SEC Filing - Henry Schein

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Sections 13 or 15(d) of the Securities Exchange
Act of 1934.

Date of Report: November 24, 1998

HENRY SCHEIN, INC.
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(Exact name of registrant as specified in its charter)

Delaware 0-27078 11-3136595
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification Number)

135 Duryea Road
Melville, New York 11747
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (516) 843-5500
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ITEM 5. OTHER EVENTS

On August 14, 1998, Henry Schein, Inc. (the "Company") acquired all the
common stock of the H. Meer Dental Supply Co. ("Meer") in exchange for 2,973,680
shares of the Company's Common Stock in a business combination accounted for
under the "pooling of interests" method of accounting. Accordingly, this Form
8-K is being filed to provide restated Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
financial statements and related exhibits included in Form 10-K/A of the Company
for the year ended December 27, 1997, which was previously filed with the
Securities and Exchange Commission.

SELECTED FINANCIAL DATA....................................................................................3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................................6

FINANCIAL STATEMENTS AND EXHIBITS

Reports of Independent Certified Public Accountants..............................................16

Consolidated Financial Statements:

Balance Sheets as of December 27, 1997 and December 28, 1996............................19

Statements of Operations for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995........................................20

Statements of Stockholders' Equity for the years ended
December 27, 1997, December 28, 1996 and December 30, 1995.....................21

Statements of Cash Flows for the years ended December 27, 1997
December 28, 1996 and December 30, 1995........................................22

Notes to Consolidated Financial Statements...........................................23-50

Schedule, years ended December 27, 1997, December 28, 1996 and
December 30, 1995

II-Valuation and Qualifying Accounts ..........................................52

All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto

Financial Data Schedules

ITEM 6. Selected Financial Data

The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended December 27, 1997 set forth below has been derived from the
Company's consolidated financial statements. The selected financial data and
consolidated financial statements have been restated to give retroactive effect
to the acquisition of the H. Meer Dental Supply Co., effective August 14, 1998,
which was accounted for under the pooling of interests method. The selected
financial data presented below should be read in conjunction with the
Consolidated Financial Statements and related notes thereto in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7. The Selected Operating Data and Net Sales By Market Data
presented below have not been audited.

Years Ended
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December 27, December 28, December 30, December 31, December 25,
1997 1996 1995 1994 1993
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(in thousands, except per share and selected operating data)

Statement of Operations Data:
Net sales............................. $1,698,496 $1,374,343 $1,090,936 $ 940,354 $ 752,142
Cost of sales......................... 1,188,098 961,588 751,616 655,398 523,613
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Gross profit.......................... 510,398 412,755 339,320 284,956 228,529
Selling, general and administrative
expenses........................... 447,789 369,642 306,347 252,720 202,239
Merger and integration costs(1)....... 50,779 -- -- -- --
Special management compensation(2).... -- -- 20,797 21,596 617
Special contingent consideration(3)... -- -- -- -- 3,216
Special professional fees(4).......... -- -- -- 2,007 2,224
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Operating income ..................... 11,830 43,113 12,176 8,633 20,233
Interest income....................... 7,353 7,139 3,433 2,512 1,458
Interest expense...................... (7,643) (5,487) (8,022) (5,546) (4,103)
Other income (expense) - net.......... 1,375 1,177 668 729 (585)
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Income before taxes on income,
minority interest and equity in
earnings of affiliates............. 12,915 45,942 8,255 6,328 17,003
Taxes on income ...................... 17,670 18,606 10,823 4,458 6,248
Minority interest in net income (loss)
of subsidiaries.................... (430) 246 509 561 318
Equity in earnings of affiliates...... 2,141 1,595 1,537 494 1,296
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Income (loss) before cumulative effect
of accounting change............... (2,184) 28,685 (1,540) 1,803 11,733
Cumulative effect of
accounting change.................. -- -- -- (60) 1,891
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Net income (loss)..................... $ (2,184) $ 28,685 $ (1,540) $ 1,743 $ 13,624
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Net income (loss) per common share:
Basic ............................. $ (0.06) $ 0.85 $ (0.06) $ 0.07
Diluted $ (0.06) $ 0.81 $ (0.06) $ 0.07
Weighted average shares outstanding:..
Basic.............................. 37,531 33,714 25,719 24,235
Diluted............................ 37,531 35,202 25,719 25,319

Years Ended
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December 27, December 28, December 30, December 31, December 25,
1997 1996 1995 1994 1993
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(in thousands, except per share and selected operating data)

Pro Forma Income Data (5):
Pro forma operating income............ $ 32,973 $ 32,236
Pro forma net income (loss)........... $ (1,778) $ 29,023 $ 17,936 $ 18,474
Pro forma net income (loss) per
common share:
Basic ............................. $ (0.05) $ 0.86 $ 0.70 $ 0.76
Diluted ........................... $ (0.05) $ 0.82 $ 0.66 $ 0.73
Pro forma average shares outstanding:
Basic ............................ 37,531 33,714 25,719 24,235
Diluted............................ 37,531 35,202 27,005 25,319

Selected Operating Data:
Number of orders shipped.............. 6,064,000 5,127,000 4,571,000 4,211,000 3,728,000
Average order size.................... $ 280 $ 268 $ 239 $ 223 $ 202

Net Sales by Market Data:
Dental(6)............................. $ 999,456 $ 819,721 $ 675,457 $ 602,253 $ 513,576
Medical............................... 441,015 341,329 245,439 211,393 144,972
Veterinary............................ 40,843 35,329 29,330 27,872 24,312
Technology(7)......................... 35,943 30,965 33,007 14,909 9,866
International(8)...................... 181,239 146,999 107,703 83,927 59,416
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$1,698,496 $ 1,374,343 $ 1,090,936 $ 940,354 $ 752,142
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Balance Sheet Data
(at period end):
Working capital....................... $ 312,916 $ 290,482 $ 188,303 $ 160,631 $ 138,081
Total assets.......................... 803,946 668,239 481,701 359,753 292,285
Total debt............................ 148,685 59,404 79,498 92,477 65,097
Redeemable stock (9).................. -- -- -- 14,745 --
Minority interest..................... 2,225 5,289 4,547 1,823 1,051
Stockholders' equity.................. 424,223 408,877 238,041 127,697 118,601

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(1) Merger and integration costs consist primarily of investment banking,
legal, accounting and advisory fees, compensation, impairment of
goodwill arising from acquired businesses integrated into the Company's
medical and dental businesses, as well as certain other integration
costs incurred in connection with the 1997 acquisitions of Sullivan,
MBMI and Dentrix, which were accounted for under the pooling of
interests method of accounting. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent
Developments" in Item 7 and the Consolidated Financial Statements and
related notes thereto in Item 8.

(2) Includes: (a) for 1995, non-cash special management compensation
charges of $17.5 million arising from final mark-to- market adjustments
(reflecting an increase in estimated market value from 1994 to the
initial public offering price of $16.00 per share) for stock grants
made to an executive officer of the Company in 1992 and other stock
issuances made to certain other senior management of the Company
(because of certain repurchase features which expired with the initial
public offering), an approximate $2.8 million non-cash special
management compensation charge (also based on the initial public
offering price of $16.00 per share) relating to compensatory options
granted in 1995, and a cash payment of $0.5 million for additional
income taxes resulting from such stock issuances; (b) for 1994,
non-cash special management compensation arising from accelerated
amortization of deferred compensation arising from the 1992 stock
grants to an executive officer of the Company of $17.3 million, which
included a 1994 mark-to-market adjustment (because of the repurchase
features referred to above) of $9.1 million, due to the resolution,
with the closing of the Reorganization, of certain contingencies
surrounding the issuance of the stock grants, non-cash special
management compensation charges of $1.6 million (net of prior accruals
of approximately $1.9 million under an executive incentive plan)
arising from stock issuances to certain other senior management of the
Company, valued at $3.5 million, and cash payments for income taxes of
approximately $2.4 million resulting from these stock issuances and
$0.3 million for additional income taxes resulting from the 1992 stock
grants; and (c) for 1993, non-cash special management compensation
charges of $0.6 million in amortization of deferred compensation
arising from the 1992 stock grants. See "Management's Discussion and
Analysis of Financial Condition And Results of Operations - Overview"
in Item 7 herein.

(3) Includes $0.7 million paid in connection with an acquisition and $2.5
million resulting from the buyout of employees' rights to future income
contained in their employment agreements. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -
Overview" in Item 7 herein.

(4) Includes special professional fees incurred by the Company in
connection with the Reorganization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview"
in Item 7 herein.

(5) Reflects the pro forma elimination of special charges incurred in 1995
and 1994 for special management compensation of $20.8 million and $21.6
million, respectively, and special professional fees incurred in 1994
of $2.0 million, arising from the Reorganization, and the related tax
effects of $1.2 million and $5.8 million for 1995 and 1994,
respectively, and provision for income taxes on previously untaxed
earnings of Dentrix as an S Corporation of $1.2 million, $0.5 million
and $0.3 million for 1996, 1995 and 1994, respectively, and provision
for income tax recoveries on previously untaxed losses of Meer as an S
Corporation of $0.4 million, $1.5 million, $0.3 million and $0.8
million for 1997, 1996,1995 and 1994, respectively. See "Management's
Discussion and Analysis of Results of Financial Condition and Results
of Operations-Overview and Recent Developments"" in Item 7 herein.

(6) Dental consists of the Company's dental business in the United States
and Canada.

(7) Technology consists of the Company's practice management software
business and certain other value-added products and services.

(8) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily Europe.

(9) Redeemable stock includes stock issued for compensation which was
subject to repurchase by the Company at fair market value in the event
of termination of employment of the holder of such shares, as well as
shares purchased by the trust for the Company's ESOP and allocable to
the ESOP participants. With the completion of the Company's initial
public offering, the stock issued for compensation and the ESOP Common
Stock were no longer subject to repurchase. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Overview" in Item 7 herein.

ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following discussion and analysis of the Company's consolidated financial
condition and consolidated results of operations has been restated to give
retroactive effect to the transactions accounted for under the pooling of
interests method of accounting and should be read in conjunction with the
Company's consolidated financial statements and notes thereto included herein.

