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Henry Schein 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Graphic
  7. Graphic
10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
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 þ   No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes o   No þ
     As of May 2, 2006, there were 88,314,954 shares of the registrant’s common stock outstanding.
 
 

 


 

HENRY SCHEIN, INC.
INDEX
             
        Page
PART I. FINANCIAL INFORMATION
 
           
  Consolidated Financial Statements:        
 
  Balance Sheets as of April 1, 2006 and December 31, 2005     3  
 
  Statements of Income for the three months ended April 1, 2006 and March 26, 2005     4  
 
  Statements of Cash Flows for the three months ended April 1, 2006 and March 26, 2005     5  
 
  Notes to Consolidated Financial Statements     6  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
  Quantitative and Qualitative Disclosures About Market Risk     25  
  Controls and Procedures     25  
PART II. OTHER INFORMATION
 
           
  Legal Proceedings     26  
  Exhibits     27  
 
  Signature     27  
 EX-10.1: PERFORMANCE INCENTIVE PLAN
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION

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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HENRY SCHEIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
                 
    April 1,     December 31,  
    2006     2005  
    (unaudited)     (Adjusted — Note 3)   
              
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 159,890     $ 254,498  
Available-for-sale securities
    80,175       80,195  
Accounts receivable, net of reserves of $39,494 and $52,308
    546,414       582,617  
Inventories
    511,949       505,542  
Deferred income taxes
    30,108       35,505  
Prepaid expenses and other
    164,970       126,052  
 
           
Total current assets
    1,493,506       1,584,409  
Property and equipment, net
    194,258       190,746  
Goodwill
    682,482       626,869  
Other intangibles, net
    133,936       123,204  
Investments and other
    62,762       57,892  
 
           
Total assets
  $ 2,566,944     $ 2,583,120  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 340,651     $ 371,392  
Bank credit lines
    3,380       2,093  
Current maturities of long-term debt
    30,717       33,013  
Accrued expenses:
               
Payroll and related
    83,318       96,113  
Taxes
    44,532       65,070  
Other
    146,477       156,433  
 
           
Total current liabilities
    649,075       724,114  
Long-term debt
    488,214       489,520  
Deferred income taxes
    60,374       54,432  
Other liabilities
    56,146       53,547  
 
Minority interest
    14,258       12,353  
Commitments and contingencies
               
 
Stockholders’ equity:
               
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding
           
Common stock, $.01 par value, 240,000,000 shares authorized, 88,256,957 outstanding on April 1, 2006 and 87,092,238 outstanding on December 31, 2005
    883       871  
Additional paid-in capital
    587,107       559,266  
Retained earnings
    684,217       667,958  
Accumulated other comprehensive income
    26,670       21,059  
 
           
Total stockholders’ equity
    1,298,877       1,249,154  
 
           
Total liabilities and stockholders’ equity
  $ 2,566,944     $ 2,583,120  
 
           
See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
                 
    Three Months Ended  
    April 1,     March 26,  
    2006     2005  
 
          (Adjusted — Note 3)  
 
               
Net sales
  $ 1,161,781     $ 1,062,997  
Cost of sales
    824,179       761,603  
 
           
Gross profit
    337,602       301,394  
Operating expenses:
               
Selling, general and administrative
    276,684       248,132  
 
           
Operating income
    60,918       53,262  
Other income (expense):
               
Interest income
    4,556       1,299  
Interest expense
    (7,394 )     (6,226 )
Other, net
    221       (113 )
 
           
Income from continuing operations before taxes, minority
interest and equity in earnings of affiliates
    58,301       48,222  
Income taxes
    (21,222 )     (17,861 )
Minority interest in net income of subsidiaries
    (1,560 )     (45 )
Equity in earnings of affiliates
    108       187  
 
           
Income from continuing operations
    35,627       30,503  
 
               
Discontinued operations:
               
Income (loss) from operations of discontinued components
    (32,279 )     560  
Income tax benefit (expense)
    12,911       (190 )
 
           
Income (loss) on discontinued operations
    (19,368 )     370  
 
           
Net income
  $ 16,259     $ 30,873  
 
           
 
               
Earnings from continuing operations per share:
               
Basic
  $ 0.41     $ 0.35  
 
           
Diluted
  $ 0.40     $ 0.35  
 
           
 
               
Earnings (loss) from discontinued operations per share:
               
Basic
  $ (0.22 )   $ 0.01  
 
           
Diluted
  $ (0.22 )   $ 0.00  
 
           
 
               
Earnings per share:
               
Basic
  $ 0.19     $ 0.36  
 
           
Diluted
  $ 0.18     $ 0.35  
 
           
 
               
Weighted-average common shares outstanding:
               
Basic
    87,310       86,679  
 
           
Diluted
    89,242       88,221  
 
           
See accompanying notes.

