SEC Filing - Henry Schein

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q --------- (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the period ended March 25, 2000 OR Transition report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 Commission File Number: 0-27078 HENRY SCHEIN, INC. (Exact name of registrant as specified in its charter) DELAWARE 11-3136595 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 135 Duryea Road Melville, New York (Address of principal executive offices) 11747 (Zip Code) Registrant's telephone number, including area code: (631) 843-5500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of May 4, 2000 there were 40,811,314 shares of the Registrant's Common Stock outstanding.

HENRY SCHEIN, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page ---- PART I. FINANCIAL INFORMATION Consolidated Financial Statements: ITEM 1. Balance Sheets as of March 25, 2000 and December 25, 1999 ............ 3 Statements of Operations for the three months ended March 25, 2000, and March 27, 1999 ... 4 Statements of Cash Flows for the three months ended March 25, 2000 and March 27, 1999 ............................... 5 Notes to Consolidated Financial Statements ........................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 10 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........... 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings .................................................... 14 ITEM 6. Exhibits and Reports on Form 8-K ..................................... 15 Signature ............................................................ 15 2

PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) March 25, December 25, 2000 1999 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents ................................................. $ 17,405 $ 26,019 Accounts receivable, less reserves of $21,062, and $20,391, respectively .. 358,371 388,063 Inventories ............................................................... 292,697 285,590 Deferred income taxes ..................................................... 17,583 15,520 Prepaid expenses and other ................................................ 66,657 63,617 ----------- ----------- Total current assets ................................................. 752,713 778,809 Property and equipment, net of accumulated depreciation and amortization of $64,518 and $60,702, respectively ..................................... 87,293 86,627 Goodwill and other intangibles, net of accumulated amortization of $34,571 and $31,356, respectively ..................................... 288,275 295,113 Investments and other .......................................................... 44,058 43,553 ----------- ----------- $ 1,172,339 $ 1,204,102 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 184,099 $ 198,983 Bank credit lines ......................................................... 40,556 41,527 Accruals: Salaries and related expenses ........................................ 31,006 31,188 Merger and integration costs ......................................... 7,921 10,093 Other ................................................................ 54,564 64,710 Current maturities of long-term debt ...................................... 3,139 3,879 ----------- ----------- Total current liabilities ............................................ 321,285 350,380 Long-term debt ................................................................. 306,263 318,218 Other liabilities .............................................................. 11,436 9,782 ----------- ----------- Total liabilities .................................................... 638,984 678,380 ----------- ----------- Minority interest .............................................................. 7,070 7,855 ----------- ----------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, authorized 120,000,000, issued: 40,805,594 and 40,768,306, respectively ...................... 408 407 Additional paid-in capital ................................................ 362,159 361,757 Retained earnings ......................................................... 179,207 167,809 Treasury stock, at cost, 62,479 shares .................................... (1,156) (1,156) Accumulated comprehensive loss ............................................ (13,773) (10,359) Deferred compensation ..................................................... (560) (591) ----------- ----------- Total stockholders' equity ........................................... 526,285 517,867 ----------- ----------- $ 1,172,339 $ 1,204,102 =========== =========== See accompanying notes to consolidated financial statements. 3

HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended ---------------------- March 25, March 27, 2000 1999 --------- --------- Net sales ............................................................... $ 553,810 $ 536,335 Cost of sales ........................................................... 384,606 372,918 --------- --------- Gross profit ....................................................... 169,204 163,417 Operating expenses: Selling, general and administrative ................................ 145,727 139,769 Merger and integration costs ....................................... -- 2,203 --------- --------- Operating income .............................................. 23,477 21,445 Other income (expense): Interest income .................................................... 1,096 2,333 Interest expense ................................................... (5,852) (5,724) Other - net ........................................................ (151) (189) --------- --------- Income before taxes on income, minority interest and equity in earnings (losses) of affiliates ....................... 18,570 17,865 Taxes on income ......................................................... 6,778 7,127 Minority interest in net income of subsidiaries ......................... 488 597 Equity in earnings (losses) of affiliates ............................... 94 (228) --------- --------- Net income .............................................................. $ 11,398 $ 9,913 ========= ========= Net income per common share: Basic .............................................................. $ 0.28 $ 0.25 ========= ========= Diluted ............................................................ $ 0.28 $ 0.24 ========= ========= Weighted average common shares outstanding: Basic .............................................................. 40,715 40,417 ========= ========= Diluted ............................................................ 41,084 41,806 ========= ========= See accompanying notes to consolidated financial statements. 4

