2000 Annual Report we are ready! About Henry Schein, Inc. Henry Schein, Inc. is the largest distributor of healthcare products and services to office-based practitioners in the combined North American and European markets. Customers include dental practices and laboratories, physician practices and veterinary clinics, as well as government and other institutions. Widely recognized for superior service, low prices, and innovative value-added solutions, the Company is dedicated to helping its customers practice high-quality healthcare and improve their profitability. Henry Schein operates its five business groups – Dental, Medical, Veterinary, International and Technology – through a centralized and automated distribution network, which provides customers in more than 125 countries with a comprehensive selection of over 80,000 national and private brand products. The Company reaches its customers through an integrated sales and marketing approach, combining a network of 1,200 field sales consultants with extensive direct marketing programs, electronic ordering options and 730 telesales representatives. During 2000, Henry Schein distributed more than 18 million pieces of direct marketing materials to approximately 650,000 office-based practitioners. Financial Highlights OPERATING RESULTS Net Sales Operating Income Operating Margin Net Income Diluted Earnings Per Share Diluted Average Shares Outstanding OPERATING DATA Number of Orders Shipped Average Order Size (In thousands, except per share and operating data) 2000 1999 1998 $ 2,381,721 $ 2,284,544 $ 1,922,851 $ $ $ $ 127,613 5.4% 70,147 1.67 42,007 $ $ $ 119,232 5.2% 59,796 1.44 41,438 8,280,000 7,979,000 288 $ 286 $ $ $ $ $ $ $ 96,196 5.0% 57,823 1.39 41,549 6,718,000 286 962,040 463,034 2,693 FINANCIAL POSITION AND CASH FLOW Total Assets Stockholders’ Equity Net Cash from Operating Activities $ 1,231,068 $ 1,204,102 $ $ 579,060 152,994 $ $ 517,867 56,493 Net Sales ($ in millions) $ 2,500 $ 2,000 2,381.7 2,284.5 1,922.9 $ 1,500 1,518.5 $ 1,000 $ 500 830.3 0 ‘96 ‘97 ‘98 ‘99 ‘00 Operating Margin (% of net sales) Operating Income ($ in millions) Earnings per Share (in dollars) 6 5 4 3 2 1 0 5.4% 5.2% 5.0% 4.1% 3.6% $ 150 $ 120 $ 90 $ 60 127.6 119.2 96.2 62.4 $ 30 29.7 ‘96 ‘97 ‘98 ‘99 ‘00 0 ‘96 ‘97 ‘98 ‘99 ‘00 2.0 1.5 1.0 0.5 0 1.67 1.44 1.39 1.14 0.93 ‘96 ‘97 ‘98 ‘99 ‘00 NOTE: Financial Highlights are presented as originally reported, and have been restated to reflect various new accounting pronouncements and exclude merger and integration costs, and restructuring costs, net of taxes; as well as losses on the disposal of certain non-core business units. we are ready! We are efficient, we are reliable, and we are the most innovative supplier to the markets we serve. Our heritage is grounded in the 69 years of service we’ve established as a premier distributor of healthcare products to office-based practitioners. Our future is dependent on helping our customers succeed by providing the value-added services and products they demand. We are Team Schein. Abe Lobel, Medical Field Sales Consultant, with customer Dr. Jude Barbera 1 49 million We ship more than 49 million line items per year. By offering the latest electronic ordering capabilities and employing state-of-the-art distribution technology, we efficiently meet our customers’ needs and offer a broad array of 80,000+ branded and private-label products. 2 Team Schein Member Romulus Voigt we are... Efficient Our customers demand it. A five-year program of organic growth has created a coupled with steady strategic acquisitions bar coding on products and loca- prehensive on-site customer tions in our facilities. A bar code is account information, our field given to each order upon its arrival salesforce can provide superior at the distribution center, and consultative services. global healthcare products and remains with the order acting as its Direct marketing – Henry Schein services leader with approximately “license plate” as it is electronically was founded as a catalog mar- $2.4 billion in annual sales, and guided through the distribution keter, and to this day our direct more than $1.2 billion in assets. center for fulfillment. Our distribu- marketing expertise remains a This foundation provides us with tion centers are also managed by core competency and a competi- the critical mass and economies sophisticated warehouse manage- tive advantage. of scale to maximize purchasing ment systems that allow us to Telesales – Our telesales organi- power, ensure high fill rates and optimize efficiency. We have incor- zation provides highly efficient out- continue offering prices that are porated pick-to-light carousels bound sales and support. below our competitors’ prices. and pick-to-light carton flow racks Electronic sales – Our suite to allow for the higher volume of of electronic ordering products Through four major state-of-the-art product shipped to our customers. distribution centers strategically located across the U.S., as well as We sell our products via field sales, over 10 distribution centers outside direct marketing, telesales and var- including our Web site www.hen- ryschein.com, ARUBA® PC and ARUBA® Touch-Tone provide 24/7 ordering capabilities, and have the U.S., we provide an extensive ious electronic modes. This unique recorded, on average, higher order range of products – more than system of integrated and comple- sizes and lower return rates – at 80,000 branded and private-label mentary channels drives financial less cost to the Company. products in total. We ship, on efficiencies for the Company, average, over 49 million line items improves communication with our The bottom line is this: Our per year. customers and leverages our infra- complementary, multichannel structure. We are committed to system works. It works for our At Henry Schein we efficiently helping satisfy our customers’ customers through ease-of-use address our customers’ product needs. Whatever channel serves and level of service. It works for needs through the effective use of their needs, they can use. the Company by driving sales with the latest distribution technology. a focus on improving margins. Our distribution centers use Field sales – Armed with technol- radio-frequency scanners to read ogy that provides real-time, com- 3 we are... Reliable We earn our customers’ trust. Our heritage is rooted in Our future is dependent on our able, first-rate service. seven decades of reli- ucts, special promotions and dis- service for handpieces, small counts, we provide a comprehen- equipment, operative and surgical sive product and service offering. instruments, sterilizers and Most important, our Team Schein laboratory equipment. During continued ability to be a trusted representatives listen. And by lis- 2000, ProRepair’s operations in business partner – to help our tening, we’re able to stay a step New York achieved ISO 9002 customers stay on top of industry ahead in anticipating and exceed- and EN46002 certifications. changes, reduce costs and oper- ing expectations. As a recognized ate more efficiently. leader in the direct marketing of We launched the Achieving healthcare products, our dental, Excellence Program during 2001. We are confident that Henry Schein medical and veterinary catalogs Under this new, nationwide initia- is the most reliable provider in the are considered reference guides tive, our customers and vendor industry. Our reliability is defined for each of those markets. During partners will find it easier to do by our service, our competitive 2000, we mailed over 18 million prices, our comprehensive product catalogs, flyers, newsletters and offerings and our ability to offer the other direct-response vehicles to business with Sullivan-Schein Dental®, our U.S. Dental business. Its utilization of technology, the latest in technological innovations. more than 650,000 office-based elimination of cumbersome paper- healthcare practitioners worldwide. work and the enhancement of And the data supports this claim. skills and tools collectively will help During 2000, our average order fill As our industry’s only Pan- us to serve our customers even rate in the U.S. and Canada was European Company with opera- better. Highlights of this program over 99 percent, and we posted tions in 16 countries, we print include remote computer devices an order accuracy rate of 99 many of our catalogs in local to empower our technicians with percent. Further, over 99 percent languages. In countries where valuable information, streamlined of orders were out the door by we do not have a local presence, procurement for large dental 5:00 p.m. the same day they our worldwide customers can equipment coupled with central- were received. That’s reliable, and rely on Schein Direct™, our rapid- ized service dispatching, parts we’re proud of our record. response, door-to-door air pack- procurement, customer service age delivery program that guaran- and technical support. Our unique approach to servicing tees delivery to practitioners in over our customers ensures that their 125 countries. reliance on us is well placed. If there are customer needs we can’t fill, we will do everything pos- Through our 1,200 Field Sales Our Zahn Dental laboratory busi- sible to make sure those needs do Consultants, and through 730 Telesales Representatives who offer introductions to new prod- ness is an industry leader, and our ProRepair® operation provides reli- able 24-hour turnaround repair not go unmet. That’s how relation- ships are built, and strengthened. 4 99%Over 99% of our U.S. and Canadian orders are out the door by 5 p.m. the same day they are received. Helping our customers succeed is our No. 1 priority. With a 99% fill rate in the U.S. and Canada and an order accuracy rate of 99%, our customers’ faith in us for the highest level of quality service is well placed. Medical Telesales Representative Patty DellaPiazza-Cobb with Medical Telesales Manager Tony Falco 5 60%Sales processed through our Web sites grew more than 60 percent during 2000. We enjoy a long tradition of being the “first” in our industry to provide essential products and services, and are pioneers in applying advanced technology to the needs of the office-based practitioner. 6 Henry Schein’s Web Master Christine Novick we are... Innovative We help our customers succeed. W e enjoy a long tradi- to provide essential products and “first” in our industry tion of being the services; for example, our exclusive distribution of OralCDx® for the early detection of oral cancer, our pio- practitioners who practice in the evolution in the “Digital Dental “underserved” areas of the United States, as noted in the U.S. Surgeon General’s Report on Oral Health in America. We are also Office” through such innovative products as our DENTRIX®, Easy Dental® and LabNet® systems. DENTRIX is one of the most pioneers in supporting our cus- comprehensive, clinically-based tomers who use the Internet, and practice management software neering work in the development of we have done so since 1997. packages, with nearly 16,000 clinically-based practice manage- Through www.henryschein.com installations worldwide. It is suc- ment systems, and our work in the and, for our U.S. office-based cessful among professional dental field of veterinary dentistry. dental practitioner customers, practices, and has been installed www.sullivanschein.com, we’ve in several dental schools through- We are committed to providing our been able to service customer out the U.S., as well. Easy Dental customers with innovative solu- demand as evidenced through is the best selling practice man- tions for success. Our customized more than 60 percent growth in agement software system in the formulary programs give practi- sales processed through our Web industry today, with over 25,000 tioners a more cost-effective sites during 2000. way to meet the product and systems sold to date. With labor- atory fees the second largest cost guidelines of their practice. Early in 2001, we introduced newly expense for the dental practitioner Through plans such as the AMA PurchaseLink® Program, now in its sixth year, member practitioners designed sites that offer an array after staff salaries, our LabNet of value-added features including system helps reduce those instant customer registration, easy expenses by making it easier for can purchase over 750 commonly shopping and ordering, and a the dentist to communicate used products at significantly high level of customer service and directly with the dental lab. reduced prices. Sales from this supply procurement capabilities. program in 2000 were approxi- mately $30 million. We have other similar formulary programs in place with organizations such For the veterinary market, we offer Our state-of-the-art electronic cat- alog and ordering system, ARUBA®, lets customers order products by AVImark®, a high-value practice management system. To date, we’ve sold more than 4,500 as the American Academy of telephone, CD-ROM or via the systems. A recent survey by Dermatology, which had sales Internet. More than $200 million the American Animal Hospital growth of nearly 200% over in sales were generated during Association revealed that 97 1999; the American Society of 2000 through our ARUBA suite percent of all AVImark users said Plastic Surgeons and The Laser of products. Vision Centers. they would recommend it to a colleague, and rated the system We are pioneers in applying the highest among all competing Most recently, we established the advanced technology to the needs systems as having met their Heritage Medical Alliance formulary, of the office-based practitioner. expectations. specifically designed to help And, we are at the forefront of the 7 we are... Adding Value W e do much more than We are partners with our customers. In addition to our leading practice photography. Digital motion video management software offerings, solves the problem of capturing just the right image at just the fill product and service needs reliably, effi- ciently and at a competitive price. right angle. we are the exclusive supplier of OralCDx®, a breakthrough product in oral cancer detection. OralCDx We also partner with our customers to simplify and streamline office is an easy-to-use brush biopsy Another way we bring added value operations, and keep them on test that provides dentists with a to our customers is through Henry top of changes to their industry. valuable tool and offers a poten- Schein Financial Services. We offer This enables our customers to tially life-saving service to their low rates for equipment leasing increase their service and drive patients. Further, it’s an easy test and financing, patient financing more revenue. to incorporate into a routine dental options, electronic credit card pro- checkup. We are proud to have cessing and lines of credit, as During 2001, we will continue been selected as the exclusive well as financial planning services. working to maximize the various distributor of this product. We are also a leader in electronic components of our dental busi- claims processing, handling nearly ness. We are intent on unifying We offer an array of innovative, 17 million claims during 2000. and leveraging the synergies among our various dental assets – including consumables, equip- ment, e-commerce and practice high-tech practice management products, including the Vipersoft® and DENTRIX® Image intraoral imaging suites. Last year, we were We provide clinical skills training with Henry Schein’s Continuing Education for Healthcare management solutions. We awarded a key patent covering the Professionals (CEHP) program, already enjoy a strong presence digital motion video capabilities through which participants can on the dental practice desktop, found in both products, effectively access fully accredited courses and we will utilize that asset to making Henry Schein the only online, in print and in person. enhance and expand the products source for this digital motion and services we provide. video technology used in intraoral 8 17 million We processed nearly 17 million dental electronic claims during 2000. As our customers’ business partner, we strive to help office-based practitioners operate a better business and practice high-quality healthcare. By offering services that help streamline office operations, and by introducing the latest industry changes, we also help increase practice profitability. Lisa Argenio, Dental Field Sales Consultant, with customers Drs. Scott and Maureen Tredwell 9 Success Our people are our most important asset, and are key to our success. The development of new ideas has always been at the core of Henry Schein’s success. If not for the contribution of each and every Team Schein Member, we would not be in the position of strength we enjoy today, looking forward to an outstanding future. 