| SCHEIN HENRY INC ITEM 1A Risk Factors The healthcare products distribution industry is highly competitive, and we may not be able to compete successfully |
| We compete with numerous companies, including several major manufacturers and distributors |
| Some of our competitors have greater financial and other resources than we do, which could allow them to compete more successfully |
| Most of our products are available from several sources and our customers tend to have relationships with several distributors |
| Competitors could obtain exclusive rights to market particular products, which we would then be unable to market |
| Manufacturers could also increase their efforts to sell directly to end-users and bypass distributors like us |
| Industry consolidation among healthcare products distributors, the unavailability of products, whether due to our inability to gain access to products or interruptions in supply from manufacturers, or the emergence of new competitors could also increase competition |
| In the future, we may be unable to compete successfully and competitive pressures may reduce our revenues |
| The healthcare industry is experiencing changes that could adversely affect our business |
| The healthcare industry is highly regulated and subject to changing political, economic and regulatory influences |
| In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs, including the reduction of spending budgets by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance plans; pressures relating to potential healthcare reform; trends toward managed care; consolidation of healthcare distribution companies; collective purchasing arrangements among office-based healthcare practitioners; and changes in reimbursements to customers |
| If we are unable to react effectively to these and other changes in the healthcare industry, our operating results could be adversely affected |
| In addition, the enactment of any significant healthcare reforms could have a material adverse effect on our business |
| We must comply with government regulations governing the distribution of pharmaceuticals and medical devices, and additional regulations could negatively affect our business |
| Our business is subject to requirements under various local, state, federal and international governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices |
| Among the federal laws with which we must comply are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987 and the Safe Medical Devices Act of 1990, as amended |
| Such laws: • regulate the storage and distribution, labeling, handling, record keeping, manufacturing and advertising of drugs and medical devices; • subject us to inspection by the Federal Food and Drug Administration and the Drug Enforcement Administration; • regulate the transportation of certain of our products that are considered hazardous materials; • require registration with the Federal Food and Drug Administration and the Drug Enforcement Administration; • require us to coordinate returns of products that have been recalled and subject us to inspection of our recall procedures; and • impose reporting requirements if a pharmaceutical or medical device causes serious illness, injury or death |
| 14 _________________________________________________________________ [68]Table of Contents Applicable federal and state laws and regulations may also require us to meet various standards relating to, among other things, licensure or registration, sales and marketing practices, product supply tracking to the manufacturer of the product, personnel, privacy of health or other personal information, and the importation and exportation of products |
| Our business is also subject to requirements of foreign governmental laws and regulations affecting our operations abroad |
| The failure to comply with any of these regulations, or new interpretations of existing laws and regulations, or the imposition of any additional laws and regulations could negatively affect our business |
| There can be no assurance that current or future United States or foreign government regulations will not adversely affect our business |
| The costs to us associated with complying with the various applicable federal and state statutes and regulations, as they now exist and as they may be modified, could be material |
| Allegations by a state or the federal government that we have not complied with these laws could have a material adverse impact on our businesses |
| If it is determined that we have not complied with these laws, or if we enter into settlement agreements to resolve allegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses or our ability to participate in federal and state healthcare programs |
| Any of the foregoing could have a material adverse impact on our businesses |
| We believe that the healthcare services industry will continue to be subject to extensive regulation at the federal, state, and local levels and that we have adequate compliance programs and controls to ensure compliance with the laws and regulations |
| If we fail to comply with laws and regulations in respect of healthcare fraud, we could suffer penalties or be required to make significant changes to our operations |
| We are subject to extensive and frequently changing federal and state laws and regulations relating to healthcare fraud |
| The federal government continues to strengthen its position and scrutiny over practices involving healthcare fraud affecting government healthcare programs |
| Our relationships with pharmaceutical manufacturers and healthcare providers subject our business to laws and regulations on fraud and abuse which, among other things, (i) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by government-sponsored healthcare programs and (ii) impose a number of restrictions upon referring physicians and providers of designated health services under government healthcare programs |
| While we believe that we are substantially compliant with all applicable laws, many of the regulations applicable to us are vague or indefinite and have not been interpreted by the courts |
| They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations |
| If we fail to comply with applicable laws and regulations, we could suffer civil and criminal penalties, including the loss of licenses or our ability to participate in federal and state healthcare programs |
| Our international operations are subject to inherent risks that could adversely affect our operating results |
| International operations are subject to risks that may materially adversely affect our business, results of operations and financial condition |
| The risks that our international operations are subject to include: • difficulties and costs relating to staffing and managing foreign operations; • difficulties in establishing channels of distribution; • fluctuations in the value of foreign currencies; • longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions; • repatriation of cash from our foreign operations to the United States; • regulatory requirements; 15 _________________________________________________________________ [69]Table of Contents • unexpected difficulties in importing or exporting our products; • imposition of import/export duties, quotas, sanctions or penalties; and • unexpected regulatory, economic and political changes in foreign markets |
