UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
FOR THE PERIOD ENDED September 28, 2002
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 November 08, 2002 there were 44,000,348 shares of the Registrant's Common
Stock outstanding.
HENRY SCHEIN, INC. AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of September 28, 2002 and December 29, 2001 .... 3
Statements of Income and Comprehensive Income for the three and
nine months ended September 28, 2002 and September 29, 2001 ... 4
Statements of Cash Flows for the nine months ended
September 28, 2002 and September 29, 2001 ..................... 5
Notes to Consolidated Financial Statements ....................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ......... 16
ITEM 4. Controls and Procedures ............................................ 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................. 18
ITEM 6. Exhibits and Reports on Form 8-K ................................... 20
Signature .......................................................... 20
Certifications ..................................................... 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 28, December 29,
2002 2001
------------ ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 149,299 $ 193,367
Marketable securities ................................................... 35,285 -
Accounts receivable, less reserves of $33,088 and $31,929, respectively.. 415,585 363,700
Inventories ............................................................. 314,499 291,231
Deferred income taxes ................................................... 29,168 25,751
Prepaid expenses and other .............................................. 63,123 52,922
----------- -----------
Total current assets ............................................... 1,006,959 926,971
Property and equipment, net of accumulated depreciation and amortization
of $101,060 and $90,823, respectively ................................... 137,163 117,980
Goodwill, net ................................................................ 294,439 279,981
Other intangibles, net of accumulated amortization
of $4,160 and $3,348, respectively ...................................... 8,919 8,023
Investments and other ........................................................ 69,652 52,473
----------- -----------
$ 1,517,132 $ 1,385,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 260,197 $ 263,190
Bank credit lines ....................................................... 6,081 4,025
Accruals:
Salaries and related expenses ...................................... 42,920 41,602
Merger and integration, and restructuring costs .................... 4,308 5,867
Acquisition earnout payments ....................................... - 26,800
Taxes and other expenses ........................................... 110,470 80,355
Current maturities of long-term debt .................................... 2,665 15,223
----------- -----------
Total current liabilities .......................................... 426,641 437,062
Long-term debt ............................................................... 242,140 242,169
Other liabilities ............................................................ 21,077 18,954
----------- -----------
Total liabilities .................................................. 689,858 698,185
----------- -----------
Minority interest ............................................................ 7,067 6,786
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000,
issued and outstanding: 0 and 0, respectively ...................... - -
Common stock, $.01 par value, authorized 120,000,000,
issued: 43,999,524 and 42,745,204, respectively .................... 440 427
Additional paid-in capital .............................................. 435,021 393,047
Retained earnings ....................................................... 399,426 312,402
Treasury stock, at cost, 62,479 shares .................................. (1,156) (1,156)
Accumulated comprehensive loss .......................................... (13,277) (23,922)
Deferred compensation ................................................... (247) (341)
----------- -----------
Total stockholders' equity ......................................... 820,207 680,457
----------- -----------
$ 1,517,132 $ 1,385,428
=========== ===========
See accompanying notes to consolidated financial statements.
3
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales ................................................ $ 759,073 $ 659,774 $ 2,077,598 $ 1,859,954
Cost of sales ............................................ 542,601 480,918 1,490,340 1,354,849
----------- ----------- ----------- -----------
Gross profit ........................................ 216,472 178,856 587,258 505,105
Operating expenses:
Selling, general and administrative ................. 152,187 136,981 440,786 400,375
----------- ----------- ----------- -----------
Operating income ............................... 64,285 41,875 146,472 104,730
Other income (expense):
Interest income ..................................... 2,536 2,266 7,456 6,684
Interest expense .................................... (4,787) (3,843) (13,982) (14,107)
Other - net ......................................... 877 87 1,017 384
----------- ----------- ----------- -----------
Income before taxes on income, minority interest
and equity in earnings of affiliates ...... 62,911 40,385 140,963 97,691
Taxes on income .......................................... 23,468 14,942 52,528 36,146
Minority interest in net income of subsidiaries .......... 337 322 1,838 1,647
Equity in earnings of affiliates ......................... 122 74 427 339
----------- ----------- ----------- -----------
Net income ............................................... $ 39,228 $ 25,195 $ 87,024 $ 60,237
=========== =========== =========== ===========
Comprehensive income:
Net income ............................................. $ 39,228 $ 25,195 $ 87,024 $ 60,237
Foreign currency translation adjustments ............ (2,150) 5,111 11,232 (2,127)
Other ............................................... (644) (159) (587) (250)
----------- ----------- ----------- -----------
Comprehensive income ..................................... $ 36,434 $ 30,147 $ 97,669 $ 57,860