Recent Developments

Since December 27, 1997, the Company has acquired in a pooling of interests
transaction, all of the outstanding common stock of the H. Meer Dental Supply
Co. ("Meer"), a leading full-service dental distributor serving over 40,000
dentists, dental laboratories and institutions throughout the United States with
1997 net sales of approximately $180.0 million. A copy of the merger agreement
and amendment to the merger agreement, dated August 14, 1998, are included as
exhibits (10.109 and 10.110) to the Company's Form 10-Q for the period ended
September 26, 1998. The Company also completed three other acquisitions
accounted for under the pooling of interests method and the acquisition of a
50.1% business interest accounted for under the purchase method of accounting
which together had aggregate net sales for 1997 of approximately $53.0 million.

The financial statements include adjustments to give retroactive effect to
the acquisition of Meer for all periods presented, as well as for the other
acquisitions described below. Prior to its acquisition by the Company, Meer
elected to be treated as an S Corporation under the Internal Revenue Code, and
accordingly, its earnings were not subject to taxation at the corporate level.
Pro forma adjustments have been made to reflect a provision for income taxes on
such previously untaxed earnings for each period presented. None of the other
1998 completed acquisitions were material.

During the year ended December 27, 1997, the Company acquired in pooling of
interests transactions, all of the outstanding common stock of (i) Sullivan
Dental Products, Inc ("Sullivan"), a distributor of consumable dental supplies
and equipment, with 1996 net sales of approximately $241.6 million, (ii) Micro
Bio-Medics, Inc. ("MBMI"), a distributor of medical supplies with 1996 net sales
of approximately $150.1 million, and (iii) Dentrix Dental Systems, Inc.
("Dentrix"), a leading provider of clinically-based dental practice management
systems with 1996 net sales of approximately $10.2 million. Prior to its
acquisition by the Company, Dentrix elected to be treated as an S Corporation
under the Internal Revenue Code, and accordingly, its earnings were not subject
to taxation at the corporate level. Pro forma adjustments have been made to
reflect a provision for income taxes on such previously untaxed earnings for
each period presented.

In connection with these acquisitions, the Company incurred certain merger
and integrations costs of approximately $50.8 million during the year ended
December 27, 1997. Net of taxes, merger and integration costs were approximately
$1.08 per share, on a diluted basis. Merger and integration costs consist
primarily of investment banking, legal, accounting and advisory fees,
compensation, impairment of goodwill arising from acquired businesses integrated
into the Company's medical and dental businesses, as well as certain other
integration costs associated with these mergers. Excluding the merger and
integration costs, pro forma net income and pro forma net income per common
share, on a diluted basis, would have been $41.0 million and $1.03,
respectively, for the year ended December 27, 1997.

In addition to these three acquisitions, the Company completed 21 other
acquisitions including; three medical and ten dental supply companies with
aggregate net sales for 1996 of approximately $32.0 million and $41.8 million,
respectively; two international dental and three international medical supply
companies with aggregate net sales for 1996 of approximately $5.3 million and
$18.3 million, respectively; two technology and value-added product companies
with aggregate net sales for 1996 of approximately $10.1

million; and certain assets and the business of IDE Interstate, Inc., a direct
marketer of healthcare products to dentists, doctors and veterinarians with net
sales for 1996 of approximately $50.0 million.

Of the 24 1997 completed acquisitions, six were accounted for under the
pooling of interests method of accounting, with the remainder being accounted
for under the purchase method of accounting (fifteen for 100% ownership
interests and three for majority ownership interests). The financial statements
have been restated to give retroactive effect to three of the pooling
transactions (Sullivan, MBMI and Dentrix) as the remaining three pooling
transactions were not material and have been included in the consolidated
financial statements from the beginning of the quarter in which the acquisitions
occurred. Operations of the 1997 completed acquisitions, accounted for under the
purchase method of accounting, have been included in the consolidated financial
statements from their respective acquisition dates.

Overview

The Company's results of operations in recent years have been significantly
impacted by strategies and transactions undertaken by the Company to expand its
business, both domestically and internationally, in part to address significant
changes in the healthcare industry, including potential national healthcare
reform, trends toward managed care, cuts in Medicare, consolidation of
healthcare distribution companies and collective purchasing arrangements. The
Company's results of operations in recent years have also been impacted by the
Reorganization.

From 1992 through 1994, the Company was a party to a series of transactions
leading to the Reorganization that resulted in, among other things, the Company
being separated from Holdings and the distribution of shares of the Common Stock
of the Company to its then current stockholders. In December 1992, an executive
officer of the Company received certain stock grants in the Company and Schein
Pharmaceutical, Inc. valued at approximately $6.2 million and $2.6 million,
respectively, and cash of approximately $5.3 million to pay income taxes on the
stock grants received. These stock grants were subject to the occurrence of
certain future events, including the fulfillment of the employment term by the
executive officer. Accordingly, these stock grants, totaling $8.8 million, were
treated as deferred compensation while the cash payments were charged to
earnings as special management compensation in the year ended December 26, 1992.
During 1993, the Company amortized the deferred compensation relating to stock
grants by the Company to the executive officer resulting in a charge to earnings
of $0.6 million. In 1994, the contingencies relating to the stock granted to the
executive officer were eliminated, such that these shares became fully vested.
Accordingly, deferred compensation of $8.8 million, less the 1993 amortization
of $0.6 million, plus a mark-to-market adjustment (because of certain repurchase
features) of approximately $9.1 million, along with a $0.3 million cash payment
for income taxes relating to the 1992 stock grants, was expensed in 1994 as
special management compensation.

In addition, in connection with the Reorganization, certain senior management
of the Company were issued shares of Common Stock of the Company in 1994 and
1995 to extinguish an obligation under a pre-existing long-term incentive plan
and to provide them with an ownership interest in the Company. In connection
with the issuance of the shares, a cash payment for income taxes relating to
such stock issuances of approximately $2.4 million was paid. This cash bonus,
plus $3.5 million, the fair value of the related stock issued, net of amounts
accrued under the long-term incentive plan of approximately $1.9 million,
resulted in an additional special management compensation charge to the Company
of approximately $4.0 million in 1994. Charges to earnings for the year ended
1995 related to a mark-to-market adjustment (because of certain repurchase
features) for stock grants made to an executive officer of the Company and the
stock issuances of the other senior management of approximately $17.5 million
and cash payments of $0.5 million for income taxes related to the stock
issuances.

Additionally, the Company has granted certain employees options for shares of
the Company's Common Stock, which became exercisable upon the Company's initial
public offering on November 3, 1995, at which time substantially all such
options vested. Non-recurring special compensation charges for the options
issued to employees recorded in the fourth quarter of 1995 amounted to
approximately $2.8 million. In addition, the Company recorded an approximate
$1.1 million related tax benefit.

Special charges for special management compensation and special professional
fees incurred in connection with the Reorganization aggregated $20.8 million and
$23.6 million for 1995 and 1994, respectively.

Results of Operations

The following table sets forth for the periods indicated the percentage of
net sales by market of the Company and the percentage change in such items for
the years ended 1997, 1996 and 1995.

Percentage Increase
Percentage of Net Sales (Decrease)
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Years Endeded
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December 27, December 28, December 30,
1997 1996 1995 1997 to 1996 1996 to 1995
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Net Sales by Market:

Dental (1) 58.8% 59.6% 61.9% 21.9% 21.4%
Medical 26.0 24.8 22.4 29.2 39.1
Veterinary 2.4 2.6 2.7 15.6 20.5
Technology (2) 2.1 2.3 3.0 16.1 (6.2)
International (3) 10.7 10.7 10.0 23.3 36.5
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100.0% 100.0% 100.0% 23.6 26.0

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(1) Dental consists of the Company's dental business in the United States
and Canada.

(2) Technology consists of the Company's practice management software
business and certain other value-added products and services.

(3) International consists of the Company's business (substantially all
dental) outside the United States and Canada, primarily in Europe.

1997 Compared to 1996

Net sales increased $324.2 million, or 23.6%, to $1,698.5 million in 1997
from $1,374.3 million in 1996. Of the $324.2 million increase, approximately
$179.8 million represented a 21.9% increase in the Company's dental business,
$99.7 million represented a 29.2% increase in its medical business, $34.2
million represented a 23.3% increase in its international business, $5.5 million
represented a 15.6% increase in the Company's veterinary business, and $5.0
million, represented a 16.1% increase in its technology business. The increase
in dental net sales was primarily the result of the continuing favorable impact
of the Company's integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), purchase acquisitions, continued success in the Company's target
marketing programs and increased sales in the large dental equipment market. Of
the approximately $99.7 million increase in medical net sales, approximately
$16.9 million, or 17.0%, represents incremental net sales to renal dialysis
centers, with a more focused direct mail strategy, large account flu vaccine
sales and acquisitions primarily accounting for the balance of the increase in
medical net sales. The Company's largest renal dialysis customer (Renal
Treatment Centers, Inc.) was recently acquired by Total Renal Care, Inc. who
currently is not a customer of the Company. In the international

market, the increase in net sales was due to acquisitions, primarily in Germany
and the United Kingdom, and increased account penetration in France and Germany.
Unfavorable exchange rate translation adjustments resulted in a net sales
decrease of approximately $10.5 million. Had net sales for the international
market been translated at the same exchange rates in effect during 1996,
international net sales would have increased by an additional 7.7%. In the
veterinary market, the increase in net sales was primarily due to increased
account penetration with corporate accounts, improved participation in select
purchasing groups, and targeted emphasis on the equine race track segment. The
increase in technology and value-added product sales was primarily due to
increase in sales of Dentrix software systems and 1997 acquisitions.

Gross profit increased by $97.6 million, or 23.6%, to $510.4 million in 1997,
from $412.8 million in 1996, following the changes in sales. Gross profit margin
increased by only 0.1% to 30.1% from 30.0% last year, with slight improvements
in technology, international and medical margins.