| As a result of our acquisition of the Demedis Group and other foreign companies, our foreign operations are significantly larger and, therefore, our exposure to the risks inherent in international operations has become greater |
| We experience fluctuations in quarterly earnings |
| As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline |
| Our business is subject to seasonal and other quarterly fluctuations |
| Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based healthcare practitioners and year-end promotions |
| Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters |
| Quarterly results may also be adversely affected by a variety of other factors, including: • costs of developing new applications and services; • costs related to acquisitions and/or integrations of technologies or businesses; • timing and amount of sales and marketing expenditures; • loss of sales representatives; • general economic conditions, as well as those specific to the healthcare industry and related industries; • timing of the release of functions of our technology-related products and services; • establishing or maintaining business relationships; • consummating the sale of our Hospital Supply Business; • changes in accounting principles; and • product availability or recalls by manufacturers |
| Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate |
| If our operating results do not meet market expectations, our stock price may decline |
| Because substantially all of the products that we distribute are not manufactured by us, we are dependent upon third parties for the manufacture and supply of substantially all of our products |
| We obtain substantially all of our products from third-party suppliers |
| Generally, we do not have long-term contracts with our suppliers committing them to supply products to us |
| Therefore, suppliers may not provide the products we need in the quantities we request |
| Because we do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control |
| In the event that any of our third-party suppliers were to become unable or unwilling to continue to provide the products in required volumes, we would need to identify and obtain acceptable replacement sources on a timely basis |
| There is no guarantee that we will be able to obtain such alternative sources of supply on a timely basis, if at all |
| An extended interruption in the supply of our products, including the supply of our influenza vaccine and any other high sales volume product, would have an 16 _________________________________________________________________ [70]Table of Contents adverse effect on our results of operations, which most likely would adversely affect the value of our common stock |
| Our expansion through acquisitions and joint ventures involves risks |
| We have expanded our domestic and international markets in part through acquisitions and joint ventures, and we expect to continue to make acquisitions and enter into joint ventures in the future |
| Such transactions involve numerous risks, including possible adverse effects on our operating results or the market price of our common stock |
| Some of our acquisitions and future acquisitions may also give rise to an obligation by us to make contingent payments or to satisfy certain repurchase obligations, which payments could have an adverse effect on our results of operations |
| In addition, integrating acquired businesses and joint ventures: • may result in a loss of customers or product lines of the acquired businesses or joint ventures; • requires significant management attention; and • may place significant demands on our operations, information systems and financial resources |
| There can be no assurance that our future acquisitions or joint ventures will be successful |
| Our ability to continue to successfully effect acquisitions and joint ventures will depend upon the following: • the availability of suitable acquisition or joint venture candidates at acceptable prices; • our ability to consummate such transactions, which could potentially be prohibited due to US or foreign antitrust regulations; and • the availability of financing on acceptable terms, in the case of non-stock transactions |
| We face inherent risk of exposure to product liability and other claims in the event that the use of the products we sell results in injury |
| Our business involves a risk of product liability and other claims and from time to time we are named as a defendant in cases as a result of our distribution of pharmaceutical and other healthcare products |
| Additionally, we own a majority interest in a company that manufactures dental implants and we are subject to the potential risk of product liability or other claims relating to the manufacture of products by that entity |
| One of the potential risks we face in the distribution of our products is liability resulting from counterfeit products infiltrating the supply chain |
| In addition, some of the products that we transport and sell are considered hazardous materials |
| The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability |
| We have insurance policies, including product liability insurance, covering risks and in amounts that we consider adequate |
| Additionally, in many cases we are covered by indemnification from the manufacturer of the product |
| However, we cannot provide assurance that the coverage maintained by us is sufficient to cover future claims, that it will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for us |
| A successful claim brought against us in excess of available insurance or indemnification, or any claim that results in significant adverse publicity against us, could harm our business |
| Our technology segment depends upon continued product development, technical support and successful marketing |
| Competition among companies supplying practice-management software is intense and increasing |
| Our future sales of practice-management software will depend on, among other factors: • the effectiveness of our sales and marketing programs; • our ability to enhance our products; and 17 _________________________________________________________________ [71]Table of Contents • our ability to provide ongoing technical support |
| We cannot be sure that we will be successful in introducing and marketing new software or software enhancements, or that such software will be released on time or accepted by the market |
| Our software products, like software products generally, may contain undetected errors or bugs when introduced or as new versions are released |
| Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software |
| We do not have any patents on our software, and rely upon copyright, trademark and trade secret laws, as well as contractual and common law protections |