=========== =========== =========== ===========
Net income per common share:
Basic ............................................... $ 0.90 $ 0.59 $ 2.01 $ 1.42
=========== =========== =========== ===========
Diluted ............................................. $ 0.87 $ 0.58 $ 1.94 $ 1.39
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic ............................................... 43,808 42,488 43,329 42,276
=========== =========== =========== ===========
Diluted ............................................. 45,000 43,517 44,779 43,188
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
-----------------------------
September 28, September 29,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income ................................................................. $ 87,024 $ 60,237
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................... 20,086 26,249
Provision for losses and allowances on accounts receivable ....... 1,159 4,921
Stock issued to ESOP trust ....................................... 1,340 2,224
Benefit for deferred income taxes ................................ (2,147) (3,943)
Undistributed earnings of affiliates ............................. (427) (339)
Minority interest in net income of subsidiaries .................. 1,838 1,647
Other ............................................................ (31) 5,465
Changes in operating assets and liabilities (net of purchase acquisitions):
Increase in accounts receivable ........................................ (49,003) (47,442)
(Increase) decrease in inventories ..................................... (18,136) 24,723
(Increase) decrease in other current assets ............................ (8,662) 14,701
Increase (decrease) in accounts payable and accruals ................... 32,609 (9,320)
----------- -----------
Net cash provided by operating activities ....................................... 65,650 79,123
----------- -----------
Cash flows from investing activities:
Capital expenditures ....................................................... (36,260) (30,010)
Business acquisitions, net of cash acquired ................................ (34,887) (336)
Purchase of marketable securities with maturities of
more than three months ................................................. (50,293) -
Other ...................................................................... (3,047) (2,587)
----------- -----------
Net cash used in investing activities ........................................... (124,487) (32,933)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................................... - 10,166
Principal payments on long-term debt ....................................... (14,388) (11,972)
Proceeds from issuance of stock upon exercise of stock
options by employees ................................................... 32,753 12,374
Proceeds from borrowings from banks ........................................ 2,659 6,193
Payments on borrowings from banks .......................................... (916) (12,017)
Other ...................................................................... (2,757) (396)
----------- -----------
Net cash provided by financing activities ....................................... 17,351 4,348
----------- -----------
Net (decrease) increase in cash and cash equivalents ............................ (41,486) 50,538
Effect of foreign exchange rate changes on cash ................................. (2,582) (1,046)
Cash and cash equivalents, beginning of period .................................. 193,367 58,362
----------- -----------
Cash and cash equivalents, end of period ........................................ $ 149,299 $ 107,854
=========== ===========
See accompanying notes to consolidated financial statements.
5
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except employee and per share data)
(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
accounting principles generally accepted in the United States for complete
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
supplementary data included in the Company's Annual Report on Form 10-K for the
year ended December 29, 2001. The Company follows the same accounting policies
in preparation of interim financial statements.
The results of operations and cash flows for the nine months ended September
28, 2002 are not necessarily indicative of the results to be expected for the
fiscal year ending December 28, 2002 or any other period. Certain amounts from
prior periods have been reclassified to conform to the current period's
presentation.
NOTE 2. Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"), effective for fiscal
years beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with FAS 142. Other
intangible assets continue to be amortized over their estimated useful lives.
The Company adopted the new standards beginning in the first quarter of
fiscal 2002. Effective with the adoption of FAS 142, goodwill, which is
substantially related to the healthcare distribution segment, is no longer
amortized but is instead subject to an annual impairment test. The Company has
reassessed the estimated useful lives of its intangible assets, which primarily
consist of non-compete agreements, and no changes have been deemed necessary.
The Company completed the transitional goodwill impairment test in connection
with the adoption of FAS 142 during the second quarter of fiscal 2002, and has
determined that there is no impairment as of the adoption date, December 30,
2001.
6
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except employee and per share data)
(unaudited)
Note 2. Goodwill and Intangible Assets--(Continued)
Other intangible assets as of September 28, 2002 and December 29, 2001 are
as follows:
September 28, 2002 December 29, 2001
---------------------- ----------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------- ------------ ------- ------------
Other intangible assets:
Non-compete agreements .. $11,713 $(3,593) $10,426 $(2,850)
Other ................... 1,366 (567) 945 (498)
------- ------- ------- -------
Total ...................... $13,079 $(4,160) $11,371 $(3,348)
======= ======= ======= =======
Amortization of other intangible assets for the nine months ended September
28, 2002 and September 29, 2001 was approximately $806 and $597, respectively.