Selling, general and administrative expenses, excluding merger and
integration costs, increased by $78.2 million, or 21.2%, to $447.8 million in
1997 from $369.6 million in 1996. Selling and shipping expenses increased by
$52.7 million, or 20.4% to $311.3 million in 1997 from $258.6 million in 1996.
As a percentage of net sales, selling and shipping expenses decreased 0.5% to
18.3% in 1997 from 18.8% in 1996. This decrease was primarily due to leveraging
of the Company's distribution infrastructure, partially offset by incremental
shipping, payroll and related costs amounting to $1.4 million resulting from the
Teamsters strike against UPS in the third quarter and an increase in selling
expenses. General and administrative expenses increased $25.5 million, or 23.0%,
to $136.5 million in 1997 from $111.0 million in 1996, primarily as a result of
purchase acquisitions. As a percentage of net sales, general and administrative
expenses decreased 0.1% to 8.0% in 1997 from 8.1% in 1996.

Other income (expense) - net decreased by $1.7 million, to $1.1 million for
the year ended December 27, 1997 from $2.8 million for 1996. The decrease in
Other income (expense) - net was primarily due to an increase in interest
expense resulting from an increase in average borrowings partially offset by a
decline in the average cost of borrowing, and a modest increase in interest
income primarily due to an increase in finance charge income and imputed
interest income arising from non-interest bearing extended payment term sales.

Equity in earnings of affiliates increased $0.5 million or 31.3% to $2.1
million in 1997 from $1.6 million in 1996. This increase in earnings of
affiliates was primarily due to increased sales volume and improved margins for
the products sold by an unconsolidated 50%-owned company.

For 1997 the Company's effective tax rate was 136.8%. On a pro forma basis,
adjusting for assumed tax benefits arising from the previously untaxed loss of
Meer, and excluding merger and integration costs, the majority of which are not
deductible for income tax purposes, the Company's effective tax rate would have
been 39.7%. The difference between the effective tax rate (excluding merger and
integration costs) and the Federal statutory rate relates primarily to state
income taxes. For 1996, the Company's provision for taxes was $18.6 million,
while the pre-tax income was $45.9 million. On a pro forma basis, adjusting for
a provision for taxes on the previously untaxed earnings of Dentrix and
previously untaxed loss of Meer, the Company's effective tax rate would have
been 39.8%. The difference between the Company's effective tax rate and the
Federal statutory rate relates primarily to state income taxes offset by
tax-exempt interest on municipal securities.

1996 Compared to 1995

Net sales increased $283.4 million, or 26.0%, to $1,374.3 million in 1996
from $1,090.9 million in 1995. Of the $283.4 million increase, approximately
$144.3 million represented a 21.4% increase in the Company's dental business,
$95.9 million represented a 39.1% increase in its medical business, $39.3
million represented a 36.5% increase in its international business and $6.0
million represented a 20.5% increase in the Company's veterinary business,
offset by a $2.0 million, or 6.2% decrease in its technology business. The
dental net sales increase was primarily the result of the Company's continued
emphasis on its integrated sales and marketing approach (which coordinates the
efforts of its field sales consultants with its direct marketing and telesales
personnel), expansion into the U.S. market for large dental equipment, which
helped increase sales to existing customers and allowed for greater market
penetration and acquisitions. Of the approximately $95.9 million increase in
medical net sales, approximately $20.9 million, or 21.8%, represents incremental
net sales to renal dialysis centers, with the effects of acquisitions, increased
sales to hospitals, increased outbound telesales activity and the addition of
new customers primarily accounting for the balance of the increase in medical
net sales. In the international market, the increase in net sales was due to
acquisitions, primarily in France, and increased account penetration in Germany
and the United Kingdom. Unfavorable exchange rate translation adjustments
resulted in a net sales decrease of approximately $4.4 million dollars. Had net
sales for the International market been translated at the same exchange rates in
effect during 1995, international net sales would have increased by an
additional 4.1%. In the veterinary market, the increase in net sales was due to
the full year impact of new product lines introduced in the fourth quarter of
1995, increased account penetration and continued volume growth to customers of
a veterinary-sponsored purchasing group. Net sales in the Company's technology
group was below last year's sales volume levels due to unusually high sales
volume in the fourth quarter of 1995 related to the introductory launch, at that
time, of the Company's Easy Dental (Registered) Plus Windows (Registered)
based product; offset due to increase in sales of Dentrix software systems.

Gross profit increased by $73.5 million, or 21.7%, to $412.8 million in 1996,
from $339.3 million in 1995, while gross profit margin decreased by 1.1% to
30.0% from 31.1% for the same period. The decrease in gross profit margin was
primarily due to product mix as fewer high margin Easy Dental(Registered) Plus
for Windows(Registered) products were sold in 1996 coupled with lower margin
hospital sales. Excluding the gross profit margin for the Company's technology
group, which was 69.0% for 1996 as compared to 79.3% for 1995, gross profit
margins decreased by 0.5% from 29.6% for 1995 to 29.1% for 1996.

Selling, general and administrative expenses increased by $63.3 million, or
20.7%, to $369.6 million in 1996 from $306.3 million in 1995. Selling and
shipping expenses increased by $48.7 million, or 23.2%, to $258.6 million in
1996 from $209.9 million in 1995. As a percentage of net sales, selling and
shipping expenses decreased 0.4% to 18.8% in 1996 from 19.2% in 1995. The
decrease in selling and shipping expenses as a percentage of net sales was
primarily due to reductions in sales promotions offered by the Company's
technology group in conjunction with the introductory promotion of Easy
Dental(Registered) Plus for Windows(Registered) version which occurred during
1995. These introductory promotional expenses represented 0.5% of net sales in
1995. Excluding these expenses from 1995, selling and shipping expenses, as a
percentage of net sales, would have been 0.1% higher than last year. This
increase was due primarily to increased commissions as a result of increased
sales, various promotional programs and incremental field sales and marketing
personnel. General and administrative expenses increased $14.6 million, or
15.1%, to $111.0 million in 1996 from $96.4 million in 1995, primarily as a
result of acquisitions. As a percentage of net sales, general and administrative
expenses decreased 0.7% to 8.1% in 1996 from 8.8% in 1995 due primarily to the
relatively fixed nature of general and administrative expenses when compared to
the 26.0% increase in sales volume for the same period.

Interest-net increased $6.3 million to a net interest income of $1.7 million
in 1996 from a net interest expense of $4.6 million in 1995. This decrease
primarily resulted from the use of the proceeds of the Company's follow-on
offering in June 1996 and from the conversion of outstanding warrants to reduce
debt, an increase in interest income arising from the temporary investment of
proceeds in excess of debt and imputed interest income arising from non-interest
bearing extended payment term sales, offset in part by an increase in average
interest rates.

For 1996, the Company's provision for taxes was $18.6 million, while the
pre-tax income was $45.9 million. On a pro forma basis, adjusting for a
provision for taxes on the previously untaxed earnings of Dentrix and previously
untaxed loss of Meer, the Company's effective tax rate would have been 39.8%.
The difference between the Company's effective tax rate and the Federal
statutory rate relates primarily to state income taxes offset by tax-exempt
interest on municipal securities. In 1995, the Company's provision for taxes was
$10.8 million, while the pre-tax income was $8.3 million. The difference between
the tax provision and the amount that would have been recoverable by applying
the statutory rate to pre-tax loss was attributable substantially to the
non-deductibility for income tax purposes of the $17.5 million appreciation in
the value of the stock issued to an executive officer and other senior
management of the Company. On a pro forma basis, excluding special charges, and
adjusting for a provision for taxes on the previously untaxed earnings of
Dentrix and previously untaxed loss of Meer, the Company's taxes on income for
1995 were $12.1 million, resulting in an effective tax rate of 41.8%. The
difference between the pro forma effective tax rate and the Federal statutory
rate relates primarily to state income taxes and currently non-deductible net
operating losses of certain foreign subsidiaries, primarily in France, which are
not included in the Company's consolidated tax return.

In the fourth quarter of 1996 the Company made adjustments which increased
net income by approximately $2.4 million. These adjustments, which related
predominately to estimated reserves for premium coupon redemptions, finance
charges receivable, and income taxes, resulted from management's updated
evaluations of historical trends (reflecting changes in business practices and
other factors) and other assumptions underlying such estimates. The amounts of
such reserves in prior quarters were based on reasonable estimates reflecting
available facts and circumstances.

Year 2000

Management has initiated a company-wide program to prepare the Company's
computer systems, applications and software products for the year 2000, as well
as to assess the readiness for the year 2000 of critical vendors and other third
parties upon which the Company relies to operate its business. The Year 2000
issue arises from the widespread use of computer programs that rely on two-digit
date codes to perform computations or decision-making functions. The Company
anticipates completing all of its system critical upgrades and enhancements and
testing before the end of the third quarter of 1999. The Company expects to
incur internal payroll costs as well as consulting costs and other expenses
related to infrastructure, facility enhancements and software upgrades necessary
to prepare for the Company's systems for the year 2000. Management estimates
that the cost of this program will be between $2.0 million and $3.0 million,
with approximately $1.5 million representing incremental costs to the Company.
There can be no assurance that the computer systems of other companies upon
which the Company's systems or software products rely will be timely converted,
or that such failure to convert by another company would not have a material
adverse effect on the Company's systems and results of operations.

The statements contained in this Year 2000 readiness disclosure are subject
to certain protection under the Year 2000 Information and Readiness Disclosure
Act.

Inflation

Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.

Effect of Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS 131)
which supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.

SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the relatively recent issuance of this standard, management
has been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.

Risk Management

The Company has operations in the United States, Canada, Mexico, the United
Kingdom, The Netherlands, Belgium, Germany, France, the Republic of Ireland,
Austria and Spain. Substantially all of the Company's operations endeavors to
protect its margins by using foreign currency forward contracts to hedge the
estimated foreign currency payments to foreign vendors. The total U.S. dollar
equivalent of all foreign currency forward contracts hedging vendor payments was
$3.4 million as of the 1997 fiscal year end.