10 Team Schein Members at Henry Schein’s Northeast Distribution Center in Denver, Pennsylvania we are... Team Schein Henry Schein is more than People serving people. a participatory atmosphere that tives planned for 2001. We are encourages new ideas. countries who support 6,200 people in 16 the needs of over 400,000 cus- Through our Employee Stock also committed to providing the posal – and there are more initia- integrated sales tools at their dis- tomers in 125 countries. Our peo- Ownership Plan and our incentive- industry’s most attractive sales ple are our most important asset, based compensation plans, which compensation packages. and are key to our success. inspire motivation and the drive for success, we have proven that our Guided by our corporate value And, our success is directly relat- Team-based working environment system of integrity, honesty and ed to the foundation from which helps us attract and retain the good business ethics, Team Team Schein was born. A founda- industry’s best talent. During 2000, Schein is committed to providing tion built with entrepreneurial spirit, we carried out new training initia- the highest level of quality and a workplace where every person tives to instruct our field salesforce service to our customers for many is as important as the next, and on how to maximize the various years to come. 11 Going forward, we are committed to our objectives of achieving accelerat- ing sales growth on a Company-wide basis, continuing improvements in gross and operating margins, and generating continued strong cash flow as a result of a growing top line and improved efficiencies. Our Markets A s evidenced by the results outlined above, we are driven by a to that improvement is our focus on strict financial and opera- commitment to continuous improvement. A contributing factor tional accountability. Another factor is the attractiveness of our markets. The annual healthcare products market for office-based practitioners in North America and Western Europe is estimated at over $12 billion, and it is growing. For the most part, this market has been historically resistant to economic downturns and, overall, our customers’ businesses are doing well. We are positioned to capitalize on these growth trends with our unique combination of competitive pricing, which is made possi- ble by the purchasing power and economies of scale generated by our size, and the level of customer service and value-added services. Our office-based medical customers are benefiting from the trend of procedures moving from acute-care settings to less costly alternate-care and physician-office settings. Our dental customers have been experi- encing a rise in the average number of procedures they perform each year, and a growing awareness of the relationship between oral health and a patient’s overall well being. A deeper focus on the prevention of oral cancer has been the subject of several recent dental industry journal articles. We are proud to have an opportunity to play a role in increasing the awareness of the importance of early cancer detection through our exclusive distribution of OralCDx®, a breakthrough product in oral cancer detection. OralCDx not only helps our customers save To Our Shareholders, We are ready! It’s on the cover of this Annual Report. And it’s on the mind of every member of Team Schein. W e’re ready to continue building on the significant success and our shareholders. Last year, we carried out several initiatives to we achieved during 2000, and to leverage assets that are unmatched in our industry for the benefit of our customers streamline our Company’s operations and improve efficiencies, and we patients’ lives, but provides a new stream of revenue for their practice. put in place other initiatives that will benefit us for years to come. Our results speak for themselves, as by any number of financial metrics, that end, we have responded to the Surgeon General’s Report on Oral last year was a tremendous success for Henry Schein. Health in America, which pointed out the disparity in the delivery of We are dedicated to helping improve access to quality healthcare. To Our Financial and Operating Results earnings per diluted share rose 16% to $1.67, gross margin For the year 2000, adjusted net income was up 17% to $70.1 million, improved by 60 basis points to 27.2% and operating margin increased by 20 basis points to 5.4%. Cash flow from operations reached healthcare throughout the United States, by establishing a formulary of products at discounted prices specifically for practitioners who treat patients in the “underserved” communities as identified in the Surgeon General’s report. As business partners of our customers, we are always striving to find an impressive $153 million, and we paid down $84 million in debt. new ways to help practitioners succeed. As small business managers We effectively managed our working capital with a 2-day improvement in integrate their offices to make their practices more profitable. We are at accounts receivable days sales outstanding and a .3-turn improvement the forefront of that trend. We strongly support the needs of office-based in inventory turnover. Our return on committed capital during 2000 was practitioners in the integration of their workstations to include accounting and owners, our customers embrace the use of technologies that fully 24%, up from 22% in 1999. systems, electronic charting, integrated digital x-ray, inventory ordering and inventory management. In addition, we have introduced a new We posted record sales of $2.4 billion last year, representing 4.3% growth product to help improve the vital communications between the dental over 1999. These gains were made despite the impact on our significant practice and the dental laboratory. With lab fees the dentists’ single overseas operations of a strong U.S. dollar relative to the Euro. Eliminating largest operating expense after salaries, this new product will help the impact of foreign exchange, in local currencies our 2000 sales were improve the practice’s profitability. up 6.3% compared with 1999. 12 A Commitment to Superior Performance • A participatory environment that promotes a healthy exchange tions, was led by a turnaround in equipment sales. Under the Last year’s performance of our largest group, our Dental opera- Achieving Excellence initiative, we implemented a number of changes to help this group succeed, including the beginning of a pro- of ideas • A philosophy that each person is as important as the next These principles, coupled with the support of our customers and supplier partners, help us remain fully committed to providing innovative and gram to provide portable computer-based tools to all professionals who dedicated service. have contact with our customers. Additionally, we streamlined our pro- curement program for large dental equipment. But most importantly, the We have made a significant investment in training and in technology to growth in dental equipment sales could not have been achieved without enhance the ability of our salesforce to maximize the benefits of the suite the enthusiasm of our sales organization. of sales and support tools available to them. This effort was extremely successful, and we remain 100% committed to attracting and retaining Sales to our medical and veterinary practitioners were strong throughout the industry’s best sales talent. 2000, as well. We continue to be a leading vaccine supplier to office- based medical practitioners; we serve as a prime vendor supplier to Midyear, we undertook a strategic restructuring that was designed to align such organizations as US Oncology, Inc., the largest network of com- our human capital with our business prospects. Though difficult, that ini- munity-based cancer physicians, clinicians, nurses and administrators tiative is behind us. Team Schein and our infrastructure is fully focused on in the world; we provide customized formulary plans to organizations tapping into the opportunities our industry-leading position affords us. including the American Medical Association and the American Society of Plastic Surgeons; and we are the prime vendor to Veterinary Centers Looking Forward of America. On the international front, we have a market presence in more countries than any competitor. We are the only Pan-European dental supplier W e have plenty of opportunity to expand market share organically and through acquisitions, both in the U.S. and regional players, the European marketplace resembles the U.S. market- internationally. In many ways, with its large number of small, with a growing presence in the medical and veterinary markets. Going place 10 years ago. forward, we believe we have significant opportunities for growth in this highly fragmented market. Leveraging Our Desktop Presence Currently, nearly one in three U.S. dental practices are using a Henry Schein practice management product. This gives us a ence with a host of other programs to maximize the inherent synergies. unique and significant opportunity to leverage our desktop pres- We also have opportunities to drive additional costs out of our business. We will continue to remain focused on gaining efficiencies throughout the organization, reducing expenses where we can, and reviewing assets to ensure they are meeting our stringent performance goals. We’ll sharpen our focus on our core value-added distribution business as we continue to selectively dispose of assets, as we have done in the recent past with Novocol, a pharmaceutical manufacturing company, and our U.K. software development unit. Our DENTRIX® and Easy Dental® practice management products, and our AVImark® software system for veterinary clinics are supported by a high level of customer satisfaction ratings. And, we intend to continue to lead We will capitalize on the critical mass we’ve built over the past five years, and will create additional value-added opportunities by better the industry in the development of the clinical workstation of the future. aligning our individual businesses. We are ready! For example, we are looking at an inventory management system, linked I encourage you to read the preceeding pages of this Annual Report, through the Company’s completely new Web site. This supplements which discuss traits that will deliver future success: Efficiency, Reliability, current technology that offers inventory monitoring services, purchase Innovation, Adding Value and Teamwork. tracking and past purchase review. Ultimately, the system may anticipate equipment service needs, too. But for now, from what we’ve heard from On behalf of the Board of Directors and Team Schein, I thank you for our customers, we’ve hit a home run with the technology improvements your continued support and reaffirm our commitment to creating value we’ve made. Our No. 1 Asset for you, our shareholders. Sincerely, None of this would be possible, of course, without the commit- ment and energy of our most important asset – our Team Schein Members. The success of our customers is directly related to Team Schein’s foundation and principles, those being: Stanley M. Bergman • An open-door policy that encourages communication Chairman, Chief Executive Officer and President April 2001 13 At-A-Glance Overview 2000 Sales Percentage of 2000 Revenues Growth Opportunities 14 Dental Medical Henry Schein’s Dental Group leads the indus- try in sales and serves more than 75% of the estimated 110,000 dental practices in the United States. The Group is also a major sup- plier to government, schools and other institu- tions – serving, for example, as prime vendor for the U.S. Army bases and clinics located in the United States and Europe. Commanding approximately 28% of the estimated $3.8 bil- lion U.S. and Canadian dental products mar- ket, the Group offers a broad array of more than 60,000 items to its dental customers, as well as a national equipment sales and service capability. The Dental Group – which includes Sullivan-Schein Dental®, our full-service U.S. business; Henry Schein Arcona in Canada; and Zahn Dental laboratory supply business – has over 700 field sales consultants and a network of nearly 80 equipment sales and service cen- ters in the U.S. and Canada. Henry Schein’s Medical Group has grown at a five-year compound annual growth rate of 43%. As a leading competitor in the $4-$5 bil- lion office-based physician supply market, the Medical Group supplies more than one- third of the nation’s medical practices with 28,000 items, including generic and branded pharmaceuticals, a full complement of med- ical and surgical supplies, diagnostic kits and major equipment. Offering formulary plans with significantly reduced prices, the Group is a major supplier to organizations such as the American Medical Association and the American Academy of Dermatology. The Group serves its customers through an exten- sive national direct marketing and telesales effort, as well as a field sales presence in the Eastern and Central U.S. $1,073.9 million $794.9 million 45% 33% Following five years of acquisitions, the platform is in place for Henry Schein to grow its share of the dental market. There is significant opportunity to increase sales to the Company’s current base of customers through an expanded national equipment sales and service capability, and new, innova- tive value-added service offerings. A primary opportunity for growth in the medical market is to leverage industry con- solidation through internal sales growth, as well as select strategic acquisitions. Approximately 500 smaller distributors occupy an estimated 60% of the office-based physician market. Successful direct marketing and telesales programs, and a strong field sales force, combined with a growing injectable and vaccine business will continue to spur Henry Schein’s growth. International Technology Veterinary Henry Schein’s International Group distributes dental products across the United Kingdom, the European Continent, the Middle East, Australia, New Zealand, Africa and Latin America, and continues to expand in the med- ical and veterinary fields. The Group has opera- tions in more countries than any of its competi- tors, including the Netherlands, Spain, Belgium, the United Kingdom, Germany, France, Iceland, Israel, the Republic of Ireland, Mexico, Austria, Australia, New Zealand and Portugal. In coun- tries where there is no local presence, sales are supported through Schein Direct™, a door-to- door air package delivery service that reaches practitioners in more than 125 countries. Henry Schein offers all of its customers an array of innovative technology and value-added products and services designed to help maxi- mize a practitioner’s efficiency and profitability, including such leading practice management software systems as DENTRIX®, Easy Dental® and LabNet® for its dental customers; and AVImark® for veterinary clinics. The Group also features the ARUBA® PC-based electronic catalog and ordering systems, credit card and electronic claims processing, practice and patient financing, equipment financing and the Continuing Education for Healthcare Professionals (CEHP) program. Henry Schein’s Veterinary Group is the largest direct marketer to companion-animal veteri- nary clinics in the U.S., providing a high level of quality service and more than 23,000 items at low prices. Currently, the Group serves nearly 70% of the approximately 22,000 U.S. veterinary clinics. The Group’s veterinary cat- alogs are supported by nearly 50 telesales professionals, and a variety of promotional material such as postcards, inserts, mailers and other direct marketing materials. The Group also enjoys a prime vendor relationship with Veterinary Centers of America (VCA), the largest provider of clinical pet care in the U.S. $389.9 million $66.6 million $56.4 million 17% 3% 2% As the only Pan-European dental Company, Henry Schein will capitalize on the significant opportunity that exists within the fragmented European healthcare supply market. Currently, more than 200 competitors occupy approxi- mately 90% of the market. The Company’s international growth strategies are based large- ly on its U.S. model – to increase penetration of the European dental market following its unique integrated marketing approach; expand its dental, medical and veterinary businesses; leverage its existing infrastructure; and begin a strategic entry into Asian and Pacific Rim markets. With nearly one of every three dental practices using a Henry Schein practice-management desktop product, the Company is accelerating its efforts toward maximizing the synergies inherent in that presence. In addition, the Company will continue to offer the latest advances in integrated technologies, such as digital x-ray and intraoral photography. These integrated technologies help practitioners increase the efficiencies of their practices and maximize revenues. The Veterinary Group’s market position as the low-cost provider is enhanced by the expense efficiencies realized through a core infrastruc- ture shared with Henry Schein’s Dental and Medical Groups. This cost-effectiveness posi- tions the Veterinary Group to service large-scale practice management companies and groups, in addition to individual veterinary clinics. 15 Directors & Officers Board of Directors Stanley M. Bergman (4) Chairman, Chief Executive Officer and President Executive Officers Stanley M. Bergman Chairman, Chief Executive Officer and President Barry J. Alperin (1) (2) (3) Retired Vice Chairman, Hasbro, Inc. Gerald A. Benjamin Executive Vice President and Chief Administrative Officer Gerald A. Benjamin (4) Executive Vice President and Chief Administrative Officer James P. Breslawski Executive Vice President and President, Sullivan-Schein Dental James P. Breslawski (4) Executive Vice President and President, Sullivan-Schein Dental Leonard A. David Vice President, Human Resources and Special Counsel Leonard A. David Larry Gibson Vice President, Human Resources and Special Counsel Executive Vice President and Chief Technology Officer Pamela Joseph Director, MaNose Studios Donald J. Kabat (1) (2) (3) Retired Partner, Andersen Consulting Mark E. Mlotek Senior Vice President, Corporate Business Development Steven Paladino Executive Vice President and Chief Financial Officer Mark E. Mlotek Senior Vice President, Corporate Business Development Michael Racioppi President, Medical Group Steven Paladino (4) Executive Vice President and Chief Financial Officer Michael Zack Senior Vice President, International Group Marvin H. Schein (4) Founder, Schein Dental Equipment Corp. Irving Shafran, Esq. Attorney at Law (1) Member Audit Committee (2) Member Compensation Committee (3) Member Stock Option Committee (4) Member Executive Committee 16 Financial Information Table of Contents 18 Market for Registrant’s Common Equity and Related Stockholder Matters 19 Selected Financial Data 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements: 29 Report of Independent Certified Public Accountants 30 Balance Sheets as of December 30, 2000 and December 25, 1999 31 Statements of Operations and Comprehensive Income for the years ended December 30, 2000, December 25, 1999 and December 26, 1998 32 Statements of Stockholders’ Equity for the years ended December 30, 2000, December 25, 1999 and December 26, 1998 33 Statements of Cash Flows for the years ended December 30, 2000, December 25, 1999 and December 26, 1998 34 Notes to Consolidated Financial Statements 17 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 Disclosure Regarding Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” period in fiscal 1999 and 2000 and for the first quarter of fiscal 2001 through for forward looking statements. Certain information in this Annual Report March 23, 2001. Fiscal 1999: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal 2000: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal 2001: High $46.88 $35.00 $32.13 $15.38 $18.81 $18.50 $20.63 $36.50 Low $24.00 $19.56 $13.25 $10.38 $10.75 $13.12 $13.31 $18.59 1st Quarter (Through March 23, 2001) $34.27 $27.19 includes information that is forward looking, such as the Company’s oppor- tunities 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 uncer- tainties 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 Com- pany’s ability to effectively integrate acquired companies, the acceptance The Company’s Common Stock is quoted through the NASDAQ National and quality of software products, acceptance and ability to manage opera- Market tier of the NASDAQ Stock Market under the symbol “HSIC.” On tions in foreign markets, the ability to maintain favorable supplier arrange- March 23, 2001, there were approximately 870 holders of record of the Com- ments and relationships, possible disruptions in the Company’s computer mon Stock. On March 23, 2001, the last reported sales price was $33.38. systems or telephone systems, possible increases in shipping rates or inter- Dividend Policy The Company does not anticipate paying any cash dividends on its Com- ruptions in shipping service, the level and volatility of interest rates and cur- rency values, economic and political conditions in international markets, including civil unrest, government changes and restriction on the ability to mon Stock in the foreseeable future; it intends to retain its earnings to transfer capital across borders, the impact of current or pending legislation, finance the expansion of its business and for general corporate purposes. regulation and changes in accounting standards and taxation require- Any payment of dividends will be at the discretion of the Company’s Board ments, environmental laws in domestic and foreign jurisdictions, as well as of Directors and will depend upon the earnings, financial condition, capital certain other risks described in this Annual Report. Subsequent written and requirements, level of indebtedness, contractual restrictions with respect to oral forward looking statements attributable to the Company or persons payment of dividends and other factors. The Company’s revolving credit acting on its behalf are expressly qualified in their entirety by the agreement and the note issued in connection with an acquisition in The cautionary statements in this paragraph and elsewhere described in this Netherlands limit the distributions of dividends without the prior written con- Annual Report. sent of the lenders. 18 Selected Financial Data Henry Schein, Inc. and Subsidiaries The following selected financial data with respect to the Company’s financial position and its results of operations for each of the five years in the period ended December 30, 2000 set forth below has been derived from the Company’s consolidated financial statements. The selected financial data presented below should be read in conjunction with the Consolidated Financial Statements and related notes thereto herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. The Selected Operating Data and Net Sales By Market Data presented below have not been audited. Certain prior year amounts have been reclassified to conform the current year’s presentation as discussed in the Consolidated Financial Statements and related notes thereto herein. (In thousands, except per share and selected operating data) Statements of Operations Data: Net sales Gross profit Selling, general and administrative expenses Merger and integration costs (1) Restructuring costs (2) Operating income Interest income Interest expense Other—net Other income (expense)—net Income before taxes on income, minority interest and equity in earnings (losses) of affiliates Taxes on income Minority interest in net income (loss) of subsidiaries Equity in earnings (losses) of affiliates Net income (loss) Net income (loss) per common share: Basic Diluted Weighted average shares outstanding: Basic Diluted December 30, December 25, December 26, 1998 2000 1999 December 27, December 28, 1996 1997 Years Ended $2,381,721 $2,284,544 $1,922,851 $1,698,862 $1,374,639 647,901 520,288 585 14,439 112,589 6,279 (20,409) (1,925) (16,055) 96,534 36,150 1,757 (1,878) 56,749 608,596 489,364 13,467 — 105,765 7,777 (23,593) (166) (15,982) 89,783 35,589 1,690 (2,192) 50,312 523,831 427,635 56,666 — 39,530 6,964 (12,050) 1,570 (3,516) 36,014 20,325 145 783 16,327 442,842 380,233 50,779 — 11,830 7,353 (7,643) 1,375 1,085 12,915 17,670 (430) 2,141 (2,184) 358,092 314,979 — — 43,113 7,139 (5,487) 1,177 2,829 45,942 18,606 246 1,595 28,685 $ $ 1.38 1.35 $ $ 1.24 1.21 $ $ 0.42 0.39 $ $ (0.06) (0.06) $ $ 0.85 0.81 41,244 42,007 40,585 41,438 39,305 41,549 37,531 37,531 33,714 35,202 19 (In thousands, except per share and selected operating data) Pro Forma Data (3): Pro forma net income (loss) Pro forma net income (loss) per common share Basic Diluted Pro forma average shares outstanding: Basic Diluted Selected Operating Data: Number of orders shipped Average order size Net Sales by Market Data: Healthcare Distribution: Dental (4) Medical Veterinary International (5) December 30, December 25, December 26, 1998 2000 1999 December 27, December 28, 1996 1997 Years Ended $ 13,748 $ $ 0.35 0.33 $ $ $ (1,778) $ 29,023 (0.05) (0.05) $ $ 0.86 0.82 39,305 41,549 37,531 37,531 33,714 35,202 8,280,000 7,979,000 6,718,000 6,064,000 5,127,000 $ 288 $ 286 $ 286 $ 280 $ 268 $1,073,889 $1,047,259 $1,085,717 $ 999,671 $ 819,898 794,880 56,421 389,946 715,210 52,050 403,137 515,276 48,492 230,792 441,110 40,852 181,278 341,403 35,336 147,031 Total Healthcare Distribution 2,315,136 2,217,656 1,880,277 1,662,911 1,343,668 Technology (6) 66,585 66,888 42,574 35,951 30,971 $2,381,721 $2,284,544 $1,922,851 $1,698,862 $1,374,639 Balance Sheet data: Working capital Total assets Total debt Minority interest Stockholders’ equity $ 423,547 $ 428,429 $ 403,592 $ 312,916 $ 290,482 1,231,068 1,204,102 276,693 7,996 579,060 363,624 7,855 517,867 962,040 209,451 5,904 463,034 803,946 148,685 2,225 424,223 668,239 59,404 5,289 408,877 (1) Merger and integration costs consist primarily of investment banking, legal, accounting and advisory fees, compensation, write-off of duplicate management information sys- tems, other assets and the impairment of goodwill arising from acquired businesses integrated into the Company’s medical and dental businesses, as well as certain other integration costs incurred primarily in connection with the 1998 acquisition of H. Meer Dental Supply Co., Inc. (“ Meer”) and the 1997 acquisitions of Sullivan Dental Products, Inc., Micro Bio-Medics, Inc. and Dentrix Dental Systems, Inc. (“Dentrix”), which were accounted for under the pooling of interests method of accounting. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Joint Ventures Strategies” herein and the Consolidated Financial Statements and related notes thereto herein. (2) Restructuring costs consist primarily of employee severance costs, including severance pay and benefits of approximately $7.2 million, facility closing costs, primarily lease termination and asset write-off costs of approximately $4.4 million and professional and consulting fees directly related to the restructuring plan of approximately $2.8 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Plan of Restructuring” herein and the Consolidated Financial Statements and related notes thereto herein. (3) Reflects the provision for income taxes on previously untaxed earnings of Dentrix as an S Corporation of $1.2 million for 1996, and provision for income tax (expense) recov- eries on previously untaxed earnings of Meer as an S Corporation of $(0.6) million, $0.4 million, and $1.5 million for 1998, 1997 and 1996, respectively, and the pro forma elim- ination of a net deferred tax asset arising from Meer’s conversion from an S Corporation to a C Corporation of $2.0 million in 1998. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Joint Ventures Strategies” 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. 20 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the Company’s consolidated finan- On October 23, 2000, the Company announced the sale of its 50% inter- cial condition and consolidated results of operations should be read in con- est in dental anesthetic manufacturer, HS Pharmaceutical Inc. (“HS junction with the Company’s consolidated financial statements and related Pharmaceutical”), which owns Novocol Pharmaceutical of Canada, Inc. notes thereto included herein. (“Novocol”), to the then current co-owner, Deproco, Inc. The Company Plan of Restructuring On August 1, 2000, the Company announced a comprehensive restructur- ing plan designed to improve customer service and increase profitability by maximizing the efficiency of the Company’s infrastructure. In addition to incurred a non-recurring net charge of approximately $1.9 million, or approx- imately $0.05 per diluted share, in connection with the sale. Novocol was an unconsolidated subsidiary and was the Company’s only manufacturing business. closing or downsizing certain facilities, this world-wide initiative included the elimination of approximately 300 positions, including open positions, or Acquisition and Joint Venture Strategies The Company’s results of operations in recent years have been significantly approximately 5% of the total workforce, throughout all levels within the impacted by strategies and transactions undertaken by the Company to organization. Estimated annual cost savings from the restructuring plan are expected to be approximately $20.0 million on a pre-tax basis ($12.0 million after taxes), equating to approximately $0.29 per diluted share. The restructuring plan was implemented over the last five months of 2000 and was substantially 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 purchas- ing arrangements. completed at December 30, 2000. During the year ended December 30, 2000, the Company completed the For the year ended December 30, 2000, the Company has incurred one- time restructuring costs of approximately $14.4 million, $9.3 million after taxes, or approximately $0.22 per diluted share, consisting primarily of: employee severance costs, including severance pay and benefits of approximately $7.2 million, facility closing costs, primarily lease termination and asset write-off costs of approximately $4.4 million, and outside profes- sional and consulting fees directly related to the restructuring plan of approximately $2.8 million. Business Dispositions On November 27, 2000, the Company announced that one of its United Kingdom subsidiaries had sold its software development business unit. In an ongoing effort to enhance the focus of the Company’s core distribution business in Europe, certain practice management software systems were sold. The United Kingdom subsidiary will continue to distribute such prac- tice management systems, but will no longer be responsible for develop- ment and technical support of the systems. The sale of this practice management software development business unit resulted in a non-recurring loss of approximately $1.6 million, or approxi- mately $0.04 per diluted share. acquisition of two healthcare distribution and one technology business, none of which were considered material either individually or in the aggre- gate. Of the three completed acquisitions, two were accounted for under the purchase method of accounting and the remaining acquisition was accounted for under the pooling of interests method of accounting. The Company issued 465,480 shares of its Common Stock, with an aggregate value of approximately $7.9 million in connection with the pooling transac- tion. The transactions completed under the purchase method of account- ing have been included in the consolidated financial statements from their respective acquisition dates. The pooling transaction was not material and, accordingly, prior period financial statements have not been restated. Results of the acquired company have been included in the consolidated financial statements from the beginning of the second quarter of 2000. During the year ended December 25, 1999, the Company completed the acquisition of eight healthcare distribution and one technology business. The completed acquisitions included General Injectables and Vaccines, Inc. (“GIV”), through the purchase of all of the outstanding common stock of Biological & Popular Culture, Inc., and the international dental, medical and veterinary healthcare distribution businesses of Heiland Holding GmbH (the “Heiland Group”). GIV, which had 1998 net sales of approximately $120.0 million, is a leading independent direct marketer of vaccines and other injectable products to office-based practitioners in the United States. The Heiland Group, the largest direct marketer of healthcare supplies to office- based practitioners in Germany, had 1998 net sales of approximately $130.0 million. The acquisition agreements for GIV and the Heiland Group provide for additional cash consideration of up to $20.0 million per year through 2004, not to exceed $75.0 million in total, and $3.9 million per year through 21 MD&A (continued) 2001, respectively, to be paid if certain sales and profitability targets are met. The Company issued 2,973,680 shares, 347,063 shares and 121,000 shares The GIV acquisition agreement also provided for additional cash consider- of its Common Stock, with an aggregate value of approximately $151.1 mil- ation of $4.1 million based upon sales of new products, as defined; of which lion in connection with three of the 1998 pooling transactions. Prior to its $1.2 million was paid during fiscal 2000. The remaining seven acquisitions acquisition by the Company, Meer elected to be treated as an S Corpora- had combined net sales of approximately $74.0 million for 1998. Six of the tion under the Internal Revenue Code, and accordingly, was not subject to acquisitions were accounted for under the purchase method of accounting, taxation at the corporate level. Pro forma adjustments have been made to while the remaining acquisition was accounted for under the pooling of reflect a provision for income taxes for each period presented and the elim- interests method of accounting. Results of operations of the business ination of a deferred tax benefit arising from Meer’s conversion from the acquisitions accounted for under the purchase method of accounting have S Corporation to a C Corporation. 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 approxi- mately $137.2 million. The excess of the acquisition costs over the fair value of identifiable assets will be amortized on a straight-line basis over 30 years. The Company issued 189,833 shares of its Common Stock with an aggre- gate market value of $6.4 million in connection with the pooling transaction. The pooling transaction was not material and, accordingly, prior period financial statements have not been restated. Results of the acquired com- pany have been included in the consolidated financial statements from the beginning of the quarter in which the acquisition occurred. During the year ended December 26, 1998, the Company completed the acquisition of five healthcare distribution businesses. The 1998 completed acquisitions included two dental supply companies, the most significant of which was H. Meer Dental Supply Co., Inc. (“Meer”), a leading full-service dental distributor serving dentists, dental laboratories and institutions throughout the United States, with 1997 annual net sales of approximately $180.0 million. Combined, Meer and the other dental company had approx- imately $212.0 million in aggregate net sales for 1997. The completed acqui- sitions 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 account- ing. The historical financial statements were restated to give retroactive effect only to the Meer transaction, as the remaining three pooling transac- tions were not material and were included in the consolidated financial statements from the beginning of the quarter in which the acquisitions occurred. Results of operations of the business acquisition accounted for under the purchase method of accounting have been included in the con- solidated financial statements commencing with the acquisition date. 