The annual amortization expense expected for the years 2002 through 2006 is
$1,138, $1,012, $926, $613, and $342, respectively.
The changes in the carrying amount of goodwill for the nine months ended
September 28, 2002 are as follows:
Healthcare
Distribution Technology Total
------------ ---------- ----------
Balance as of December 29, 2001 ............... $ 279,666 $ 315 $ 279,981
Adjustments to goodwill:
Acquisition costs incurred during the nine
months ended September 28, 2002 ......... 7,768 20 7,788
Foreign currency translation .............. 6,912 - 6,912
Other ..................................... (242) - (242)
--------- -------- ---------
Balance as of September 28, 2002 .............. $ 294,104 $ 335 $ 294,439
========= ======== =========
The acquisition costs incurred during the nine months ended September 28,
2002 related to contingent earnout payments relating to acquisitions in prior
years, increased ownership interest in a consolidated subsidiary, and the
acquisition of a dental consumable supply business. The acquisition of the
dental consumable supply business was not considered material.
With the adoption of FAS 142, the Company ceased amortization of goodwill
as of December 30, 2001. The following table presents the results of the Company
for all periods presented on a comparable basis:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income ................................. $ 39,228 $ 25,195 $ 87,024 $ 60,237
Add back goodwill amortization, net of
tax provision ........................ - 1,824 - 5,472
------------- ------------- ------------- -------------
Adjusted net income ........................ $ 39,228 $ 27,019 $ 87,024 $ 65,709
============= ============= ============= =============
Diluted net income per share:
Net income .............................. $ 0.87 $ 0.58 $ 1.94 $ 1.39
Add back goodwill amortization, net of
tax provision ........................ - 0.04 - 0.13
------------- ------------- ------------- -------------
Adjusted diluted net income per share ...... $ 0.87 $ 0.62 $ 1.94 $ 1.52
============= ============= ============= =============
7
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except employee and per share data)
(unaudited)
Note 3. Business Acquisitions
In connection with prior years' acquisitions, the Company incurred certain
merger and integration costs. The following table shows amounts paid against the
merger and integration accrual during the nine months ended September 28, 2002:
Balance at Balance at
December 29, September 28,
2001 Payments 2002
------------ -------- -------------
Severance and other direct costs .. $ 365 $ (161) $ 204
Direct transaction and other
integration costs ............... 2,183 (521) 1,662
------- ------- -------
$ 2,548 $ (682) $ 1,866
======= ======= =======
For the nine months ended September 28, 2002, one employee received
severance and was still owed severance at September 28, 2002.
Note 4. Plan of Restructuring
On August 1, 2000, the Company announced a comprehensive restructuring plan
designed to improve customer service and increase profitability by maximizing
the efficiency of the Company's infrastructure. In addition to closing or
downsizing certain facilities, this world-wide initiative included the
elimination of approximately 300 positions, including open positions, or about
5% of the total workforce, throughout all levels within the organization. The
restructuring plan was substantially completed at December 30, 2000.
The following table shows amounts paid against the restructuring accrual
during the nine months ended September 28, 2002:
Balance at Balance at
December 29, September 28,
2001 Payments 2002
------------ -------- -------------
Severance costs (1) ........ $ 633 $ (392) $ 241
Facility closing costs (2).. 2,645 (484) 2,161
Other ...................... 41 (1) 40
------- ------- -------
$ 3,319 $ (877) $ 2,442
======= ======= =======
- ----------
(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).
For the nine months ended September 28, 2002, six employees received
severance and one was owed severance at September 28, 2002.
8
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except employee and per share data)
(unaudited)
Note 5. 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 and international business groups, distributes
healthcare products (primarily consumable) and services to office-based
healthcare practitioners and professionals in the combined North American and
international markets. Products, which are similar for each business group, are
maintained and distributed from strategically located distribution centers. The
technology segment consists primarily of the Company's practice management
software business and certain other value-added products and services that are
distributed primarily to healthcare professionals in the North American market.
