1992 between the Company and Stanley M. Bergman**
10.14 Stock Issuance Agreements dated December 27, 1994 between the
Company and various executive officers**
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
=========== =========== ========
<S> <C>
10.15 Form of Henry Schein, Inc. Non-Employee Director Stock Option Plan**
10.16 Amended Credit Agreement dated December 15, 1995 among the
Company, The Chase Manhattan Bank, N.A., Cooperatieve Centrale
Raiffeisen Boerenleenbank, B.A. "Rabobank Nederland", New York
Branch, Natwest Bank, N.A. and European American Bank
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Commission File No. 33-96528))
10.17 First Amendment to the Amended Credit Agreement dated December 15,
1995 among the Company, The Chase Manhattan Bank, N.A., Natwest
Bank, N.A., "Rabobank Nederland" and European American Bank +
10.18 Amendments to the Company's 1994 Stock Option Plan effective as of
July 15, 1997.
10.19 Revolving Credit Agreement (the ("Credit Agreement") dated as of
January 31, 1997 among the Company, The Chase Manhattan Bank,
Fleet Bank, N.A., Cooperative Centrale Raiffeisen Boerenleenbank,
B.A., "Rabobank Nederland", New York Branch and european American
BAnk (Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 Commission File No. 33-96528
10.20 Employment Agreement dated March 7, 1997, between Bruce J. Haber
and the Company (Incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-30615))
10.21 Termination of Employment Agreement, dated March 7, 1997 as
revised, between Bruce J. Haber and the Company (Incorporated by
reference to Exhibit 10.92 to the Company's Registration Statement
on Form S-4(Registration No. 333-30615))
10.22 Amendment dated as of June 30, 1997 to Credit Agreement
(Incorporated by reference to Exhibit 10.103 to the Company's
Registration Statement on Form S-4 (Commission File No.
333-36081))
10.23 Amendment No. 2 and Supplement to Revolving Credit Agreement,
dated August 15, 1997 (Incorporated by reference to Exhibit 10.104
to the Company's Registration Statement on Form S-4 (Commission
File No. 333-36081))
10.24 Lease Agreement dated December 23, 1997, between First Industrial
Pennsylvania, L.P. and the Company (Incorporated by reference to
Exhibit 10.103 to the Company's 1998 Annual Report on Form 10K).
10.25 Amendment dated as of May 15, 1998 to Credit Agreement
(Incorporated by reference to Exhibit 10.108 to the Company's
Quarterly Report on Form 10Q for the quarter ended June 27, 1998)
10.26 Henry Schein, Inc. Senior Executive Group 2000 Performance
Incentive Plan Summary.+**
10.27 Stock Purchase Agreement by and among the Company, New River
Management Company, L.L.C., Chiron Corporation and Biological &
Popular Culture Inc., dated as of December 8, 1998 (Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated December 31, 1998)
10.28 Amendment No. 1, dated as of December 30, 1998, to the Stock
Purchase Agreement by and among the Company, New River Management
Company, L.L.C., Chiron Corporation and Biological & Popular
Culture Inc., dated as of December 8, 1998. (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated December 31, 1998).
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
=========== =========== ========
<S> <C>
10.29 Rights Agreement dated as of Novemebr 30,1998, between the Company
and Continental Stock Transfer and Trust Co. (filed as the exhibit
to the Company's Current Report on Form 8-K, dated Novemebr 30,
1998).
10.30 Form of the Note Purchase Agreements between the Company and the
Purchasers listed on Schedule A thereto relating to an aggregate
of $130,000,000 in principal amount of the Company's 6.94% Senior
Notes due June 30, 2009 (Incorporated by Reference to Exibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 26, 1999).
10.31 Form of Agreements dated January 1, 2000 between the Company and
Gerald Benjamin, James Breslawski, Leonard David, Mark Mlotek,
Steven Paladino and Michael Zack, respectively.+**
10.32 Employment Agreement dated as of January 1, 2000 between the
Company and Stanley M. Bergman.+**
10.33 Form of Agreements dated January 1, 2000 between the Company and
Michael Ettinger, Diane Forrest, Larry Gibson and Michael
Racioppi, respectively.+**
11.1 Statement re: computation of per share income (loss)*
21.1 List of Subsidiaries of the Company.
27.1 Financial data Schedules - Year ended December 25, 1999.+
</TABLE>
- -----------
+ Filed herewith
** Indicates management contract or compensatory plan or agreement
65
<PAGE>
Exhibit 10.31
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
January 1, 2000
Dear :
In recognition of your contributions to Henry Schein, Inc. ("HSI" or
the "Company") and the Company's desire to assure your continued services in the
event of a pending or actual Change in Control (as hereinafter defined) of HSI,
the Company's Board of Directors is pleased to offer you the Change in Control
protection outlined in this letter agreement ("Agreement"). This Agreement
amends and restates in its entirety any and all prior agreements between you and
the Company relating to the subject matter hereof.
1. Term Of Agreement. The term of this Agreement shall commence on the
date of this letter (the "Effective Date") and end on June 30, 2001 (the
"Original Term"). The Original Term may be renewed from time to time for a term
or terms to be determined by the Company, in its sole discretion (the "Renewal
Terms"). "Term" shall mean the Original Term and all Renewal Terms.
Notwithstanding the foregoing, if a Change in Control occurs during the Term,
the Term shall not expire earlier than two years from the date the Change in
Control occurs.
2. Entitlement to Cash Bonus. Provided (a) you are then employed by the
Company or (b) you were employed by the Company until your employment was
terminated by the Company without Cause or by you for Good Reason, in either
case, (i) within ninety (90) days prior to the effective date of the Change in
Control, or (ii) after the first public announcement of the pendency of the
Change in Control, upon the effective date of the
<PAGE>
Change in Control you shall be entitled to a cash payment equal to the Change in
Control Price (as defined), as determined as of such payment date, times ,
such payment to be paid to you no later than 10 days after the effective date of
the Change in Control ("Bonus Payment Date"). In the event that the Change in
Control Price increases in the 50-day period after the Bonus Payment Date
occurs, you shall be entitled to receive an additional payment equal to the
product of such increase in the Change in Control Price times ,
such amount payable to you no later than 60 days from the Bonus Payment Date.
3. Entitlement to Severance Benefits.
(a) Cash Severance Benefit. In the event your employment is
terminated (a "Termination") by the Company without Cause or by you for
Good Reason, in either case within two years following a Change in
Control, you shall be entitled to receive the sum of the following,
payable in a cash lump sum no later than 15 days after the Termination
date: (i) Base Salary through the Termination date; (ii) a pro rata annual
incentive award at target for the year in which the Termination occurs,
and (iii) an amount equal to 300% of the sum of your Base Salary plus your
target annual cash bonus. In addition, notwithstanding the foregoing, in
the event your employment is terminated by the Company without Cause or by
you for Good Reason, in either case (i) within ninety (90) days prior to
the effective date of a Change in Control, or (ii) after the first public
announcement of the pendency of the Change in Control, such termination
shall, upon the effective date of a Change in Control, be deemed to be a
"Termination" covered under the preceding sentence of this Section 3(a),
and you shall be entitled to the amounts provided for under the preceding
sentence.
(b) Other Severance Benefits. In the event you are entitled to the
amounts provided for in Section 3(a) hereof, and notwithstanding anything
to the contrary contained in any stock option or restricted stock
agreement, you shall also be entitled to the following: (i) immediate
vesting of all outstanding stock options to the fullest extent permitted
under the applicable stock option plan; (ii) elimination of all
restrictions on any restricted or deferred stock awards outstanding at the
time of Termination, (iii) immediate vesting of all restricted or deferred
stock awards and non-qualified retirement benefits, (iv) settlement of all
deferred compensation arrangements in accordance with any then applicable
deferred compensation plan or election form (iv) continued participation
in all HSI's welfare benefit plans at the same benefit level at which you
were participating on the Termination date for a
2
<PAGE>
period of 36 months unless and until the date or dates you receive
substantially equivalent coverage from a subsequent employer.