| We cannot assure you that such legal protections will be available or enforceable to protect our software products |
| Our revenues depend on our relationships with capable sales personnel as well as key customers, vendors and manufacturers of the products that we distribute |
| Our future operating results depend on our ability to maintain satisfactory relationships with qualified sales personnel as well as key customers, vendors and manufacturers |
| If we fail to maintain our existing relationships with such persons or fail to acquire relationships with such key persons in the future, our business may suffer |
| Our future success is substantially dependent upon our senior management |
| Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Stanley M Bergman, Chairman and Chief Executive Officer, among others |
| We have an employment agreement with Mr |
| We do not currently have “key man” life insurance policies on any of our employees |
| Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel |
| Increases in the cost of shipping or service trouble with our third-party shippers could harm our business |
| Shipping is a significant expense in the operation of our business |
| We ship almost all of our US orders through United Parcel Service, Inc |
| Accordingly, any significant increase in shipping rates could have an adverse effect on our operating results |
| Similarly, strikes or other service interruptions by those shippers could cause our operating expenses to rise and adversely affect our ability to deliver products on a timely basis |
| We may not be able to respond to technological change effectively |
| Traditional healthcare supply and distribution relationships are being challenged by electronic online commerce solutions |
| Our distribution business is characterized by rapid technological developments and intense competition |
| The advancement of online commerce will require us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address changing demands of consumers and our clients on a timely basis, particularly in response to competitive offerings |
| Our inability to anticipate and effectively respond to changes on a timely basis could have an adverse effect on our business |
| We are exposed to the risk of an increase in interest rates |
| In 2003, we entered into interest rate swap agreements to exchange our fixed-rate interest rates for variable interest rates payable on our dlra230dtta0 million senior notes |
| Our fixed interest rates on the senior notes were 6dtta94prca and 6dtta66prca for the dlra130dtta0 million and dlra100dtta0 million senior notes, respectively |
| The variable rate is comprised of LIBOR plus the spreads and resets on the interest due dates for the senior notes |
| As a result 18 _________________________________________________________________ [72]Table of Contents of these interest rate swap agreements, as well as our existing variable rate credit lines, and loan agreements, we are exposed to risk from fluctuations in interest rates |
| Our acquisitions may not result in the benefits and revenue growth we expect |
| We are in the process of integrating companies that we acquired, including the Demedis Group, and assimilating the operations, services, products and personnel of each company with our management policies, procedures and strategies |
| We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions |
| To effectively manage our expected future growth, we must continue to successfully manage our integration of these companies and continue to improve our operational systems, internal procedures, accounts receivable and management, financial and operational controls |
| If we fail in any of these areas, our business could be adversely affected |
| The market price for our common stock may be highly volatile |
| The market price for our common stock may be highly volatile |
| A variety of factors may have a significant impact on the market price of our common stock, including: • the publication of earnings estimates or other research reports and speculation in the press or investment community; • changes in our industry and competitors; • our financial condition, results of operations and cash flows and prospects; • any future issuances of our common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, restricted stock and the grant or exercise of stock options from time to time; • the dilutive impact of convertible debt on our earnings per share; • general market and economic conditions; and • any outbreak or escalation of hostilities in areas we do business |
| In addition, the Nasdaq National Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on Nasdaq |
| Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies |
| This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business |
| Certain provisions in our governing documents and other documents to which we are a party may discourage third-party offers to acquire us that might otherwise result in our stockholders receiving a premium over the market price of their shares |
| The provisions of our certificate of incorporation and by-laws may make it more difficult for a third party to acquire us, may discourage acquisition bids, and may limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| These provisions, among other things: • require the affirmative vote of the holders of at least 60prca of the shares of common stock entitled to vote to approve a merger, consolidation, or a sale, lease, transfer or exchange of all or substantially all of our assets; and 19 _________________________________________________________________ [73]Table of Contents • require the affirmative vote of the holders of at least 66 2/3prca of our common stock entitled to vote to: • remove a director; and • to amend or repeal our by-laws, with certain limited exceptions |
| In addition, our 1994 Stock Incentive Plan, 1996 Non-Employee Director Stock Incentive Plan and 2001 Non-Employee Director Incentive Plan provide for accelerated vesting of stock options upon a change in control, and certain agreements between us and our executive officers provide for increased severance payments if those executive officers are terminated without cause within two years after a change in control |
| We also have a stockholder rights plan that could make it more difficult for a third party to acquire us if our Board of Directors does not determine that the acquisition proposal is adequate and in the stockholders’ best interest |
| Tax legislation initiatives could adversely affect the Company’s net earnings and tax liabilities |
| We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions |
| From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions |
| There can be no assurance that our effective tax rate will not be adversely affected by these initiatives |
| In addition, tax laws and regulations are extremely complex and subject to varying interpretations |
| Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge |