UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 26,September 25, 2004

OR

For the transition period from ____________ to ____________

Commission File Number:0-27078

HENRY SCHEIN, INC.

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:

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of July 28,October 27, 2004, there were 43,583,37243,263,489 shares of the registrant’s common stock outstanding.

HENRY SCHEIN, INC.
INDEX

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PART I. FINANCIAL INFORMATION

HENRY SCHEIN, INC.

HENRY SCHEIN, INC.

HENRY SCHEIN, INC.INC .

HENRY SCHEIN, INC.

Note 1. Basis of Presentation

     Our consolidated financial statements include our accounts as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

     Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“USU.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by USU.S. GAAP for complete financial statements.

     The consolidated financial statements reflect all adjustments considered necessary for a fair statement of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 27, 2003.

     The preparation of financial statements in conformity with USU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the sixnine months ended June 26,September 25, 2004 are not necessarily indicative of the results to be expected of any other interim period or for the year ending December 25, 2004.

Note 2. Segment Data

     We conduct our business through two segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution segment consists of our dental, medical (including veterinary) and international groups. Products distributed consist of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

     Our dental group serves office-based dental practices in the combined United States and Canadian dental market. Our medical group serves office-based physician practices, in the United States, as well as surgical centers and other alternate-care settings and veterinarian clinics throughout the United States. Our international group serves practices in 1415 countries outside of North America and is a leading Pan-European healthcare supplier serving office-based dental, medical, and veterinary practices.

     Our technology group provides software, technology, and other value-added services to healthcare providers, primarily in the United States and Canada. Our value-added practice solutions include practice management software systems for dental practices and veterinary clinics. TheOur technology group offerings also include financial services and continuing education services for practitioners.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 2. Segment Data – (Continued)

     The following tables present information about our business segments:

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 3. Stock-Based Compensation

     We account for stock option awards under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, no compensation expense is recorded, provided the exercise price is equal to or greater than the quoted market price of the stock at the grant date.

     We make pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting (the alternative method of accounting for stock-based compensation) had been applied as required by Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value-based method requires us to make assumptions regarding future stock price volatility, risk-free interest rates, dividend yield and weighted-average option life.

     Under the accounting provisions of FAS 123, our net income and net income per common share would have been adjusted to the pro forma amounts indicated in the table below. The following assumptions were used in determining the fair values: stock price volatility of 30.0% (2004) and 45.0% (2003), weighted-average risk-free interest rate of 3.0%, dividend yield of 0.0%, and weighted-average expected option life of five years:

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4. Acquisitions

     On January 8,June 18, 2004, as a meanswe acquired all of expanding our international presence, we entered into agreements to purchase demedisthe outstanding equity shares of Demedis GmbH (excluding its Austrian operations), a leading full-service distributor of dental consumables and equipment in Germany, Austria, and the Benelux countries, and Euro Dental Holding GmbH, which includesincluded KRUGG S.p.A., Italy’s leading distributor of dental consumable products, and DentalMV GmbH (otherwise known as Muller & Weygandt, or “M&W”), one of Germany’s leading direct marketing distributors of dental consumable products.. We refer to these entities collectively as the “Demedis Group”.

     On June 18, 2004, we acquired all of the outstanding equity shares of the Demedis Group, excluding its Austrian operations, for approximately 259.5 million euro (or $315.5 million), including transaction costs and the assumption of debt. We allocated $88.4 million of the total purchase price to tangible assets and liabilities, $59.2 million to identifiable intangible assets ($28.0 million to definite-lived customer relationships with an average life of approximately 7 years and $31.2 million to indefinite-lived trademarks and trade names) and the remainder of $167.9 million to goodwill. This preliminary purchase price allocation is based on our best estimates and is subject to completion of a final fair market valuation.

     We financed the acquisition primarily with cash on hand, borrowings under our existing revolving credit facility and with proceeds from a bridge loan in the amount of $150.0 million. This bridge loan had a variable interest rate of 2.0% as of June 26, 2004 and matures on the earlier of the day following the receipt of proceeds from a permanent financing or December 17, 2004. We classified the bridge loan as non-current in our accompanying balance sheet because we expect to repay it with the net proceeds from a long-term financing and currently have the ability to repay such debt through our existing revolving credit facility.Group.”