(c) Section 280(G) Gross-Up Protection. In the event you become
entitled to payments, all or a portion of which become subject to tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any other similar tax, but excluding any income
tax of any nature)("Excise Tax"), HSI shall pay you an additional amount
("Gross-Up Payment") such that the amount retained by you after reduction
for any Excise Tax (including penalties or interest thereon) equals the
amount to be paid to you by HSI hereunder prior to the imposition of such
Excise Tax. The amount of the Gross-Up Payment shall be calculated by
HSI's independent auditors. In the event that such Gross-Up Payment is
finally determined to be less than the amount necessary to provide that
the amount to be retained by you after reduction for any Excise Tax
(including penalties or interest thereon) equals the amount to be paid to
you by HSI hereunder prior to the imposition of such Excise Tax, HSI shall
pay an additional amount to you in respect of such deficiency (including
any interest and penalties). In the event that such Gross-Up Payment is
finally determined to exceed the amount necessary to provide that the
amount to be retained by you after reduction for any Excise Tax (including
penalties or interest thereon) equals the amount to be paid to you by HSI
hereunder prior to the imposition of such Excise Tax, you must promptly
repay the entire amount of such excess Gross- Up Payment to HSI.
(d) No Mitigation; No Offset. In the event of any Termination, you
shall be under no obligation to seek other employment and no amounts due
to you under this Agreement shall be subject to offset due to any
remuneration attributable to subsequent employment that you may obtain.
(e) Exclusivity of Severance Payments; Release. In the event you are
entitled to the amounts provided for in Section 3(a) hereof, you shall not
be entitled to any other severance payments or severance benefits from HSI
or any payments by HSI on account of any claim by you of wrongful
termination, including claims under any federal, state or local human and
civil rights or labor laws. Termination payments and benefits made to you
are conditioned upon your execution of a release agreement, in a form
reasonably satisfactory to HSI, releasing any and all claims arising out
of your employment (other than enforcement of this Agreement), any rights
under HSI's incentive compensation and employee benefit plans, and any
claim for any non-employment related tort for personal injury.
3
<PAGE>
4. Definitions.For purposes of this Agreement, the following terms
shall have the meanings ascribed to them.
(a) "Base Salary" means the annualized rate of pay in effect on the
Termination date, provided that if a reduction in Base Salary is the basis
for a Termination for Good Reason, then "Base Salary" shall mean the rate
of pay in effect immediately prior to such reduction.
(b) "Cause" shall exist if: (i) you are convicted of, or plead nolo
contendere to, any felony which materially and adversely impacts HSI's
financial condition or reputation, (ii) you engage in conduct that
constitutes willful gross neglect or willful gross misconduct in carrying
out your duties which materially and adversely impacts HSI's financial
condition or reputation, or (iii) you violate Section 5 of this Agreement.
(c) A "Change in Control" shall be deemed to occur upon any of the
following: (i) acquisition by any one "person" (as such term is defined in
ss.3(a)(9) of the Securities and Exchange Act of 1934, as amended, and
used in ss.13(d) and 14(d) thereof, including "group" as defined in
ss.13(d) thereof) of 33% or more of the Company's voting shares without
the prior express approval of the Company's Board of Directors; (ii)
acquisition by any one "person" or "group" (as referred to in the
preceding sentence) of more than 50% of HSI's voting shares; (iii)
directors elected to the Board over any 24 month period not nominated by
the HSI Executive Committee represent 30% or more of the total number of
directors constituting the Board at the beginning of the period (or such
nomination results from an actual or threatened proxy contest); (iv) any
merger, consolidation or other corporate combination upon the completion
of which HSI shares do not represent more than 50% of the combined voting
power of the resulting entity; and (v) upon the sale of all or
substantially all of the consolidated assets of HSI, other than a
distribution to shareholders.
(d) "Change in Control Price" shall mean an amount in cash, not more
than $40, equal to the higher of (i) the amount of cash and fair market
value of property that is the highest price per share paid (including
extraordinary dividends) in any transaction triggering the Change in
Control or any liquidation of shares following a sale of substantially all
assets of the Company, or (ii) the highest fair market value per share at
any time during the 60-day period preceding and 60-day period following
the Change in Control.
4
<PAGE>
(e) "Confidential Information" shall mean all information concerning
the business of HSI relating to any of their products, product
development, trade secrets, customers, suppliers, finances, and business
plans and strategies. Excluded from the definition of "Confidential
Information" is information (i) that is or becomes part of the public
domain, other than through your breach of this Agreement, or (ii)
regarding HSI's business or industry properly acquired by you in the
course of your career as an employee in HSI's industry and independent of
your employment by HSI. For this purpose, information known or available
generally within the trade or industry of HSI shall be deemed to be known
or available to the public.
(f) "Good Reason" shall mean your termination of your employment
based upon one or more of the following events (except as a result of a
prior termination): (i) any change in your position or responsibilities or
assignment of duties materially inconsistent with your status prior to the
Change in Control; (ii) following a business combination related to a
Change in Control, a failure to offer you a position in the combined
business entity, having authority equivalent in scope to the authority in
the position held by you in the Company immediately prior to such business
combination; (iii) any decrease in your Base Salary, target annual
incentive or long- term incentive opportunity; (iv) any breach of the
terms of this Agreement by HSI after receipt of written notice from you
and a reasonable opportunity to cure such breach; (v) HSI fails to obtain
any successor entity's assumption of its obligations to you hereunder; or
(vi) the Company requiring you to perform your services as an employee on
an ongoing basis at a location more than 75 miles distant from the
location at which you perform your services as of the date immediately
prior to the Change in Control.
5. Non-Disclosure; Non-Solicitation; Non-Disparagement.
(a) During the Term and thereafter, you shall not, without HSI's
prior written consent disclose to anyone (except in good faith in the ordinary
course of business) or make use of any Confidential Information except in the
performance of your duties hereunder or when required to do so by law. In the
event that you are so required by law, you shall give prompt written notice to
HSI sufficient to allow HSI the opportunity to object to or otherwise resist
such order.
(b) During the Term and for a period of 24 months thereafter, you
shall not, without HSI's prior written consent, solicit for employment, whether
directly or indirectly,
5
<PAGE>
any person who (i) at the time is employed by HSI or any affiliate, or (ii) was
employed by HSI or any affiliate within three months prior to such solicitation.
(c) You agree that, during the Term and thereafter (including
following any Termination for any reason) you will not make statements or
representations, or otherwise communicate, directly or indirectly, in writing,
orally, or otherwise, or take any action which may, directly or indirectly,
disparage or be damaging to HSI or its respective officers, directors,
employees, advisors, businesses or reputations. Notwithstanding the foregoing,
nothing in this Agreement shall preclude you from making truthful statements or
disclosures that are required by applicable law, regulation or legal process.
6. Resolution of Disputes. Any controversy or claim arising out of or
relating to this Agreement or any breach or asserted breach hereof shall be
resolved by binding arbitration, to be held at an office closest to HSI's
principal offices in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court of competent jurisdiction. Pending the resolution of
any arbitration or court proceeding, HSI shall continue payment of all amounts
and benefits due you hereunder. All reasonable costs and expenses of any
arbitration or court proceeding (including fees and disbursements of counsel)
shall be promptly paid on your behalf by HSI; provided, however, that no such
expense reimbursement shall be made if and to the extent the arbitrator(s)
determine(s) that any of your litigation assertions or defenses were in bad
faith or frivolous.