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 equiv- alent to those of the Company’s Common Stock, which are exchangeable into 603,500 shares of the Company’s Common Stock, at each sharehold- ers’ option, and had an aggregate value of approximately $24.0 million. The total cash purchase price for the 1998 acquisition accounted for under the purchase method of accounting was approximately $6.8 million. The excess of the acquisition costs over the fair value of identifiable net assets acquired are being amortized on a straight-line basis over 30 years. In connection with the 2000, 1999 and 1998 acquisitions, the Company incurred certain merger and integration costs of approximately $0.6 million, $13.5 million and $56.7 million, respectively. Net of taxes, merger and inte- gration costs were approximately $0.01, $0.23, and $1.06 per share, on a diluted basis, respectively. Merger and integration costs for the healthcare distribution and technology segments were $0.0 million and $0.6 million for 2000, $13.5 million and $0.0 million for 1999 and $55.7 million and $1.0 mil- lion for 1998, respectively. Merger and integration costs consist primarily of investment banking, legal, accounting and advisory fees, severance, impairment of goodwill arising from acquired businesses integrated into the Company’s medical and dental businesses, as well as certain other inte- gration costs associated with these mergers. Excluding the merger and integration costs and restructuring costs, and the losses on the disposals of HS Pharmaceutical and the United Kingdom software development business unit, and including pro forma adjustments, pro forma net income and pro forma net income per common share, on a diluted basis, would have been $70.1 million, and $1.67, respectively, for the year ended December 30, 2000, $59.8 million and $1.44, respectively, for the year ended December 25, 1999 and $57.8 million and $1.39, respectively, for the year ended December 26, 1998. 22 Results of Operations The following table sets forth for the periods indicated Net Sales, Gross Profit and Adjusted Operating Profit, excluding merger and integration, and restruc- turing costs (in thousands), by business segment for the years ended 2000, 1999 and 1998. Percentages are calculated on related net sales. Certain prior year amounts have been reclassified to conform the current year’s presentation as discussed in the Consolidated Financial Statements and related notes thereto herein. Net Sales by Segment Data: Healthcare distribution: Dental (1) Medical Veterinary International (2) Total healthcare distribution Technology (3) Total Gross Profit by Segment Data: Healthcare distribution Technology Total Adjusted Operating Profit (excluding merger and integration, and restructuring costs) by Segment Data: Healthcare distribution (4) Technology (5) Total 2000 1999 1998 $1,073,889 794,880 56,421 389,946 2,315,136 66,585 45.1% 33.4 2.4 16.4 97.2 2.8 $1,047,259 715,210 52,050 403,137 2,217,656 66,888 45.8% 31.3 2.3 17.6 97.1 2.9 $1,085,717 515,276 48,492 230,792 1,880,277 42,574 56.5% 26.8 2.5 12.0 97.8 2.2 $2,381,721 100.0% $2,284,544 100.0% $1,922,851 100.0% $ 601,036 46,865 $ 647,901 $ 102,953 24,660 $ 127,613 26.0% 70.4% 27.2% 4.4% 37.0% 5.4% $ 563,107 45,489 $ 608,596 $ 93,934 25,298 $ 119,232 25.4% 68.0% 26.6% 4.2% 37.8% 5.2% $ 490,442 33,389 $ 523,831 $ $ 79,871 16,325 96,196 26.1% 78.4% 27.2% 4.3% 38.3% 5.0% (1) Dental consists of the Company’s dental business in the United States and Canada. (2) International consists of the Company’s business (primarily dental) outside the United States and Canada, primarily in Europe, and Australia. (3) Technology consists of the Company’s practice management software business and certain other value-added products and services. (4) Excludes merger and integration, and restructuring costs of $14.1 million, $13.5 million and $55.7 million in 2000, 1999 and 1998, respectively. (5) Excludes merger and integration, and restructuring costs of $1.0 million, $0.0 million and $1.0 million in 2000, 1999, and 1998, respectively. 2000 Compared to 1999 The remaining decrease in 2000 net sales was due to the technology busi- Net sales increased $97.2 million, or 4.3%, to $2,381.7 million in 2000 from ness, which decreased $(0.3) million, or 0.3%, to $66.6 million for 2000, from $2,284.5 million in 1999. Of the $97.2 million increase, approximately $97.5 $66.9 million for 1999. The decrease in technology and value-added prod- million, or 100.3%, represented a 4.4% increase in the Company’s health- uct net sales was primarily due to a decrease in practice management soft- care distribution business. As part of this increase, approximately $79.7 mil- ware sales, which was exceptionally strong in 1999 primarily due to Year lion represented a 11.1% increase in its medical business, $26.6 million 2000 conversions. represented a 2.5% increase in its dental business, $4.4 million represented a 8.4% increase in the Company’s veterinary business, and $(13.2) million represented a 3.3% decrease in the Company’s international business. The increase in medical net sales was primarily attributable to increased sales to core physicians office and alternate care markets. In the dental market, the increase in net sales was primarily due to increased account penetra- tion. In the veterinary market, the increase in net sales was primarily due to increased account penetration. In the international market, the decrease in net sales was primarily due to unfavorable exchange rate translation adjustments. Had net sales for the international market been translated at the same exchange rates in 1999, net sales would have increased by 8.4%. Gross profit increased by $39.3 million, or 6.5%, to $647.9 million in 2000, from $608.6 million in 1999. Gross profit margin increased by 0.6% to 27.2% from 26.6% last year. Healthcare distribution gross profit increased by $37.9 million, or 6.7%, to $601.0 million in 2000, from $563.1 million in 1999. Health- care distribution gross profit margin increased by 0.6%, to 26.0%, from 25.4% last year primarily due to changes in sales mix. Technology gross profit increased by $1.4 million, or 3.0%, to $46.9 million in 2000, from $45.5 million in 1999. Technology gross profit margin increased by 2.4%, to 70.4%, from 68.0% last year also primarily due to changes in sales mix. 23 MD&A (continued) Selling, general and administrative expenses increased by $30.9 million, or 1999 Compared to 1998 6.3%, to $520.3 million in 2000 from $489.4 million in 1999. Selling and ship- Net sales increased $361.7 million, or 18.8%, to $2,284.5 million in 1999 from ping expenses increased by $9.7 million, or 3.2%, to $310.6 million in 2000 $1,922.8 million in 1998. Of the $361.7 million increase, approximately $337.4 from $300.9 million in 1999. As a percentage of net sales, selling and ship- million, or 93.3%, represented a 17.9% increase in the Company’s health- ping expenses decreased 0.2% to 13.0% in 2000 from 13.2% in 1999. This care distribution business. As part of this increase, approximately $200.0 decrease was primarily due to improvement in the Company’s distribution million represented a 38.8% increase in its medical business, $172.3 million efficiencies resulting from the leveraging of the Company’s distribution infra- represented a 74.7% increase in its international business, $3.5 million rep- structure. General and administrative expenses increased $21.2 million, or resented a 7.3% increase in the Company’s veterinary business, and $(38.4) 11.2%, to $209.7 million in 2000 from $188.5 million in 1999, primarily as a million represented a 3.5% decrease in the Company’s dental business. The result of acquisitions. As a percentage of net sales, general and adminis- increase in medical net sales was primarily attributable to telesales and trative expenses increased 0.5% to 8.8% in 2000 from 8.3% in 1999. direct marketing activities, acquisitions, and increased sales to hospitals. In the international market, the increase in net sales was primarily due to acqui- sitions in Germany and the United Kingdom, and increased account pene- tration 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 ero- sion related to the Meer acquisition and a reduction in dental equipment sales. The remaining increase in 1999 net sales was due to the technology business, which increased $24.3 million, or 57.0%, to $66.9 million for 1999, from $42.6 million for 1998. The increase in technology and value-added product net sales was primarily due to increased practice management software sales and an acquisition. Gross profit increased by $84.8 million, or 16.2%, to $608.6 million in 1999, from $523.8 million in 1998. Gross profit margin decreased by 0.6% to 26.6% from 27.2% last year. Healthcare distribution gross profit increased by $72.7 million, or 14.8%, to $563.1 million in 1999, from $490.4 million in 1998. Healthcare distribution gross profit margin decreased by 0.7%, to 25.4%, from 26.1% last year primarily due to changes in sales mix and lower manu- facturers rebates as a result of reduced annual sales. Technology gross profit increased by $12.1 million, or 36.2%, to $45.5 million in 1999, from $33.4 million in 1998. Technology gross profit margin decreased by 10.4%, to 68.0%, from 78.4% last year primarily due to changes in sales mix. Other income (expense)—net changed by $(0.1) million, to $(16.1) million for the year ended December 30, 2000 from $(16.0) million for 1999 primarily due to the non-recurring loss of approximately $1.6 million, or approximately $0.04 per diluted share, from the sale of the Company’s software develop- ment unit in the United Kingdom and lower interest income on accounts receivable balances, offset by a decrease in interest expense resulting from a decrease in average borrowings. Equity in losses of affiliates decreased $0.3 million or 13.6%, to $(1.9) million in 2000 from $(2.2) million in 1999. The net increase is primarily due to increased earnings from an affiliate offset by a non-recurring net loss of approximately $1.9 million, or approximately $0.05 per diluted share from the sale of the Company’s interest in HS Pharmaceutical during the fourth quar- ter of 2000. For 2000, the Company’s effective tax rate was 37.4%. Excluding merger and integration costs, the majority of which are not deductible for income tax purposes, the Company’s effective tax rate would have been 37.3%. The difference between the Company’s effective tax rate, excluding merger and integration costs, and the Federal statutory rate relates primarily to state income taxes. For 1999, the Company’s effective tax rate was 39.6%. Excluding merger and integration costs, the majority of which are not deductible for income tax purposes, the Company’s effective tax rate would have been 38.3%. The difference between the Company’s effective tax rate, excluding merger and integration costs, and the Federal statutory rate relates primarily to state income taxes. 24 Selling, general and administrative expenses increased by $61.8 million, or Euro Conversion 14.4%, to $489.4 million in 1999 from $427.6 million in 1998. Selling and ship- Effective January 1, 1999, 11 of the 15 member countries of the European ping expenses increased by $30.4 million, or 11.2%, to $300.9 million in 1999 Union have adopted the Euro as their common legal currency. On that from $270.5 million in 1998. As a percentage of net sales, selling and ship- date, the participating countries established fixed Euro conversion rates ping expenses decreased 0.9% to 13.2% in 1999 from 14.1% in 1998. This between their existing sovereign currencies and the Euro. The Euro now decrease was primarily due to improvement in the Company’s distribution trades on currency exchanges and is available for non-cash transactions. efficiencies resulting from the leveraging of the Company’s distribution infra- The participating countries now issue sovereign debt exclusively in Euro, structure. General and administrative expenses increased $31.4 million, or and have re-denominated outstanding sovereign debt. The authority to 20.0%, to $188.5 million in 1999 from $157.1 million in 1998, primarily as a direct monetary policy for the participating countries, including money sup- result of acquisitions. As a percentage of net sales, general and adminis- ply and official interest rates for the Euro, is now exercised by the new Euro- trative expenses increased 0.1% to 8.3% in 1999 from 8.2% in 1998. pean Central Bank. Other income (expense)—net changed by $12.5 million, to $(16.0) million for Beginning on January 1, 2002, Euro banknotes and coins will be put into cir- the year ended December 25, 1999 from $(3.5) million for 1998 due to an culation. There will be a changeover period of two months where there will increase in interest expense resulting from an increase in average borrow- be dual circulation—where both Euro and national currencies will be used ings and to a lesser extent an increase in interest rates, offset by higher inter- together. Following the changeover period, the national currencies will be est income on notes receivable and accounts receivable balances. completely replaced by the Euro. Equity in earnings (losses) of affiliates decreased $3.0 million or 375%, to a The Company is currently addressing the impact of the Euro on its infor- loss of $(2.2) million in 1999 from income of $0.8 million in 1998. The decline mation systems, as well as, product and customer concerns. The Company was due to reduced earnings from HS Pharmaceutical, which is accounted expects to achieve timely Euro information system and product readiness, for under the equity method; totaling approximately $1.3 million, net of taxes, so as to conduct transactions in the Euro, in accordance with implementa- due to a temporary cessation of production of anesthetic products. On Sep- tion schedules as they are established by the European Commission. The tember 23, 1999, the FDA issued clearance for HS Pharmaceutical to Company does not anticipate that the costs of the overall effort will have a resume production of its anesthetic products for shipment into the United material adverse impact on future results. States. HS Pharmaceutical resumed limited production and shipment of its products in the fourth quarter of 1999. E-Commerce For 1999, the Company’s effective tax rate was 39.6%. Excluding merger challenged by electronic on-line commerce solutions. The Company’s and integration costs, the majority of which are not deductible for income distribution business is characterized by rapid technological develop- tax purposes, the Company’s effective tax rate would have been 38.3%. ments and intense competition. The rapid evolution of on-line commerce The difference between the Company’s effective tax rate, excluding merger will require continuous improvement in performance, features and relia- and integration costs, and the Federal statutory rate relates primarily to state bility of Internet content and technology by the Company, particularly in Traditional healthcare supply and distribution relationships are being 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 Corpora- tion 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. response to competitive offerings. Through the Company’s proprietary technologically based suite of products, customers are offered a variety of competitive alternatives. The Company’s tradition of reliable service, proven name recognition, and large customer base built on solid cus- tomer relationships makes it well situated to participate fully in this rapidly growing aspect of the distribution business. The Company is exploring ways and means of improving and expanding its Internet presence and will continue to do so. In January 2001, the Company announced the unveiling of a new website (http://www.henryschein.com), which includes an array of value-added features. As part of this effort, the Company also launched http://www.sullivanschein.com for its office-based dental practitioner customers. 25 MD&A (continued) Inflation Management does not believe inflation had a material adverse effect on the Risk Management The Company has operations in the United States, Canada, Mexico, the financial statements for the periods presented. United Kingdom, The Netherlands, Belgium, Germany, France, the Repub- Effect of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities.” FAS 133 is required for transactions entered into by the Company after December 30, 2000. FAS 133 requires that all derivative instruments be recorded on the lic of Ireland, Austria, Spain, Israel, Australia and New Zealand. Substantially all of the Company’s operations endeavor to protect their financial results by using foreign currency forward contracts to hedge intercompany debt and the foreign currency payments to foreign vendors. The total U.S. dollar equivalent of all foreign currency forward contracts hedging debt and the purchase of merchandise from foreign vendors was $51.2 million and $6.8 million, respectively, as of the end of fiscal 2000. The contracts expire at var- balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, ious dates through 2001. depending on whether a derivative is designated as part of the hedge trans- The Company considers its investment in foreign operations to be both action and the type of hedge transaction. The ineffective portion of all long-term and strategic. As a result, the Company does not hedge the long- hedges will be recognized in earnings. term translation exposure to its balance sheet. The Company has experi- In June 2000, the FASB issued Statement of Financial Accounting Stan- dards No. 138 (“FAS 138”), “Accounting for Certain Derivative Instruments and Certain Hedging Activities” which amended FAS 133. The amendments in FAS 138 address certain implementation issues and relate to such mat- ters as the normal purchases and normal sales exception, the definition of enced negative translation adjustments of approximately $7.8 million and $8.3 million in 2000 and 1999, respectively, which adjustments were reflected in the balance sheet as a component of stockholders’ equity. The cumulative translation adjustment at the end of 2000 showed a net nega- tive translation adjustment of $18.2 million. interest rate risk, hedging recognized foreign currency denominated assets In October 1997, the Company entered into a Netherlands Guilder (NLG) and liabilities, and intercompany derivatives. loan in the amount of 6.5 million NLG. The loan serves to hedge the repay- Effective December 31, 2000, the Company will adopt FAS 133 and FAS 138. The initial impact of adoption on the Company’s financial statements will be recorded in the first quarter of 2001 and will not be material. The ongoing ment 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. effect of adoption on the Company’s consolidated financial statements will Interest Rate Swaps and Cap be determined each quarter by several factors, including the specific hedg- As of December 30, 2000, the Company had approximately $17.8 million ing instruments in place and their relationships to hedged items, as well as outstanding in interest rate swaps. These swaps are used to convert $13.0 market conditions at the end of each period. million of floating rate debt relating to the Company’s revolving credit agree- ment and $4.8 million relating to a Deutsche Mark floating rate debt of DM10.0 million, to fixed rate debt to reduce the Company’s exposure to interest rate fluctuations. The net result was to substitute a weighted aver- age fixed interest rate of 7.2% for the variable LIBOR rate on $13.0 million and a 5.3% fixed interest rate for the variable EURIBOR Deutsche Mark loan of the Company’s debt. The swaps expire in December 2003, December 2004 and April 2005. Under the interest rate environment during the year ended December 30, 2000, the Company’s interest rate swap agreements resulted in additional interest expense of approximately $0.1 million. In addi- tion, the Company has an interest rate cap of 5.5% on a Deutsche Mark floating rate debt of DM6.3 million (approximately $3.0 million). 