     As part of our agreement with the German regulatory authorities, we agreed to divest M&W shortly after the consummation of the acquisition. On July 16, 2004, this divestiture was completed for EUR 50.0 million euro (or $62.2 million), including the assumption of debt of approximately EUR 27.5 million euro (or $34.2 million), resulting in no gain or loss on disposal. Our investment in M&W was included in other current assets as a business held-for-sale at a net realizable valuereduction of 22.5 million euro (or $27.4 million) as of June 26, 2004.the purchase price for the Demedis Group.

     As part of the agreement to divest M&W, we arewere entitled to receive 50% of the net sale proceeds in excess of EUR 55.0 million, euro, in the event M&W iswas subsequently resold before June 18, 2005. On September 24, 2004, an agreement was signed to resell M&W for an amount that resulted in our realizing a share of the net sales proceeds equal to EUR 26.4 million (or $32.4 million), which we received in October 2004. The accrual of this receivable as of September 25, 2004 was included in other current assets and was treated as a reduction of the purchase price for the Demedis Group.

     The regulatory authorities are continuing their review of our pending acquisition of the Demedis GroupGroup’s business in Austria, which operates under the Austrodent brand. Of the total purchase price for the Demedis Group, EUR 11.0 million euro (or $13.4$13.5 million) was attributable to Austrodent, which is included in other non-current assets as of June 26,September 25, 2004. In the event that we receive regulatory approval to acquire Austrodent, we will reclassify this amount towill be reclassified based on the fair value of the assets and liabilities acquired through a purchase price allocation, with an increase to goodwill for any excess of purchase price over fair value allocated to goodwill.value. In the event that we do not receive regulatory approval to acquire Austrodent, we are entitled to receive the proceeds through a sale of Austrodent, net of selling costs, up to $13.4EUR 11.0 million. Any differenceshortfall between the $13.4EUR 11.0 million and the proceeds received upon a subsequent sale of Austrodent will be recorded as an addition to goodwill of the acquired entitiesDemedis Group.

     Excluding its Austrian operations and giving effect to the additional proceeds received from the divestiture and subsequent resale of M&W as discussed above, the purchase price for the Demedis Group was approximately EUR 183.1 million (or $220.9 million), including transaction costs and the assumption of debt. We preliminarily allocated $35.7 million of the Demedis Group.total purchase price to tangible assets and liabilities, $62.2 million to identifiable intangible assets ($45.2 million to definite-lived customer relationships; $4.4 million to definite-lived trademarks and trade names; and $12.6 million to indefinite-lived trademarks and trade names) and the remainder of $123.0 million to goodwill. This preliminary purchase price allocation is based on our best estimates and is subject to change.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4. Acquisitions (Continued)

     Assuming the acquisition of the Demedis Group occurred at the beginning of our fiscal year ended December 27, 2003, excluding the results of Austrodent and M&W, and Austrodent, our pro forma net sales would have been approximately $1.0 billion and $863.7$973.2 million for the three month periodsperiod ended June 26, 2004 and June 28,September 27, 2003 and $2.0$3.0 billion and $1.7$2.6 billion for the sixnine month periods ended June 26,September 25, 2004 and June 28,September 27, 2003. These unaudited net sales amounts do not purport (i) to be indicative of what our net sales would have been had the above transaction been completed at the beginning of our fiscal year ended December 27, 2003 or (ii) to project our net sales for any other interim period or for the year ending December 25, 2004. The pro forma effect of the acquisition of the Demedis Group on our net income and earnings per share was not material.

     During the first quarter ofIn January 2004, we paid approximately $43.0$44.2 million towards anthe acquisition of Camlog Holding AG (“Camlog”("Camlog"), a Swiss manufacturer and marketer of dental implants used in tooth replacement. On July 2, 2004, we made a nominal final payment upon the closing of this acquisition in whichreplacement, whereby we acquired 50.1% of the outstanding equity sharesshares. On July 2, 2004, we paid approximately $387 as a final payment upon the closing of our acquisition of Camlog. We will begin consolidating Camlog’sThe operating results of Camlog are included in the accompanying financial statements fromsince the acquisition close date.

     We preliminarily allocated the total purchase price for Camlog of approximately $45.6 million, including transaction costs, as follows: a net liability of $8.3 million to tangible assets and liabilities; $33.7 million to identifiable intangible assets ($14.8 million to definite-lived customer relationships; $14.6 million to definite-lived patents; and $4.3 million to indefinite-lived trademarks and trade names) and the remainder of $20.2 million to goodwill. This preliminary purchase price allocation is based on our best estimates and is subject to change. The pro forma effect of the acquisition of Camlog on our financial statements was not material.