HENRY SCHEIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended ---------------------- March 25, March 27, 2000 1999 --------- --------- Cash flows from operating activities: Net income ................................................................ $ 11,398 $ 9,913 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................................... 7,926 6,973 Provision (benefit) for losses and allowances on accounts receivable ................................................ 671 (1,561) Benefit for deferred income taxes ............................... (484) (1,404) Undistributed (earnings) losses of affiliates ................... (94) 228 Minority interest in net income of subsidiaries ................. 488 597 Other ........................................................... 93 (182) Changes in assets and liabilities (net of acquisitions): Decrease in accounts receivable ...................................... 27,057 10,157 (Increase) decrease in inventories ................................... (9,287) 985 (Increase) decrease in other current assets .......................... (3,403) 9,599 Decrease in accounts payable and accruals ............................ (25,510) (48,540) --------- --------- Net cash provided by (used in) operating activities ............................ 8,855 (13,235) --------- --------- Cash flows from investing activities: Capital expenditures ...................................................... (6,041) (8,975) Business acquisitions, net of cash acquired ............................... (470) (119,777) Proceeds from sale of fixed assets ........................................ -- 6,402 Other ..................................................................... (457) (70) --------- --------- Net cash used in investing activities .......................................... (6,968) (122,420) --------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt .................................. -- 234 Principal payments on long-term debt ...................................... (2,317) (12,256) Proceeds from issuance of stock ........................................... 435 3,643 Proceeds from borrowing from banks ....................................... 3,730 137,325 Payments on borrowings from banks ......................................... (13,467) (4,789) Other ..................................................................... 58 (3,398) --------- --------- Net cash (used in) provided by financing activities ............................ (11,561) 120,759 --------- --------- Net decrease in cash and cash equivalents ...................................... (9,674) (14,896) Effect of exchange rate changes on cash ........................................ 1,060 -- --------- --------- Cash and cash equivalents, beginning of year ................................... 26,019 28,222 --------- --------- Cash and cash equivalents, end of year ......................................... $ 17,405 $ 13,326 ========= ========= See accompanying notes to consolidated financial statements. 5

HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Basis of Presentation The consolidated financial statements include the accounts of Henry Schein, Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the "Company"). In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 25, 1999. The Company follows the same accounting policies in preparation of interim reports. The results of operations for the three months ended March 25, 2000 are not necessarily indicative of the results to be expected for the fiscal year ending December 30, 2000 or any other period. Note 2. Business Acquisitions During the three months ended March 27, 1999, the Company completed six acquisitions. The 1999 completed acquisitions included General Injectables and Vaccines, Inc. ("GIV"), through the purchase of all of the outstanding common stock of Biological and Popular Culture, Inc., a leading independent direct marketer of vaccines and other injectables to office-based practitioners throughout the United States; and the Heiland Group GmbH ("Heiland"), the largest direct marketer of healthcare supplies to medical, dental and veterinary office-based practitioners, in Germany. Of the six completed acquisitions, five 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 pooling transaction was not material and has been included in the consolidated financial statements from the beginning of the first quarter of 1999. Acquisitions completed during the first quarter of 2000 were not material. 6

HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (in thousands, except employee data) (unaudited) Note 2. Business Acquisitions --(Continued) In connection with prior year acquisitions, which were accounted for under the pooling of interests method, the Company incurred certain merger and integration costs. The following table shows amounts paid against the merger and integration accrual during the three months ended March 25, 2000: Balance At Balance At December 25, March 25, 1999 Payments 2000 ------------ -------- ---------- Severance and other direct costs .. $ 1,694 $ (370) $ 1,324 Direct transaction and other integration costs ........... 8,399 (1,802) 6,597 ------------ -------- ---------- $ 10,093 $ (2,172) $ 7,921 ============ ======== ========== For the three months ended March 25, 2000, 33 employees received severance and 24 were owed severance at March 25, 2000. Note 3. Comprehensive Income Net comprehensive income for the three months ended March 25, 2000 and March 27, 1999 is as follows: Three Months Ended ---------------------------------- March 25, March 27, 2000 1999 --------------- --------------- Net income .................................. $ 11,398 $ 9,913 Foreign currency translation adjustments .... (3,414) (3,684) --------------- --------------- Net comprehensive income .................... $ 7,984 $ 6,229 =============== =============== 7

HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (in thousands) (unaudited) Note 4. Segment Data The Company has two reportable segments, healthcare distribution and technology. The healthcare distribution segment which is comprised of the Company's dental, medical, veterinary and international business groups, distributes healthcare products (primarily consumable) and services to office-based healthcare practitioners and professionals in the combined North American, European and the Pacific Rim markets. The technology segment consists primarily of the Company's practice management software business and certain other value-added products and services which are distributed primarily to healthcare professionals in the North American market. The 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 tables present information about the Company's business segments: Three Months Ended -------------------------------- March 25, March 27, 2000 1999 -------------- -------------- Net Sales: Healthcare distribution (1): Dental ................................. $ 254,788 $ 253,253 Medical ................................ 168,875 158,075 Veterinary ............................. 13,457 12,689 International (2) ...................... 99,955 98,318 --------------- --------------- Total healthcare distribution ..... 537,075 522,335 Technology (3) .............................. 16,735 14,000 --------------- --------------- $ 553,810 $ 536,335 =============== =============== ------------------------------------------ (1) Consists of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, surgical products, diagnostic tests, infection control and vitamins. (2) Consists of products sold in Dental, Medical and Veterinary groups in European and Pacific Rim markets. (3) Consists of practice management software and other value-added products and services. 8

HENRY SCHEIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (in thousands, except share data) (unaudited) Note 4. Segment Data -- (Continued) Three Months Ended -------------------------------- March 25, March 27, 2000 1999 -------------- -------------- Operating Income: Healthcare distribution (includes merger and integration costs of $2,203 in 1999) ............. $ 17,309 $ 16,956 Technology ............................................ 6,168 4,489 -------------- -------------- Total ................................................. $ 23,477 $ 21,445 ============== ============== March 25, March 27, 2000 1999 -------------- -------------- Total Assets: Healthcare distribution ............................... $ 1,143,207 $ 1,122,120 Technology ............................................ 72,411 40,301 -------------- -------------- Total assets for reportable segments ............. 1,215,618 1,162,421 Receivables due from healthcare distribution segment .. (40,544) (21,575) Receivables due from technology segment ............... (2,735) (831) -------------- -------------- Consolidated total assets ........................ $ 1,172,339 $ 1,140,015 ============== ============== Note 5. Earnings per Share A reconciliation of shares used in calculating basic and diluted earnings per share follows: Three Months Ended -------------------------------- March 25, March 27, 2000 1999 -------------- -------------- Basic ...................................................... 40,715 40,417 Effect of assumed conversion of employee stock options ..... 369 1,389 -------------- -------------- Diluted .................................................... 41,084 41,806 ============== ============== 9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 25, 2000 compared to Three Months Ended March 27, 1999 Net sales increased $17.5 million, or 3.3%, to $553.8 million for the three months ended March 25, 2000 from $536.3 million for the three months ended March 27, 1999. Of the $17.5 million increase, approximately $14.7 million, or 84.3%, represented a 2.8% increase in the Company's healthcare distribution business. As part of this increase approximately $10.8 million represented a 6.8% increase in the Company's medical business, $1.6 million represented a 1.7% increase in its international business, $1.5 million represented a 0.6% increase in its dental business and $0.8 million represented a 6.1% increase in its veterinary business. The increase in medical net sales is primarily attributable to telesales and marketing activities, partially offset by a decrease in sales to hospitals. In the international market, the increase in net sales was primarily due to increased account penetration in Germany, Australia, France and Spain, offset by unfavorable foreign exchange rates. In the veterinary market, the increase in net sales was primarily due to increased account penetration. The increase in dental net sales was primarily due to improvement in equipment sales and services. The remaining increase in first quarter 2000 net sales was due to the technology business, which increased $2.8 million, or 20.0%, to $16.8 million for the three months ended March 25, 2000, from $14.0 million for the three months ended March 27, 1999. The increase in technology and value-added product net sales was primarily due to increased practice management software sales. Gross profit increased by $5.8 million, or 3.5%, to $169.2 million for the three months ended March 25, 2000 from $163.4 million for the three months ended March 27, 1999. Gross profit margin increased 0.1% to 30.6% from 30.5% for the same period last year. Healthcare distribution gross profit increased $3.9 