26 Liquidity and Capital Resources Historically, the Company’s principal capital requirements have been to fund 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 capital expenditures, acquisitions and working capital needs resulting from either fair market value or a formula price based on earnings of the entity. increased sales, special inventory forward buy-in opportunities and to fund initial start-up inventory requirements for new distribution centers. Since sales tend to be strongest during the fourth quarter and special inventory forward buy-in opportunities are most prevalent just before the end of the year, the Company’s working capital requirements have been generally higher from the end of the third quarter to the end of the first quarter of the following year. In 2000, the Company’s operating cash flow has increased significantly due to increased profitability and better management of net working capital. The Company has financed its business primarily through its revolving credit facilities, private placement loans and stock issuances. The Company continues to make capital expenditures as it invests in its infrastructure, however debt reduction has also been a major use of cash. Net cash provided by operating activities for the year ended December 30, 2000 of $153.0 million resulted primarily from net income of $56.7 million, increased by non-cash charges, relating primarily to depreciation and amortization of $33.8 million, and net cash flow from working capital of approximately $50.1 million. The increase of working capital was primar- ily due to an increase in accounts payable and other accrued expenses of $44.9 million, a $5.2 million decrease in accounts receivable, and a $4.6 million decrease in inventories, offset by a $4.6 million increase in other current assets. The Company’s cash and cash equivalents as of December 30, 2000 of $58.4 million consist of bank balances and investments in commercial paper rated AAA by Moody’s (or an equivalent rating). These investments have staggered maturity dates, none of which exceed three months, and have a high degree of liquidity since the securities are actively traded in public markets. The Company entered into an amended revolving credit facility on August 15, 1997 that increased its main credit facility to $150.0 million and extended the facility termination date to August 15, 2002. Borrowings under the credit facility were $10.7 million at December 30, 2000. The Company also has two uncommitted bank lines totaling $30.0 million, none of which had been bor- rowed against at December 30, 2000. On June 30, 1999 and September 25, 1998, the Company completed private placement transactions under which it issued $130.0 million and $100.0 million, respectively, in Senior Notes, the proceeds of which were used respectively, for the permanent financing of its acquisitions of GIV and the Heiland Group, as well as repaying and retir- ing a portion of four uncommitted bank lines and to pay down amounts owed under its revolving credit facility. The $130.0 million notes come due on June 30, 2009 and bear interest at a rate of 6.94% per annum. Principal payments totaling $20.0 million are due annually starting September 25, 2006 on the $100.0 million notes and bear interest at a rate of 6.66% per Net cash used in investing activities for the year ended December 30, 2000 annum. Interest is payable semi-annually. Certain of the Company’s sub- of $46.2 million resulted primarily from cash used for capital expenditures sidiaries have credit facilities that totaled $52.3 million at December 30, and acquisitions (primarily contingent consideration arising from acquisi- 2000 under which $4.4 million had been borrowed. tions completed in prior periods) of $29.7 million and $6.8 million, respec- tively. During the past three years, the Company has invested $97.8 million in the development of new computer systems, and for new and existing operating facilities. In the coming year, the Company expects to invest in excess of $45.0 million in capital projects to modernize and expand its facil- ities and infrastructure systems, and integrate operations. 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 Net cash used in financing activities for the year ended December 30, 2000 remaining cash portion of the purchases. of $77.9 million resulted primarily from net debt repayments of $84.5 million, offset primarily by proceeds from the issuance of stock upon exercise of stock options of $6.3 million. The Company believes that its cash and cash equivalents of $58.4 million as of December 30, 2000, its ability to access public and private debt and equity markets, and the availability of funds under its existing credit agree- ments will provide it with sufficient liquidity to meet its currently foreseeable short-term and long-term capital needs. 27 MD&A (continued) Market Risks The Company is exposed to market risks, which include changes in U.S. Interest Rate Swaps and Cap As of December 30, 2000, the Company had approximately $17.8 million and international interest rates as well as changes in foreign currency outstanding in interest rate swaps. These swaps are used to convert $13.0 exchange rates as measured against the U.S. dollar and each other. The million of floating rate debt relating to the Company’s revolving credit agree- Company attempts to reduce these risks by utilizing financial instruments, ment and $4.8 million relating to a Deutsche Mark floating rate debt of pursuant to Company policies. DM10.0 million to fixed rate debt to reduce the Company’s exposure to inter- Forward Foreign Currency Contracts The value of certain foreign currencies as compared to the U.S. dollar may affect the Company’s financial results. Changes in exchange rates may pos- itively or negatively affect the Company’s revenues (as expressed in U.S. dollars), gross margins, operating expenses, and retained earnings. Where the Company deems it prudent, it engages in hedging programs aimed at limiting, in part, the impact of currency fluctuations. Using primarily forward exchange contracts, the Company hedges those transactions that, when remeasured according to accounting principles generally accepted in the est rate fluctuations. The net result was to substitute a weighted average fixed interest rate of 7.2% for the variable LIBOR rate on $13.0 million and 5.3% fixed interest rate for the variable EURIBOR Deutsche Mark loan of the Company’s debt. The swaps expire in December 2003, December 2004 and April 2005. Under the interest rate environment during the year ended December 30, 2000, the Company’s interest rate swap agreements resulted in additional expense of approximately $0.1 million. In addition, the Company has an interest rate cap of 5.5% on a Deutsche Mark floating rate debt of DM6.3 million (approximately $3.0 million). United States, may impact its statement of operations. From time to time, The Company is exposed to risk from changes in interest rates from bor- the Company purchases short-term forward exchange contracts to protect rowings under certain variable bank credit lines and loan agreements. If the against currency exchange risks associated with the ultimate repayment of outstanding balance at December 30, 2000 of $46.7 million was the aver- intercompany loans due from the Company’s international subsidiaries and age balance for the following twelve month period and the Company expe- the payment of merchandise purchases to foreign vendors. As of Decem- rienced a 1% increase in average interest rates, the interest expense for that ber 30, 2000, the Company had outstanding foreign currency forward period would have increased by $0.5 million. Based upon current economic contracts aggregating $58.0 million, of which $51.2 million related to conditions, the Company does not believe interest rates will increase intercompany debt and $6.8 million related to the purchase of merchandise substantially in the near future. As a result, the Company does not believe from foreign vendors. The contracts hedge against currency fluctuations of it is necessary to hedge its exposure against potential future interest Australian dollars ($0.4 million), Canadian dollars ($13.9 million), Deutsche rate increases. Mark ($11.9 million), Euro ($0.1 million), French Francs ($9.2 million) British Pounds ($14.2 million), Netherland Guilders ($2.5 million), Swiss Francs ($0.7 million), Belgium Francs ($2.0 million) and Spanish Pesetas ($3.1 million). At December 30, 2000, the Company had net deferred losses from foreign cur- rency forward contracts of approximately $0.4 million. The contracts expire at various dates through 2001. These hedging activities provide only limited protection against currency exchange risks. Factors that could impact the effectiveness of the Com- pany’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 rev- enues or costs are adversely affected. 28 Report of Independent Certified Public Accountants Board of Directors and Stockholders Henry Schein, Inc. Melville, New York We have audited the accompanying consolidated balance sheets of Henry by management, as well as evaluating the overall financial statement Schein, Inc. and Subsidiaries as of December 30, 2000 and December 25, presentation. We believe that our audits provide a reasonable basis for 1999, and the related consolidated statements of operations and compre- our opinion. hensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 30, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. In our opinion, the consolidated financial statements referred to above pre- sent fairly, in all material respects, the financial position of Henry Schein, Inc. and Subsidiaries at December 30, 2000 and December 25, 1999, and the results of their operations and their cash flows for each of the three years in We conducted our audits in accordance with auditing standards generally the period ended December 30, 2000 in conformity with accounting princi- accepted in the United States of America. Those standards require that ples generally accepted in the United States of America. we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made BDO SEIDMAN, LLP New York, New York March 1, 2001 29 Consolidated Balance Sheets Henry Schein, Inc. and Subsidiaries (In thousands, except share data) Assets Current assets: Cash and cash equivalents Accounts receivable, less reserves of $27,556 and $20,391, respectively Inventories Deferred income taxes Prepaid expenses and other Total current assets Property and equipment, net Goodwill and other intangibles, net Investments and other Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Bank credit lines Accruals: Salaries and related expenses Merger and integration, and restructuring costs Other Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Total liabilities Minority interest Commitments and contingencies Stockholders’ equity: Common stock, $.01 par value, authorized 120,000,000, issued: 41,946,284 and 40,768,306, respectively Additional paid-in capital Retained earnings Treasury stock, at cost, 62,479 shares Accumulated comprehensive loss Deferred compensation Total stockholders’ equity See accompanying notes to consolidated financial statements. 30 December 30, 2000 December 25, 1999 $ 58,362 $ 26,019 371,668 276,473 21,001 60,900 788,404 94,663 292,018 55,983 388,063 285,590 15,520 63,617 778,809 86,627 295,113 43,553 $1,231,068 $1,204,102 $ 216,535 $ 198,983 4,390 41,527 39,830 13,735 84,288 6,079 364,857 266,224 12,931 644,012 7,996 419 373,413 225,029 (1,156) (18,179) (466) 579,060 31,188 10,093 64,710 3,879 350,380 318,218 9,782 678,380 7,855 407 361,757 167,809 (1,156) (10,359) (591) 517,867 $1,231,068 $1,204,102 Consolidated Statements of Operations and Comprehensive Income Henry Schein, Inc. and Subsidiaries (In thousands, except per share data) Net sales Cost of sales Gross profit Operating expenses: Selling, general and administrative Merger and integration costs Restructuring costs Operating income Other income (expense): Interest income Interest expense Other—net Income before taxes on income, minority interest and equity in earnings (losses) of affiliates Taxes on income Minority interest in net income of subsidiaries Equity in earnings (losses) of affiliates Net income Net income Other comprehensive income: Foreign currency translation adjustment Other comprehensive income Net income per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Pro forma: Historical net income Pro forma adjustment: Elimination of deferred tax benefit arising from conversion of an acquisition from S Corporation to a C Corporation Income tax expense related to acquired S Corporation Pro forma net income Pro forma net income per common share: Basic Diluted See accompanying notes to consolidated financial statements. Years Ended December 30, 2000 December 25, 1999 December 26, 1998 $2,381,721 $2,284,544 $1,922,851 1,733,820 647,901 1,675,948 608,596 1,399,020 523,831 520,288 585 14,439 112,589 6,279 (20,409) (1,925) 96,534 36,150 1,757 (1,878) 489,364 13,467 — 105,765 7,777 (23,593) (166) 89,783 35,589 1,690 (2,192) 427,635 56,666 — 39,530 6,964 (12,050) 1,570 36,014 20,325 145 783 $ $ 56,749 56,749 $ $ 50,312 50,312 $ $ 16,327 16,327 (7,820) (8,302) (448) $ 48,929 $ 42,010 $ 15,879 $ $ 1.38 1.35 $ $ 1.24 1.21 $ $ 0.42 0.39 41,244 42,007 40,585 41,438 39,305 41,549 $ 16,327 (2,000) (579) $ 13,748 $ $ 0.35 0.33 31 Consolidated Statements of Stockholders’ Equity Henry Schein, Inc. and Subsidiaries (In thousands, except share data) Shares Amount Common Stock $.01 Par Value Additional Paid-in Capital Retained Earnings Accumulated Treasury Comprehensive Stock Deferred Loss Compensation Total Stockholders’ Equity Balance, December 27, 1997 38,120,572 $381 $328,644 $ 99,588 $(1,156) $ (1,609) $(1,625) $424,223 Retained earnings of three companies acquired under the pooling of interests method, not deemed material individually or in the aggregate Net income Dividends paid by pooled companies Shares issued for acquisitions Shares issued to ESOP trust Amortization of restricted stock Accumulated comprehensive loss Shares issued upon exercise of stock options by employees, including — — — 1,124,469 34,720 — — — — — 11 — — — — — — 2,110 1,311 — — tax benefit of $5,098 971,175 10 16,054 5,161 16,327 (2,012) — — — — — — — — — — — — — — — — — — — (448) — — — — — 287 — 5,161 16,327 (2,012) 2,121 1,311 287 (448) — — 16,064 Balance, December 26, 1998 40,250,936 402 348,119 119,064 (1,156) (2,057) (1,338) 463,034 Deficit of one company acquired under the pooling of interests method, not deemed material Net income Shares issued for acquisitions Shares issued to ESOP trust Amortization of restricted stock Accumulated comprehensive loss Shares issued upon exercise of stock options by employees, including — — 189,833 101,233 — — — — 2 1 — — — — 1,900 1,766 — — tax benefit of $5,974 226,304 2 9,972 (1,567) 50,312 — — — — — — — — — — — — — — — — — (8,302) — — — — 747 — (1,567) 50,312 1,902 1,767 747 (8,302) — — 9,974 Balance, December 25, 1999 40,768,306 407 361,757 167,809 (1,156) (10,359) (591) 517,867 Retained earnings of one company acquired under the pooling of interests method, not deemed material Net income Shares issued for acquisitions Shares issued to ESOP trust Amortization of restricted stock Accumulated comprehensive loss Shares issued upon exercise of stock options by employees, — — 465,480 121,253 — — — — 5 1 — — — — 423 2,192 — — including tax benefit of $2,758 591,245 6 9,041 471 56,749 — — — — — — — — — — — — — — — — — (7,820) — — — — 125 — 471 56,749 428 2,193 125 (7,820) — — 9,047 Balance, December 30, 2000 41,946,284 $419 $373,413 $225,029 $(1,156) $(18,179) $ (466) $579,060 See accompanying notes to consolidated financial statements. 