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HENRY SCHEIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
    Three Months Ended  
    April 1,     March 26,  
    2006     2005  
          (Adjusted Note — 3)  
 
               
Cash flows from operating activities:
             
Net income
  $ 16,259     $ 30,873  
Adjustments to reconcile net income to net cash used in operating activities:
               
Loss on sale of discontinued operation, net of tax
    19,363        
Depreciation and amortization
    14,352       13,237  
Stock-based compensation expense
    3,857       3,740  
Provision for (recovery of) losses on trade and other accounts receivable
    118       (208 )
Deferred income taxes
    4,978       1,638  
Undistributed earnings of affiliates
    (108 )     (187 )
Minority interest in net income of subsidiaries
    1,560       45  
Other
    (1,113 )     1,089  
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
    4,599       14,434  
Inventories
    (12,481 )     8,610  
Other current assets
    3,143       29,908  
Accounts payable and accrued expenses
    (92,527 )     (121,356 )
 
           
Net cash used in operating activities
    (38,000 )     (18,177 )
 
           
 
               
Cash flows from investing activities:
               
Purchases of fixed assets
    (11,168 )     (8,138 )
Payments for business acquisitions, net of cash acquired
    (72,712 )     (39,046 )
Purchases of available-for-sale securities
    (60,875 )      
Proceeds from sales of available-for-sale securities
    60,895        
Net payments for foreign exchange forward contract settlements
    (1,161 )     (4,478 )
Other
    191       (2,302 )
 
           
Net cash used in investing activities
    (84,830 )     (53,964 )
 
           
 
               
Cash flows from financing activities:
               
Net proceeds from bank borrowings
    1,223       183  
Principal payments for long-term debt
    (2,645 )     (696 )
Proceeds from issuance of stock upon exercise of stock options
    17,108       10,944  
Payments for repurchases of common stock
          (16,310 )
Excess tax benefits related to stock-based compensation
    6,925       2,882  
Other
    (186 )     (401 )
 
           
Net cash provided by (used in) financing activities
    22,425       (3,398 )
 
           
 
               
Net change in cash and cash equivalents
    (100,405 )     (75,539 )
Effect of exchange rate changes on cash and cash equivalents
    5,797       3,659  
Cash and cash equivalents, beginning of period
    254,498       186,621  
 
           
Cash and cash equivalents, end of period
  $ 159,890     $ 114,741  
 
           
See accompanying notes.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
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 (“U.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 U.S. GAAP for complete financial statements.
     The consolidated financial statements reflect all adjustments considered necessary for a fair presentation 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 31, 2005.
     The preparation of financial statements in conformity with U.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 three months ended April 1, 2006 are not necessarily indicative of the results to be expected of any other interim period or for the year ending December 30, 2006.
Note 2. Segment Data
     We conduct our business through two reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical (including veterinary) and international operating segments. Products distributed include consumable products, small equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
     Our dental group serves office-based dental practices, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based physician practices, surgical centers, other alternate-care settings, veterinarian clinics and other institutions throughout the United States. Our international group serves 17 countries outside of North America and is what we believe to be a leading European healthcare supplier serving office-based 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 and medical practices and veterinary clinics. Our 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:
                 
    Three Months Ended  
    April 1,     March 26,  
    2006     2005 (1)  
Net Sales:
               
Healthcare distribution (2):
               
Dental (3)
  $ 482,036     $ 436,522  
Medical (4)
    334,631       313,370  
International (5)
    322,306       292,098  
 
           
Total healthcare distribution
    1,138,973       1,041,990  
Technology (6)
    22,808       21,007  
 
           
Total
  $ 1,161,781     $ 1,062,997  
 
           
 
(1)   Adjusted to reflect the effects of discontinued operations.
 
(2)   Consists of consumable products, small equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
 
(3)   Consists of products sold in the United States and Canada.
 
(4)   Consists of products sold in the United States medical and veterinary markets.
 
(5)   Consists of products sold in the dental, medical and veterinary markets, primarily in Europe.
 
(6)   Consists of practice-management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States and Canada.
                 
    Three Months Ended  
    April 1,     March 26,  
    2006     2005 (1) (2)  
Operating Income:
               
Healthcare distribution
  $ 52,162     $ 45,083  
Technology
    8,756       8,179  
 
           
Total
  $ 60,918     $ 53,262  
 
           
 
(1)   Adjusted to reflect the effects of discontinued operations.
 