The 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 Nine Months Ended
----------------------------- ------------------------------
September 28, September 29, September 28, September 29,
2002 2001 (1) 2002 2001 (1)
------------- ------------- ------------- -------------
Net Sales:
Healthcare distribution (2):
Dental (3) ....................... $ 300,714 $ 279,577 $ 902,282 $ 828,909
Medical (4) ...................... 337,529 273,434 811,634 697,869
International (5) ................ 103,386 92,811 316,003 291,284
---------- ---------- ---------- ----------
Total healthcare distribution .. 741,629 645,822 2,029,919 1,818,062
Technology (6) ..................... 17,444 13,952 47,679 41,892
---------- ---------- ---------- ----------
$ 759,073 $ 659,774 $2,077,598 $1,859,954
========== ========== ========== ==========
- ----------
(1) Reclassified to conform to current period presentation.
(2) Includes consumable products, small equipment, laboratory products, large
dental equipment, branded and generic pharmaceuticals, surgical products,
diagnostic tests, infection control and vitamins.
(3) Consists of products sold in the U.S. and Canadian Dental markets.
(4) Consists of products sold in the U.S. Medical and Veterinary markets.
(5) Consists of products primarily sold in the European Dental and Medical
(including Veterinary) markets.
(6) Consists of practice management software and other value-added products and
services that are distributed primarily to healthcare professionals in the
U.S. and Canadian markets.
9
HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except employee and per share data)
(unaudited)
Note 5. Segment Data -- (Continued)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2002 2001 (1) 2002 2001 (1)
------------- ------------- ------------- -------------
Operating income:
Healthcare distribution..... $ 57,487 $ 36,796 $ 127,580 $ 88,875
Technology ................. 6,798 5,079 18,892 15,855
-------- -------- ----------- --------
Total ........................ $ 64,285 $ 41,875 $ 146,472 $104,730
======== ======== =========== ========
September 28, September 29,
2002 2001 (1)
------------- -------------
Total assets:
Healthcare distribution ................................... $ 1,486,899 $ 1,247,023
Technology ................................................ 114,044 97,363
----------- ------------
Total assets for reportable segments .................... 1,600,943 1,344,386
Receivables due from healthcare distribution segment .... (82,038) (58,478)
Receivables due from technology segment ................. (1,773) (4,472)
----------- ------------
Consolidated total assets ................................... $ 1,517,132 $ 1,281,436
=========== ============
- ----------
(1) Reclassified to conform to current period presentation.
Note 6. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings
per share follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Basic .................................... 43,808 42,488 43,329 42,276
Effect of assumed conversion of employee
stock options ....................... 1,192 1,029 1,450 912
------ ------ ------ ------
Diluted .................................. 45,000 43,517 44,779 43,188
====== ====== ====== ======
Weighted average options to purchase approximately 17 and 1,142 shares of
common stock at prices ranging from $48.25 to $50.39 and $35.38 to $46.00 per
share, which were outstanding during the three months ended September 28, 2002
and September 29, 2001, respectively, were excluded from the computation of
diluted earnings per share. Weighted average options to purchase approximately
23 and 1,528 shares of common stock at prices ranging from $46.00 to $50.39 and
$35.13 to $46.00 per share, which were outstanding during the nine months ended
September 28, 2002 and September 29, 2001, respectively, were excluded from the
computation of diluted earnings per share. In each of the respective periods,
the options' exercise prices exceeded the fair market value of the Company's
common stock.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
29, 2001
Net sales increased $99.3 million, or 15.1%, to $759.1 million for the
three months ended September 28, 2002 from $659.8 million for the three months
ended September 29, 2001. Of the $99.3 million increase, approximately $95.8
million, or 96.5%, represented a 14.8% increase in the Company's healthcare
distribution business. As part of this increase approximately $64.1 million
represented a 23.4% increase in the Company's medical business, $21.1 million
represented a 7.6% increase in its dental business, and $10.6 million
represented an 11.4% increase in its international business. In the medical
market, approximately $43.7 million of the increase in net sales was due to
earlier availability and shipments of influenza vaccine, with the balance
primarily due to increased sales to core physicians' office and alternate care
markets. In the dental market, the increase in net sales was primarily due to
increased account penetration. Net sales of dental consumable merchandise
increased by 5.5%, while net sales of dental equipment increased by 16.9%. In
the international market, the increase in net sales was primarily due to
favorable exchange rates to the U.S. dollar, increased penetration in France,
the United Kingdom, Australia, and Spain, and an acquisition. Had net sales for
the international market been translated at the same rates as 2001,
international net sales would have increased by 2.1%. The remaining increase in
third quarter 2002 net sales was due to the technology business, which increased
$3.5 million, or 25.0%, to $17.4 million for the three months ended September
28, 2002, from $13.9 million for the three months ended September 29, 2001. The
increase in the technology business net sales was primarily due to increased
sales of practice management software products, electronic services and other
value-added services. As part of a new marketing initiative, MarketOne, certain
technology and equipment products were sold directly to end-user customers
beginning with the third quarter of 2002, rather than through resellers, which
resulted in a higher growth rate for the technology business. Without this
change, the technology business net sales would have increased by 19.6%.