7. Effect of Agreement on Other Benefits. Except as specifically
provided in this Agreement, the existence of this Agreement shall not be
interpreted to prohibit or restrict your participation in any other employee
benefit or other plans or programs in which you currently participate.
8. Not an Employment Agreement. This Agreement is not a contract of
employment between you and HSI. HSI may terminate you at any time, subject to
the terms hereof or any other agreement that might exist between you and HSI.
9. Assignability; Binding Nature. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors, heirs
(as applies to you) and permitted assigns. HSI agrees that in the event of a
sale or transfer of assets, it shall, as a condition of such sale, require such
assignee or transferee to expressly assume HSI's liabilities, obligations and
duties hereunder.
6
<PAGE>
10. Governing Law/Jurisdiction. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
Please acknowledge your acceptance of the terms of this Agreement by
executing below and returning a copy to HSI.
HENRY SCHEIN, INC.
By:
-----------------------------
Name:
Title:
Accepted:
--------------------------------
7
<PAGE>
Exhibit 10.32
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
January 1, 2000
Dear :
In recognition of your contributions to Henry Schein, Inc. ("HSI" or
the "Company") and the Company's desire to assure your continued services in the
event of a pending or actual Change in Control (as hereinafter defined) of HSI,
the Company's Board of Directors is pleased to offer you the Change in Control
protection outlined in this letter agreement ("Agreement"). This Agreement
amends and restates in its entirety any and all prior agreements between you and
the Company relating to the subject matter hereof.
1. Term Of Agreement. The term of this Agreement shall commence on the
date of this letter (the "Effective Date") and end on June 30, 2001 (the
"Original Term"). The Original Term may be renewed from time to time for a term
or terms to be determined by the Company, in its sole discretion (the "Renewal
Terms"). "Term" shall mean the Original Term and all Renewal Terms.
Notwithstanding the foregoing, if a Change in Control occurs during the Term,
the Term shall not expire earlier than two years from the date the Change in
Control occurs.
2. Entitlement to Cash Bonus. Provided (a) you are then employed by the
Company or (b) you were employed by the Company until your employment was
terminated by the Company without Cause or by you for Good Reason, in either
case, (i) within ninety (90) days prior to the effective date of the Change in
Control, or (ii) after the first public announcement of the pendency of the
Change in Control, upon the effective date of the
<PAGE>
Change in Control you shall be entitled to a cash payment equal to the Change in
Control Price (as defined), as determined as of such payment date, times such
payment to be paid to you no later than 10 days after the effective date of the
Change in Control ("Bonus Payment Date"). In the event that the Change in
Control Price increases in the 50-day period after the Bonus Payment Date
occurs, you shall be entitled to receive an additional payment equal to the
product of such increase in the Change in Control Price times 45,000, such
amount payable to you no later than 60 days from the Bonus Payment Date.
3. Entitlement to Severance Benefits.
(a) Cash Severance Benefit. In the event your employment is
terminated (a "Termination") by the Company without Cause or by you for
Good Reason, in either case within two years following a Change in
Control, you shall be entitled to receive the sum of the following,
payable in a cash lump sum no later than 15 days after the Termination
date: (i) Base Salary through the Termination date; (ii) a pro rata annual
incentive award at target for the year in which the Termination occurs,
and (iii) an amount equal to 200% of the sum of your Base Salary plus your
target annual cash bonus. In addition, notwithstanding the foregoing, in
the event your employment is terminated by the Company without Cause or by
you for Good Reason, in either case (i) within ninety (90) days prior to
the effective date of a Change in Control, or (ii) after the first public
announcement of the pendency of the Change in Control, such termination
shall, upon the effective date of a Change in Control, be deemed to be a
"Termination" covered under the preceding sentence of this Section 3(a),
and you shall be entitled to the amounts provided for under the preceding
sentence.
(b) Other Severance Benefits. In the event you are entitled to the
amounts provided for in Section 3(a) hereof, and notwithstanding anything
to the contrary contained in any stock option or restricted stock
agreement, you shall also be entitled to the following: (i) immediate
vesting of all outstanding stock options to the fullest extent permitted
under the applicable stock option plan; (ii) elimination of all
restrictions on any restricted or deferred stock awards outstanding at the
time of Termination, (iii) immediate vesting of all restricted or deferred
stock awards and non-qualified retirement benefits, (iv) settlement of all
deferred compensation arrangements in accordance with any then applicable
deferred compensation plan or election form (iv) continued participation
in all HSI's welfare benefit plans at the same benefit level at which you
were participating on the Termination date for a
2
<PAGE>
period of 24 months unless and until the date or dates you receive
substantially equivalent coverage from a subsequent employer.
(c) Section 280(G) Gross-Up Protection. In the event you become
entitled to payments, all or a portion of which become subject to tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any other similar tax, but excluding any income
tax of any nature)("Excise Tax"), HSI shall pay you an additional amount
("Gross-Up Payment") such that the amount retained by you after reduction
for any Excise Tax (including penalties or interest thereon) equals the
amount to be paid to you by HSI hereunder prior to the imposition of such
Excise Tax. The amount of the Gross-Up Payment shall be calculated by
HSI's independent auditors. In the event that such Gross-Up Payment is
finally determined to be less than the amount necessary to provide that
the amount to be retained by you after reduction for any Excise Tax
(including penalties or interest thereon) equals the amount to be paid to
you by HSI hereunder prior to the imposition of such Excise Tax, HSI shall
pay an additional amount to you in respect of such deficiency (including
any interest and penalties). In the event that such Gross-Up Payment is
finally determined to exceed the amount necessary to provide that the
amount to be retained by you after reduction for any Excise Tax (including
penalties or interest thereon) equals the amount to be paid to you by HSI
hereunder prior to the imposition of such Excise Tax, you must promptly
repay the entire amount of such excess Gross- Up Payment to HSI.
(d) No Mitigation; No Offset. In the event of any Termination, you
shall be under no obligation to seek other employment and no amounts due
to you under this Agreement shall be subject to offset due to any
remuneration attributable to subsequent employment that you may obtain.
(e) Exclusivity of Severance Payments; Release. In the event you are
entitled to the amounts provided for in Section 3(a) hereof, you shall not
be entitled to any other severance payments or severance benefits from HSI
or any payments by HSI on account of any claim by you of wrongful
termination, including claims under any federal, state or local human and
civil rights or labor laws. Termination payments and benefits made to you
are conditioned upon your execution of a release agreement, in a form
reasonably satisfactory to HSI, releasing any and all claims arising out
of your employment (other than enforcement of this Agreement), any rights
under HSI's incentive compensation and employee benefit plans, and any
claim for any non-employment related tort for personal injury.
3
<PAGE>
4. Definitions. For purposes of this Agreement, the following terms
shall have the meanings ascribed to them.
(a) "Base Salary" means the annualized rate of pay in effect on the
Termination date, provided that if a reduction in Base Salary is the basis
for a Termination for Good Reason, then "Base Salary" shall mean the rate
of pay in effect immediately prior to such reduction.
(b) "Cause" shall exist if: (i) you are convicted of, or plead nolo
contendere to, any felony which materially and adversely impacts HSI's
financial condition or reputation, (ii) you engage in conduct that
constitutes willful gross neglect or willful gross misconduct in carrying
out your duties which materially and adversely impacts HSI's financial
condition or reputation, or (iii) you violate Section 5 of this Agreement.