The Company considers its investment in foreign operations to be both
long-term and strategic. As a result, the Company does not hedge the long-term
translation exposure to its balance sheet. The Company has experienced negative
translation adjustments of approximately $1.0 million and $0.5 million in 1997
and 1996, respectively, which adjustments were reflected in the balance sheet as
an adjustment to stockholders' equity. The cumulative translation adjustment at
the end of 1997 showed a net negative translation adjustment of $1.6 million.

The Company issues a Canadian catalog once a year with prices stated in
Canadian dollars; however, orders are shipped from the Company's United States
warehouses resulting in U.S. dollar costs for Canadian dollar sales. To minimize
the exposure to fluctuations in foreign currency exchange rates, in January 1998
the Company entered into a foreign currency forward option with a major
international bank to convert estimated monthly Canadian dollar receipts into
U.S. dollars. Under this agreement, the Company has an option to sell 6.0
million Canadian dollars at predetermined fixed rates. The option expires on
August 28, 1998, however the Company anticipates entering into new options and
contracts in the normal course of its business.

A balloon payment of approximately $3.4 million due to a bank under a term
loan related to a Dutch acquisition came due in October 1997. The Company
settled this loan by entering into a new Netherlands Guilder (NLG) loan in the
amount of 6.5 million NLG. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary. The new NLG loan has a balloon payment of 4.1 million NLG due in
January 2002.

The Company entered into two interest rate swaps with major financial
institutions to exchange variable rate interest for fixed rate interest. The net
result was to substitute a weighted average fixed interest rate of 7.81% for the
variable LIBOR rate on $13.0 million of the Company's debt. The interest rate
swaps expire in October and November of 2001. The Company entered into an
interest rate collar agreement with a major bank for $10.0 million. The
agreement limits the net interest rate charged to 8.25%. The Company receives no
further interest rate benefit once the applicable interest rate falls below
6.55%. This agreement matures in June 1998.

Liquidity and Capital Resources

The Company's principal capital requirements have been to fund (a) working
capital needs resulting from increased sales, extended payment terms on various
products, special inventory forward buy-in opportunities and to fund initial
start-up inventory requirements for new distribution centers, (b) acquisitions,
and (c) capital expenditures. Since sales have been strongest during the fourth
quarter and special inventory forward buy-in opportunities are most prevalent
just before the end of the year, the Company's working capital requirements have
been generally higher from the end of the third quarter to the end of the first
quarter of the following year. In addition, a subsidiary of the Company had a
stock repurchase plan under which 205,800 shares of common stock, on a converted
basis, were repurchased from the public over the last two years at an
approximate cost of $2.5 million. The Company has financed its business
primarily through its revolving credit facilities and stock issuances.

Net cash used in operating activities for the year ended December 27, 1997 of
$41.9 million resulted primarily from a net increase in working capital of $71.2
million offset in part by non-cash charges relating primarily to provision for
merger and integration costs, depreciation and amortization, and allowances on
accounts receivable of $17.1 million, $15.7 million and $3.9 million,
respectively. The increase in working capital was primarily due to (i) a $50.7
million increase in accounts receivable resulting primarily from increased net
sales and extended payment terms and a decrease in the percentage of customers
who make payment with their orders, (ii) a $19.9 million increase in
inventories, primarily due to year-end inventory forward buy-in opportunities
and to fund initial start-up inventory requirements for new distribution
centers, and (iii) a $5.2 million increase in loans and other receivables,
offset in part by an increase in accounts payable and other accrued expenses of
$4.7 million. The Company anticipates future increases in working capital as a
result of its continued sales growth, extended payment terms and special
inventory forward buy-in opportunities.

Net cash used in investing activities for the year ended December 27, 1997 of
$70.3 million resulted primarily from cash used to make acquisitions of $42.3
million and capital expenditures of $21.9 million. During the past three years,
the Company has invested more than $51.4 million in the development of new
computer systems, and expenditures for new and exisiting operating facilities.
The Company expects that it will continue to invest in excess of $30.0 million
during the year-ending December 26, 1998, including approximately $10.0 million
to $12.0 million relating to the consolidation and integration of facilities and
systems as a result of recent acquisitions. Thereafter, the Company expects to
invest in excess of $20.0 million per year in capital projects to modernize and
expand its facilities and infrastructure systems and integrate operations.

Net cash provided by financing activities for the year ended December 27,
1997 of $78.2 million resulted primarily from cash proceeds from bank borrowings
of approximately $92.6 million offset primarily by debt repayments of
approximately $16.0 million.

Certain acquisitions and joint ventures, holders of minority interests in the
acquired entities or ventures have the right at certain times to require the
Company to acquire their interest at either fair market value or a formula price
based on earnings of the entity.

The Company's cash and cash equivalents as of December 27, 1997 of $11.8
million consist of bank balances and investments in commercial paper rated AAA
by Moody's (or an equivalent rating). These investments have staggered maturity
dates, none of which exceed three months, and have a high degree of liquidity
since the securities are actively traded in public markets.

The Company entered into an amended revolving credit facility on August 15,
1997 that increased its main credit facility to $150.0 million and extended the
facility termination date to August 15, 2002. Borrowings under the credit
facility were $76.2 million at December 27, 1997. Certain of the Company's
subsidiaries have credit facilities that totaled $75.4 million at December 27,
1997 under which $43.0 million had been borrowed.

The aggregate purchase price of the acquisitions completed during 1997,
including the acquisition of the minority interests of a subsidiary, was
approximately $502.4 million, payable $40.8 million in cash, $8.6 million in
notes and $453.0 million in stock. The cash portion of the purchase price was
primarily funded by proceeds from the Company's follow-on offering, completed in
June 1996.

The Company believes that its cash and cash equivalents of $11.8 million as
of December 27, 1997, its ability to access public debt and equity markets and
the availability of funds under its existing credit agreements will provide it
with sufficient liquidity to meet its currently foreseeable short-term and
long-term capital needs.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

HENRY SCHEIN, INC. AND SUBSIDIARIES Page Number
-----------
Reports of Independent Certified Public Accountants....................................... 16-18

Consolidated Financial Statements:

Balance Sheets as of December 27, 1997 and December 28, 1996........................... 19

Statements of Operations for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 ........................................... 20

Statements of Stockholders' Equity for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 ............................................. 21

Statements of Cash Flows for the years ended December 27, 1997,
December 28, 1996 and December 30, 1995 ............................................. 22

Notes to Consolidated Financial Statements ............................................ 23-50

Schedule, years ended December 27, 1997,
December 28, 1996 and December 30, 1995

II - Valuation and Qualifying Accounts ................................................ 52

All other schedules are omitted because the required information is either
inapplicable or is included in the consolidated financial statements or the
notes thereto.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Henry Schein, Inc.
Melville, New York

We have audited the accompanying consolidated balance sheets of Henry Schein,
Inc. and Subsidiaries as of December 27, 1997 and December 28, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 27, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 and 1995 consolidated financial statements
of Micro Bio-Medics, Inc., which statements reflect total assets of $60,444,000
as of November 30, 1996, and total revenues of $150,143,000 and $119,874,000,
for the years ended November 30, 1996 and 1995, respectively, or the 1996 and
1995 financial statements of Sullivan Dental Products, Inc. which statements
reflect total assets of $101,050,000 as of December 31, 1996 and total revenues
of $241,583,000 and $215,568,000 for the years ended December 31, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such subsidiaries, is based solely on the reports of the other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Henry Schein, Inc. and Subsidiaries
at December 27, 1997 and December 28, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
27, 1997 in conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

New York, New York
February 27, 1998, except for Note 7
which is as of August 14, 1998

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Micro Bio-Medics, Inc.
Pelham Manor, New York

We have audited the consolidated balance sheets of Micro Bio-Medics, Inc. and
Subsidiaries as of November 30, 1996 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for each of the two years
in the period ended November 30, 1996, not presented separately herein. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro Bio-Medics,
Inc. and Subsidiaries as of November 30, 1996 and the results of their
operations and their cash flows for each of the two years in the period ended
November 30, 1996, in conformity with generally accepted accounting principles.

MILLER, ELLIN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
February 12, 1997

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Sullivan Dental Products, Inc.
West Allis, Wisconsin

We have audited the balance sheets of Sullivan Dental Products, Inc. as of
December 31, 1996 and the related statements of income, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996, not
presented separately herein. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sullivan Dental Products, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE, LLP

Milwaukee, Wisconsin
February 18, 1997

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

December 27, December 28,
1997 1996
-------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 11,813 $ 45,818
Accounts receivable, less reserves of $14,922 and
$10,135, respectively................................. 284,727 227,272
Inventories.............................................. 228,005 194,519
Deferred income taxes.................................... 13,323 7,944
Other.................................................... 41,128 32,092
--------- ---------
Total current assets.............................. 578,996 507,645
Property and equipment, net................................. 63,155 52,243
Goodwill and other intangibles, net ........................ 130,847 77,718
Investments and other....................................... 30,948 30,633
--------- ---------
$ 803,946 $ 668,239
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 137,992 $ 131,278
Bank credit lines........................................ 32,173 17,127
Accruals:
Salaries and related expenses......................... 25,021 22,487
Merger and integration costs.......................... 17,056 ---
Other................................................. 42,194 37,377
Current maturities of long-term debt..................... 11,644 8,894
--------- ---------
Total current liabilities......................... 266,080 217,163
Long-term debt.............................................. 104,868 33,383
Other liabilities........................................... 6,550 3,527
--------- ---------
Total liabilities................................. 377,498 254,073
--------- ---------
Minority interest........................................... 2,225 5,289
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 60,000,000;
issued: 38,120,572 and
36,619,516 respectively............................... 381 366
Additional paid-in capital............................... 328,644 316,771
Retained earnings ....................................... 99,588 96,278
Treasury stock, at cost, 62,479 and 281,394
shares, respectively ................................. (1,156) (3,902)
Foreign currency translation adjustment.................. (1,609) (636)
Deferred compensation.................................... (1,625) ---
--------- ---------
Total stockholders' equity........................ 424,223 408,877
--------- ---------
$ 803,946 $ 668,239
========= =========

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

Years Ended
---------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
--------------- ------------ ----------