Gross profit increased by $37.6 million, or 21.0%, to $216.5 million for
the three months ended September 28, 2002 from $178.9 million for the three
months ended September 29, 2001. Gross profit margin increased 1.4% to 28.5%
from 27.1% for the same period last year. Healthcare distribution gross profit
increased $34.2 million, or 20.3%, to $202.9 million for the three months ended
September 28, 2002 from $168.7 million for the three months ended September 29,
2001, primarily due to sales volume. Healthcare distribution gross profit margin
increased by 1.3% to 27.4% for the three months ended September 28, 2002 from
26.1% for the three months ended September 29, 2001, primarily due to changes in
sales mix and purchasing efficiencies. Technology gross profit increased by $3.4
million or 33.3% to $13.6 million for the three months ended September 28, 2002
from $10.2 million for the three months ended September 29, 2001 primarily due
to sales volume. Technology gross profit margins increased by 4.8%, of which
1.0% was attributable to the MarketOne initiative referred to above, to 78.2%
for three months ended September 28, 2002 from 73.4% for the three months ended
September 29, 2001, primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $15.2 million, or
11.1%, to $152.2 million for the three months ended September 28, 2002 from
$137.0 million for the three months ended September 29, 2001. Selling and
shipping expenses increased by $9.7 million, or 11.6%, to $93.6 million for the
three months ended September 28, 2002 from $83.9 million for the three months
ended September 29, 2001, primarily due to increased sales volume and leveraging
of the Company's expense infrastructure. As a percentage of net sales, selling
and shipping expenses decreased by 0.4% to 12.3% for the three months ended
September
11
28, 2002 from 12.7% for the three months ended September 29, 2001. General and
administrative expenses increased $5.5 million, or 10.4%, to $58.6 million for
the three months ended September 28, 2002 from $53.1 million for the three
months ended September 29, 2001, primarily due to increased sales volume. As a
percentage of net sales, general and administrative expenses decreased by 0.3%
to 7.7% for the three months ended September 28, 2002 from 8.0% for the three
months ended September 29, 2001, primarily due to the elimination of goodwill
amortization expense in accordance with FAS 142.
Other income (expense) - net decreased by $0.1 million, to $(1.4) million
for the three months ended September 28, 2002, compared to $(1.5) million for
the three months ended September 29, 2001, due primarily to the favorable
settlement of a disputed real estate transaction and higher interest income,
offset by higher interest expense and foreign currency losses.
Equity in earnings of affiliates was substantially unchanged from the prior
period.
For the three months ended September 28, 2002, the Company's effective tax
rate was 37.3%. For the three months ended September 29, 2001, the Company's
effective tax rate was 37.0%. The difference between the Company's effective tax
rates and the Federal statutory rate relates primarily to state income taxes.
NINE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
2001
Net sales increased $217.6 million, or 11.7%, to $2,077.6 million for the
nine months ended September 28, 2002 from $1,860.0 million for the nine months
ended September 29, 2001. Of the $217.6 million increase, approximately $211.8
million, or 97.3%, represented an 11.6% increase in the Company's healthcare
distribution business. As part of this increase approximately $113.7 million
represented a 16.3% increase in the Company's medical business, $73.4 million
represented an 8.9% increase in its dental business, and $24.7 million
represented an 8.5% increase in its international business. In the medical
market, approximately $43.7 million of the increase in net sales was due to
earlier availability and shipments of influenza vaccine, with the balance
primarily due to increased sales to core physicians' office and alternate care
markets. In the dental market, the increase in net sales was primarily due to
increased account penetration. Net sales of dental consumable merchandise
increased by 7.8%, while net sales of dental equipment increased by 13.7%. In
the international market, the increase in net sales was primarily due to
penetration in the United Kingdom, France, Germany, and Australia, favorable
exchange rates to the U.S. dollar, and an acquisition. Had net sales for the
international market been translated at the same rates as 2001, international
net sales would have increased by 5.3%. The remaining increase in 2002 net sales
was due to the technology business, which increased $5.8 million, or 13.8%, to
$47.7 million for the nine months ended September 28, 2002, from $41.9 million
for the nine months ended September 29, 2001. The increase in the technology
business net sales was primarily due to increased sales of practice management
software products, electronic services and other value-added services. As part
of a new marketing initiative, MarketOne, certain technology and equipment
products were sold directly to end-user customers beginning with the third
quarter of 2002, rather than through resellers, which resulted in a higher
growth rate for the technology business. Without this change, the technology
business net sales would have increased by 12.0%.