32 Consolidated Statements of Cash Flows Henry Schein, Inc. and Subsidiaries (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for losses and allowances on accounts receivable Stock issued to ESOP trust Provision (benefit) for deferred income taxes Write-off of equipment and intangibles Undistributed (earnings) losses of affiliates Minority interest in net income of subsidiaries Other Changes in operating assets and liabilities (net of purchase acquisitions): Decrease (increase) in accounts receivable Decrease (increase) in inventories (Increase) decrease in other current assets Increase (decrease) in accounts payable and accruals Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Business acquisitions, net of cash acquired of $0, $11,092, and $0 Proceeds from sale of fixed assets Other Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Principal payments on long-term debt Proceeds from issuance of stock upon exercise of stock options by employees Proceeds from borrowing from banks Payments on borrowings from banks Distributions to stockholders Other Net cash (used in) provided by financing activities Net increase in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to consolidated financial statements. Years Ended December 30, 2000 December 25, 1999 December 26, 1998 $ 56,749 $ 50,312 $ 16,327 33,762 7,165 2,193 (1,335) 464 1,878 1,757 237 5,186 4,630 (4,628) 44,936 152,994 (29,743) (6,838) — (9,645) (46,226) — (5,147) 6,283 9,714 (89,047) — 346 28,273 255 1,767 13 415 2,192 1,690 (129) (22,258) 12,102 6,786 (24,925) 56,493 (34,549) (132,552) 8,583 (5,557) (164,075) 131,211 (14,873) 3,998 139,924 (146,877) — 40 (77,851) 113,423 28,917 3,426 26,019 5,841 (8,044) 28,222 19,984 4,379 1,311 185 13,500 (783) 145 178 (48,947) (34,533) (12,143) 43,090 2,693 (33,521) (13,883) 8,121 (9,416) (48,699) 129,717 (49,192) 10,956 112,344 (139,503) (2,012) 105 62,415 16,409 — 11,813 $ 58,362 $ 26,019 $ 28,222 33 Notes to Consolidated Financial Statements Henry Schein, Inc. and Subsidiaries (In thousands, except share data) 1• Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Henry Schein, Inc. and all of its wholly owned and majority-owned subsidiaries (collectively the “Company”). Investments in unconsolidated affiliates, which management software is deferred and recognized ratably over the period in which the support is to be provided, generally one-year. Revenues from freight charged to customers are recognized when products are shipped. Provisions for discounts, rebates to customers, customer returns and other adjustments are provided for in the period the related sales are recorded. are greater than 20% and less than or equal to 50% owned, are accounted Direct Handling Fees for under the equity method. All intercompany accounts and transactions Direct handling fees, which represent primarily direct compensation costs are eliminated in consolidation. of employees who pick, pack and otherwise prepare, if necessary, mer- The consolidated financial statements reflect, for all periods presented, the adoption of the classification requirements pursuant to Emerging Issues Task Force (“EITF”) 00-10, Accounting for Shipping and Handling Fees and Costs, EITF 00-14, Accounting for Certain Sales Incentives, and EITF 00-22, chandise for shipment to the Company’s customers are reflected in “Sell- ing, general and administrative” expenses. These costs were approximately $17,700, $15,700 and $15,000 for the years ended 2000, 1999 and 1998, respectively. Accounting for “Points” and Certain Other Time Based or Volume Based Inventories Sales Incentive Offers, and Offers for Free Products to be Delivered in the Inventories consist substantially of finished goods and are valued at the Future, which were effective in the Company’s fourth quarter of 2000. lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) Accordingly, the Company reclassified certain costs for the periods pre- method. sented (including the quarterly information included in Note 16) for freight incurred on delivered merchandise, merchandise and other products pro- vided to customers pursuant to promotional incentive programs and other costs which were historically included in “Selling, general and administra- tive” expenses to “Cost of sales.” In addition, the Company reclassified to “Net sales” income from freight charged to customers, and the cost of rebates and refunds provided to customers pursuant to promotional incen- tive programs, which were historically included in “Selling, general and administrative” expenses. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates 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: Buildings and improvements Machinery and warehouse equipment Furniture, fixtures and other Computer equipment and software Years 40 5-10 3-10 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. and assumptions that affect the reported amounts of assets and liabilities Taxes on Income and disclosure of contingent assets and liabilities at the date of the financial The Company accounts for income taxes under an asset and liability statements and the reported amounts of revenues and expenses during the approach that requires the recognition of deferred tax assets and liabilities reporting period. Actual results could differ from those estimates. for the expected future tax consequences of events that have been recog- Fiscal Year The Company reports its operations and cash flows on a 52-53 week basis ending on the last Saturday of December. The fiscal year ended December 30, 2000 consisted of 53 weeks. The fiscal years ended December 25, 1999 and December 26, 1998 consisted of 52 weeks. Revenue Recognition Sales are recorded when products are shipped or services are rendered to customers, as the Company generally has no significant post delivery obli- gations, the product price is fixed and determinable, collection of the result- ing receivable is probable and product returns are reasonably estimable. Revenues derived from post contract customer support for practice nized 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 ini- tial maturity of three months or less to be cash equivalents. The Company 34 has determined that the effect of foreign exchange rate changes on cash Long-Lived Assets flows was not material for the year ended December 26, 1998. Long-lived assets, such as goodwill and property and equipment, are eval- 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 uated 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 deter- mined in 1999 and 1998, respectively, that certain long-lived assets had been impaired (see Note 6). No impairment losses have been deemed nec- essary for the year ended December 30, 2000. stockholders’ equity. Gains and losses resulting from foreign currency Stock-Based Compensation transactions are included in earnings, except for certain hedging transac- The Company accounts for its stock option awards to employees under the tions (see New Accounting Pronouncements). intrinsic value based method of accounting prescribed by Accounting Prin- 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 until the transaction is completed. In order to manage interest rate exposure, the Company has entered into interest rate swap and cap 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 adjust- ments 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 ciples 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 mea- surement 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 outstand- ing 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 maturity of these financial instruments. The carrying amount reported for of stock options. bank credit lines and long-term debt approximates fair value because cer- tain 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 instru- ments with similar maturities and terms. 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 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 stock- holders’ equity. The Company’s comprehensive income is comprised of foreign currency translation adjustments. Reclassifications Certain amounts as previously reported have been reclassified to conform to current year classifications (See Principles of Consolidation). on a straight-line basis over periods not exceeding 30 years. Certain acqui- New Accounting Pronouncements sitions provide for contingent consideration, primarily cash, to be paid in the In June 1998, the Financial Accounting Standards Board (“FASB”) issued event certain financial performance targets are satisfied over periods typi- Statement of Financial Accounting Standards No. 133 (“FAS 133”), cally not exceeding three years from the date of acquisition. The Company’s “Accounting for Derivative Instruments and Hedging Activities.” FAS 133 is policy is to record a liability and adjust the acquisition price for such amounts required for transactions entered into by the Company after December 30, when it becomes probable that targets will be met. 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 35 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of the hedge trans- 3• Property and Equipment, Net Major classes of property and equipment consist of the following: action and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. In June 2000, the FASB issued Statement of Financial Accounting Stan- dards No. 138 (“FAS 138”), “Accounting for Certain Derivative Instruments and Certain Hedging Activities” which amended FAS 133. The amendments in FAS 138 address certain implementation issues and relate to such mat- Land Buildings and leasehold improvements Machinery and warehouse equipment Furniture, fixtures and other Computer equipment and software ters as the normal purchases and normal sales exception, the definition of Less accumulated depreciation and amortization December 30, December 25, 2000 1999 $ 1,257 42,744 21,909 24,888 76,999 167,797 73,134 $ 1,257 37,543 24,117 25,430 58,982 147,329 60,702 interest rate risk, hedging recognized foreign currency denominated assets Net property and equipment $ 94,663 $ 86,627 and liabilities, and intercompany derivatives. Effective December 31, 2000, the Company will adopt FAS 133 and FAS 138. The initial impact of adoption on the Company’s financial statements will be recorded in the first quarter of 2001 and will not be material. The ongoing effect of adoption on the Company’s consolidated financial statements will be determined each quarter by several factors, including the specific hedg- ing instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. The net book value of equipment held under capital leases amounted to approximately $2,165 and $2,541 as of December 30, 2000 and December 25, 1999, respectively (See Note 14(b)). 4• Goodwill and Other Intangibles, Net Goodwill and other intangibles consist of the following: December 30, December 25, Estimated Lives 2000 1999 30 years 3-5 years $319,625 16,812 336,437 44,419 $314,353 12,116 326,469 31,356 $292,018 $295,113 2• Earnings Per Share A reconciliation of shares used in calculating basic and diluted earnings per Goodwill Other share follows (in thousands): Less accumulated amortization Years Ended December 30, December 25, December 26, Basic Effect of assumed conversion of employee stock options Diluted 2000 41,244 763 42,007 1999 40,585 853 41,438 1998 39,305 2,244 41,549 Goodwill represents the excess of the purchase price of acquisitions over the fair value of identifiable net assets acquired. During 2000, the increase in goodwill was primarily due to additional purchase price consideration for a prior year acquisition. Other intangibles include covenants not-to- compete, computer programming costs, customer lists and deferred Options to purchase approximately 3,011,000, 2,485,000 and 772,000 acquisition costs. shares of common stock at prices ranging from $19.73 to $46.00, $24.56 to $46.00 and $39.88 to $46.00 per share were outstanding during portions of 2000, 1999, and 1998, respectively, but were not included in the computa- tion of diluted earnings per share for each of the respective years because the options’ exercise prices exceeded the fair market value of the Com- pany’s common stock. 5• Investments and Other Investments and other consist of: Investments in unconsolidated affiliates Long-term notes receivables (1) Other December 30, December 25, 2000 1999 $ 4,791 39,028 12,164 $55,983 $12,852 19,770 10,931 $43,553 (1) Long-term notes receivables include various notes due arising from the sale of certain businesses of approximately $21,700. The Company’s investments are predominately 50% owned unconsoli- dated affiliates consisting of various companies involved in the healthcare distribution business. In the fourth quarter of fiscal 2000, the Company sold its 50% interest in HS Pharmaceutical Inc. (“HS Pharmaceutical”), a manu- facturer and distributor of generic pharmaceuticals, which resulted in a non- 36 recurring net loss of $1,925 which is included in “Equity in earnings (losses) largest direct marketer of healthcare supplies to the medical, dental, and of affiliates.” veterinarian office-based practitioners, in Germany. As of December 30, 2000, the Company’s investments in unconsolidated GIV and Heiland had 1998 net sales of approximately $120,000 and affiliates were $1,933 more than the Company’s proportionate share of the $130,000, respectively. The purchase price and resultant goodwill, which is underlying equity of these affiliates. This amount, which has been treated as being amortized over 30 years, for these acquisitions was approximately goodwill, is being amortized over 30 years and charged to equity in earn- $65,000 and $47,400, and $60,400 and $55,800, respectively (see Note 9 ings (losses) of affiliates. As of December 30, 2000, approximately $2,706 of (a)). The acquisition agreements for GIV and Heiland provide for additional the Company’s retained earnings represented undistributed earnings of cash consideration of up to $20,000 per year through 2004, not to exceed affiliates. Combined financial data for substantially all of these companies $75,000 in total, and $3,900 per year through 2001, respectively to be paid are as follows: Current assets Total assets Liabilities Stockholders’ equity December 30, December 25, 2000 1999 $30,789 33,563 28,451 5,112 $46,233 71,619 56,154 15,465 Years Ended December 30, December 25, December 26, Net sales Operating income (loss) Net income (loss) 2000 1999 1998 $86,536 2,559 860 $112,746 (3,530) (5,230) $114,788 2,589 541 6• Business Acquisitions During the year ended December 30, 2000, the Company completed the if certain sales and profitability targets are met. The GIV acquisition agree- ment also provided for additional cash consideration of $4,125 based upon sales of new products, as defined; of which $1,238 was paid during fiscal 2000. Additionally, during 1999, the Company acquired six other companies, which had total sales in 1998 of approximately $74,000, that were accounted for under the purchase method of accounting. Results of operations of the business acquisitions accounted for under the purchase method of accounting have been included in the financial statements commencing with the acquisition dates. The total purchase price of the six companies acquired was approximately, $11,800 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 acquisition of two healthcare distribution and one technology business, Company issued 189,833 shares of its Common Stock with an aggregate none of which were considered material either individually or in the aggre- market value of $6,400. The pooling transaction was not material and gate. Of the three completed acquisitions, two were accounted for under accordingly prior period financial statements have not been restated. the purchase method of accounting and the remaining acquisition was Results of the pooling transaction acquisition have been included in the con- accounted for under the pooling of interests method of accounting. The solidated financial statements from the beginning of the quarter in which the Company issued 465,480 shares of its Common Stock, with an aggregate acquisition occurred. value of approximately $7,900 in connection with the pooling transaction. The transactions completed under the purchase method of accounting have been included in the consolidated financial statements from their respective acquisition dates. The pooling transaction was not material and accordingly prior period financial statements have not been restated. Results of the acquired company have been included in the consolidated financial statements from the beginning of the second quarter of 2000. In 1999, the Company completed the acquisition of eight healthcare distri- bution and one technology business, the most significant of which were transactions accounted for under the purchase method of accounting; General Injectables and Vaccines, Inc. (“GIV”) through the purchase of all of the outstanding common stock of Biological and Popular Culture, Inc. (on December 30, 1998) a leading independent direct marketer of vaccines and other injectables to office based practitioners throughout the United States; and the Heiland Group GmbH (“Heiland”) (on December 31, 1998), the In 1998, the Company completed the acquisition of five healthcare distribu- tion businesses, the most significant of which was a transaction accounted for under the pooling of interests method of accounting, H. Meer Dental Supply Co., Inc, (“Meer”) a distributor of consumable dental supplies. The historical financial statements were restated to give retroactive effect to the Meer transaction. Pursuant to the respective merger agreement for Meer, which was com- pleted on August 14, 1998, the Company issued approximately 2,974,000 shares of its Common Stock with aggregate market values (on their respec- tive closing dates) of approximately $132,700. 