Net sales...................................... $1,698,496 $ 1,374,343 $1,090,936
Cost of sales.................................. 1,188,098 961,588 751,616
---------- ------------ ----------
Gross profit................................ 510,398 412,755 339,320
Operating expenses:
Selling, general and administrative......... 447,789 369,642 306,347
Special management compensation............. --- --- 20,797
Merger and integration costs................ 50,779 --- ---
---------- ------------ ----------
Operating income ........................ 11,830 43,113 12,176
Other income (expense):
Interest income............................. 7,353 7,139 3,433
Interest expense ........................... (7,643) (5,487) (8,022)
Other-net................................... 1,375 1,177 668
---------- ------------ ----------
Income before taxes on income, minority
interest and equity in earnings of
affiliates........................... 12,915 45,942 8,255
Taxes on income .............................. 17,670 18,606 10,823
Minority interest in net income (loss) of
subsidiaries................................ (430) 246 509
Equity in earnings of affiliates............... 2,141 1,595 1,537
---------- ------------ ----------
Net income (loss).............................. $ (2,184) $ 28,685 $ (1,540)
========== ============ ==========

Net income (loss) per common share:
Basic ...................................... $ (0.06) $ 0.85 $ (0.06)
========== ============ ==========
Diluted..................................... $ (0.06) $ 0.81 $ (0.06)
========== ============ ==========
Weighted average common shares outstanding:
Basic....................................... 37,531 33,714 25,719
Diluted..................................... 37,531 35,202 25,719

Pro forma:
Historical net income (loss)................ $ (2,184) $ 28,685 $ (1,540)
Pro forma adjustments:
Special management compensation.......... --- --- 20,797
Tax effect of above...................... --- --- (1,174)
Provision for income taxes on previously
untaxed earnings of acquisitions..... 406 338 (147)
---------- ------------ ----------
Pro forma net income (loss)................. $ (1,778) $ 29,023 $ 17,936
========== ============ ==========

Pro forma net income (loss) per common share
Basic.................................... $ (0.05) $ 0.86 $ 0.70
========== ============ ==========
Diluted.................................. $ (0.05) $ 0.82 $ 0.66
========== ============ ==========

Weighted average shares outstanding:
Basic ................................... 37,531 33,714 25,719
Diluted.................................. 37,531 35,202 27,005

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)

Common Stock Additional
$.01 Par Value Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
----------- ------- --------- -------- ----------

Balance, December 31, 1994, as previously reported......... 9,923,859 $ 99 $ 9,960 $ 29,954 $ ---
Adjustment for pooled companies ........................... 12,594,447 126 40,124 47,892 ---
----------- ------- --------- -------- ----------
Balance, December 31, 1994, as restated.................... 22,518,306 225 50,084 77,846 ---
Net loss................................................... --- --- --- (1,540) ---
Dividends paid by pooled companies ........................ --- --- --- (2,912) ---
Shares issued for acquisition.............................. 1,341,266 14 7,957 --- ---
Stock issued in initial public offering.................... 5,090,000 51 72,417 --- ---
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of
initial public offering................................. 2,084,398 20 32,180 --- ---
Issuance of compensatory stock options..................... --- --- 2,805 --- ---
Purchase of treasury stock (233,442 shares)................ --- --- --- --- (3,000)
Shares reacquired from a prior year's acquisition
(7,497 shares).......................................... --- --- --- --- (101)
Foreign currency translation adjustment.................... --- --- --- --- ---
Shares issued for stock options and warrants, including
tax benefit............................................. 84,996 1 779 --- ---
Shares issued for conversion of debentures................. 116,250 1 1,389 --- ---
----------- ------- --------- -------- ---------
Balance, December 30, 1995................................. 31,235,216 312 167,611 73,394 (3,101)
Net income................................................. --- --- --- 28,685 ---
Dividends paid by pooled companies ........................ --- --- --- (5,801) ---
Shares issued for acquisitions............................. 820,930 10 16,246 --- ---
Stock issued in follow-on offering......................... 3,734,375 37 124,070 --- ---
Stock issued to ESOP trust................................. 24,210 --- 820 --- ---
Purchase of treasury stock (27,455 shares)................. --- --- --- --- (628)
Shares reacquired from a prior year's acquisition
(13,000 shares)......................................... --- --- --- --- (173)
Foreign currency translation adjustment.................... --- --- --- --- ---
Shares issued by pooled company............................ 240,017 2 2,597 --- ---
Shares issued for stock options and warrants, including
tax benefit............................................. 448,518 4 4,030 --- ---
Shares issued for conversion of debentures................. 116,250 1 1,397 --- ---
----------- ------- --------- -------- ---------
Balance, December 28, 1996................................. 36,619,516 366 316,771 96,278 (3,902)
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in
the aggregate........................................... --- --- --- 5,899 ---
Adjustment to change the fiscal year end of two companies
acquire under the pooling of interests method........ --- --- --- 2,037 ---
Net loss................................................... --- --- --- (2,184) ---
Dividends paid by pooled companies ........................ --- --- --- (2,442) ---
Shares issued for acquisitions............................. 906,401 9 2,945 --- ---
Issuance of restricted stock............................... 44,846 --- --- --- ---
Treasury shares issued for acquisitions (246,960 shares)... --- --- --- --- 3,303
Purchase of treasury stock (30,507 shares)................. --- --- --- --- (618)
Shares reacquired from a prior year's acquisition
(2,339 shares).......................................... --- --- --- --- (34)
Treasury shares retired................................... (5,644) --- (95) --- 95
Foreign currency translation adjustment.................... --- --- --- --- ---
Shares issued by pooled company............................ 171,714 1 2,875 --- ---
Stock issued to ESOP trust................................. 44,122 --- 1,150 --- ---
Shares issued for stock options, including tax benefit..... 339,617 5 4,998 --- ---
----------- ------- --------- -------- -----------
Balance, December 27, 1997................................. 38,120,572 $ 381 $ 328,644 $ 99,588 $ (1,156)
=========== ======= ========= ======== ===========

Foreign
Currency Deferred Total
Translation Compen- Stockholders'
Adjustment sation Equity
------------ ------- ------------

Balance , December 31, 1994, as previously reported........ $ (458) $ --- $ 39,555
Adjustment for pooled companies ........................... --- --- 88,142
----------- ------- ----------
Balance, December 31, 1994, as restated.................... (458) --- 127,697
Net loss................................................... --- --- (1,540)
Dividends paid by pooled companies ........................ --- --- (2,912)
Shares issued for acquisition.............................. --- --- 7,971
Stock issued in initial public offering.................... --- --- 72,468
Reclassification of redeemable stock issued as special
compensation and to ESOP trust upon closing of
initial public offering................................. --- --- 32,200
Issuance of compensatory stock options..................... --- --- 2,805
Purchase of treasury stock (233,442 shares)................ --- --- (3,000)
Shares reacquired from a prior year's acquisition
(7,497 shares).......................................... --- --- (101)
Foreign currency translation adjustment.................... 283 --- 283
Shares issued for stock options and warrants, including
tax benefit............................................. --- --- 780
Shares issued for conversion of debentures................. --- --- 1,390
----------- ------- ---------
Balance, December 30, 1995................................. (175) --- 238,041
Net income................................................. --- --- 28,685
Dividends paid by pooled companies ........................ --- --- (5,801)
Shares issued for acquisitions............................. --- --- 16,256
Stock issued in follow-on offering......................... --- --- 124,107
Stock issued to ESOP trust................................. --- --- 820
Purchase of treasury stock (27,455 shares)................. --- --- (628)
Shares reacquired from a prior year's acquisition
(13,000 shares)......................................... --- --- (173)
Foreign currency translation adjustment.................... (461) --- (461)
Shares issued by pooled company............................ --- --- 2,599
Shares issued for stock options and warrants, including
tax benefit............................................. --- --- 4,034
Shares issued for conversion of debentures................. --- --- 1,398
----------- ------- ----------
Balance, December 28, 1996................................. (636) --- 408,877
Retained earnings of three companies acquired under the
pooling of interests method, deemed not material in
the aggregate........................................... --- --- 5,899
Adjustment to change the fiscal year end of two companies
acquire under the pooling of interests method........ --- --- 2,037
Net loss................................................... --- --- (2,184)
Dividends paid by pooled companies ........................ --- --- (2,442)
Shares issued for acquisitions............................. --- --- 2,954
Issuance of restricted stock............................... --- (1,625) (1,625)
Treasury shares issued for acquisitions (246,960 shares)... --- --- 3,303
Purchase of treasury stock (30,507 shares)................. --- --- (618)
Shares reacquired from a prior year's acquisition
(2,339 shares).......................................... --- --- (34)
Treasury shares retired................................... --- --- ---
Foreign currency translation adjustment.................... (973) --- (973)
Shares issued by pooled company............................ --- --- 2,876
Stock issued to ESOP trust................................. --- --- 1,150
Shares issued for stock options, including tax benefit..... --- --- 5,003
----------- ------- ---------
Balance, December 27, 1997................................. $ (1,609) $(1,625) $ 424,223
=========== ======= =========

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended
------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ----------- ---------

Cash flows from operating activities:
Net income (loss).......................................... $ (2,184) $ 28,685 $(1,540)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 15,730 12,644 10,003
Provision for losses and allowances on accounts
receivable........................................... 3,857 2,225 2,871
Stock issued to ESOP trust ............................. 1,150 820 ---
Provision (benefit) for deferred income taxes........... (3,920) 2,884 (874)
Provision for merger and integration costs.............. 17,056 --- ---
Special management compensation......................... --- --- 20,289
Undistributed earnings of affiliates.................... (2,141) (1,595) (1,537)
Minority interest in net income (loss) of subsidiaries.. (430) 246 509
Other................................................... 221 (614) (535)
Changes in assets and liabilities:
Increase in accounts receivable...................... (50,711) (52,680) (40,707)
Increase in inventories.............................. (19,939) (18,633) (16,549)
Increase in other current assets..................... (5,241) (7,791) (5,517)
Increase in accounts payable and accruals............ 4,683 18,805 20,790
--------- -------- -------
Net cash used in operating activities...................... (41,869) (15,004) (12,797)
--------- -------- -------
Cash flows from investing activities:
Capital expenditures.................................... (21,862) (15,980) (13,578)
Business acquisitions, net of cash acquired............. (42,267) (32,222) (17,541)
Other................................................... (6,173) (6,342) (5,252)
--------- -------- -------
Net cash used in investing activities...................... (70,302) (54,544) (36,371)
--------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 19,040 1,154 978
Principal payments on long-term debt.................... (14,795) (5,291) (15,808)
Proceeds from issuance of stock......................... 5,306 130,731 73,120
Proceeds from borrowings from banks..................... 73,582 6,060 12,346
Purchase of treasury stock.............................. (618) (628) (3,000)
Payments on borrowings from banks....................... (1,177) (23,378) (20,976)
Distributions to stockholders........................... (2,442) (4,632) (2,443)
Other................................................... (730) (525) 1,739
--------- -------- -------
Net cash provided by financing activities.................. 78,166 103,491 45,956
--------- -------- -------
Net increase (decrease) in cash and cash equivalents ...... (34,005) 33,943 (3,212)
Cash and cash equivalents, beginning of year............... 45,818 11,875 15,087
--------- -------- -------
Cash and cash equivalents, end of year..................... $ 11,813 $ 45,818 $11,875
========= ======== =======

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Henry Schein,
Inc. and all of its wholly-owned and majority-owned subsidiaries (the
"Company"). Investments in unconsolidated affiliates which are greater than 20%
and less than 51% owned are accounted for under the equity method. All material
intercompany accounts and transactions are eliminated in consolidation. The
financial statements include adjustments to give retroactive effect to the
acquisitions of Dentrix Dental Systems, Inc. ("Dentrix"), effective February 28,
1997, Micro Bio-Medics, Inc. ("MBMI"), effective August 1, 1997, Sullivan Dental
Products, Inc. ("Sullivan"), effective November 12, 1997 and the H. Meer Dental
Supply Co. ("Meer"), effective August 14, 1998, which were accounted for under
the pooling of interests method of accounting.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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.

Fiscal Year

The Company reports its operations on a 52-53 week basis ending on the last
Saturday of December. Fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995 all consisted of 52 weeks. The accounts of (i) Meer, (ii)
MBMI and (iii) Sullivan and Dentrix, have been consolidated on a basis with
years-ended of; (i) September 27, (ii) November 30, and (iii) December 31,
respectively, for periods through December 28, 1996. Meer, MBMI and Dentrix
adopted the Company's fiscal year end starting in 1997.

Revenue Recognition

Sales are recorded when products are shipped or services are rendered,
except for the portion of revenues from sales of practice management software
which is attributable to noncontractual post contract customer support, which is
deferred and recognized ratably over the period in which the support is expected
to be provided.

Inventories

Inventories consist substantially of finished goods and are valued at the
lower of cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share data)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment and Depreciation and Amortization

Property and equipment are stated at cost. Depreciation is computed
primarily under the straight-line method over the following estimated useful
lives:

Years
-----

Buildings and improvements........................ 40
Machinery and warehouse equipment................. 5 - 10
Furniture, fixtures and other..................... 3 - 10
Computer equipment and software................... 5 - 7

Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the assets or the lease term.

Taxes on Income

The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. The effect on deferred tax
assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a
consolidated Federal income tax return with its 80% or greater owned
subsidiaries.

Statement of Cash Flows

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and other short-term investments with an initial
maturity of three months or less to be cash equivalents. The Company has
determined that the effect of foreign exchange rate changes on cash flows is not
material.

Foreign Currency Translation and Transactions

The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in earnings, except for certain hedging transactions (see below).

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share data)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial Instruments

The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the basis of the transaction when it is
completed.

In order to manage interest rate exposure, the Company has entered into
interest rate swap agreements to exchange variable rate debt into fixed rate
debt without the exchange of the underlying principal amounts. Net payments or
receipts under the agreements are recorded as adjustments to interest expense.

The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported for
long-term debt approximates fair value because the underlying instruments are at
variable rates which are repriced frequently.

Acquisitions

The net assets of businesses purchased are recorded at their fair value at
the acquisition date and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight-line basis over periods not exceeding 30 years.

Long-Lived Assets

Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. In
connection with certain recent acquisitions, the Company has determined that
certain long-lived assets have been impaired (see Note 7).

Stock-Based Compensation

The Company accounts for its 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 the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by Statement of Financial Accounting Standards
("SFAS") 123, "Accounting for Stock-Based Compensation."

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which provides for
the calculation of "basic" and "diluted" earnings per share. This Statement is
effective for financial statements issued for periods ending after December 15,
1997. Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options. As required by this Statement, all
periods presented have been restated to comply with the provisions of SFAS No.
128.

New Accounting Pronouncements

NOTE 2--REORGANIZATION

In connection with the Company's corporate restructuring in 1992, certain
shares issued to an executive officer and certain senior management were subject
to repurchase by the Company at fair market value in the event employment was
terminated for any reason or an initial public offering did not occur by
December 31, 1999. The repurchase feature was eliminated upon the closing of the
initial public offering. Special management compensation for the year ended
December 30, 1995 includes a $17,484 charge to operations to reflect the
appreciation in the market value of stock grants and issuances based on the
initial public offering price of $16.00 per share and a cash payment of
approximately $508 to cover income taxes related to those stock grants and
issuances.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 2 - REORGANIZATION (Continued)

In addition, special management compensation for the year ended December
30, 1995 includes a charge of $2,805 to reflect the excess of the initial public
offering price over the exercise price of Class A options issued to certain
executive management in May 1995 (see Note 14(a)).

NOTE 3 -- EARNINGS PER SHARE

A reconciliation of shares used in calculating basic and diluted earnings per
share follows (in thousands):

Historical Pro Forma
---------- ---------

December 28, 1996
Basic...................................... 33,714 33,714
Effect of assumed conversion of
employee stock options................. 1,488 1,488
--------- -------
Diluted ................................... 35,202 35,202
========= =======

December 30, 1995:

Basic ..................................... 25,719 25,719
Effect of assumed conversion of
employee stock options................. --- 1,286
--------- -------
Diluted ................................... 25,719 27,005
========= =======

Options to purchase approximately 4,135,000 and 2,395,000 shares of common
stock at exercise prices ranging from $4.21 to $36.18 per share were outstanding
during a portion of 1997 and 1995, respectively, but were not included in the
computation of diluted earnings per share because they are anti- dilutive. These
options expire through 2007.

NOTE 4--PROPERTY AND EQUIPMENT--NET

Major classes of property and equipment consist of the following:

December 27, December 28,

1997 1996
------ -----
Land......................................... $1,654 $ 1,539
Buildings and leasehold
improvements............................... 29,088 27,860
Machinery and warehouse equipment............ 33,657 30,376
Furniture, fixtures and other................ 22,845 22,063
Computer equipment and software.............. 39,218 23,411
-------- --------
126,462 105,249

Less accumulated depreciation and

amortization............................... 63,307 53,006
-------- --------
Net property and equipment................... $ 63,155 $ 52,243
======== ========

Equipment held under capital leases amounted to approximately $2,510 and
$2,400 as of December 27, 1997 and December 28, 1996, respectively (see Note
15(b)).

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 5--GOODWILL AND OTHER INTANGIBLES--NET

Goodwill and other intangibles consist of the following:

December 27, December 28,
1997 1996
----------- -----------
Goodwill............................... $ 129,724 $ 76,282
Other.................................. 12,034 7,412
----------- ----------
141,758 83,694
Less accumulated

amortization......................... 10,911 5,976
----------- ----------
$ 130,847 $ 77,718
=========== ==========

Goodwill represents the excess of the purchase price of acquisitions over
the fair value of identifiable net assets acquired. During 1997, seven
acquisitions, including the acquisition of the minority interests of a foreign
subsidiary, accounted for $44,671 of the increase in goodwill. Other intangibles
include covenants not to compete, computer programming costs, customer lists and
deferred acquisition costs. Goodwill and other intangibles are amortized on a
straight-line basis over periods not exceeding 30 years. In connection with
certain recent acquisitions, the Company has determined that the goodwill of
certain prior acquisitions has been impaired (see Note 7).

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 6--INVESTMENTS AND OTHER

Investments and other consist of:

December 27, December 28,
1997 1996
---------- ----------
Investments in unconsolidated affiliates......... $ 13,048 $11,524
Long-term receivables (see Note 11(b))........... 8,203 11,051
Other............................................ 9,697 8,058
-------- -------
$ 30,948 $30,633
======== =======

The Company's investments are predominately 50% owned unconsolidated
affiliates consisting of various companies involved in the healthcare
distribution business and HS Pharmaceutical, Inc., which manufactures and
distributes generic pharmaceuticals. As of December 27, 1997, the Company's
investments in unconsolidated affiliates were $3,121 more than the Company's
proportionate share of the underlying equity of these affiliates. This amount,
which has been treated as goodwill, is being amortized over 30 years and charged
to equity in the operating results of these companies. As of December 27, 1997,
approximately $8,773 of the Company's retained earnings represented
undistributed earnings of affiliates. Combined financial data for substantially
all of these companies is as follows:

December 27, December 28,
1997 1996
--------- ---------
Current assets............................ $39,688 $38,172
Total assets.............................. 56,239 47,103
Liabilities............................... 35,753 30,939
Stockholders equity....................... 19,832 16,164

Years Ended
- --------------------------------------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
--------- ------------ -----------
Net sales.................... $98,954 $103,169 $55,090
Operating income............. 7,303 7,044 5,147
Net income................... 4,841 3,755 2,920

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 7--BUSINESS ACQUISITIONS

The Company has completed the acquisition of 61 healthcare distribution
businesses between 1995 and 1997, the most significant of which were; Sullivan
Dental Products, Inc. ("Sullivan"), a distributor of consumable dental supplies
and dental equipment through 52 sales and service centers located throughout the
United States, Micro Bio-Medics, Inc. ("MBMI"), a distributor of medical
supplies to physicians and hospitals as well as to other healthcare
professionals nationwide, and Dentrix Dental Systems, Inc. ("Dentrix"), a
leading provider of clinically-based dental practice management systems, in
merger transactions accounted for as poolings of interests. Pursuant to the
respective merger agreements, which were completed on November 12, 1997, August
1, 1997 and February 28, 1997, the Company issued approximately 7,594,900,
3,231,400 and 1,070,000 shares of its Common Stock with aggregate market values
(on their respective closing dates) of approximately $266,800, $122,800 and
$29,400, respectively and assumed and exchanged all options to purchase Sullivan
and MBMI stock for options to purchase 1,192,000 and 1,117,000, respectively of
the Company's Common Stock. Sullivan, MBMI and Dentrix had net sales and
earnings of approximately $241,600 and $8,700, $150,000 and $1,700, and $10,000
and $2,000, respectively in 1996.