Gross profit increased by $82.2 million, or 16.3%, to $587.3 million for
the nine months ended September 28, 2002 from $505.1 million for the nine months
ended September 29, 2001. Gross profit margin increased 1.1% to 28.3% from 27.2%
for the same period last year. Healthcare distribution gross profit increased
$76.4 million, or 16.1%, to $550.9 million for the nine months ended September
12
28, 2002 from $474.5 million for the nine months ended September 29, 2001,
primarily due to sales volume. Healthcare distribution gross profit margin
increased by 1.0% to 27.1% for the nine months ended September 28, 2002 from
26.1% for the nine months ended September 29, 2001, primarily due to changes in
sales mix and purchasing efficiencies. Technology gross profit increased by $5.8
million or 19.0% to $36.4 million for the nine months ended September 28, 2002
from $30.6 million for the nine months ended September 29, 2001 primarily due to
sales volume. Technology gross profit margins increased by 3.3%, of which 0.3%
was attributable to the MarketOne initiative referred to above, to 76.3% for the
nine months ended September 28, 2002 from 73.0% for the nine months ended
September 29, 2001, primarily due to changes in sales mix.
Selling, general and administrative expenses increased by $40.4 million, or
10.1%, to $440.8 million for the nine months ended September 28, 2002 from
$400.4 million for the nine months ended September 29, 2001. Selling and
shipping expenses increased by $29.1 million, or 12.0%, to $272.3 million for
the nine months ended September 28, 2002 from $243.2 million for the nine months
ended September 29, 2001, primarily due to increased sales volume. As a
percentage of net sales, selling and shipping expenses remained constant at
13.1% for the nine months ended September 28, 2002 compared to the nine months
ended September 29, 2001. General and administrative expenses increased $11.3
million, or 7.2%, to $168.5 million for the nine months ended September 28, 2002
from $157.2 million for the nine months ended September 29, 2001, primarily due
to increased sales volume and leveraging of the Company's expense
infrastructure. As a percentage of net sales, general and administrative
expenses decreased 0.4% to 8.1% for the nine months ended September 28, 2002
from 8.5% for the nine months ended September 29, 2001, primarily due to the
elimination of goodwill amortization expense in accordance with FAS 142.
Other income (expense) - net decreased by $1.5 million, to $(5.5) million
for the nine months ended September 28, 2002, compared to $(7.0) million for the
nine months ended September 29, 2001, due primarily to the favorable settlement
of a disputed real estate transaction and higher interest income.
Equity in earnings of affiliates increased $0.1 million to $0.4 million for
the nine months ended September 28, 2002 from $0.3 million in the comparable
prior year period.
For the nine months ended September 28, 2002, the Company's effective tax
rate was 37.3%. For the nine months ended September 29, 2001, the Company's
effective tax rate was 37.0%. The difference between the Company's effective tax
rates and the Federal statutory rate relates primarily to state income taxes.
SEASONALITY
The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year-end promotions
and purchasing patterns of office-based healthcare practitioners and are
generally lower in the first quarter due primarily to the increased purchases in
the prior quarter. Quarterly results also may be materially affected by a
variety of other factors, including the timing of acquisitions and related
costs, timing of purchases and/or sales, special promotional campaigns, seasonal
products, fluctuations in exchange rates associated with international
operations and adverse weather conditions.
E-COMMERCE
Traditional healthcare supply and distribution relationships are being
challenged by electronic on-line commerce solutions. The Company's distribution
13
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.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, and special inventory forward
buy-in opportunities, (b) capital expenditures, and (c) acquisitions. Since
sales tend to be strongest during the fourth quarter and special inventory
forward buy-in opportunities are most prevalent just before the end of the year,
the Company's working capital requirements have been generally higher from the
end of the third quarter to the end of the first quarter of the following year.
The Company has financed its business primarily through operations, its
revolving credit facilities, private placement loans and stock issuances.