(2)   Adjusted to reflect the effect of our adoption of FAS 123(R) using the modified retrospective application. See Note 3.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation
     Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 123(R), “Share-Based Payment.” We previously applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the required pro forma disclosures of FAS 123, “Accounting for Stock-Based Compensation” in our consolidated financial statements. We elected to adopt the modified retrospective application method provided by FAS 123(R), and accordingly, financial statement amounts for the periods presented herein reflect results as if the fair value method of expensing had been applied from the original effective date of FAS 123. Such results are consistent with the previously reported pro forma disclosures required under FAS 123.
     As part of our adoption of FAS 123(R), we recorded the cumulative share-based compensation expense, net of taxes, for the period 1995 through 2005, resulting in a reduction of our retained earnings of $67.1 million and our deferred income tax liability of $19.6 million, with an offsetting increase to additional paid-in capital of $86.3 million in the accompanying consolidated balance sheet as of December 31, 2005. The $19.6 million reduction to our deferred income tax liability represents the cumulative expense related to stock options expected to result in a future tax deduction. Additionally, we reclassified $425 of deferred compensation to additional paid-in capital as of December 31, 2005.
     Our accompanying unaudited consolidated statements of income reflect pre-tax share-based compensation expense of $3.9 million ($2.5 million after-tax) for the three months ended April 1, 2006 and $3.7 million ($2.4 million after-tax) for the three months ended March 26, 2005. Our basic and diluted earnings per share as originally reported for the three months ended March 26, 2005 were reduced by $.03 as a result of our modified retrospective application of FAS 123(R).
     Our accompanying unaudited consolidated statements of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash used in operating activities for both periods presented. Additionally, prior to adopting FAS 123(R), benefits associated with tax deductions in excess of recognized compensation expense were presented as part of operating cash flow on our consolidated statements of cash flows. However, FAS 123(R) requires that such excess tax benefits be presented as a cash inflow from financing activities. In the accompanying consolidated statements of cash flows, we presented $6.9 million and $2.9 million of such excess tax benefits as a cash inflow from financing activities for the three months ended April 1, 2006 and March 26, 2005.
     Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at grant date, based on the estimated fair value of the award, and recognize the cost as compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income.
     Stock-based awards are provided to certain employees and non-employee directors under the terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock Incentive Plan, as amended (the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include a combination of at-the-money stock options and restricted stock (including restricted stock units). As of April 1, 2006, there were 20,157,270 shares authorized and 2,312,387 shares available to be granted under the 1994 Stock Incentive Plan and 800,000 shares authorized and 333,694 shares available to be granted under the 1996 Non-Employee Director Plan.
     Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to our closing stock price on the date of grant. These awards, which generally vest 25% per year, are fully vested four years from the grant date and have a contractual term of ten years from the grant date. Additionally, recipients may not sell any shares that they acquire when they exercise their options until the third anniversary of the date of the grant of such options. We estimate the fair value of stock options using the Black-Scholes valuation model.
     Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. We issue restricted stock which vests based on the recipient’s continued service over time (four-year cliff vesting) and restricted stock which vests based on our achieving specified performance measurements (three-year cliff vesting).
     We estimate the fair value of restricted stock that vests based on the passage of time on the date of grant, based on our closing stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are received by the recipient depends on our earnings per share performance measured against specified targets over a three-year period. The fair value of performance-based restricted stock is determined on the date of grant, based on our closing stock price, and assumes that performance targets will be achieved. Over the performance period, the number of shares of common stock that will ultimately vest and be issued is adjusted upward or downward based upon the probability of achievement of such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
     Restricted stock units (“RSUs”) are unit awards we grant to certain non-U.S. employees that entitle the recipient to shares of common stock upon vesting after four years for time-based awards or three years for performance-based awards. The fair value of RSUs is determined on the date of grant, based on our closing stock price.
     We record deferred tax assets for awards that result in deductions on our income tax returns, based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).
     The majority of stock-based compensation expense for the three months ended April 1, 2006 and March 26, 2005 was generated through stock options. The weighted-average grant date fair value of stock-based awards granted during the three months ended April 1, 2006 and March 26, 2005 was $24.2 million and $20.8 million. For the three months ended April 1, 2006, the fair value of stock-based awards issued was evenly divided between stock options and restricted stock (including RSUs).
     Total unrecognized compensation cost related to non-vested awards as of April 1, 2006 was $54.6 million, which is expected to be recognized over a weighted-average period of approximately 3 years. There were no significant capitalized stock-based compensation costs as of April 1, 2006.
     The following table summarizes stock option activity under the Plans during the three months ended April 1, 2006:
                 
            Weighted  
            Average Exercise  
    Shares     Price  
Outstanding at beginning of period
    8,882,557     $ 26.37  
Granted
    799,565       47.31  
Exercised
    (909,187 )     18.82  
Forfeited
    (53,645 )     20.86  
     
Outstanding at end of period
    8,719,290       29.11  
     
Options exercisable at end of period
    5,599,562       23.07  
     

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
     The shares under option at April 1, 2006, were in the following exercise price ranges:
                                                         
                            Options Outstanding  
                                    Weighted Average              
                                    Remaining     Weighted     Aggregate  
                            Number     Contractual Life     Average Exercise     Intrinsic  
Range of Exercise Prices     Outstanding     in Years     Price     Value  
$
    5.91     to   $ 9.87       416,423       2.8     $ 7.11     $ 16,969,083  
 
    10.75     to     15.03       635,647       3.9       13.27       21,985,516  
 
    16.10     to     22.80       2,760,861       5.6       19.65       77,874,331  
 
    22.98     to     47.31       4,906,359       8.6       38.35       46,659,706  
 
                                                   
 
                            8,719,290       7.0       29.11     $ 163,488,636  
 
                                                   
                                                         