(c) A "Change in Control" shall be deemed to occur upon any of the
following: (i) acquisition by any one "person" (as such term is defined in
ss.3(a)(9) of the Securities and Exchange Act of 1934, as amended, and
used in ss.13(d) and 14(d) thereof, including "group" as defined in
ss.13(d) thereof) of 33% or more of the Company's voting shares without
the prior express approval of the Company's Board of Directors; (ii)
acquisition by any one "person" or "group" (as referred to in the
preceding sentence) of more than 50% of HSI's voting shares; (iii)
directors elected to the Board over any 24 month period not nominated by
the HSI Executive Committee represent 30% or more of the total number of
directors constituting the Board at the beginning of the period (or such
nomination results from an actual or threatened proxy contest); (iv) any
merger, consolidation or other corporate combination upon the completion
of which HSI shares do not represent more than 50% of the combined voting
power of the resulting entity; and (v) upon the sale of all or
substantially all of the consolidated assets of HSI, other than a
distribution to shareholders.
(d) "Change in Control Price" shall mean an amount in cash, not more
than $40, equal to the higher of (i) the amount of cash and fair market
value of property that is the highest price per share paid (including
extraordinary dividends) in any transaction triggering the Change in
Control or any liquidation of shares following a sale of substantially all
assets of the Company, or (ii) the highest fair market value per share at
any time during the 60-day period preceding and 60-day period following
the Change in Control.
4
<PAGE>
(e) "Confidential Information" shall mean all information concerning
the business of HSI relating to any of their products, product
development, trade secrets, customers, suppliers, finances, and business
plans and strategies. Excluded from the definition of "Confidential
Information" is information (i) that is or becomes part of the public
domain, other than through your breach of this Agreement, or (ii)
regarding HSI's business or industry properly acquired by you in the
course of your career as an employee in HSI's industry and independent of
your employment by HSI. For this purpose, information known or available
generally within the trade or industry of HSI shall be deemed to be known
or available to the public.
(f) "Good Reason" shall mean your termination of your employment
based upon one or more of the following events (except as a result of a
prior termination): (i) any change in your position or responsibilities or
assignment of duties materially inconsistent with your status prior to the
Change in Control; (ii) following a business combination related to a
Change in Control, a failure to offer you a position in the combined
business entity, having authority equivalent in scope to the authority in
the position held by you in the Company immediately prior to such business
combination; (iii) any decrease in your Base Salary, target annual
incentive or long- term incentive opportunity; (iv) any breach of the
terms of this Agreement by HSI after receipt of written notice from you
and a reasonable opportunity to cure such breach; (v) HSI fails to obtain
any successor entity's assumption of its obligations to you hereunder; or
(vi) the Company requiring you to perform your services as an employee on
an ongoing basis at a location more than 75 miles distant from the
location at which you perform your services as of the date immediately
prior to the Change in Control.
5. Non-Disclosure; Non-Solicitation; Non-Disparagement.
(a) During the Term and thereafter, you shall not, without HSI's
prior written consent disclose to anyone (except in good faith in the ordinary
course of business) or make use of any Confidential Information except in the
performance of your duties hereunder or when required to do so by law. In the
event that you are so required by law, you shall give prompt written notice to
HSI sufficient to allow HSI the opportunity to object to or otherwise resist
such order.
(b) During the Term and for a period of 24 months thereafter, you
shall not, without HSI's prior written consent, solicit for employment, whether
directly or indirectly,
5
<PAGE>
any person who (i) at the time is employed by HSI or any affiliate, or (ii) was
employed by HSI or any affiliate within three months prior to such solicitation.
(c) You agree that, during the Term and thereafter (including
following any Termination for any reason) you will not make statements or
representations, or otherwise communicate, directly or indirectly, in writing,
orally, or otherwise, or take any action which may, directly or indirectly,
disparage or be damaging to HSI or its respective officers, directors,
employees, advisors, businesses or reputations. Notwithstanding the foregoing,
nothing in this Agreement shall preclude you from making truthful statements or
disclosures that are required by applicable law, regulation or legal process.
6. Resolution of Disputes. Any controversy or claim arising out of or
relating to this Agreement or any breach or asserted breach hereof shall be
resolved by binding arbitration, to be held at an office closest to HSI's
principal offices in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court of competent jurisdiction. Pending the resolution of
any arbitration or court proceeding, HSI shall continue payment of all amounts
and benefits due you hereunder. All reasonable costs and expenses of any
arbitration or court proceeding (including fees and disbursements of counsel)
shall be promptly paid on your behalf by HSI; provided, however, that no such
expense reimbursement shall be made if and to the extent the arbitrator(s)
determine(s) that any of your litigation assertions or defenses were in bad
faith or frivolous.
7. Effect of Agreement on Other Benefits. Except as specifically
provided in this Agreement, the existence of this Agreement shall not be
interpreted to prohibit or restrict your participation in any other employee
benefit or other plans or programs in which you currently participate.
8. Not an Employment Agreement. This Agreement is not a contract of
employment between you and HSI. HSI may terminate you at any time, subject to
the terms hereof or any other agreement that might exist between you and HSI.
9. Assignability; Binding Nature. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors, heirs
(as applies to you) and permitted assigns. HSI agrees that in the event of a
sale or transfer of assets, it shall, as a condition of such sale, require such
assignee or transferee to expressly assume HSI's liabilities, obligations and
duties hereunder.
6
<PAGE>
10. Governing Law/Jurisdiction. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of New York without
reference to principles of conflict of laws.
Please acknowledge your acceptance of the terms of this Agreement by
executing below and returning a copy to HSI.
HENRY SCHEIN, INC.
By:
-----------------------------
Name:
Title:
Accepted:
--------------------------------
7
<PAGE>
Exhibit 10.33
EMPLOYMENT AGREEMENT dated as of January 1, 2000 between HENRY
SCHEIN, INC., a Delaware corporation (the "Company"), and STANLEY M. BERGMAN
("Bergman").
Bergman is currently Chairman of the Board, Chief Executive Officer
and President of the Company. The Company recognizes that Bergman has made
substantial contributions to the success of the Company over a long period of
time and desires to assure the Company of Bergman's continued service. Bergman
desires to continue to perform services for the Company.
In consideration of the agreements hereinafter set forth, the
Company and Bergman agree as follows:
1. EMPLOYMENT
1.1 Capacity; Duties. The Company hereby employs Bergman as the
Company's Chairman of the Board, President and Chief Executive Officer. Bergman
shall have general supervision over the business and affairs of the Company and
its subsidiaries, shall report and be responsible only to, and subject to the
supervision of, the Board of Directors of the Company, and shall have powers and
authority superior to those of any other officer or employee of the Company or
any of its subsidiaries. The Board of Directors may with Bergman's consent,
which consent may be withheld in his reasonable discretion, confer the title of
President upon another person without any diminution in the compensation or
benefits payable to Bergman hereunder. Subject to Section 6(b) hereof, Bergman
may serve on the board of directors of any other corporation, may be involved in
civic or charitable activities and may manage his personal investments, so long
as such service does not interfere with his duties to the Company or its
subsidiaries. Bergman accepts the employment described herein and agrees to
devote his full business time and effort thereto, and to perform those duties
normally attributable to the positions for which he is employed hereunder.
Bergman shall not be required to perform duties hereunder that would require him
to relocate his residence.
1.2 Employment Period. Subject to the succeeding sentence hereof,
Bergman's employment shall be for the period (the "Employment Period")
commencing on January 1, 2000, and ending on the earlier of (i) December 31,
2002, or (ii) the date on which Bergman's employment is terminated earlier
pursuant to Section 4 hereof.