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 year ended December 26, 1998, pro forma adjustments have been made to the restated statements of operations to 37 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) reflect the income tax provisions and recoveries that would have been pro- Summarized unaudited pro forma results of operations for the acquisitions vided for had Meer been subject to income taxes in prior years. completed during fiscal 2000 and 1999, which were accounted for under Additionally, during 1998, the Company acquired four other businesses with aggregate net sales for 1997 of approximately $85,000, three of which were the purchase method of accounting, are not presented as the impact of reflecting the Company’s results of operations which assumed the acquisi- tions occurred as of the beginning of fiscal 2000 and 1999, respectively, accounted for under the pooling of interests method of accounting, with the remaining acquisition of a 50.1% ownership interest being accounted for is not material. under the purchase method of accounting. The total amount of cash paid The Company incurred certain direct costs in connection with the afore- (for the purchased business) and the value of the Company’s Common mentioned acquisitions accounted for under the pooling of interests Stock issued in connection with three of these acquisitions was approxi- method of accounting and the integration of these and certain other mately $6,800 and approximately $18,400, respectively. In connection with acquired businesses into the Company’s infrastructure. These costs, which one of the pooling acquisitions, the Company issued shares of a subsidiary, have been classified as merger and integration costs are as follows: 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 Years Ended December 30, December 25, December 26, each shareholders’ option, and had an aggregate value of approximately Direct transaction / merger costs (1) $24,000. In connection with the other two pooling acquisitions, the Com- Integration costs: pany issued approximately 347,000 and 121,000 shares of its Common Stock. The three pooling transactions were not material individually or in the aggregate, and their results were included in the consolidated financial statements from the beginning of the quarter in which the acquisitions Severance and other direct costs Costs associated with the closure of distribution centers (2) Long-lived asset write-off and impairment (3) Signing bonuses (4) occurred. Results of operations of the business acquisition accounted for Total integration costs 2000 $585 1999 1998 $ 4,032 $ 7,100 — — — — — 3,437 12,366 5,583 15,400 415 — 9,435 13,500 8,300 49,566 under the purchase method of accounting have been included in the con- Total merger and integration costs $585 $13,467 $56,666 solidated financial statements commencing with the acquisition date. (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. (4) Signing bonuses and stay pay packages to sales force and certain senior management directly related to the mergers. The following table shows the activity in the merger and integration accruals: Year ended December 26, 1998: Severance and other direct costs Direct transaction and other integration costs Year ended December 25, 1999: Severance and other direct costs Direct transaction and other integration costs Year ended December 30, 2000: Severance and other direct costs Direct transaction and other integration costs Balance at Applied Against Adjustments to Beginning of Year Provision Payments Long-Lived Assets(1) Reflect Actual Cost $ 6,871 10,185 $17,056 $ 7,943 14,049 $21,992 $ 1,694 8,399 $10,093 $12,366 44,300 $56,666 $ 4,721 8,340 $13,061 $ $ — 585 585 $(11,294) (31,185) $(42,479) $ (9,686) (9,156) $(18,842) $ (947) (4,844) $ (5,791) $ — (9,251) $(9,251) $ — (6,524) $(6,524) $ — — $ — $ — — $ — $(1,284) 1,690 $ 406 $ — — $ — Balance at End of Year $ 7,943 14,049 $21,992 $ 1,694 8,399 $10,093 $ 747 4,140 $ 4,887 (1) To reflect specific write-offs relating to amounts previously provided. As a result of the acquisitions and integration of these and certain other busi- received severance payments during 1998, 206 received severance during nesses into the Company’s infrastructure, 870 employees were terminated 1999, 37 received severance during 2000 and 11 were owed severance at though December 30, 2000. Of the 870 terminated employees, 502 December 30, 2000. 38 7• Plan of Restructuring On August 1, 2000, the Company announced a comprehensive restructur- 9• Long-Term Debt Long-term debt consists of: ing plan designed to improve customer service and increase profitability by maximizing the efficiency of the Company’s infrastructure. In addition to clos- ing or downsizing certain facilities, this world-wide initiative included the elim- ination of approximately 300 positions, including open positions, or about 5% of the total workforce, throughout all levels within the organization. For the year ended December 30, 2000, the Company has incurred one-time restructuring costs of approximately $14,439 ($9,270 after taxes), consisting of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off costs, and outside professional and consulting fees directly related to the restruc- turing plan. The following table shows amounts expensed and paid for restructuring costs that were incurred and accrued in 2000: Severance costs (1) Facility closing costs (2) Other professional and consulting costs Provision Payments $ 7,198 4,406 2,835 $14,439 $3,191 722 1,678 $5,591 Balance at December 30, 2000 $4,007 3,684 1,157 $8,848 Private Placement Loans (a) Borrowings under Revolving Credit Agreement (b) Notes payable for business acquisitions (c) Notes payable to banks, interest at 5.98% to 7.00%, payable in quarterly installments ranging from $59 to $62 through 2019, semi-annual installments of $952 through 2003 and a lump sum payment of $5,709 on January 1, 2002 secured by inventory and accounts receivable in the amount of $32,579 at December 30, 2000 Various loans payable with interest, in varying installments through 2007, uncollateralized Capital lease obligations in various installments through fiscal 2010; interest at 6.0% to 10.0% or varies with prime rate (see Note 14 b) Total Less current maturities Total long-term debt December 30, December 25, 2000 1999 $230,000 10,660 1,984 $230,000 53,664 2,436 21,517 25,208 5,682 7,338 2,460 272,303 6,079 3,451 322,097 3,879 $266,224 $318,218 (a) Private Placement Loans On June 30, 1999, the Company completed a private placement transac- tion 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 (1) Represents salaries and related benefits for employees separated from the Company. (2) Represents costs associated with the closing of certain equipment branches (primarily lease termination costs) and property and equipment write-offs. 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. For the year ended December 30, 2000, 284 employees separated from the Company and received severance, and 104 were owed severance pay and On September 25, 1998, the Company completed a private placement benefits at December 30, 2000. These employees were from nearly all func- transaction under which it issued $100,000 in Senior Notes, the proceeds tional areas of the Company’s operations. 8• Bank Credit Lines At December 30, 2000, certain subsidiaries of the Company had available various short-term bank credit lines totaling approximately $52,343, expir- of which were used to pay down amounts owed under its revolving credit facility. Principal payments totaling $20,000 are due annually starting Sep- tember 25, 2006 through 2010. The notes bear interest at a rate of 6.66% per annum. Interest is payable semi-annually. ing through June 2004. Borrowings of $4,390 under these credit lines, bear (b) Revolving Credit Agreement interest rates ranging from 4.25% to 8.0%, and were collateralized by On August 15, 1997, the Company entered into an amended revolving credit accounts receivable, inventory and property and equipment with an aggre- agreement which, among other things, increased the maximum available gate net book value of $74,642 at December 30, 2000. borrowings to $150,000 from $100,000 and extended the term of the agree- ment 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 9.50%, and 6.40%, respectively, at December 30, 2000. The borrow- ings outstanding at December 30, 2000 bear an interest rate of 7.07%. 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 main- tain, on a consolidated basis, as defined, a minimum tangible net worth, cur- rent, cash flow, and interest coverage ratios, a maximum leverage ratio, and 39 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) contains restrictions relating to annual dividends in excess of $500, guar- The tax effects of temporary differences that give rise to the Company’s antees of subsidiary debt, investments in subsidiaries, mergers and acqui- deferred tax asset (liability) are as follows: sitions, 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 Current deferred tax assets: Inventory, premium coupon redemptions and accounts receivable valuation allowances Uniform capitalization adjustments to inventories Other accrued liabilities is denominated in British Pounds, and interest is payable quarterly at 5.5%. Total current deferred tax asset In 1998, the Company paid $4,478 and the remaining amount due was paid Non-current deferred tax asset (liability): 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 repay- ment 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. Property and equipment Provision for other long-term liabilities Net operating loss carryforward Net operating losses of foreign subsidiaries Total non-current deferred tax liability Valuation allowance for non-current deferred tax assets Net non-current deferred tax liabilities December 30, December 25, 2000 1999 $ 11,824 3,750 5,427 21,001 (8,459) (3,001) 156 2,863 (8,441) (2,686) (11,127) $ 8,062 3,979 3,479 15,520 (4,659) (2,769) 91 3,672 (3,665) (3,697) (7,362) Net deferred tax asset $ 9,874 $ 8,158 The net deferred tax asset is realizable as the Company has sufficient tax- able income in prior years to realize the tax benefit for deductible temporary As of December 30, 2000, the aggregate amounts of long-term debt matur- differences. The non-current deferred liability is included in “Other liabilities” ing in each of the next five years are as follows: 2001—$6,079; 2002— on the Consolidated Balance Sheets. $13,010; 2003—$12,591; 2004—$1,011; 2005—$934. At December 30, 2000, the Company has net operating loss carryforwards 10• Taxes on Income Taxes on income are based on income before taxes on income, minority for Federal income tax purposes of $389, which are available to offset future Federal taxable income through 2010. Foreign net operating losses totaled interest and equity in earnings (losses) of affiliates as follows: $8,009 at December 30, 2000. Such losses can be utilized against future Years Ended December 30, December 25, December 26, Domestic Foreign Total 2000 1999 1998 $102,777 (6,243) $ 96,534 $84,877 4,906 $89,783 $31,959 4,055 $36,014 foreign income. These losses expire between 2001 and 2006, with $1,500 expiring in 2001. The tax provisions differ from the amount computed using the Federal statu- tory income tax rate as follows: Years Ended December 30, December 25, December 26, The provision for taxes on income was as follows: Years Ended December 30, December 25, December 26, Provision at Federal statutory rate State income taxes, net of Federal 2000 1999 1998 $33,785 $31,425 $12,741 2000 1999 1998 income tax effect 1,874 2,757 1,109 Net foreign losses for which no tax benefits are available 1,009 196 $33,989 2,882 614 37,485 (1,046) 90 (379) (1,335) $28,137 5,579 1,860 35,576 954 (1,338) 397 13 $15,339 1,412 3,389 20,140 657 304 (776) 185 Foreign income taxed at other than the Federal statutory rate Reduction in valuation allowance Deferred tax benefit arising from termination of S Corporation election of an acquired company Tax effect of S Corporation Non-deductible merger and integration costs $36,150 $35,589 $20,325 Other 448 (1,011) — — 205 (160) 38 — — — 1,329 (156) 386 17 — (2,000) (579) 8,814 (163) Income tax provision $36,150 $35,589 $20,325 Current tax expense: U.S. Federal State and local Foreign Total current Deferred tax expense (benefit): U.S. Federal State and local Foreign Total deferred Total provision 40 Provision has not been made for U.S. or additional foreign taxes on undis- an interest rate cap of 5.5% on a Deutsche Mark floating rate debt of tributed earnings of foreign subsidiaries. Those earnings have been and will DM6,250 (approximately $3,000). continue to be reinvested. These earnings could become subject to addi- tional 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; how- ever, the Company believes that foreign tax credits would substantially off- set any U.S. tax. At December 30, 2000, the cumulative amount of reinvested earnings was approximately $3,951. 11• Financial Instruments and Credit Risk Concentrations (a) Financial Instruments (b) Concentrations of Credit Risk Certain financial instruments potentially subject the Company to concen- trations 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 insti- tution. 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. To reduce its exposure to fluctuations in foreign currencies and interest rates, the Company is party to foreign currency forward contracts, interest 12• Segment and Geographic Data The Company has two reportable segments: healthcare distribution and rate swaps and an interest rate cap, with major financial institutions. 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 Pacific Rim markets. Products, which are similar for each business group, are maintained and distributed from strate- gically located distribution centers in North America, Europe and the Pacific Rim. 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. 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 col- lateral or other security to support these financial instruments. As of December 30, 2000, the Company had outstanding foreign currency forward contracts aggregating $57,996 of which $51,203 related to inter- company debt and $6,793 related to the purchase and sale of merchandise from foreign vendors. The contracts hedge against currency fluctuations of Australian dollars ($391), Canadian dollars ($13,930), Deutsche Mark ($11,974), Euro ($65), French Francs ($9,166) British Pounds ($14,235), Netherland Guilders ($2,517), Swiss Francs ($686), Belgium Francs ($1,982) and Spanish Pesetas ($3,050). At December 30, 2000, the Company had net deferred gains from foreign currency forward contracts of $416. The contracts expire at various dates through 2001. As of December 30, 2000, the Company had approximately $17,800 out- standing in interest rate swaps. These swaps are used to convert $13,000 of floating rate debt relating to the Company’s revolving credit agreement and $4,800 relating to a Deutsche Mark floating rate debt of DM10,000, to fixed rate debt to reduce the Company’s exposure to interest rate fluctua- tions. The net result was to substitute a weighted average fixed interest rate of 7.2% for the variable LIBOR rate on $13,000 and a 5.3% interest rate for the variable EURIBOR Deutsche Mark loan of the Company’s debt. The swaps expire in December 2003, December 2004 and April 2005, respec- tively. Under the interest rate environment during the year ended December 30, 2000, the Company’s interest rate swap agreements resulted in addi- tional interest expense of approximately $118. In addition, the Company has 41 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) 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 informa- tion about the Company’s business segments: Years Ended December 30, December 25, December 26, 2000 1999 1998 Net Sales: Healthcare distribution (1): Dental Medical Veterinary International (2) Total healthcare distribution Technology (3) $1,073,889 794,880 56,421 389,946 2,315,136 66,585 $1,047,259 715,210 52,050 403,137 2,217,656 66,888 $1,085,717 515,276 48,492 230,792 1,880,277 42,574 $2,381,721 $2,284,544 $1,922,851 Total Assets: Healthcare distribution Technology Total Depreciation and Amortization: Healthcare distribution Technology Total Capital Expenditures: Healthcare distribution Technology Total December 30, December 25, December 26, 2000 1999 1998 $1,188,098 97,058 $1,134,312 110,563 $935,573 42,371 $1,285,156 $1,244,875 $977,944 $ $ $ $ 32,465 1,297 33,762 28,344 1,399 29,743 $ $ $ $ 26,355 1,918 28,273 32,639 1,910 34,549 $ 19,341 643 $ 19,984 $ 32,664 857 $ 33,521 The following table reconciles segment totals to consolidated totals as of, and for the years ended December 30, 2000, December 25, 1999 and (1) Consists of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, surgical products, diagnostic tests, December 26, 1998: 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. Years Ended December 30, December 25, December 26, Total Assets: Total assets for reportable segments December 30, December 25, December 26, 2000 1999 1998 $1,285,156 $1,244,875 $977,944 2000 1999 1998 Receivables due from healthcare Operating Income: Healthcare distribution (includes merger and integration and restructuring costs of $14,081, $13,467 and $55,688, respectively) Technology (includes merger and integration and restructuring costs of $943, $0 and $978, respectively) Total Interest Income: Healthcare distribution Technology Total Interest Expense: Healthcare distribution Technology Total distribution segment (46,494) (36,593) (13,742) Receivables due from technology segment (7,594) (4,180) (2,162) Consolidated total assets $1,231,068 $1,204,102 $962,040 $ 88,872 $ 80,467 $24,183 Interest Income: Total interest income for reportable 23,717 25,298 $112,589 $105,765 $ 5,231 4,424 $ 7,811 1,534 $ 9,655 $ 9,345 $ 22,611 1,174 $ 24,785 376 $ 23,785 $ 25,161 15,347 $39,530 $ 6,198 1,373 $ 7,571 $12,585 72 $12,657 segments $ 9,655 $ 9,345 $ 7,571 Interest on receivables due from healthcare distribution segment Interest on receivables due from (2,887) (1,369) technology segment (489) (199) (566) (41) Total consolidated interest income Interest Expense: Total interest expense for reportable segments Interest on payables due to $ 6,279 $ 7,777 $ 6,964 $ 23,785 $ 25,161 $ 12,657 healthcare distribution segment (489) (199) Interest on payables due to technology segment Total consolidated interest (2,887) (1,369) (41) (566) expense $ 20,409 $ 23,593 $ 12,050 42 The following table presents information about the Company by geographic area as of, and for the years ended December 30, 2000, December 25, 1999 and December 26, 1998. There were no material amounts of sales or transfers among geographic areas and there were no material amounts of United States export sales. North America Europe Pacific Rim Consolidated Total 2000 1999 1998 Net Sales Long-Lived Assets Net Sales Long-Lived Assets Net Sales Long-Lived Assets $2,010,398 340,520 30,803 $2,381,721 $271,188 108,902 6,591 $386,681 $1,899,188 356,868 28,488 $2,284,544 $249,524 124,664 7,552 $381,740 $1,711,945 200,240 10,666 $1,922,851 $174,917 34,021 7,136 $216,074 The Company’s subsidiary located in Germany had long-lived assets of $77,995, $88,050 and $4,952 at December 30, 2000, December 25, 1999 and December 26, 1998, respectively. 