                            Options Exercisable  
                                    Weighted Average              
                                    Remaining     Weighted     Aggregate  
                            Number     Contractual Life     Average Exercise     Intrinsic  
Range of Exercise Prices     Exercisable     in Years     Price     Value  
$
    5.91     to   $ 9.87       416,423       2.8     $ 7.11     $ 16,969,083  
 
    10.75     to     15.03       635,647       3.9       13.27       21,985,516  
 
    16.10     to     22.80       2,760,429       5.6       19.65       77,862,934  
 
    22.98     to     47.31       1,787,063       8.1       35.55       22,003,453  
 
                                                   
 
                            5,599,562       6.0       23.07     $ 138,820,986  
 
                                                   
     The following weighted-average assumptions were used in determining the fair values of stock options using the Black-Scholes valuation model:
                 
    2006   2005
Expected dividend yield
    0 %     0 %
Expected stock price volatility
    25 %     30 %
Risk-free interest rate
    4.8 %     4.0 %
Expected life of options (years)
    5       5  
     We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in the foreseeable future. The expected stock price volatility is based on implied volatilities from traded options on our stock, historical volatility of our stock, and other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options. The expected life of options is based on historical data on option exercises and represents the period of time that granted options are expected to be outstanding. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us.

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HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)
Note 3. Stock-Based Compensation (Continued)
     The total intrinsic value of stock options exercised during the three months ended April 1, 2006 and March 26, 2005 was $25.5 million and $12.5 million. The total cash received as a result of stock option exercises for the three months ended April 1, 2006 and March 26, 2005 was approximately $17.1 million and $10.9 million. In connection with these exercises, the tax benefits realized by us for the three months ended April 1, 2006 and March 26, 2005 were $9.4 million and $4.7 million. We settle employee stock option exercises with newly issued common shares.
     The total intrinsic value of restricted stock (including RSUs) that vested during the three months ended April 1, 2006 and March 26, 2005 was $55 and $27. The following table summarizes the status of our non-vested restricted shares for the three months ended April 1, 2006:
                 
    Time-Based Restricted Stock  
            Weighted Average  
    Shares     Grant Date Fair Value  
Outstanding at beginning of period
    17,478     $ 424,766  
Granted
    104,269       4,932,961  
Vested
    (1,189 )     (29,583 )
Forfeited
           
 
           
Outstanding at end of period
    120,558     $ 5,328,144  
 
           
                 
                 
    Performance-Based Restricted Stock  
            Weighted Average  
    Shares     Grant Date Fair Value  
Outstanding at beginning of period
        $  
Granted
    151,263       7,156,512  
Vested
       
Forfeited
           
 
           
Outstanding at end of period
    151,263     $ 7,156,512  
 
           
Note 4. Business Acquisitions and Divestiture
Acquisitions
     On March 31, 2006, we completed the acquisition of NLS Animal Health (“NLS”), a privately held, full-service veterinary distribution business with annual revenues of approximately $110.0 million. We recorded $49.0 million of goodwill related to this acquisition through a preliminary purchase price allocation. Although the assets and liabilities of NLS are included in the accompanying financial statements, the operating results of NLS will be reflected in our financial statements beginning with the three months ending July 1, 2006.
     In addition to the NLS acquisition, we completed one other acquisition during the three months ended April 1, 2006. Both acquisitions were immaterial to our financial statements individually and in the aggregate.

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

(unaudited)
Note 4. Business Acquisitions and Divestiture (Continued)
Divestiture
     On April 1, 2006, we sold substantially all of the assets of our Hospital Supply Business, previously reported as part of our healthcare distribution reportable segment. The sale price was $36.5 million, $34.5 million of which was received on April 3, 2006 with the balance due on June 30, 2006. As a result of this sale, included in the operating results from discontinued operations for the three months ended April 1, 2006 is a $32.3 million ($19.4 million after-tax) loss on the sale, including $3.5 million ($2.1 million after-tax) of transitional service obligations and selling costs.
     Net sales generated by our Hospital Supply Business were $37.9 million and $38.4 million for the three month periods ended April 1, 2006 and March 26, 2005. We have classified the operating results of the Hospital Supply Business as a discontinued operation in the accompanying consolidated statements of income for all periods presented. The carrying amounts of the major classes of the Hospital Supply Business assets held-for-sale as of December 31, 2005 included accounts receivable, net of reserves, of approximately $43.9 million and inventories, net of reserves, of approximately $16.2 million.
     As part of the sale agreement, we are obligated to make payments to the buyer, up to a maximum of $13.0 million, contingent upon the buyer’s collection of specified accounts receivable within one year and the maintenance of a specified level of aggregate sales of the Hospital Supply Business during the two-year post-closing period. Any future payments made in connection with these contingencies will be presented as part of the results from discontinued operations.
Note 5. Earnings Per Share
     Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except it reflects the effect of common shares issuable upon vesting of restricted stock and upon exercise of stock options using the treasury stock method in periods in which they have a dilutive effect.
     For the three months ended April 1, 2006, diluted earnings per share does not include the effect of common shares issuable upon conversion of our convertible debt because the principal is required to be settled in cash. If at any time, the debt is convertible at a premium as a result of the conditions of the debt, the amount in excess of the principal would be presumed settled in common shares and thereby reflected in our calculation of diluted earnings per share.
     A reconciliation of shares used in calculating earnings per basic and diluted share follows:
                 