million, or 2.5%, to $157.8 million for the three months ended March 25, 2000 from $153.9 million for the three months ended March 27, 1999. Healthcare distribution gross profit margin decreased by 0.1% to 29.4% for the three months ended March 25, 2000 from 29.5% for the three months ended March 27, 1999, primarily due to sales mix. Technology gross profit increased by $1.9 million or 20.4% to $11.4 million for the three months ended March 25, 2000 from $9.5 million for the three months ended March 27, 1999. Technology gross profit margins increased by 0.5% to 68.2% for three months ended March 25, 2000 from 67.7% for the three months ended March 27, 1999, primarily due to changes in sales mix. Selling, general and administrative expenses increased by $5.9 million, or 4.2%, to $145.7 million for the three months ended March 25, 2000 from $139.8 million for the three months ended March 27, 1999. Selling and shipping expenses increased by $0.9 million, or 0.9%, to $95.7 million for the three months ended March 25, 2000 from $94.8 million for the three months ended March 27, 1999. As a percentage of net sales, selling and shipping expenses decreased 0.4% to 17.3% for the three months ended March 25, 2000 from 17.7% for the three months ended March 27, 1999. The decrease was primarily due to reductions in sales and marketing expenses. General and administrative expenses increased $5.0 million, or 11.1%, to $50.0 million for the three months ended March 25, 2000 from $45.0 million for the three months ended March 27, 1999, primarily due to acquisitions. As a percentage of net sales, general and administrative expenses increased 0.6% to 9.0% for the three months ended March 25, 2000 from 8.4% for the three months ended March 27, 1999. 10

Other income (expense) - net decreased by $1.3 million, to $(4.9) million for the three months ended March 25, 2000, compared to $(3.6) million for the three months ended March 27, 1999, due primarily to lower interest income on receivables, and an increase in interest expense, which resulted from an increase in interest rates. Equity in earnings (losses) of affiliates increased $0.3 million to $0.1 million for the three months ended March 25, 2000 from $(0.2) million for the three months ended March 27, 1999. The increase is due to a reduced loss in 2000 from an affiliate. In 1998, HS Pharmaceutical, an affiliated company, which is accounted for under the equity method, ceased manufacturing of certain anesthetic products. On September 23, 1999, the United States Food and Drug Administration ("FDA") issued clearance for HS Pharmaceutical to resume production of its anesthetic products for shipment into the United States. HS Pharmaceutical resumed limited production and shipment of its products in the fourth quarter of 1999. For the three months ended March 25, 2000 the Company's effective tax rate was 36.5%. The difference between the Company's effective tax rate and the Federal statutory rate relates primarily to state income taxes. For the three months ended March 27, 1999, the Company's effective tax rate was 39.9%. Excluding merger and integration costs net of applicable taxes the Company's effective tax rate for the three months ended March 27, 1999 would have been 39.8%. The difference between the Company's effective tax rate, excluding certain non-deductible merger and integration costs, and the Federal statutory rate relates primarily to state income taxes. Euro Conversion Effective January 1, 1999, 11 of the 15 member countries of the European Union have adopted the Euro as their common legal currency. On that date, the participating countries established fixed Euro conversion rates between their existing sovereign currencies and the Euro. The Euro now trades on currency exchanges and is available for non-cash transactions. The participating countries now issue sovereign debt exclusively in Euros, and have re-denominated outstanding sovereign debt. The authority to direct monetary policy for the participating countries, including money supply and official interest rates for the Euro, is now exercised by the new European Central Bank. The Company has established an Euro Task Force to address its information system, product and customer concerns. The Company expects to achieve timely Euro information system and product readiness, so as to conduct transactions in the Euro, in accordance with implementation schedules as they are established by the European Commission. The Company does not anticipate that the costs of the overall effort will have a material adverse impact on future results. E-Commerce Traditional healthcare supply and distribution relationships are being challenged by electronic on-line commerce solutions. The Company's distribution business is characterized by rapid technological developments and intense competition. The rapid evolution of on-line commerce will require continuous improvement in performance, features and reliability of Internet content and technology by the Company, particularly in response to competitive offerings. Through the Company's proprietary technologically based suite of products, customers are offered a variety of competitive alternatives. The Company's tradition of reliable service, proven name recognition, and large customer base built on solid customer relationships makes it well situated to participate fully in this rapidly growing aspect of the distribution business. The Company is exploring ways and means of improving and expanding its Internet presence and will continue to do so. 11

LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements have been to fund (a) repayments on bank borrowings, (b) acquisitions, (c) capital expenditures, and (d) working capital needs resulting from increased sales and special inventory forward buy-in opportunities. Since sales have been strongest during the fourth quarter and special inventory forward buy-in opportunities are most prevalent just before the end of the year, the Company's working capital requirements have been generally higher from the end of the third quarter to the end of the first quarter of the following year. The Company has financed its business primarily through revolving credit facilities, private placement loans, and stock issuances. Net cash provided by operating activities for the three months ended March 25, 2000 of $8.9 million resulted primarily from net income of $11.4 million, adjusted for non-cash charges of $8.6 million, offset by an increase in operating items of working capital of $11.1 million. The increase in working capital was primarily due to a decrease in accounts payable and other accrued expenses of $25.5 million primarily due to payments made to vendors for year-end inventory buy-ins, a $9.3 million increase in inventory, a $3.4 million increase in other current assets, offset by a decrease in accounts receivable of $27.1 million. The Company anticipates future increases in working capital requirements as a result of its continued sales growth and special inventory forward buy-in opportunities. Net cash used in investing activities for the three months ended March 25, 2000 of $7.0 million resulted primarily from cash used for capital expenditures of $6.0 million and to make acquisitions of $0.5 million. The Company expects that it will invest more than $25.0 million during the year ending December 30, 2000, in capital projects to modernize and expand its facilities and infrastructure systems and integrate operations. Net cash used in financing activities for the three months ended March 25, 2000 of $11.6 million resulted primarily from repayments on the Company's revolving credit facility and other long-term debt, offset by proceeds from issuances of stock resulting from option conversions. Certain holders of minority interests in acquired entities or ventures have the right at certain times to require the Company to acquire their interest at either fair market value or a formula price based on earnings of the entity. The Company's cash and cash equivalents as of March 25, 2000 of $17.4 million consist of bank balances and money market funds. The Company has a $150.0 million revolving credit facility, which has a termination date of August 15, 2002. Borrowings under the credit facility were $43.9 million at March 25, 2000. The Company also has one uncommitted bank line totaling $15.0 million, none of which has been borrowed at March 25, 2000. Certain of the Company's subsidiaries have revolving credit facilities that total approximately $54.1 million at March 25, 2000, under which $41.6 million has been borrowed. 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 the GIV and Heiland acquisitions, as well as repaying and retiring a portion of four uncommitted bank lines and to pay down amounts owed under 12