13• Employee Benefit Plans (a) Stock Compensation Plans The Company established the 1994 Stock Option Plan for the benefit of cer- tain employees. As amended in May 1999, pursuant to this plan the Com- pany 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. 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, sub- stantially all of which became exercisable upon the closing of the Com- pany’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 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 Com- pany, for up to 50,000 shares of the Company’s Common Stock. The exer- cise 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 and 1998, 13,000, and 3,000 options, respectively, were granted to certain non- employee directors at exercise prices, which were equal to the market price on the date of grant. There were no options granted to non-employee direc- tors during 2000. Additionally, in 1997 as a result of the Company’s acquisition of Sullivan Den- tal Products Inc. and Micro Bio-Medics, Inc., 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. anniversary of the date of issuance, subject to acceleration upon termina- A summary of the status of the Company’s two fixed stock option plans and tion of employment. Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Options exercisable at year end Weighted-average fair value of options granted during the year the Assumed Plans, and the related transactions for the years ended December 30, 2000, December 25, 1999, and December 26, 1998 is pre- sented below: 2000 1999 1998 Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price 5,439,340 93,500 (591,245) (290,873) 4,650,722 3,708,213 4,434,173 1,447,935 (226,304) (216,464) 5,439,340 3,593,439 $23.53 14.77 11.00 29.39 $24.59 $25.98 $ 8.85 $25.89 17.35 36.22 36.76 $23.53 $23.62 $ 9.85 4,134,577 1,339,362 (971,175) (68,591) 4,434,173 2,725,828 $18.19 39.01 10.95 30.80 $25.89 $19.63 $17.17 43 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) The following table summarizes information about stock options outstanding at December 30, 2000: Range of Exercise Prices $ 4.21 to $ 9.97 $10.89 to $16.00 $16.13 to $27.00 $29.00 to $46.00 Options Outstanding Weighted Average Options Exercisable Number Remaining Weighted Average Number Weighted Average Outstanding Contractual Life Exercise Price Exercisable Exercise Price 167,889 1,312,187 1,477,706 1,692,940 4,650,722 1.2 5.7 6.5 7.0 6.0 $ 4.56 $13.19 $22.39 $37.32 $24.59 167,889 799,263 1,190,587 1,550,474 3,708,213 $ 4.56 $13.85 $22.51 $37.21 $25.98 The Company applies Accounting Principles Board Opinion No. 25, (b) Profit Sharing Plans “Accounting for Stock Issued to Employees” (APB 25) and related interpre- Prior to April 1, 1998, the Company had qualified contributory and noncon- tations in accounting for its employee stock options. Under APB 25, tributory 401(k) and profit sharing plans, respectively, for eligible employees. because the exercise price of the Company’s employee stock options As of April 1, 1998, the Company’s profit sharing plan was merged into its equals the market price of the underlying stock on the date of grant, no 401(k) plan. Assets of the profit sharing plan are now held in self-directed compensation expense is recognized. accounts within the 401(k) plan. Contributions to the plans, which were 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 determined by the Board of Directors and charged to operations during 2000, 1999 and 1998, amounted to $7,305, $6,517, and $6,033, respectively. acquired subsidiaries had accounted for its employee stock options under (c) Employee Stock Ownership Plan (ESOP) the fair value method of FAS 123. The weighted average fair value of options In 1994, the Company established an ESOP and a related trust as a benefit granted during 2000, 1999 and 1998 was $8.85, $9.85 and $17.17, respec- for substantially all of its domestic employees. This plan supplemented the tively. The fair value for these options was estimated at the date of grant Company’s Profit Sharing Plan. Charges to operations related to this plan using a Black-Scholes option pricing model with the following weighted- were $2,537, $2,283 and $1,400 for 2000, 1999 and 1998, respectively. average assumptions for 2000, 1999 and 1998, risk-free interest rates of Under this plan, the Company issued 121,253, 101,233 and 34,720 shares of 6.3% for 2000, 5.6% for 1999 and 5.5% for 1998; volatility factor of the the Company’s Common Stock to the trust in 2000, 1999 and 1998, to sat- expected market price of the Company’s Common Stock of 45.1% for 2000, isfy the 1999, 1998 and 1997 contribution, respectively. The Company 45.8% for 1999 and 30% for 1998, assumed dividend yield of 0% for all years expects to fund the 2000 accrued contribution in 2001 with shares of the and a weighted-average expected life of the option of 10 years. 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 Under the accounting provisions of FAS 123, the Company’s net income and income per common share for the years ended December 30, 2000, held in trust by the 401(k) plan. December 25, 1999 and December 26, 1998 would have been adjusted to (d) Supplemental Executive Retirement Plan the pro forma amounts indicated below: In 1994, the Company instituted an unfunded non-qualified supplemental 2000 1999 $48,630 $43,012 $ 1.18 $ 1.16 $ 1.06 $ 1.04 Net income Net income per common share: Basic Diluted Net income, reflecting special adjustments (1) Net income, per common share to reflect special adjustments (1): Basic Diluted 1998 $9,615 $ 0.24 $ 0.23 $7,036 $ 0.18 $ 0.17 executive retirement plan for eligible employees. The increase in value which was charged to operations, was $360, $617 and $283 for 2000, 1999 and 1998, respectively. 14• Commitments and Contingencies (a) Operating Leases The Company leases facilities and equipment under noncancelable operat- ing leases expiring through 2011. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. (1) Special adjustments include proforma adjustments for income tax provisions and benefits on previously untaxed losses of Meer. 44 Future minimum annual rental payments under the noncancelable leases at In addition, the Company is subject to other claims, suits and complaints December 30, 2000 are as follows: arising in the course of the Company business. In Texas District Court, Travis 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments $ 20,447 17,646 14,894 13,642 12,963 26,032 $105,624 Total rental expense for 2000, 1999 and 1998 was $29,730, $25,798, and $19,130, respectively. (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 min- imum lease payments at December 30, 2000: 2001 2002 2003 2004 2005 Thereafter Total minimum lease payments Less: Amount representing interest at 6.0% to 10.0% (c) Litigation $ 971 549 381 250 145 877 3,173 (713) $2,460 County, the Company and one of its subsidiaries are defendants in a mat- ter 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 manage- ment 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 cus- tomers could be covered by the judge’s ruling. In November of 1999, the Company filed an interlocutory appeal of the District Court’s determination to the Texas Court of Appeals on the issue of whether this case was prop- erly certified as a class action. On September 14, 2000, the Court of Appeals affirmed the District Court’s certification order. On January 5, 2001, the Com- pany filed a Petition for Review in the Texas Supreme Court asking this court to find “conflicts jurisdiction” to permit review of the District Court’s certifi- cation order, which appeal is now pending. During the appeal of the class certification, a trial on the merits is stayed. The Company intends to vigor- ously 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 The manufacture or distribution of certain products by the Company cases the Company is provided by indemnification by the manufacturer of involves a risk of product liability claims, and from time to time the Company the product. There can be no assurance that the coverage maintained by is named as a defendant in products liability cases as a result of its distri- the Company is sufficient or will be available in adequate amounts or at a bution of pharmaceutical and other healthcare products. As of the end of reasonable cost, or that indemnification agreements will provide adequate fiscal 2000, the Company was named a defendant in approximately 68 such protection for the Company. In the opinion of the Company, all pending mat- cases. Of these product liability claims, 52 involve claims made by health- ters are covered by insurance or will not otherwise have a material adverse care workers who claim allergic reaction relating to exposure to latex gloves. effect on the Company’s financial condition. In each of these cases, the Company acted as a distributor of both brand name and “Henry Schein” private brand latex gloves, which were manufac- tured 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 identifica- tion; however, the Company is taking steps to implead those manufactur- ers 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 indem- nification from the manufacturers of these products, although this is depen- dent upon, among other things, the financial viability of the manufacturer and their insurers. (d) Employment, Consulting and Noncompete Agreements The Company has employment, consulting and noncompete agreements expiring through 2006 (except for a lifetime consulting agreement with a principal stockholder which provides for initial compensation of $283 per year, increasing $25 every fifth year beginning in 2002). The agreements provide for varying base aggregate annual payments of approximately $4,721 per year which decrease periodically to approximately $866 per year. In addition, some agreements have provisions for incentive and additional compensation. 45 Notes to Consolidated Financial Statements (continued) Henry Schein, Inc. and Subsidiaries (In thousands, except share data) 15• Supplemental Cash Flow Information Cash paid for interest and income taxes amounted to the following: Years Ended December 30, December 25, December 26, Interest Income taxes 2000 1999 1998 $19,810 $28,219 $19,528 $23,266 $10,047 $15,420 Years Ended December 30, December 25, December 26, 2000 1999 1998 Fair value of assets acquired, excluding cash Less liabilities assumed and created upon acquisition Net cash paid $6,838 $239,278 $22,725 — 106,726 8,842 $6,838 $132,552 $13,883 16• Quarterly Information (Unaudited) The following presents certain unaudited quarterly financial data: Quarters Ended Net Sales Gross profit Operating income Net income Net income per share: Basic Diluted Quarters Ended Net Sales Gross profit Operating income Net income Net income per share: Basic Diluted March 25, 2000 June 24, 2000 September 23, 2000 December 30, 2000 $554,139 149,116 23,477 11,398 $ $ 0.28 0.28 $568,631 158,815 30,982 16,381 $ $ 0.40 0.39 $603,319 161,951 28,944 16,238 $ $ 0.39 0.39 $655,632 178,019 29,186 12,732 $ $ 0.31 0.30 March 27, 1999 June 26, 1999 September 25, 1999 December 25, 1999 $536,561 144,243 21,445 9,913 $ $ 0.25 0.24 $559,438 152,962 26,778 13,337 $ $ 0.33 0.32 $578,591 152,083 26,519 11,523 $ $ 0.28 0.28 $609,954 159,308 31,023 15,539 $ $ 0.38 0.38 The Company’s business is subject to seasonal and other quarterly influ- charges of approximately $600, $2,200, $5,300, and $6,000 were recorded ences. Net sales and operating profits are generally higher in the fourth in the first quarter of 2000 and the first, second and third quarters of 1999, quarter due to timing of sales of software and equipment, year-end promo- respectively. To conform to the fourth quarter and full year presentation, certain amounts recorded in the first, second and third quarters of 2000 and all quarters in 1999 have been reclassified as described in Note 1. 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. tions and purchasing patterns of office-based healthcare practitioners and are generally lower in the first quarter due primarily to the increased pur- chases 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. In the fourth quar- ter of 2000, the Company recorded non-recurring losses on business disposals relating to the sale of certain practice management software systems and sale of its 50% interest in dental anesthetic manufacturer, HS Pharmaceutical of approximately $1,600 and $1,900, respectively. Restruc- turing charges of approximately $5,400 and $9,100 were recorded in the third and fourth quarter of 2000, respectively. Merger and integration 46 Corporate Information Corporate Headquarters Form 10-K Henry Schein, Inc. 135 Duryea Road Melville, N.Y. 11747 (631) 843-5500 Common Stock Henry Schein common stock trades on The Nasdaq Stock Market® under the symbol HSIC. Annual Shareholders Meeting Our Annual Meeting of Shareholders will be held on Wednesday, June 6, 2001, at 10 a.m., at the Huntington Hilton, Melville, N.Y. 11747. Henry Schein on the Internet A copy of the Company’s annual report on Form 10-K for the fiscal year ended December 30, 2000, is available without charge to shareholders upon request to the Company’s Investor Relations department. The report is also available on the Company’s Web site. Independent Auditors BDO Seidman, LLP 330 Madison Avenue New York, N.Y. 10017 Legal Counsel Proskauer Rose, LLP 1585 Broadway New York, N.Y. 10036 Stock Transfer Agent For more information about Henry Schein and its products and services, go to www.henryschein.com. Other Company Web For address changes, account consolidation, sites include: www.sullivanschein.com; www.studentdentist.com; registration changes, and lost stock certificates, please contact: www.dentrix.com; www.easydental.com; www.labnet.net; Continental Stock Transfer & Trust Company www.ident.com; www.caligor.com Shareholder Reports and Investor Inquiries For shareholder inquiries, including requests for quarterly and annual reports, contact our Investor Relations department at (631) 843-5611/5562, or e-mail your request to 2 Broadway New York, N.Y. 10004 (212) 509-4000 investor@henryschein.com. Printed materials can also be This Annual Report contains forward-looking statements under requested through the Company’s Web site. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. The Company’s results may differ materially from those expressed in or indicated by such forward- looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. On The Cover Team Schein Members (left to right): Gus Bravo, International Telesales Representative; Julio Paulino, Dental Equipment Service Technician; Betty Jonson, Dental Field Sales Consultant; Vincent Valenti, Dental Equipment Sales Specialist; Pepsi Parker, Medical Telesales Representative; Andrea Whittles, Dental Equipment Service Hub Manager; Paul Jaeger, Veterinary Telesales Representative Corporate Mission: To be the worldwide leader in providing the best quality and value in products and services for our healthcare customers. Corporate Charter: To Our Customers We provide the best quality and value in products and services, helping them, as business partners, to: • Deliver quality healthcare to their patients; • Efficiently operate and grow their practices; and • Increase their financial return and financial security. To Our Shareholders and Venture Partners We are responsible for achieving continued growth and profitability, resulting in an excellent return on investment. To Team Schein We will continue to foster an entrepreneurial environment, while offering exciting opportuni- ties for personal and professional growth, and treating each individual with respect and dignity. To Our Suppliers We will together strive to create an environment that enables us to grow our respective businesses in the spirit of partnership, each making a fair profit. Henry Schein, Inc. 135 Duryea Road Melville, New York 11747 U.S.A. (631) 843-5500 www.henryschein.com