    Three Months Ended
    April 1,   March 26,
    2006   2005
Basic
    87,309,609       86,679,090  
Effect of assumed exercise of employee stock options
    1,847,918       1,541,737  
Effect of assumed vesting of restricted stock
    84,102        
 
               
Diluted
    89,241,629       88,220,827  
 
               

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

(unaudited)
Note 5. Earnings Per Share (Continued)
     Weighted-average options to purchase 263,593 shares of common stock at an exercise price of $47.31 per share and 311,111 shares of common stock at exercise prices ranging from $38.50 to $39.43 per share that were outstanding during the three months ended April 1, 2006 and March 26, 2005 were excluded from the computation of diluted earnings per share. In each of these periods, such options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive.
Note 6. Comprehensive Income
     Comprehensive income includes certain gains and losses that, under U.S. GAAP, are excluded from net income, as these amounts are recorded directly as adjustments to stockholders’ equity. Our comprehensive income primarily includes net income, foreign currency translation adjustments and unrealized gains and losses on hedging activities. Comprehensive income totaled $21.9 million and $20.7 million for the three months ended April 1, 2006 and March 26, 2005.
Note 7. Supplemental Cash Flow Information
     Cash paid for interest and income taxes was:
                 
    Three Months Ended
    April 1,   March 26,
    2006   2005
Interest
  $ 12,629     $ 11,786  
Income taxes
    25,428       3,067  
     During the three months ended April 1, 2006 and March 26, 2005, we had a $4.0 million non-cash net unrealized loss and an $18.5 million non-cash net unrealized gain related to hedging activities. Further, in connection with our sale of our Hospital Supply Business, as previously discussed, we received $34.5 million of the $36.5 million sale proceeds on April 3, 2006 with the balance due on June 30, 2006.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
     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 which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or other comparable terms.
     Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: competitive factors; changes in the healthcare industry; changes in government regulations that affect us; financial risks associated with our international operations; fluctuations in quarterly earnings; our dependence on third parties for the manufacture and supply of our products; transitional challenges associated with acquisitions; regulatory and litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence upon sales personnel and key customers; our dependence on our senior management; possible increases in the cost of shipping our products or other service trouble with our third-party shippers; risks from rapid technological change; risks from potential increases in variable interest rates; financial risks associated with acquisitions; possible volatility of the market price of our common stock; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation that affect us. The order in which these factors appear should not be construed to indicate their relative importance or priority.
     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
     On March 31, 2006, we completed the acquisition of NLS Animal Health, a privately held, full-service veterinary distribution business with annual revenues of approximately $110.0 million. Refer to Note 4 in the accompanying financial statements for further discussion.
     On April 1, 2006, we sold substantially all of the assets of our Hospital Supply Business, previously reported as part of our healthcare distribution reportable segment. Refer to Note 4 in the accompanying financial statements for further discussion.
Executive-Level Overview
     We believe 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

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500,000 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 74 years of experience distributing healthcare products.
     We are headquartered in Melville, New York, employ nearly 11,000 people and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Portugal, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Israel, Australia and New Zealand. We also have an affiliate in Iceland.
     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 prices, 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 reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical (including veterinary) and international operating segments. Products distributed include consumable products, small equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
     Our dental group serves office-based dental practices, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based physician practices, surgical centers, other alternate-care settings, veterinarian clinics and other institutions throughout the United States. Our international group serves 17 countries outside of North America and is what we believe to be a leading European healthcare supplier serving office-based 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 and medical practices and veterinary clinics. Our technology group offerings also include financial services and continuing education services for practitioners.
Industry Overview
     In recent years, the healthcare industry has increasingly focused on cost containment. This trend has benefited distributors capable of providing a broad array of products and services at low prices. It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support. We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management.
     Our operating results in recent years have been significantly affected by strategies and transactions we undertook to expand our business, domestically and internationally, in part to address significant changes in the healthcare industry, including consolidation of healthcare distribution companies, potential healthcare reform, trends toward managed care, cuts in Medicare and collective purchasing arrangements.
Industry Consolidation
     The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and veterinary markets, was estimated to produce revenues of approximately $21 billion in 2005 in the combined North

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American and Western and Central European markets. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.
     Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare practitioners has been characterized by frequent, small-quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decisions within an office-based healthcare practice are typically made by the practitioner or an administrative assistant, and supplies and small equipment are generally purchased from more than one distributor, with one generally 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 growth opportunities. This consolidation also may 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 complement our existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.
     As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure. In the U.S. dental market, we estimate that there are currently more than 300 smaller distributors holding approximately 35% of the market. In the U.S. medical market, we estimate that more than 500 smaller distributors hold approximately 50% of the market, and in the European dental market, we estimate that more than 200 competitors hold approximately 80% of the market.
     As the healthcare industry continues to change, we continually evaluate possible candidates for merger or acquisition 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.
Aging Population and Other Market Influences
     The healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing shifting from hospitals to alternate-care sites, particularly physicians’ offices. As the cosmetic surgery and elective procedure markets continue to grow, physicians are increasingly performing more of these procedures in their offices. The elder-care market continues to benefit from the increasing growth rate of the population of elderly Americans.
     The January 2000 U.S. Bureau of the Census estimates that the elderly population in the United States will more than double by the year 2040. In 2000, four million Americans were aged 85 or older, the segment of the population most in need of long-term care and elder-care services. By the year 2040, that