     During the sixnine months ended June 26,September 25, 2004, we also made an earn-out payment related to a prior period acquisition and completed other transactions that resulted in recording additional goodwill. None of these transactions were material individually or in the aggregate.

Note 5. Convertible Debt Issuance

     On August 9, 2004, we completed an issuance of $240.0 million of convertible debt. These notes are senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year, beginning on February 15, 2005. The notes are convertible into our common stock at a conversion ratio of 10.79 shares per one thousand dollars of principal amount of notes, which is the equivalent conversion price of $92.68 per share, under the following circumstances:

	•		if the last price of our common stock is above 130% of the conversion price measured over a specified number of trading days;
	•		during the five business-day period following any 10 consecutive trading-day period in which the average of the trading prices for the notes for that 10 trading-day period was less than 98% of the average conversion value for the notes during that period;
	•		if the notes have been called for redemption; or

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 5. Convertible Debt Issuance (Continued)

     Upon conversion, we will satisfy our conversion obligation with respect to the principal amount of the notes to be converted in cash, with any remaining amount to be satisfied in shares of our common stock. We will also pay contingent interest during any six-month interest period beginning August 15, 2010 if the average trading price of the notes is above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014, 2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event.

Note 5.6. Earnings Per Share

     A reconciliation of shares used in calculating earnings per basic and diluted common share follows:

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 7.8. Supplemental Cash Flow Information

     Cash paid for interest and income taxes was:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

     Except for historical information containedThe nature of our business and the countries in which we operate subject us to changing economic, competitive, regulatory, and technological conditions, risks, and uncertainties. In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. The forward-looking statements included herein are based on then-current expectations of management. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance. These statements are identified by the statements in this report (including, without limitation, statements indicating that weuse of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate,” or “believe” and all other statements concerning future financial results, product or service offerings, or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe harbor provisions of applicable securities legislation and regulations.comparable terms.

     Forward-looking statements involve known and unknown factors, risks and uncertainties that may cause our actual results, inperformance and achievements, or industry results, to be materially different from any future periods to differ materially from thoseresults, performance, or achievements expressed in anyor implied by such forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, the factors described under “Risk Factors” discussed later in this Form 10-Q. We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.

Recent Developments

     In October 2004, we revised guidance for 2004 earnings per diluted share to $3.03 — $3.07 from our previously issued guidance reported on August 27, 2004 of $3.55 — $3.61, as a result of a press release issued by Chiron Corporation stating that Chiron will not supply Fluvirin® influenza vaccine to the U.S. market for the current influenza season. On October 5, 2004, Chiron announced that this was the result of action by the U.K. regulatory body, the Medicines and Healthcare Products Regulatory Agency (MHRA), to temporarily suspend Chiron’s license to manufacture Fluvirin® influenza vaccine in Chiron’s Liverpool, U.K. facility. We are the primary distributor of Fluvirin® to the U.S. market and Chiron is currently our primary supplier of the influenza vaccine.

     It is not yet known whether the MHRA will lift the suspension in time for Chiron to produce the influenza vaccine for the 2005/2006 influenza season. Should Fluvirin® not be available for the 2005/2006 influenza season, in addition to lost earnings, we will record a pre-tax one-time charge of approximately $13 million related to a deferred expense incurred in connection with our Fluvirin® contract.

Executive-Level Overview

     We are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners in the combined North American and European markets. We serve more than 450,000 customers worldwide, including dental practices and laboratories, physician practices, and veterinary clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 70 years of experience distributing healthcare products. We are headquartered in Melville, New York; employ more than 9,000 people; and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Portugal, Australia and New Zealand. We also have affiliates in Iceland and Israel.

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     We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive pricing, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.

     We conduct our business through two segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution segment consists of our dental, medical (including veterinary) and international groups. Products distributed consist of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

     Our dental group serves office-based dental practices in the combined United States and Canadian dental market. Our medical group serves office-based physician practices, in the United States, as well as surgical centers and other alternate-care settings and veterinarian clinics throughout the United States. Our international group serves practices in 1415 countries outside of North America and is a leading Pan-European healthcare supplier serving office-based dental, medical, and veterinary practices.

     Our technology group provides software, technology, and other value-added services to healthcare providers, primarily in the United States and Canada. Our value-added practice solutions include practice management software systems for dental practices and veterinary clinics. To date, more than 50,000 of our software systems have been installed. TheOur technology group offerings also include financial services and continuing education services for practitioners.

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substantially complete order fulfillment. The purchasing decisiondecisions within an office-based healthcare practice isare typically made by the practitioner or an administrative assistant, and supplies and small equipment are generally purchased from more than one distributor, with one distributor serving as the primary supplier.

     We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger companies that can provide opportunities for growth. This consolidation may also continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

     Our trend with regard to acquisitions has been to expand our role as a provider of products and services to the healthcare industry. This trend has resulted in expansion into service areas that (a) complement our existing operations, and (b) provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.

     As the healthcare industry continues to change, we continually evaluate possible candidates to merge with or acquire and intend to continue to seek opportunities to expand our role as a provider of products and services to the healthcare industry. There can be no assurance that we will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or consummated, we would incur additional merger and acquisition-related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful.

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     The Medicare Prescription Drug, Improvement, and Modernization Act (the “Medicare Act”) was passed by Congress and enacted by President Bush on December 8, 2003. The Medicare Act is the largest expansion of the Medicare program since its inception and provides beneficiaries with voluntary prescription drug benefits effective in 2006. In the meantime, Medicare beneficiaries can apply for an interim drug discount card. The Medicare Act also includes provisions relating to medication management programs, generic substitution and provider reimbursement. Based upon current information, we believe the Medicare Act may create additional volume demand and provide incentives for additional use of generic drugs, both of which have potentially positive implications for our pharmaceutical distribution business.

Product Integrity

     Certain pharmaceutical and medical-surgical product manufacturers are in discussions with legislators about the risks of counterfeit products in the supply chain and manufacturers’ concerns regarding the impact of secondary market distribution on counterfeiting. As a distributor of such products, we continue to work with our suppliers to help minimize the risks associated with counterfeit products in the supply chain and potential litigation.

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Results of Operations

     The following table summarizes the significant components of our operating results and cash flows for the three and sixnine months ended June 26,September 25, 2004 and June 28,September 27, 2003 (in thousands):

     The $140.9 million or 15.8% increase in net sales for the three months ended September 25, 2004 includes increases of 14.2% local currency growth (0.6% internally generated and 13.6% from acquisitions net of a divestiture) and 1.6% related to foreign currency exchange.

     The $59.9 million or 17.7% increase in dental net sales for the three months ended September 25, 2004 includes increases of 17.3% local currency growth (16.6% internally generated and 0.7% from acquisitions) and 0.4% related to foreign currency exchange. The 17.3% local currency growth was due to dental consumable merchandise sales growth of 15.5%, which was all internally generated (of which 7.5% related to sales of the Colgate and Pentron product lines), and dental equipment and service sales growth of 24.8% (21.3% internal growth). We expect that the Colgate and Pentron product lines, introduced through distribution agreements executed in 2004, will continue to contribute to our overall increase in dental net sales.

     The $32.8 million or 8.3% decrease in medical net sales for the three months ended September 25, 2004 includes a decrease of 15.2% internally generated, offset by an increase of 6.9% from acquisitions. This decrease in medical sales was primarily due to the absence of Fluvirin® influenza vaccine sales for the three months ended September 25, 2004 (refer to Recent Developments section) which totaled $94.5 million for the three months ended September 27, 2003 (accounting for a decrease of 23.8%). This decrease was offset by a $61.7 million increase in non-influenza vaccine sales (representing an increase of 20.4%, including 11.3% internal growth and 9.1% acquisition growth).

     The $111.4 million or 80.5% increase in international net sales for the three months ended September 25, 2004 includes increases of 71.1% in local currencies (5.0% internally generated and 66.1% from our acquisition of the Demedis Group and Camlog, net of a divestiture) and 9.4% due to foreign currency exchange.

     The $2.4 million or 13.1% increase in technology net sales for the three months ended September 25, 2004 includes increases of 12.9% internal growth and 0.2% due to foreign currency exchange. The increase was primarily due to our electronic services business, including dental claims processing.