its revolving credit facility. The $130.0 million notes come due in full 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 through 2010. The notes and bear interest at a rate of 6.66% per annum. Interest on both notes are payable semi-annually. The Company believes that its cash and cash equivalents, its anticipated cash flow from operations, its ability to access private and public debt and equity markets, and the availability of funds under its existing credit agreements will provide it with sufficient liquidity to meet its short and long-term capital needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes to the disclosures made in our report 10-K for the year ended December 25, 1999, on this matter. Disclosure Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information in this Form 10-Q contains information that is forward-looking, such as the Company's opportunities to increase sales through, among other things, acquisitions; its exposure to fluctuations in foreign currencies; its anticipated liquidity and capital requirements; competitive product and pricing pressures and the ability to gain or maintain share of sales in global markets as a result of actions by competitors; and the results of legal proceedings. The matters referred to in forward-looking statements could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation of health care practitioners, the impact of health care reform, opportunities for acquisitions and the Company's ability to effectively integrate acquired companies, the acceptance and quality of software products, acceptance and ability to manage operations in foreign markets, the ability to maintain favorable supplier arrangements and relationships, possible disruptions in the Company's computer systems or telephone systems, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates and currency values, economic and political conditions in international markets, including civil unrest, government changes and restrictions on the ability to transfer capital across borders, the impact of current or pending legislation, regulation and changes in accounting standards and taxation requirements, environmental laws in domestic and foreign jurisdictions, as well as certain other risks described in this Form 10-Q. Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere described in this Form 10-Q. 13

PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The manufacture or distribution of certain products by the Company involves a risk of product liability claims, and from time to time the Company is named as a defendant in products liability cases as a result of its distribution of pharmaceutical and other healthcare products. As of the end of the Company's first fiscal quarter of 2000 the Company was named a defendant in approximately sixty-five such cases. Of these product liability claims, forty-five involve claims made by healthcare workers who claim allergic reaction relating to exposure to latex gloves. In these cases, the Company acted as a distributor of both brand name and/or "Henry Schein" private brand latex gloves, which were manufactured by third parties. To date, discovery in these cases has generally been limited to product identification issues. The manufacturers in these cases have withheld indemnification of the Company pending product identification; however, the Company is taking steps to implead those manufacturers into each case in which the Company is a defendant. The Company is also a named defendant in nine lawsuits involving the sale of phentermine and fenfluramin. Plaintiffs in the case allege injuries from the combined use of the drugs known as "Phen/fen". The Company expects to obtain indemnification from the manufacturers of these products, although this is dependent upon the financial viability of the manufacturer and insurer. In addition, the Company is subject to other claims, suits and complaints, which arise in the course of the Company's business. In Texas District Court, Travis County, the Company, and one of its subsidiaries, are defendants in a matter entitled Shelly E. Stromboe & Jeanne N. Taylor, on Behalf of Themselves and All Other Similarly Situated vs. Henry Schein, Inc., Easy Dental Systems, Inc. and Dentisoft, Inc. Case No. 98-00886. This complaint alleges among other things, negligence, breach of contract, fraud, and violations of certain Texas Commercial Statutes involving the sale of certain practice management software products sold prior to 1998 under the Easy Dental name. In October 1999, the Court, on motion, certified both a Windows Sub-Class and a DOS Sub-Class to proceed as a class action pursuant to Tex. R.Civ. P.42. It is estimated that 5,000 Windows customers and 15,000 DOS customers could be covered by the judge's ruling. The Company has filed an appeal of the Court's determination, during which time a trial on the merits is stayed. The Company intends to vigorously defend itself against this claim, as well as all other claims, suits and complaints. The Company has various insurance policies, including product liability insurance covering risks and in amounts it considers adequate. In many cases the Company is provided by indemnification by the manufacturer of the product. There can be no assurance that the coverage maintained by the Company is sufficient to cover all future claims or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for the Company. The Company intends to vigorously defend all such claims, suits and complaints. In the opinion of the Company, all such pending matters are covered by insurance or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial statements of the Company if disposed of unfavorably. 14

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 27.1 Financial Data Schedule (b) Reports on Form 8-K. None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. HENRY SCHEIN, INC. (Registrant) By: /s/ Steven Paladino ------------------------------------ STEVEN PALADINO Executive Vice President and Chief Financial Officer and Director (principal financial officer and accounting officer) Dated: May 9, 2000 15

5 The schedule contains summary financial information extracted from the consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-30-2000 DEC-26-1999 MAR-25-2000 17,405 0 379,433 (21,062) 292,697 752,713 151,811 (64,518) 1,172,339 321,285 309,402 0 0 408 525,877 1,172,339 553,810 553,810 384,606 384,606 145,727 0 5,852 18,570 6,778 11,398 0 0 0 11,398 0.28 0.28