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number is projected to more than triple to more than 14 million. The population aged 65 to 84 years is projected to more than double in the same time period.
     As a result of these market dynamics, the annual expenditures for healthcare services continue to increase in the United States. The Centers for Medicare and Medicaid Services (CMS) published “National Health Care Expenditures Projections: 2005 – 2015” indicating that total national healthcare spending reached $1.9 trillion in 2004, or 16.0% of the nation’s gross domestic product. Healthcare spending is projected to reach $4.0 trillion in 2015, an estimated 20.0% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States.

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Results of Operations
     The following table summarizes the significant components of our operating results from continuing operations and cash flows for the three months ended April 1, 2006 and March 26, 2005 (in thousands):
                 
    Three Months Ended  
    April 1,     March 26,  
    2006     2005 (1)  
Operating Results:
               
Net sales
  $ 1,161,781     $ 1,062,997  
Cost of sales
    824,179       761,603  
 
           
Gross profit
    337,602       301,394  
Operating expenses:
               
Selling, general and administrative (2)
    276,684       248,132  
 
           
Operating income
  $ 60,918     $ 53,262  
 
           
 
               
Other expense, net
  $ (2,617 )   $ (5,040 )
Income from continuing operations
    35,627       30,503  
 
               
Cash Flows:
               
Net cash used in operating activities (2)
  $ (38,000 )   $ (18,177 )
Net cash used in investing activities
    (84,830 )     (53,964 )
Net cash provided by (used in) financing activities (2)
    22,425       (3,398 )
 
(1)   Adjusted to reflect the effects of our discontinued operation.
 
(2)   Prior period amounts have been adjusted to reflect the effect of our adoption of FAS 123(R) using the modified retrospective application.
Three Months Ended April 1, 2006 Compared to Three Months Ended March 26, 2005
Net Sales
     Net sales from continuing operations for the three months ended April 1, 2006 and March 26, 2005 were as follows (in thousands):
                                 
    April 1,     % of     March 26,     % of  
    2006     Total     2005 (1)     Total  
Healthcare distribution (2):
                               
Dental (3)
  $ 482,036       41.5 %   $ 436,522       41.1 %
Medical (4)
    334,631       28.8       313,370       29.4  
International (5)
    322,306       27.7       292,098       27.5  
 
                       
Total healthcare distribution
    1,138,973       98.0       1,041,990       98.0  
Technology (6)
    22,808       2.0       21,007       2.0  
 
                       
Total
  $ 1,161,781       100.0 %   $ 1,062,997       100.0 %
 
                       
 
(1)   Adjusted to reflect the effects of our discontinued operation.
 
(2)   Consists of consumable products, small equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.
 
(3)   Consists of products sold in the United States and Canada.
 
(4)   Consists of products sold in the United States medical and veterinary markets.
 
(5)   Consists of products sold in the dental, medical and veterinary markets, primarily in Europe.

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(6)   Consists of practice-management software and other value-added products and services, which are distributed primarily to healthcare providers in the United States and Canada.
     The $98.8 million, or 9.3%, increase in net sales for the three months ended April 1, 2006, includes increases of 11.7% local currency growth (8.3% internally generated primarily due to volume growth and 3.4% from acquisitions), offset by a 2.4% decline related to foreign currency exchange.
     The $45.5 million, or 10.4%, increase in dental net sales for the three months ended April 1, 2006, includes increases of 9.8% local currency growth (9.1% internally generated and 0.7% from acquisitions) and 0.6% related to foreign currency exchange. The 9.8% local currency growth was due to dental consumable merchandise sales growth of 9.9% (9.3% internal growth and 0.6% acquisition growth) and dental equipment sales and service growth of 9.1% (8.4% internal growth and 0.7% acquisition growth). Internally generated dental net sales growth was primarily due to increased volume.
     The $21.3 million, or 6.8%, increase in medical net sales for the three months ended April 1, 2006, includes internal growth of 4.9% primarily due to volume growth and acquisition growth of 1.9%.
     The $30.2 million, or 10.3%, increase in international net sales for the three months ended April 1, 2006, includes increases of 20.3% in local currencies (9.5% from acquisitions and 10.8% internally generated primarily due to volume growth), offset by a 10.0% decline related to foreign currency exchange.
     The $1.8 million, or 8.6%, increase in technology net sales for the three months ended April 1, 2006, includes increases of 8.3% in local currency growth and 0.3% due to foreign currency exchange. The increase was primarily due to increased electronic and financial services sales.
Gross Profit
     Gross profit and gross margins from continuing operations by segment and in total for the three months ended April 1, 2006 and March 26, 2005 were as follows (in thousands):
                                 