Additionally, during 1997 the Company acquired 21 other businesses with
aggregate net sales for 1996 of approximately $157,000, three of which were
accounted for under the pooling of interests method, with the remainder being
accounted for under the purchase method of accounting (fifteen for 100%
ownership interests and three for majority ownership interests). The total
amount of cash paid and promissory notes issued, and the value of the Company's
Common Stock issued in connection with these acquisitions was $40,798 and
$34,000, respectively.

On August 14, 1998, the Company acquired all of the common stock of Meer in
exchange for 2,973,680 shares of the Company's Common Stock valued at
approximately $132,700. Meer is a leading full-service dental distributor
serving over 40,000 dentists, dental laboratories and institutions throughout
the United States with 1997 net sales and net loss of approximately $180,000 and
$(1,200), respectively. Prior to its acquisition by the Company, Meer elected to
be taxed as an S Corporation under the Internal Revenue Code. Accordingly, the
current taxable income of Meer was taxable to its shareholders who were
responsible for payment of taxes thereon. Upon its acquisition, Meer will be
taxed as a regular corporation. Pro forma adjustments have been made to the
restated statement of operations to reflect the income tax recoveries that would
have been provided for had Meer been subject to income taxes in prior years.

The financial statements have been restated to give retroactive effect to
three of the 1997 pooling transactions (Sullivan, MBMI and Dentrix) and Meer, as
the remaining pooling transactions were not material and have been included in
the consolidated financial statements from the beginning of the quarter in which
the acquisitions occurred. Operations of the 1997 completed acquisitions
accounted for under the purchase method of accounting have been included in the
consolidated financial statements from their respective acquisition dates.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 7 - BUSINESS ACQUISITIONS (Continued)

During 1996, the Company acquired twelve dental and four medical companies,
a veterinary supply distributor and three international dental companies, with
aggregate net sales in their last fiscal year ends of approximately $104,000,
all of which were accounted for under the purchase method of accounting. Of
these, eighteen were for majority ownership (100% in twelve of the
transactions). The total amount of cash paid and promissory notes issued for
these acquisitions was approximately $33,105. The Company also issued 818,591
shares of common stock valued at approximately $16,200 in 1996 in connection
with five of these acquisitions. Operations of these businesses have been
included in the consolidated financial statements from their respective
acquisition dates. No single 1996 acquisition was material.

During 1995, the Company acquired the distribution business of The Veratex
Corporation, a national direct marketer of dental, medical and veterinary
products, and Schein Dental Equipment Corp., a distributor and manufacturer of
large dental equipment. The Company also completed the majority acquisition of
fourteen other companies and a 50% acquisition of one other company during 1995.
The total amount of cash paid and promissory notes issued for the 1995
acquisitions was approximately $23,518. The Company also issued 1,331,711 shares
of common stock valued at approximately $20,600 in connection with three of the
1995 acquisitions, of which approximately 928,700 shares were issued to a
stockholder of the Company. These acquisitions have been accounted for under the
purchase method, except one from an affiliate which involves carryover of
predecessor basis with respect to the affiliate's proportionate share of net
assets. Operations of these businesses have been included in the consolidated
financial statements from their acquisition dates.

Certain acquisitions provide for contingent consideration, primarily cash,
to be paid in the event certain financial performance targets are satisfied over
periods typically not exceeding three years from the date of acquisition. The
Company's policy is to record a liability for such amounts when it becomes
probable that targets will be met. As of December 27, 1997 additional contingent
consideration of $631 was recorded as goodwill.

Additionally, pursuant to a shareholders' agreement, certain minority
shareholders of a subsidiary of the Company exercised their option to sell their
shares in the subsidiary to the Company. The value of the shares put to the
Company was approximately $11,800, of which approximately $3,200 was paid for in
cash, with the remainder payable over two years in equal annual installments.

In connection with the 1997 acquisitions accounted for under the pooling of
interests method, the Company recorded merger and integration costs of
approximately $50,800 during the year ended December 27, 1997. Net of taxes,
merger and integration costs were approximately $1.08 per share, on a diluted
basis. These charges include approximately $13,300 of direct transaction costs
(consisting primarily of investment banking and professional fees) and $37,500
for integration and other merger related charges. Such charges include the
following:

- $8,600 related to the write-off of fixed assets (including
duplicate management information systems and other corporate
assets), purchased technology, other assets and goodwill (of
approximately $4,800) primarily associated with the consolidation
of the medical business under a national infrastructure;

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 7 - BUSINESS ACQUISITIONS (Continued)

- $11,900 related to sales force and certain senior management signing
bonuses directly related to the mergers;

- $7,100 related to the closure of a distribution center;

- $3,700 for severance and direct compensation, and

- $6,200 of other nonrecurring costs associated with planning and
executing the merger of the acquired companies' operations.

Additional charges are expected to be recorded in subsequent reporting
periods, and to the extent actual costs exceed estimated amounts, as the mergers
are implemented. Excluding merger and integration costs, net income and net
income per share, on a diluted basis, would have been $40,574 and $1.02,
respectively, for the year ended December 27, 1997.

The summarized unaudited pro forma results of operations set forth
below for 1997 and 1996 assume the acquisitions, which were accounted for under
the purchase method of accounting, occurred as of the beginning of each of these
periods.

Years Ended
---------------------------
December 27, December 28,
1997 1996
----------- ----------
Net sales............................................ $ 1,746,946 $1,550,116
Net income (loss) (1)................................ (2,751) 27,850
Net income (loss) per common share:
Basic .......................................... $(0.07) $ 0.83
Diluted ........................................ $(0.07) $ 0.79
Pro forma net income (loss), reflecting adjustment
in 1996 for income taxes on previously untaxed
earnings of Dentrix, and in 1997 and 1996 for
income tax recovered on previously untaxed
losses of Meer ................................. (2,345) 28,188
Pro forma net income (loss) per common share:.......
Basic........................................... $(0.06) $ 0.84
Diluted ........................................ $(0.06) $ 0.80

- --------------
(1) Includes, in 1997, merger and integration costs of approximately $50,779
and related tax benefit of $8,021.

Pro forma adjusted net income per common share, including acquisitions, may
not be indicative of actual results, primarily because the pro forma earnings
include historical results of operations of acquired entities and do not reflect
any cost savings or potential sales erosion that may result from the Company's
integration efforts.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 7 - BUSINESS ACQUISITIONS (Continued)

Net sales, net income (loss) and pro forma net income for the Company,
Dentrix, MBMI, Sullivan, Meer and on a combined basis for the years ended
December 1996 and 1995 were as follows:

Years Ended
------------------------------------
December 28, December 30,
1996 1995
----------- ------------

Net sales:
HSI, as previously reported $ 829,962 $ 616,209
Dentrix 10,160 7,093
MBMI 150,143 119,874
Sullivan 241,583 215,568
Meer 142,495 132,192
---------- ----------
Combined $1,374,343 $1,090,936
========== ==========

Net income (loss):

HSI, as previously reported $19,340 $(10,216)
Dentrix 3,183 1,415
MBMI 1,745 1,109
Sullivan 8,665 7,240
Meer (4,082) (1,024)
---------- ----------
28,851 (1,476)
Adjustments to conform
accounting policies (166) (64)
---------- ----------
Combined $ 28,685 $ (1,540)
========== ==========

Pro forma net income:
HSI, as previously reported (1) $ 19,340 $ 9,407
Dentrix (2) 1,986 882
MBMI 1,745 1,109
Sullivan 8,665 7,240
Meer(2) (2,547) (638)
---------- ----------
29,189 18,000
Adjustments to conform
accounting policies (166) (64)
---------- ----------
Combined $ 29,023 $ 17,936
========== ==========

-------------------------------------------------------
(1) Reflects adjustment to exclude special management compensation in
1995, net of applicable tax benefits.

(2) Reflects adjustment for provision for income taxes (recoveries) on
previously untaxed earnings (losses).

Meer had net sales of approximately $180,000 and a loss of $1,200 for
the twelve months ended December 27, 1997, Sullivan had net sales of
$196,300 and earnings of $7,400 for the nine months ended September 30,
1997, and MBMI had net sales of $77,800 and earnings of $700 for the six
months ended May 31, 1997.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 8--BANK CREDIT LINES

At December 27, 1997, certain subsidiaries of the Company had available
various bank credit lines totaling approximately $62,533 expiring through
October 2002. Borrowings of $32,173 under these credit lines at interest rates
ranging from 4.1% to 8.75% were collateralized by accounts receivable, inventory
and property and equipment of the subsidiaries with an aggregate net book value
of $22,885 at December 27, 1997.