Gross Profit

     Gross profit and gross margins by segment and in total for the three months ended September 25, 2004 and September 27, 2003 were as follows (in thousands):

     For the three months ended September 25, 2004, gross profit increased $22.5 million or 9.0% from the comparable prior-year period. As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we realize substantially higher gross margin percentages in our technology segment than in our healthcare distribution segment. These higher gross margins result from being both the developer and seller of software products combined with the nature of the software industry, in which developers realize higher gross margins to recover investments in research and development.

     Healthcare distribution gross profit increased $21.2 million or 8.9% for the three months ended September 25, 2004 from the comparable prior-year period primarily due to increased sales in 2004. Healthcare distribution gross profit margin decreased primarily due to the absence of Fluvirin® influenza vaccine sales during the three months ended September 25, 2004, and increased sales of lower-margin vaccines and injectable pharmaceutical products in our medical business.

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     Technology gross profit increased $1.3 million or 9.3% for the three months ended September 25, 2004 from the comparable prior-year period. Technology gross profit margin decreased primarily due to changes in sales mix including increased sales in our electronic services business, including dental claims processing.

Selling, General and Administrative

     Selling, general and administrative expenses by segment and in total for the three months ended September 25, 2004 and September 27, 2003 were as follows (in thousands):

     For the three months ended September 25, 2004, selling, general and administrative expenses increased $45.8 million or 26.1% from the comparable prior-year period. As a percentage of net sales, selling, general and administrative expenses increased from the comparable prior-year period primarily as a result of an increase in payroll as a percentage of sales related to current year acquisitions.

     As a component of selling, general and administrative expenses, selling expenses increased $24.4 million, or 21.8%, to $136.4 million for the three months ended September 25, 2004 from $112.0 million for the comparable prior-year period. The increase was primarily due to a $21.3 million or 24.7% increase in payroll expenses associated with current year acquisitions and increased sales volume. As a percentage of net sales, selling expenses increased to 13.2% from 12.5% for the comparable prior-year period, primarily as a result of an increase in payroll as a percentage of sales as a result of current year acquisitions.

     As a component of selling, general and administrative expenses, general and administrative expenses increased $21.4 million, or 33.9%, to $84.5 million for the three months ended September 25, 2004 from $63.1 million for the comparable prior-year period. The increase was primarily due to overall growth in our business. As a percentage of net sales, general and administrative expenses increased to 8.2% from 7.1% for the comparable prior-year period, primarily as a result of current year acquisitions.

Other Expense, Net

     Other expense, net for the three months ended September 25, 2004 and September 27, 2003 was as follows (in thousands):

     Other expense, net increased $2.2 million to $4.4 million for the three months ended September 25, 2004 from the comparable prior-year period. The net increase was primarily due to a $1.4 million increase in interest expense related to our financing of the Demedis Group acquisition and a decrease of $513 thousand in

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interest income due to lower cash and marketable securities balances.

Income Taxes

     For the three months ended September 25, 2004, our effective tax rate decreased to 37.0% from 37.2% for the comparable prior-year period. The difference between our effective tax rates and the federal statutory rates for both periods related primarily to foreign and state income taxes.

Nine Months Ended September 25, 2004 Compared to Nine Months Ended September 27, 2003

Net Sales

     Net sales for the nine months ended September 25, 2004 and September 27, 2003 were as follows (in thousands):

     The $169.5$459.1 million or 21.8%19.1% increase in net sales for the threenine months ended June 26,September 25, 2004 includes 20.3%increases of 16.9% local currency growth (12.4%(7.1% internally generated and 7.9%9.8% from acquisitions net of a divestiture) and 1.5%2.2% related to foreign currency exchange.

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     The $194.0 million or 11.7%). Our increased sales of vaccines and injectable pharmaceutical products contributed significantly to our overall increase in medical net sales, and we expect this trend to continue.

     The $42.7 million or 30.2%47.4% increase in international net sales for the threenine months ended June 26,September 25, 2004 includes 22.2%35.6% in local currencies (7.2%(6.5% internally generated and 15.0%29.1% from acquisitions net of a divestiture) and 8.0%11.8% due to foreign currency exchange. The increase was primarily due to continued executionour second quarter acquisition of our full-service dental strategy across the continent, particularly in France and the United Kingdom and to increased direct marketing activities in Spain.Demedis Group.