    April 1,     Gross     March 26,     Gross  
    2006     Margin %     2005 (1)     Margin %  
Healthcare distribution
  $ 320,115       28.1 %   $ 285,267       27.4 %
Technology
    17,487       76.7       16,127       76.8  
 
                       
Total
  $ 337,602       29.1     $ 301,394       28.4  
 
                       
 
(1)   Adjusted to reflect the effects of our discontinued operation.
     For the three months ended April 1, 2006, gross profit increased $36.2 million, or 12.0%, 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 $34.8 million, or 12.2%, for the three months ended April 1, 2006 from the comparable prior year period. Healthcare distribution gross profit margin increased to 28.1% for the three months ended April 1, 2006 from 27.4% for the comparable prior year period which reflects improved margin management.

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     Technology gross profit increased $1.4 million, or 8.4%, for the three months ended April 1, 2006 from the comparable prior year period. Technology gross profit margin decreased slightly to 76.7% for the three months ended April 1, 2006 from 76.8% for the comparable prior year period.
Selling, General and Administrative
     Selling, general and administrative expenses from continuing operations by segment and in total for the three months ended April 1, 2006 and March 26, 2005 were as follows (in thousands):
                                 
            % of             % of  
    April 1,     Respective     March 26,     Respective  
    2006     Net Sales     2005 (1) (2)     Net Sales  
Healthcare distribution
  $ 267,953       23.5 %   $ 240,184       23.1 %
Technology
    8,731       38.3       7,948       37.8  
 
                           
Total
  $ 276,684       23.8     $ 248,132       23.3  
 
                           
 
(1)   Adjusted to reflect the effects of our discontinued operation.
 
(2)   Adjusted to reflect the effect of our adoption of FAS 123(R) using the modified retrospective application.
     Selling, general and administrative expenses increased $28.6 million, or 11.5%, to $276.7 million for the three months ended April 1, 2006 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses increased to 23.8% from 23.3% for the comparable prior year period. The increase of 0.5% was primarily due to payroll and expenses related to recent acquisitions.
     As a component of selling, general and administrative expenses, selling expenses increased $23.4 million, or 14.8%, to $182.0 million for the three months ended April 1, 2006 from the comparable prior year period. As a percentage of net sales, selling expenses increased to 15.7% from 14.9% for the comparable prior year period. The increase was primarily due to payroll and expenses related to recent acquisitions.
     As a component of selling, general and administrative expenses, general and administrative expenses increased $5.2 million, or 5.8%, to $94.7 million for the three months ended April 1, 2006 from the comparable prior year period. As a percentage of net sales, general and administrative expenses decreased to 8.1% from 8.4% for the comparable prior year period. The decrease was primarily due to leveraging our infrastructure with increased sales volume.

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Other Expense, Net
     Other expense, net from continuing operations for the three months ended April 1, 2006 and March 26, 2005 were as follows (in thousands):
                 
    April 1,     March 26,  
    2006     2005 (1)  
Interest income
  $ 4,556     $ 1,299  
Interest expense
    (7,394 )     (6,226 )
Other, net
    221       (113 )
 
           
Other expense, net
  $ (2,617 )   $ (5,040 )
 
           
 
(1)   Adjusted to reflect the effects of our discontinued operation.
     Other expense, net decreased $2.4 million for the three months ended April 1, 2006 from the comparable prior year period, primarily due to increases in interest income resulting from higher cash and security balances at higher interest rates, partially offset by increased interest expense due to rising interest rates.
Income Taxes
     For the three months ended April 1, 2006, our effective tax rate from continuing operations decreased to 36.4% from 37.0% 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.
Liquidity and Capital Resources
     Our principal capital requirements include the funding of working capital needs, acquisitions, capital expenditures and repurchases of common stock. 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 ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for, and supply by our vendors of, 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. We do not expect the loss of cash flows from discontinued operations to have a material impact on our future liquidity or capital resources.
     Net cash flow used in operating activities was $38.0 million for the three months ended April 1, 2006, compared to $18.2 million for the comparable prior year period. This net change of $19.8 million was due primarily to timing changes in inventory and other current assets, partially offset by changes in accounts payable and accrued expenses, all before the effects of foreign exchange.
     Net cash used in investing activities was $84.8 million for the three months ended April 1, 2006, compared to $54.0 million for the comparable prior year period. The net change of $30.8 million was primarily due to acquisitions. We expect to invest up to approximately $55.0 million during the

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remainder of the fiscal year in capital projects to modernize and expand our facilities and computer systems infrastructure and to integrate subsidiary operations into our core infrastructure.
     Net cash provided by financing activities was $22.4 million for the three months ended April 1, 2006, compared to $3.4 million used in financing activities for the comparable prior year period. The net change of $25.8 million was primarily due to no repurchases of common stock during the three months ended April 1, 2006 and increased proceeds from the exercise of stock options.
     The following table summarizes selected measures of liquidity and capital resources (in thousands):
                 