Net cash provided by operating activities for the nine months ended
September 28, 2002 of $65.7 million resulted primarily from net income of $87.0
million and non-cash charges of approximately $21.9 million, offset by a net
increase in working capital of approximately $43.2 million. The increase in net
working capital was primarily due to an increase in accounts receivable of $49.0
million, an $18.1 million increase in inventory, and an $8.7 million increase in
other current assets, partially offset by an increase in accounts payable and
accruals of $32.6 million. The Company's annualized accounts receivable days
sales outstanding ratio improved to 49.4 days for the nine months ended
September 28, 2002 from 55.7 days for the nine months ended September 29, 2001.
The Company's annualized inventory turns were 6.6 turns for the nine months
ended September 28, 2002 compared to 6.8 turns for the nine months ended
September 29, 2001. 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 nine months ended September
28, 2002 of $124.5 million resulted primarily from cash used for the purchases
of United States government and agency bonds rated AAA by Moody's (or an
equivalent rating) and commercial paper rated P-1 by Moody's (or an equivalent
rating) with maturities of more than three months of $50.3 million, capital
expenditures of $36.3 million, of which approximately $11.6 million was for the
purchase of a building used for the Company's corporate headquarters, and
business acquisition related payments of $34.9 million, of which $27.4 million
represented contingent earnout payments associated with acquisitions made in
prior years. The Company expects that it will invest more than $50.0 million
during the year ending December 28, 2002 in capital projects to modernize and
expand facilities, on computer infrastructure systems and to integrate
operations.
Net cash provided by financing activities for the nine months ended
14
September 28, 2002 of $17.4 million resulted primarily from proceeds from the
issuance of stock upon exercise of stock options of $32.8 million, offset
primarily by debt repayments of $15.3 million.
Certain holders of minority interests in acquired entities or ventures have
the right at certain times to require the Company to acquire their interest at
either fair market value or a formula price based on earnings of the entity.
The Company's cash and cash equivalents as of September 28, 2002 of $149.3
million consist of bank balances and investments in money market funds. These
investments have staggered maturity dates, none of which exceed three months,
and have a high degree of liquidity since the securities are actively traded in
public markets.
On May 2, 2002, the Company renewed and increased its revolving credit
facility to $200.0 million from $150.0 million. The new facility is a four year
committed line. As of September 28, 2002, none of the credit facility was
utilized.
The Company also has one uncommitted bank line of $15.0 million, none of
which had been borrowed at September 28, 2002. Certain of the Company's
subsidiaries have revolving credit facilities that total approximately $42.4
million at September 28, 2002, under which $6.1 million had 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 $130.0 million notes come due on June 30,
2009 and bear interest at a rate of 6.94% per annum. Principal payments totaling
$20.0 million are due annually starting September 25, 2006 on the $100.0 million
notes and bear interest at a rate of 6.66% per annum. Interest on both notes is
payable semi-annually.
The Company believes that its cash and cash equivalents of $149.3 million
and its investment in short-term marketable securities of $35.3 million as of
September 28, 2002, its ability to access public and private debt and equity
markets, and the availability of funds under its existing credit agreements will
provide it with sufficient liquidity to meet its currently foreseeable
short-term and long-term capital needs.
15
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 29, 2001, 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.
16
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days of the filing date of this quarterly report on Form 10-Q (the
"Evaluation Date")), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this quarterly report on Form 10-Q was
being prepared.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions. As a result, no corrective
actions were taken.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's business involves a risk of product liability claims and
other claims in the ordinary course of business, and from time to time the
Company is named as a defendant in cases as a result of its distribution of
pharmaceutical and other healthcare products. As of September 28, 2002, the
Company was named a defendant in approximately 68 product liability cases. Of
these claims, 49 involve claims made by healthcare workers who claim allergic
reaction relating to exposure to latex gloves. In each of these cases, the
Company acted as a distributor of both brand name and "Henry Schein" private
brand latex gloves, which were manufactured by third parties. To date, discovery
in these cases has generally been limited to product identification issues. The
manufacturers in these cases have withheld indemnification of the Company
pending product identification; however, the Company is taking steps to implead
those manufacturers into each case in which the Company is a defendant. The
Company is also a named defendant in nine lawsuits involving the sale of
phentermine and fenfluramin. Plaintiffs in the cases allege injuries from the
combined use of the drugs known as "Phen/fen." The Company expects to obtain
indemnification from the manufacturers of these products, although this is
dependent upon, among other things, the financial viability of the manufacturer
and their insurers.