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The Employment Period may be extended by the Company from time to time for
successive one-year periods by giving Bergman notice (an "Extension Notice")
thereof at least six months but not more than twelve months prior to the date
that the then applicable Employment Period is to expire. Notwithstanding the
preceding sentence the Employment Period shall not be extended if Bergman,
within 90 days after any Extension Notice is given, advises the Company that he
chooses not to extend the Employment Period. The date on which the Employment
Period is scheduled to expire pursuant to whichever shall be the later of clause
(i) above or the second sentence hereof is hereinafter referred to as the
"Employment Expiration Date."
2. COMPENSATION
2.1 Base Salary. During the Employment Period, as compensation for
Bergman's employment hereunder, Bergman shall receive a base salary at the rate
of $585,000 per annum, commencing on January 1, 2000, payable in accordance with
the Company's normal payroll practices for its senior executive officers from
time to time in effect. The base salary shall be increased in such amounts and
at such times, not less frequently than annually, within the sole discretion of
the Board of Directors or the Compensation Committee of the Board of Directors
(the "Compensation Committee"). (The base salary, including such increases, is
hereinafter referred to as the "Base Salary.") Once increased, the Base Salary
may not be decreased.
2.2 Incentive Compensation. During the Employment Period, Bergman
shall be eligible to receive, in addition to his Base Salary, incentive
compensation (the "Incentive Compensation") as follows: With respect to each
year during the Employment Period, the Board of Directors or the Compensation
Committee shall, after consultation with Bergman, establish a maximum annual
Incentive Compensation opportunity for Bergman, to be expressed as a percentage
of the Base Salary for such year, and performance criteria consistent with such
performance-based criteria as are applicable to other Company senior management.
All Incentive Compensation shall be payable within five business days of the
determination of such Incentive Compensation.
2.3 Additional Compensation. Nothing contained herein shall limit or
otherwise restrict the Board of Directors of the Company from granting to
Bergman at any time and from time to time such additional compensation as may be
recommended from time to time by the Compensation Committee.
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2.4 Expenses. The Company shall promptly reimburse Bergman for all
expenses reasonably incurred by him in the performance of his duties under this
Agreement in accordance with the Company's general policies and practices for
senior executive officers in effect from time to time.
3. BENEFITS
3.1 Benefits. During the Employment Period, Bergman shall be
entitled to participate in all benefit, welfare and perquisite plans, policies
and programs, in accordance with the terms thereof, as are generally provided
from time to time by the Company for its senior management employees and for
which Bergman is eligible. Unless the Employment Period shall have been
terminated for Cause (as defined in Section 4.3 hereof) or Bergman terminates
his employment pursuant to Section 4.1(c) (ii), during the period commencing
immediately after the Employment Period and continuing (x) as to Bergman, for
the life of Bergman, (y) as to Bergman's spouse, for the life of his spouse and
(z) as to his children, until the earlier to occur of (A) such child attaining
the age of 28 or (B) such child completes his graduate studies (collectively,
his "Family") the Company shall continue the participation of Bergman and his
Family in all health and medical benefit plans, policies and programs in effect
from time to time with respect to the senior executive officers of the Company
and their families generally (at the same levels and at the same cost, if any,
as provided to the senior executive officers of the Company generally).
Notwithstanding the foregoing, if Bergman's or his Family's continued
participation thereunder is not possible under the general terms and provisions
thereof, the Company shall provide such benefits at such levels to Bergman
and/or his Family either by obtaining other insurance or by self-insuring such
amounts, net of any reimbursement any of them shall receive with respect to
health and medical costs from insurance other than pursuant to this Section 3.1;
provided, however, that prior to receiving benefits hereunder from the Company,
Bergman and/or his Family shall first endeavor to obtain reimbursement with
respect to health and medical costs from other insurance Bergman and/or his
Family may own, if any, provided that such reimbursement can be obtained without
unreasonable effort or expense on the part of Bergman or his Family.
3.2 Vacation. During each calendar year during the Employment
Period, Bergman shall be entitled to four (4) weeks of vacation and such other
number of personal days generally afforded to senior executives of the Company.
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3.3 Automobile. During the Employment Period and, if Bergman's
employment hereunder has been terminated by him pursuant to Section 4.1(c)(iii)
hereof, for a period of three years thereafter, or if Bergman's employment
hereunder has not been terminated by the Company for Cause (as defined in
Section 4.3 hereof) or by Bergman pursuant to Section 4.1(c)(ii) hereof,
for a period of two years thereafter, the Company shall provide for Bergman's
use a new automobile of similar make and model to the automobile he currently
drives or its substantial equivalent, and all ancillary equipment similar to
that as he currently uses with his automobile, and shall pay the costs of fuel,
maintenance, repairs and insurance. The Company shall provide Bergman (at
Bergman's option) with the use of a new automobile every three years and shall
continue to provide such ancillary equipment and pay all such costs during the
Employment Period and, if applicable, the two-year period referred to above.
3.4 Conversion of Benefits. During the Employment Period, Bergman
shall be entitled to the same conversion privileges (including but not limited
to cash conversions) with regard to the Company's benefit plans, policies and
programs in which Bergman is entitled to participate under Section 3.1 hereof as
may be generally offered from time to time by the Company to its senior
executive officers.
3.5 Gross-up. To the extent that Bergman incurs any tax obligations
as a result of the provisions of Section 3.3 hereof, the Company shall pay to
Bergman or the applicable taxing authority on Bergman's behalf, no later than 30
days prior to the time the tax is due, an amount equal to the sum of such taxes
and all taxes payable on account of payments made to Bergman under this Section
3.5.
4. TERMINATION
4.1 Termination of Employment. Bergman's employment (and the
Employment Period) shall terminate prior to the Employment Expiration Date upon
the occurrence of any of the following events:
(a) upon Bergman's death or Bergman's Disability (pursuant to
Section 4.2 hereof); or
(b) (i) by the Company for Cause; or (ii) by action of the Board of
Directors without Cause upon ninety (90) days' prior written notice to Bergman;
or
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(c) by Bergman (i) following a material breach by the Company of
this Agreement, which breach is not cured within 30 days after notice from
Bergman thereof, (ii) upon 180 days prior written notice to the Company, or
(iii) upon 30 days prior written notice to the Company given at any time within
one year following a Change in Control, as hereinafter defined. A "Change in
Control" shall be deemed to occur upon any of the following: (A) acquisition by
any one "person" (as such term is defined in ss.3(a)(9) of the Securities and
Exchange Act of 1934, as amended, and used in ss.13(d) and 14(d) thereof,
including "group" as defined in ss.13(d) thereof) of 33% or more of the
Company's voting shares without the prior express approval of the Company's
Board of Directors; (B) acquisition by any one "person" (as referred to in the
preceding sentence) of more than 50% of the Company's voting shares; (C)
directors elected to the Board over any 24 month period not nominated by the
Company's Executive Committee represent 30% or more of the total number of
directors constituting the Board at the beginning of the period, (or such
nomination results from an actual or threatened proxy contest); (D) any merger,
consolidation or other corporate combination upon the completion of which the
Company's shares do not represent more than 50% of the combined voting power of
the resulting entity; and (E) upon the sale of all or substantially all of the
consolidated assets of the Company, other than a distribution to shareholders.
4.2 Disability. If, by reason of physical or mental disability,
Bergman is unable to carry out the material duties he has agreed to carry out
under this Agreement (i) for more than 180 days in any twelve-month period or
(ii) as certified by a physician ("Disability"), the Employment Period shall
terminate hereunder. Bergman shall submit to an examination by a physician for
purposes of the preceding sentence upon the request of the Board of Directors.
During any period of Disability prior to such termination, Bergman shall
continue to receive all compensation and other benefits provided herein as if he
had not been disabled at the time, in the amounts and in the manner provided
herein, provided that the Company shall be entitled to a credit against such
amounts with regard to the amount, if any, paid to Bergman for such period under
any disability plan of the Company.