    April 1,     December 31,  
    2006     2005  
Cash and cash equivalents
  $ 159,890     $ 254,498  
Available-for-sale securities
    80,175       80,195  
Working capital
    844,431       860,295    
 
                 
Debt:
               
Bank credit lines
  $ 3,380     $ 2,093  
Current maturities of long-term debt
    30,717       33,013  
Long-term debt
    488,214       489,520  
 
           
Total debt
  $ 522,311     $ 524,626  
 
           
     Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. Our available-for-sale securities consist of short-term tax-efficient auction rate securities, which also have a high degree of liquidity.
     Our business requires a substantial investment in working capital, which is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory.
     Our accounts receivable days sales outstanding from continuing operations improved to 42.6 days for the three months ended April 1, 2006 from 43.4 days for the comparable prior year period. Our inventory turnover from continuing operations for the three months ended April 1, 2006 increased to 6.6 turns from 6.4 turns for the comparable prior year period. We anticipate future increases in the value of our working capital as a result of continued sales growth.
     In 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, which commenced on February 15, 2005. The notes are convertible into our common stock at a conversion ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is the equivalent conversion price of $46.34 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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    upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement.
     Upon conversion, we are required to 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 currently have sufficient availability of funds through our $300.0 million revolving credit facility (discussed below) along with cash on hand to fully satisfy the cash portion of our conversion obligation. We also will pay contingent interest during any six-month interest period beginning August 20, 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.
     Our $130.0 million senior notes come due on June 30, 2009 and bear interest at a fixed rate of 6.94% per annum. Beginning September 25, 2006, principal payments totaling $20.0 million are due annually on our $100.0 million senior notes which bear interest at a fixed rate of 6.66% per annum. Interest on both notes is payable semi-annually.
     In 2003, we entered into agreements relating to our $230.0 million senior notes to exchange their fixed interest rates for variable interest rates. For the three months ended April 1, 2006, the weighted-average variable interest rate was 7.5%. This weighted-average variable interest rate comprises LIBOR plus a spread and resets on the interest due dates for such senior notes.
     On May 24, 2005, we entered into a $300.0 million revolving credit facility with a $100.0 million expansion feature. This facility, which expires in May 2010, replaced our previous revolving credit facility of $200.0 million, which was scheduled to expire in May 2006. As of April 1, 2006, there were $8.2 million of letters of credit provided to third parties and no borrowings outstanding under this revolving credit facility.
     On June 21, 2004, we announced that our Board of Directors had authorized a common stock repurchase program. This program previously allowed us to repurchase up to $100.0 million in shares of our common stock, which represented approximately 3.5% of shares outstanding on the announcement date. On October 31, 2005, our board authorized an additional $100.0 million of shares in our common stock to be repurchased under this program. As of April 1, 2006, we had repurchased $88.5 million or 2,518,110 shares under this initiative, with $111.5 million remaining.
     Some minority shareholders in certain of our subsidiaries have the right at certain times to require us to acquire their ownership interest in those entities at a price that approximates fair value pursuant to a formula price as defined in the agreements. Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain profitability targets are met. We accrue liabilities that may arise from these transactions when we believe the outcome of the contingency is determinable beyond a reasonable doubt.
     We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change our funding structure to reflect any new requirements.
     We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets, and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.

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     E-Commerce
     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 the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.
     Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive alternatives. We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships position us well to participate in this growing aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities.
Critical Accounting Policies and Estimates
     There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2005.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     There have been no material changes in our exposure to market risk from that disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
     Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of April 1, 2006 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
     There have been no changes in our internal control over financial reporting that occurred during the quarter ended April 1, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Internal Control
     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     Our business involves a risk of product liability claims and other claims in the ordinary course of business, 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. As a business practice, we generally obtain product indemnification from our suppliers.
     We have various insurance policies, including product liability insurance, covering risks in amounts that we consider adequate. In many cases in which we have been sued in connection with products manufactured by others, the manufacturer provides us with indemnification. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection. In our opinion, all pending matters, including those described below, are covered by insurance or will not otherwise have a material adverse effect on our financial condition or results of operations.
     As of April 1, 2006, we had accrued our best estimate of potential losses relating to product liability and other claims that were probable to result in a liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows. Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.
Product Liability Claims
     As of April 1, 2006, we were a defendant in approximately 40 product liability cases. We have obtained defense and indemnification commitments from the manufacturer in many of these cases. The manufacturer has withheld indemnification commitments in some of these cases pending product identification. In our opinion, these cases are covered by insurance or will not otherwise have a material adverse effect on our financial condition or results of operations.

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ITEM 6. EXHIBITS
     Exhibits.
     10.1 Henry Schein’s Management Team 2006 Performance Incentive Plan Summary
     31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
  Henry Schein, Inc.
 
  (Registrant)
 
   
 
  By: /s/ Steven Paladino
 
   
 
  Steven Paladino
 
  Executive Vice President and
 
  Chief Financial Officer
 
  (Authorized Signatory and Principal Financial
 
  and Accounting Officer)
Dated: May 9, 2006

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