On January 27, 1998, in District Court in Travis County, Texas, the Company
and one of its subsidiaries were named as defendants in a matter entitled
"Shelly E. Stromboe and Jeanne Taylor, on Behalf of Themselves and all others
Similarly Situated vs. Henry Schein, Inc., Easy Dental Systems, Inc. and
Dentisoft, Inc., Case No. 98-00886. The Petition alleges, among other things,
negligence, breach of contract, fraud, and violations of certain Texas
commercial statutes involving the sale of certain practice management software
products sold prior to 1998 under the Easy Dental(R) name. In October 1999, the
trial court, on motion, certified both a Windows(R) sub-class and a DOS
sub-class to proceed as a class action pursuant to Tex. R. Civ. P. 42. It is
estimated that 5,000 Windows(R) customers and 10,000 DOS customers were covered
by the class action that was certified by the trial court. In November of 1999,
the Company filed an interlocutory appeal of the trial court's determination to
the Texas Court of Appeals on the issue of whether this case was properly
certified as a class action. On September 14, 2000, the Court of Appeals
affirmed the trial court's certification order. On January 5, 2001, the Company
filed a Petition for Review in the Texas Supreme Court asking the Court to find
that it had "conflicts jurisdiction" to permit review of the trial court's
certification order. The Texas Supreme Court heard oral argument on February 6,
2002. On October 31, 2002, the Texas Supreme Court issued an opinion in the case
holding that it had conflicts jurisdiction to review the decision of the Court
of Appeals and finding that the trial court's certification of the case as a
class action was improper. The Supreme Court further held that the judgment of
the court of appeals which affirmed the class certification order must be
reversed in its entirety. Upon reversal of the class certification order, the
Supreme Court remanded the case to the trial court for further proceedings
consistent with its opinion. Because this matter has not yet come before the
trial court for consideration consistent with the Texas Supreme Court's opinion
reversing the trial court's certification order, it is not possible to determine
what the trial court will do if the plaintiffs file another motion for class
certification. Further, because of the decertification of the class by the Texas
Supreme Court, because it is not possible to determine whether the trial court
will certify a different class upon motion, if any, and other factors, it is not
possible to determine the possible range of damages or other relief sought by
the plaintiffs in the trial court.
18
In February 2002, the Company was served with a summons and complaint in an
action commenced in the Superior Court of New Jersey, Law Division, Morris
County, entitled West Morris Pediatrics, P.A. vs. Henry Schein, Inc., doing
business as Caligor, no. MRSL-421-02. The complaint by West Morris Pediatrics
purports to be on behalf of a nationwide class, but there has been no court
determination that the case may proceed as a class action. Plaintiff seeks to
represent a class of all physicians, hospitals and other healthcare providers
throughout New Jersey and across the United States. This complaint, as amended
in August 2002, alleges, among other things, breach of oral contract, breach of
implied covenant of good faith and fair dealing, violation of the New Jersey
Consumer Fraud Act, unjust enrichment, conversion, and promissory estoppel
relating to sales of a vaccine product in the year 2001. The Company filed an
answer in October 2002. Because damages have not been specified by the
plaintiffs, it is not possible to determine the range of damages or other relief
sought by the plaintiffs. The Company intends to vigorously defend itself
against this claim, as well as all other claims, suits and complaints.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many cases in
which the Company has been sued in connection with products manufactured by
others, the Company is provided indemnification by the manufacturer. There can
be no assurance that the coverage maintained by the Company is sufficient or
will be available in adequate amounts or at a reasonable cost, or that
indemnification agreements will provide adequate protection for the Company. In
the opinion of the Company, all pending matters are covered by insurance or will
not otherwise seriously harm the Company's financial condition.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.2 Certificate of the Company's Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
On August 13, 2002, the Company filed an 8-K under Item 9 announcing that
its Chief Executive Officer, Stanley M. Bergman, and principal financial
officer, Steven Paladino, submitted their statements under oath in response
to the order of the Securities and Exchange Commission pursuant to Section
21 (a) (1) of the Securities Exchange Act of 1934 (SEC File No. 4-460).
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,
Chief Financial Officer and Director
(principal financial officer and accounting officer)
Dated: November 12, 2002
20
CERTIFICATIONS
I, Stanley M. Bergman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Henry Schein, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/s/ Stanley M. Bergman
-------------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and
President
21
CERTIFICATIONS
I, Steven Paladino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Henry Schein, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/s/ Steven Paladino
-------------------------------------------
Steven Paladino
Executive Vice President and
Chief Financial Officer
22