4.3 Cause. For purposes of this Agreement, the term "Cause" shall be
limited to (i) action by Bergman involving willful malfeasance having a material
adverse effect on the Company, (ii) Bergman being convicted of a felony
involving theft, fraud or moral turpitude (other than resulting from a traffic
violation or like event), or (iii) any other action by Bergman constituting a
material breach of this Agreement which is not cured within 30 days after notice
from the Company thereof.
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5. CONSEQUENCES OF TERMINATION
5.1 Death. If Bergman's employment hereunder is terminated by reason
of Bergman's death, the Company shall have no further obligation to Bergman
under this Agreement except that Bergman's heirs or estate shall be paid those
obligations accrued hereunder to the date of his death, consisting only of (a)
Bergman's unpaid Base Salary to the extent unpaid through the date of
termination, (b) any deferred compensation earned but not yet paid (together
with any accrued earnings thereon), (c) the product of (i) the annual Incentive
Compensation paid or payable to Bergman for the last full fiscal year of the
Company ending prior to the date of termination multiplied by (ii) a fraction,
the numerator of which is the number of days in the current fiscal year during
which Bergman was employed by the Company, and the denominator of which is 365,
(d) any accrued and unpaid vacation pay, and (e) to the extent permitted under
this Agreement, any other amounts or benefits owing to Bergman or his
beneficiaries under the then applicable benefit plans, policies and programs of
the Company. (All amounts determined pursuant to the provisions of in clauses
(a) through (e) above are hereinafter referred to as "Accrued Obligations".)
Unless otherwise previously directed by Bergman (or, in the case of any benefit
plan qualified under Section 401(a) of the Internal Revenue Code, as amended
(the "Code") (any such plan hereinafter referred to as a "Qualified Plan"), as
may be required by such Qualified Plan), all Accrued Obligations shall be paid
to Bergman's estate or designated beneficiaries, as the case may be, in a lump
sum (to the extent such obligations are able to be paid, under the terms of the
plan for which such obligation arose, in a lump sum) in cash within 30 days
after the date of Bergman's death, and, otherwise, in accordance with the terms
of the applicable plan or applicable law. Nothing in this Section 5.1 shall be
deemed to limit or expand in any way the right of Bergman's family to receive
the applicable benefits referred to in Section 3.1 hereof.
5.2 [Intentionally Omitted]
5.3 Company Termination for Cause or Resignation Other Than for
Material Breach. If Bergman's employment hereunder is terminated by the Company
for Cause or by Bergman pursuant to Section 4.1(c)(ii) above, the Company shall
have no further obligation to Bergman under this Agreement, except that, unless
otherwise directed by Bergman (or in the case of any Qualified Plan, as may be
required by such plan) Bergman shall be paid all Accrued Obligations to the date
of termination (other than the obligation specified in clause (c) of Section 5.1
hereof), in a lump sum (to the extent such obligations are able to be paid,
under the terms of the plan for which such
6
<PAGE>
obligation arose, in a lump sum) in cash within 30 days after the date of
termination, and, otherwise, in accordance with the terms of the applicable plan
or applicable law.
5.4 Company Termination Without Cause or Due to Disability;
Resignation Following Material Breach; Non-Renewal. If Bergman's employment
hereunder is terminated pursuant to Section 4.2 hereof or by the Company without
Cause or by Bergman pursuant to Section 4.1(c)(i) above or the Company at any
time chooses not to extend or not to continue to extend the Employment Period,
the Company shall have no further obligation to Bergman under this Agreement
except that:
(a) Unless otherwise directed by Bergman (or, in the case of any
Qualified Plan, as may be required by such plan), Bergman shall be paid all
Accrued Obligations to the date of termination in a lump sum (to the extent such
obligations are able to be paid, under the terms of the plan for which such
obligation arose, in a lump sum) in cash within thirty (30) business days after
the date of termination, and, otherwise, in accordance with the terms of the
applicable plan or applicable law.
(b) Unless otherwise directed by Bergman, Bergman shall be paid, as
severance pay, within thirty (30) business days after the date of termination:
(i) in a lump sum in cash an amount equal to 200% of Bergman's
then annual Base Salary plus in a lump sum in cash an amount equal to 200%
of Bergman's average annual Incentive Compensation paid or payable with
respect to the immediately preceding three fiscal years of the Company
ending prior to the date of termination; and
(ii) with respect to each pension plan, as such term is
defined in ERISA Section 3(2)(A), of the Company (or its subsidiaries) in
which Bergman participated or had a benefit under at the date of
termination, a cash payment equal to the value (to be determined as
indicated below) of the excess of (A) the fully vested value of the
benefit to him under such plan, assuming additional credit for service for
all purposes under such plan for the period from the date of termination
through the Employment Expiration Date (the "Remaining Term"),
continuation of Bergman's Base Salary for the Remaining Term, and that
there are no earnings on plan funds in defined contribution type plans for
any period after the date of termination, over (B) Bergman's vested
accrued benefits pursuant to the provisions of each respective plan on the
date
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of termination. (For purposes of this Section 5.4(b)(ii), the value of the
excess shall be calculated using a discount rate equal to the applicable
Federal Rate (as defined in Code Section 1274) in effect on the date of
termination of employment and no other actuarial assumptions).
(c) To the extent permitted or not prohibited by any pension plan,
as such term is defined in ERISA Section 3(2)(A), of the Company (or its
subsidiaries) in which Bergman is permitted to participate hereunder or by
applicable law, after the date of termination, the Company shall make
immediately available to Bergman, in a lump sum (to the extent such obligation
is able to be paid in a lump sum under the terms of the plan for which such
obligation arose), all vested amounts under any such plan.
(d) Nothing in this Section 5.4 shall be deemed to limit or expand
in any way Bergman's or his Family's rights to receive the applicable benefits
referred to in Section 3.1 hereof.
(e) With respect to an amount due to the Executive pursuant to
Section 5.4(b)(i) hereof, the Company shall be entitled to a credit against such
amount with regard to the amount, if any, payable to Bergman for such period
under any disability plan of the Company.
5.5 Termination Following a Change in Control. If Bergman's
employment is terminated by Bergman pursuant to Section 4.1(c)(iii) above, the
Company shall have no further obligation to Bergman under this Agreement except
that:
(a) Unless otherwise directed by Bergman (or, in the case of any
Qualified Plan, as may be required by such plan), Bergman shall be paid all
Accrued Obligations to the date of termination in a lump sum (to the extent such
obligations are able to be paid, under the terms of the plan for which such
obligation arose, in a lump sum) in cash within thirty (30) business days after
the date of termination, and, otherwise, in accordance with the terms of the
applicable plan or applicable law.
(b) Unless otherwise directed by Bergman, Bergman shall be paid, as
severance pay, within thirty (30) business days after the date of termination:
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(i) in a lump sum in cash an amount equal to 300% of Bergman's
then annual Base Salary plus, in a lump sum in cash an amount equal to
300% of the maximum Incentive Compensation target for which Bergman was
eligible with respect to the year in which such termination occurs; and
(ii) with respect to each pension plan, as such term is
defined in ERISA Section 3(2)(A), of the Company (or its subsidiaries) in
which Bergman participated or had a benefit under at the date of
termination, a cash payment equal to the value (to be determined as
indicated below) of the excess of (A) the fully vested value of the
benefit to him under such plan, assuming additional credit for service for
all purposes under such plan for the period from the date of termination
through the Employment Expiration Date (the "Remaining Term"),
continuation of Bergman's Base Salary for the Remaining Term, and that
there are no earnings on plan funds in defined contribution type plans for
any period after the date of termination, over (B) Bergman's vested
accrued benefits pursuant to the provisions of each respective plan on the
date of termination. (For purposes of this Section 5.5(b)(ii), the value
of the excess shall be calculated using a discount rate equal to the
applicable Federal Rate (as defined in Code Section 1274) in effect on the
date of termination of employment and no other actuarial assumptions).