     The $1.8$6.4 million or 9.7%11.7% increase in technology net sales for the threenine months ended June 26,September 25, 2004 includes 6.0%increases of 9.2% internal growth, 2.4% acquisition growth and 3.7% acquisition growth.0.1% due to foreign currency exchange. The increase was primarily due to our electronic services business, including dental claims processing.

Gross Profit

     Gross profit and gross margins by segment and in total for the threenine months ended June 26,September 25, 2004 and June 28,September 27, 2003 were as follows (in thousands):

     As a component of selling, general and administrative expenses, selling expenses increased $16.5$58.9 million, or 16.0%18.7%, to $119.8$373.4 million for the threenine months ended June 26,September 25, 2004 from $103.3$314.5 million for the comparable prior-year period. The increase was primarily due to a $15.1$50.2 million or 19.2%20.7% increase in payroll expenses primarily associated with current year acquisitions and increased sales volume. As a percentage of net sales, selling expenses decreased to 12.7%13.0% from 13.3% for the comparable prior-year period, primarily as a result of a decrease in payroll as a percentage of sales realized by leveraging our distribution infrastructure.

     As a component of selling, general and administrative expenses, general and administrative expenses increased $7.1 million, or 11.7%, to $68.3 million for the three months ended June 26, 2004 from $61.2 million for the comparable prior-year period. The increase was primarily due to overall sales growth in our business. As a percentage of net sales, general and administrative expenses decreased to 7.2% from 7.9% for the comparable prior-year period, primarily as a result of leveraging our distribution and corporate infrastructure.

Other Expense, Net

     Other expense, net decreased $1.9 million to $483 thousand for the three months ended June 26, 2004 from the comparable prior-year period. The net decrease was primarily due to lower interest expense resulting from the effect of interest rate swaps entered into during the fourth quarter of 2003 (accounting for a decrease of $1.4 million).

Income Taxes

     For the three months ended June 26, 2004, our effective tax rate decreased to 37.1% from 37.7% for the comparable prior-year period. The difference between our effective tax rates and the federal statutory rates for both periods related primarily to state income taxes.

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Liquidity and Capital Resources

     Our principal capital requirements include the funding of acquisitions and repayments of debt assumed in acquisitions, repurchases of common stock, working capital needs, and capital expenditures. Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities and payment terms for receivables and payables. Because sales tend to be stronger during the third and fourth quarters and special inventory forward buy-in opportunities are most prevalent just before the end of the year, our working capital requirements have generally been higher from the end of the third quarter to the end of the first quarter of the following year.

     We finance our business primarily through cash generated from our operations, revolving credit facilities, private-placement debt and stock issuances. Our principal sources of cash are from our operations and short-term and long-term debt financings. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for our products and services. Given current operating, economic and industry conditions, we believe that demand for our products and services will remain consistent in the foreseeable future.

     Net cash flow provided by operating activities was $60.7$57.6 million for the sixnine months ended June 26,September 25, 2004 compared to $41.0$18.1 million for the comparable prior-year period. This net change of $19.7$39.5 million was due primarily to changes in working capital accounts (accounting for an increase of $10.1$40.2 million), which were significantly impacted by the effects of the absence of Fluvirin® influenza sales and an increase in net income (accounting for an increase of $9.5 million).related purchases, as previously discussed.

     Net cash used in investing activities was $197.0$178.1 million for the sixnine months ended June 26,September 25, 2004 compared to $78.9$78.4 million for the comparable prior-year period. The net change of $118.1$99.7 million was primarily due to payments for completed and pending business acquisitions accounting for $125.5$165.5 million. We expect to invest up to approximately $25.0$15.0 million during the remainder of the fiscal year in capital projects to modernize and expand our facilities and computer systems infrastructure systems and to integrate subsidiary operations into our core infrastructure.

     Net cash provided by (used in) financing activities was $86.6$37.8 million for the sixnine months ended June 26,September 25, 2004 compared to $(40.8)$(46.0) million for the comparable prior-year period. The net change of $127.4$83.8 million was primarily due to proceeds from bank borrowingsour issuance of long-term debt (accounting for an increase of $180.0 million) and$234.8 million, net proceeds from short-term bank borrowings (accounting for an increase of $96.8 million) borrowed to fund our completed and pending acquisitions,issuance costs), partially offset by repayments of the debt assumed in business acquisitions (accounting for a decrease of $113.8$135.7 million) and increased payments to repurchase our common stock (accounting for a decrease of $46.0$12.9 million).