(c) To the extent permitted or not prohibited by any pension plan,
as such term is defined in ERISA Section 3(2)(A), of the Company (or its
subsidiaries) in which Bergman is permitted to participate hereunder or by
applicable law, after the date of termination, the Company shall make
immediately available to Bergman, in a lump sum (to the extent such obligation
is able to be paid in a lump sum under the terms of the plan for which such
obligation arose), all vested amounts under any such plan.
(d) Nothing in this Section 5.5 shall be deemed to limit or expand
in any way Bergman's or his Family's rights to receive the applicable benefits
referred to in Section 3.1 hereof.
(e) In the event that Bergman shall become entitled to the payments
and/or benefits provided by this Section 5.5 or any other amounts (whether
pursuant to the terms of this Agreement, including Section 5.4 hereof, or any
other plan, arrangement or agreement with the Company) (collectively the
"Company Payments") and such Company Payments will be subject to the tax (the
"Excise Tax") imposed by
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Section 4999 of the Code (or any similar tax that may hereafter be imposed), the
Company shall pay to Bergman at the time specified below, an additional amount
(the "Gross-up Payment") such that the net amount retained by Bergman, after
deduction of any Excise Tax on the Company Payments and any federal, state and
local income tax and Excise Tax upon the Gross-up Payment provided for by this
Section 5.5(e), but before deduction for any federal, state or local income tax
on the Company Payments, shall be equal to the Company Payments.
(f) For purposes of determining whether any of the Company Payments
and Gross-up Payments (collectively the "Total Payments") will be subject to the
Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "parachute payments" in excess of the "base amount" (as defined
under Code Section 280G(b)(3) of the Code) shall be treated as subject to the
Excise Tax, unless and except to the extent that, in the opinion of the
Company's independent certified public accountants appointed prior to any change
in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected
by such accountants (the "Accountants") such Total Payments (in whole or in
part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the "base amount" or are otherwise not
subject to the Excise Tax, and (ii) the value of any non-cash benefits or any
deferred payment or benefit shall be determined by the Accountants in accordance
with the principles of Section 280(G) of the Code.
(g) For purposes of determining the amount of the Gross-up Payment,
Bergman shall be deemed to pay federal income taxes at the highest marginal rate
of federal income taxation in the calendar year in which the Gross-up Payment is
to be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of Bergman's residence for the calendar year
in which the Company Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes if paid in such year, after taking into account the limitation on
the deductibility of itemized deductions, including such state and local taxes,
under Section 68 of the Code. In the event that the Excise Tax is subsequently
determined by the Accountants to be less than the amount taken into account
thereunder at the time the Gross-up Payment is made, Bergman shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the prior Gross-up Payment attributable to such
reduction (plus the portion of the Gross-up Payment attributable to the Excise
Tax and federal
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and state and local income tax imposed on the portion of the Gross-up Payment
being repaid by the Executive if such repayment results in a reduction in Excise
Tax or a federal and state and local income tax deduction), plus interest on the
amount of such repayment at the rate provided in Section 1274 (b)(2)(B) of the
Code. Notwithstanding the foregoing, in the event any portion of the Gross-up
Payment to be refunded to the Company has been paid to any federal, state or
local tax authority, repayment thereof (and related amounts) shall not be
required until actual refund or credit of such portion has been made to Bergman
and, interest payable to the Company shall not exceed the interest received or
credited to Bergman by such tax authority for the period it held such portion.
Bergman and the Company shall mutually agree upon the course of action to be
pursued (and the method of allocating the expenses thereof) if Bergman's good
faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the
Accountants or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Gross-up Payment is made (including by reason
of any payment the existence or amount of which cannot be determined at the time
of the Gross-up Payment), the Company shall make an additional Gross-up Payment
in respect of such excess (plus any interest or penalties payable with respect
to such excess) at the time that the amount of such excess is finally
determined.
(h) The Gross-up Payment or portion thereof provided for in Section
5.5(f) hereof shall be paid not later than the thirtieth day following an event
occurring which subjects the Executive to the Excise Tax; provided, however,
that if the amount of such Gross-up Payment or portion thereof cannot be finally
determined on or before such day, the Company shall pay to Bergman on such day
an estimate, as determined in good faith by the Accountants, of the minimum
amount of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code),
subject to further payments pursuant to Section 5.5(f) hereof, as soon as the
amount thereof can reasonably be determined, but in no event later than the
ninetieth day after the occurrence of the event subjecting the Executive to the
Excise Tax. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to Bergman, payable on the fifth day after demand by the
Company (together with interest at the rate provided in Section 1274(b)(2)(B) of
the Code).
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5.6 Office Support. For two years following termination of Bergman's
employment by the Company without Cause or by Bergman pursuant to Section
4.1(c)((i) above, or due to the Company choosing not to extend the Employment
Period, and for three years following termination of Bergman's employment by
Bergman pursuant to Section 4.1(c)(iii) above, the Company shall, at its cost,
provide Bergman an office comparable to that used by him prior to termination
and related office support, including making available the services of his
executive assistant.
5.7 Vesting of Options, Etc. Notwithstanding anything to the
contrary in any other agreement between the Company and Bergman, upon the
occurrence of a Change in Control any and all options held by Bergman (or his
assignees) to purchase Company capital stock, to the extent not theretofore
vested, shall be fully vested and, with respect to any and all shares of stock
theretofore issued to Bergman bearing restrictions on transfer imposed by the
Company, such restrictions shall thereupon lapse.
6. CONFIDENTIAL INFORMATION, NON-COMPETITION, ETC.
(a) (i) Both during and after the Employment Period, Bergman shall
hold in a fiduciary capacity for the benefit of the Company and shall not,
without the prior written consent of the Company, communicate or divulge
(other than in the regular course of the Company's business), to anyone
other than the Company, its subsidiaries and those designated by it, any
confidential or proprietary information, knowledge or data relating to the
Company or any of its subsidiaries, or to any of their respective
businesses, obtained by Bergman before or during the Employment Period
except to the extent (A) disclosure is made during the Employment Period
by Bergman in the course of his duties hereunder and Bergman reasonably
determines in good faith that it is in the best interest of the Company to
do so, (B) Bergman is compelled pursuant to an order of a court or other
body having jurisdiction over such matter to do so (in which case the
Company shall be given prompt written notice of such intention to divulge
not less than five days prior to such disclosure or such shorter period as
the circumstances may reasonably require) or (C) such information,
knowledge or data is or becomes public knowledge or is or becomes
generally known within the Company's industry other than through improper
disclosure by Bergman.
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(ii) Bergman acknowledges and agrees that the whole interest
in any invention, improvement, confidential information, copyright,
design, plan, drawing or data, including all worldwide rights to
copyrights or any other intellectual property rights (collectively, the
"Rights") arising out of or resulting from Bergman's performance of his
duties during the Employment Period shall be the sole and exclusive
property of the Company. Bergman undertakes (at the expense of the
Company) to execute any document or do any reasonably necessary act to
enable the Company to obtain or to assist the Company in obtaining any
Rights. Bergman hereby irrevocably appoints the Company to be his
attorney-in-fact to execute in his name and on his behalf any instrument
required and take any actions reasonably necessary for the purpose of
giving to the Company the full benefit of the provisions of this
subsection; provided, however, that the Company shall notify Bergman prior
to executing any such instruments or taking any such actions.
(b) Bergman will not (other than on behalf of the Company) directly
or indirectly during the Employment Period and for one (1) year thereafter if
Bergman's termination is due to a termination by the Company without Cause, by
Bergman pursuant to Section 4.1(c)(i) or (iii) or because of Bergman's
Disability (which term may be extended for an additional year at the Company's
option; provided, however, that upon making such election which shall be made no
less than 180 days prior to the expiration of such term, the Company shall pay
Bergman 100% of his Base Salary at the rate being paid on the date of such
termination), or until the later of (A) the second anniversary of the expiration
of the Employment Period and (B) the Employment Expiration Date if such
termination is due to a termination by the Company for Cause or by Bergman
pursuant to Section 4.1(c)(ii), as an individual proprietor, partner,
stockholder, officer, employee, director, joint venturer, investor, lender, or
in any other capacity whatsoever (other than as the holder of not more than one
(1) percent of the total outstanding stock of a publicly held company other than
Schein Pharmaceutical, Inc., (x) engage in any activity competitive with a
material segment of the business of the Company, or (y) recruit, solicit or
induce any employee or employees of the Company (other than his personal
administrative assistant) to terminate their employment with, or otherwise cease
their relationship with, the Company.
(c) If any restriction set forth in Section 6(b) hereof is found by
any court of competent jurisdiction or arbitrator to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a
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geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(d) The restrictions contained in Sections 6(a) and (b) hereof are
necessary for the protection of the business and goodwill of the Company and are
considered by Bergman to be reasonable to such purpose. Bergman acknowledges and
agrees that money damages would not adequately compensate the Company for any
breach of Sections 6(a) or 6(b) hereof and will cause the Company substantial
and irreparable damage and therefore, in the event of any such breach, in
addition to such other remedies which may be available, the Company shall have
the right to seek specific performance and injunctive relief.
7. NO MITIGATION; NO SET-OFF
The Company agrees that if Bergman's employment with the Company is
terminated prior to the Employment Expiration Date for any reason whatsoever,
Bergman is not required to seek other employment or to attempt in any way to
reduce any amounts payable to Bergman by the Company pursuant to this Agreement.
Further, the amount of any payment provided for in this Agreement shall not be
reduced by any compensation earned by Bergman as the result of employment by
another employer or otherwise; and the amount of any benefit (other than the
health and medical benefits provided for in Section 3.1 hereof) provided for in
this Agreement shall not be reduced by any benefit provided to Bergman as the
result of employment by another employer or otherwise. The Company's obligations
to make the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, or other similar right which the Company may have against Bergman.
8. LEGAL FEES
If Bergman seeks to collect or negotiates and reaches a settlement
for any part or all of the payments provided for hereunder (or otherwise
successfully enforces the terms of this Agreement) by or through a lawyer, the
Company shall advance all reasonable costs of such collection or enforcement,
including reasonable legal fees and disbursements and other fees and expenses
which Bergman may incur, promptly after submission of documentation reasonably
acceptable to the Company in respect of such costs and expenses. All amounts
paid by the Company shall promptly be refunded to the Company if and when a
court of competent jurisdiction finds that the Company is
14
<PAGE>
entitled to have such sums refunded or if a settlement is reached which is
insubstantial compared to the damages that were requested. The Company shall pay
or reimburse Bergman for all reasonable legal fees (not in excess of $7,500)
incurred by him in connection with the negotiation and execution of this
Agreement.
9. SUCCESSORS; BINDING AGREEMENT
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to expressly assume
and agree in writing to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
transaction had taken place, provided that Bergman need only be one of the
senior executive officers with the authority, powers and responsibilities set
forth in Section 1.1 hereof with respect to the subsidiary or subdivision which
operates the business of the Company as it exists on the date of such business
combination. Failure of the Company to obtain such express assumption and
agreement at or prior to the effectiveness of any such transaction shall be a
breach of this Agreement and shall entitle Bergman to compensation and benefits
from the Company in the same amount and on the same terms to which Bergman would
be entitled hereunder if the Company terminated his employment without Cause,
except that for purposes of implementing the foregoing, the date on which any
such transaction becomes effective shall be deemed the date of termination. As
used in this Agreement, "Company" shall mean the Company as hereinbefore defined
and any successor to its business or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
(b) The Company may not assign this Agreement except in connection
with, and to the acquiror of, all or substantially all of the business or assets
of the Company, provided such acquiror expressly assumes and agrees in writing
to perform this Agreement as provided in Section 9(a) hereof.
(c) This Agreement shall inure to the benefit of and be enforceable
by Bergman and his personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees; provided, however, that
this Agreement may not be assigned by Bergman.
(d) The parties agree that Bergman's family members are the intended
third party beneficiaries of the provisions of Section 3.1 and Article 5 (only
to the
15
<PAGE>
extent that the events described therein would cause Bergman's family members to
be entitled to the benefit of rights granted to them under Section 3.1) to the
extent that benefits are expressly granted to them in such sections, with the
right to enforce such provisions as fully as if they were parties to this
Agreement.
10. MISCELLANEOUS
(a) Any notices or other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to have been duly made,
given or received when hand-delivered, one (1) business day after being
transmitted by telecopier (confirmed by mail) or sent by overnight courier
against receipt, or five (5) days after being mailed by registered or certified
mail, postage prepaid, return receipt requested, to the party to whom such
communication is given at the address set forth below, which address may be
changed by notice given in accordance with this Section:
If to the Company:
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
Attention: Corporate Secretary
If to Bergman:
Stanley M. Bergman
104A Middleville Road
Northport, New York 11768
(b) If any provision of this Agreement shall be held by court of
competent jurisdiction to be illegal, invalid or any unenforceable, such
provision shall be construed and enforced as if it had been more narrowly drawn
so as not to be illegal, invalid or unenforceable and such illegality,
invalidity or unenforceability shall have no effect upon and shall not impair
the enforceability of any other provision of this Agreement.
(c) No provision of this Agreement may be modified, waived or
discharged except by a waiver, modification or discharge in writing signed by
Bergman
16
<PAGE>
and such officer as may be designated by the Board of Directors. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
in compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement.
(d) This Agreement represents the entire agreement of the parties
and shall supersede any and all previous contracts, arrangements or
understandings between the Company and Bergman with respect to the subject
matter hereof.
(e) This Agreement shall be construed, interpreted, and governed in
accordance with the laws of the State of New York, without reference to rules
relating to conflicts of law.
(f) The section headings herein are for the purpose of convenience
only and are not intended to define or limit the contents of any section.
(g) The parties may sign this Agreement in counterparts, all of
which shall be considered one and the same instrument.
[END OF TEXT-- SIGNATURE PAGE FOLLOWS]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of
the day and year first above written.
HENRY SCHEIN, INC.
By:
---------------------------------
Authorized Officer
/S/ STANLEY M. BERGMAN
------------------------------------
STANLEY M. BERGMAN
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statments and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> DEC-25-1999
<CASH> 26019
<SECURITIES> 0
<RECEIVABLES> 408454
<ALLOWANCES> (20391)
<INVENTORY> 285590
<CURRENT-ASSETS> 778809
<PP&E> 147329
<DEPRECIATION> (60702)
<TOTAL-ASSETS> 1204102
<CURRENT-LIABILITIES> 350380
<BONDS> 322097
0
0
<COMMON> 407
<OTHER-SE> 517460
<TOTAL-LIABILITY-AND-EQUITY> 1204102
<SALES> 2285700
<TOTAL-REVENUES> 2285700
<CGS> 1587344
<TOTAL-COSTS> 1587344
<OTHER-EXPENSES> 592591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23593
<INCOME-PRETAX> 89783
<INCOME-TAX> 35589
<INCOME-CONTINUING> 50312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50312
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.21
</TABLE>