NOTE 9--LONG-TERM DEBT

Long-term debt consists of:

December 27, December 28,
1997 1996
------ -----

Borrowings under Revolving Credit Agreement (a)................ $ 76,152 $18,040
Secured Revolving Loan (b)..................................... --- 7,500
Notes payable for business acquisitions (c).................... 11,552 4,383
Notes payable to banks, interest variable (9.25% at December
27, 1997), payable in quarterly installments ranging from
$16 to $34 through 2004, secured by inventory and
accounts receivable in the amount of $26,164................ 3,925 1,932
Note payable to bank (d)....................................... 12,825
Mortgage payable to bank in quarterly installments of $14,
interest at 4.5% through November 2013, collateralized by
a building with a net book value of $1,305.................. 814 987
Various notes and loans payable with interest, in varying
installments through 2006, uncollateralized................. 9,378 8,241
Capital lease obligations in various installments through
fiscal 2006; interest at 6.5% to 9.06% or varies with
prime rate.................................................. 1,866 1,194
--------- -------
Total 116,512 42,277
Less current maturities........................................ 11,644 8,894
--------- -------
Total long-term debt $ 104,868 $33,383
========= =======

(a) Revolving Credit Agreement

On August 15, 1997, the Company entered into an amended revolving credit
agreement which, among other things, increased the maximum available borrowings
to $150,000 from $100,000 and extended the term of the agreement to August 15,
2002. The interest rate on any borrowings under the agreement is based on prime
or LIBOR as defined in the agreement, which were 8.50% and 6.065%, respectively,
at December 27, 1997. The borrowings outstanding at December 27, 1997 were at
interest rates ranging from 6.1% to 8.5%. The agreement provides for a sliding
scale fee ranging from 0.1% to 0.3%, based upon certain financial ratios, on any
unused portion of the commitment. The agreement also provides, among other
things, that HSI will maintain, on a consolidated basis, as defined, a minimum
tangible net worth, current, cash flow, and interest coverage ratios, a maximum
leverage ratio, and contains restrictions relating to annual dividends

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 9 - LONG TERM DEBT (Continued)

in excess of $500, guarantees of subsidiary debt, investments in subsidiaries,
mergers and acquisitions, liens, capital expenditures, certain changes in
ownership and employee and shareholder loans.

(b) Secured Revolving Loan

A subsidiary of the Company had a $25,000 secured revolving loan agreement
with certain banks which was paid off following the acquisition of the
subsidiary by the Company and the agreement was terminated.

In May 1997, a subsidiary of the Company entered into a term loan for $8,299
to acquire the remaining minority interests of a foreign subsidiary. The loan
provides for $4,312 of principal payable upon demand beginning in March 1998,
with the remainder payable upon demand beginning in March 1999. The loan is
denominated in British Pounds. Interest is payable quarterly at 4.5% through May
1998 and 5.5% thereafter.

A balloon payment of approximately $3,400 due to a bank under a term loan
related to a Dutch acquisition came due in October 1997. The Company settled
this loan by entering into a new Netherlands Guilder (NLG) loan in the amount of
6,500 NLG. Principal is payable in semi-annual installments of 300 NLG through
January 2002, with a final balloon payment of 4,100 NLG on January 31, 2002.
Interest is payable quarterly at a rate of 4.9% per annum, plus a margin. The
agreement also provides for the same financial convenants and restrictions as
the revolving credit agreement. The loan serves to hedge the repayment of an
intercompany loan in the same amount, denominated in NLG, due from a Dutch
subsidiary.

(d) Note payable to bank

On October 6, 1997 a subsidiary of the Company entered into an unsecured
line-of-credit agreement which allowed the subsidiary to borrow up to $25,000
through October 2002. Any borrowings bear interest at prime or the
Eurodollar-based rate, elected at the time of each advance. Rates ranged from
7.125% to 8.50% at December 27, 1997. Additionally, the agreement contained
options to enter into two term notes with the bank also due October 2002.
Simultaneously the subsidiary exercised its option on one of the term notes. The
term note is payable in quarterly installments beginning January 1, 1998 of $458
plus interest at a rate of 7.635%.

As of December 27, 1997, the aggregate amounts of long-term debt maturing in
each of the next five years are as follows: 1998 - $11,644; 1999 - $11,629; 2000
- - $3,842; 2001 - $3,163; 2002 - $80,412.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 10--TAXES ON INCOME

Taxes on income are based on income before taxes on income, minority
interest and equity in earnings of affiliates as follows:

Years Ended
---------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
----- ------ -----

Domestic.......................................... $ 10,785 $43,699 $ 6,938
Foreign........................................... 2,130 2,243 1,317
---------- ------- -------
Total income before taxes on income,
minority interest and equity in
earnings of affiliates......................... $ 12,915 $45,942 $ 8,255
========== ======= =======

The provision for taxes on income was as follows:

Years Ended
------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
----- ------ -----

Current tax expense:
U.S. Federal................................ $ 18,019 $12,476 $ 8,987
State and local............................. 2,455 2,551 2,094
Foreign..................................... 1,116 695 616
--------- ------- -------
Total current.................................. 21,590 15,722 11,697
--------- ------- -------
Deferred tax expense (benefit):
U.S. Federal................................ (3,954) 1,984 (628)
State and local............................. (78) 747 (276)
Foreign..................................... 112 153 30
--------- ------- -------
Total deferred................................. (3,920) 2,884 (874)
--------- ------- -------
Total provision................................ $ 17,670 $18,606 $10,823
========= ======= =======

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 10 --TAXES ON INCOME (Continued)

The tax effects of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:

December 27, December 28,
1997 1996
------ -----

Current deferred tax assets:
Inventory, premium coupon redemptions
and accounts receivable valuation
allowances.................................. $ 4,145 $ 3,614
Uniform capitalization adjustments to
inventories.................................. 2,838 2,053
Accrued special professional fees and other
accrued liabilities.......................... 2,692 2,277
Merger and integration costs........................ 3,648 ---
-------- --------
Total current deferred tax asset ...................... 13,323 7,944
-------- --------
Non-current deferred tax assets (liabilities):
Property and equipment.............................. (2,591) (2,592)
Provision for long-term executive incentive
compensation and other accrued
liabilities................................. (1,573) (85)
Net operating loss carryforward..................... 175 262
Net operating losses of foreign subsidiaries........ 2,375 1,928
Other............................................... --- (88)
-------- --------
Total non-current deferred tax asset (liability)....... (1,614) (575)
Valuation allowance for non-current deferred
tax assets................................... (2,421) (1,928)
-------- --------
Net non-current deferred tax liabilities............... (4,035) (2,503)
-------- --------
Net deferred tax asset................................. $ 9,288 $ 5,441
======== ========

The net deferred tax asset is realizable as the Company has sufficient
taxable income in prior carryback years to realize the tax benefit for
deductible temporary differences. The non-current deferred liability is included
in Other liabilities on the Consolidated Balance Sheets.

At December 27, 1997, the Company has net operating loss carryforwards for
Federal income tax purposes of $427 which are available to offset future Federal
taxable income through 2009. Foreign net operating losses totalled $7,300 at
December 27, 1997. Such losses can be utilized against future foreign income.
The losses expire between 1999 and 2002, with $2,000 expiring in 1999.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 10--TAXES ON INCOME (Continued)

The tax provisions differ from the amount computed using the Federal
statutory income tax rate as follows:

Years Ended
-----------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------ ------ -----

Provision at Federal statutory rate..................... $ 4,877 $17,508 $ 3,248
State income taxes, net of Federal income tax
effect................................................ 1,630 2,555 1,381
Net foreign and domestic losses for which no
tax benefits are available............................ 167 --- 574
Foreign income taxed at other than the Federal
statutory rate........................................ (2) (55) (25)
Tax effect of Sub S income.............................. --- (1,197) (533)
Non-deductible appreciation in stock issued as
special management compensation....................... --- --- 6,109
Non-deductible merger and integration costs............ 10,752 --- ---
Tax exempt interest.................................... --- (237) ---
Other................................................... 246 32 69
------- ------- ---------
Income tax provision ................................... $17,670 $18,606 $ 10,823
======= ======= =========

Provision has not been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries. Those earnings have been and
will continue to be reinvested. These earnings could become subject to
additional tax if they were remitted as dividends, if foreign earnings were
loaned to the Company or a U.S. affiliate, or if the Company should sell its
stock in the foreign subsidiaries. It is not practicable to determine the amount
of additional tax, if any, that might be payable on the foreign earnings;
however, the Company believes that foreign tax credits would substantially
offset any U.S. tax. At December 27, 1997, the cumulative amount of reinvested
earnings was approximately $4,173.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 11-- FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS

(a) Financial Instruments

To reduce its exposure to fluctuations in foreign currencies and
interest rates, the Company is party to foreign currency forward contracts and
interest rate swaps with major financial institutions.

While the Company is exposed to credit loss in the event of
nonperformance by the counterparties of these contracts, the Company does not
anticipate nonperformance by the counterparties. The Company does not require
collateral or other security to support these financial instruments.

As of December 27, 1997, the Company has outstanding foreign currency
forward contracts aggregating $12,162 related to debt and the purchase and sale
of merchandise. The contracts hedge against currency fluctuations of the
Canadian dollar ($428), Swiss Franc ($140), The Netherland Guilder ($506),
Spanish Pesetas ($1,000), Deutsche Mark ($1,293), Japanese Yen ($78) and British
Pounds ($8,717). The contracts expire at various dates through December 1998. At
December 27, 1997, the Company had net deferred losses from foreign currency
forward contracts of $147.

As of December 27, 1997, HSI had $13,000 outstanding in interest rate
swaps. These swaps are used to convert floating rate debt to fixed rate debt to
reduce the Company's exposure to interest rate fluctuations. The net result was
to substitute a weighted average fixed interest rate of 7.81% for the variable
LIBOR rate on $13,000 of the Company's debt. The swaps expire in October and
November 2001. Under the interest rate environment during the year ended
December 27, 1997, the net fair value of the Company's interest rate swap
agreements resulted in a recognized loss of $249.

On June 7, 1995, an acquired subsidiary of the Company entered into a
zero cost, three year interest rate collar agreement for $10,000 intended to
reduce interest rate risk. The agreement was assumed by the Company and serves
to limit the net interest rate charged on the first $10,000 of the Company's
Revolving Credit Agreement to 8.25%. The Company receives no further interest
rate benefit once the applicable interest rate falls below 6.55%.

(b) Concentrations of Credit Risk

Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables and short-term cash investments.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 11--FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued)

The Company places its short-term cash investments with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and its
dispersion across different types of healthcare professionals and geographic
areas. The Company maintains an allowance for losses based on the expected
collectability of all receivables. Included in Accounts receivable and Long-term
receivables at December 27, 1997 and December 28, 1996 is $10,967 and $4,651,
and $18,355 and $7,485, respectively, related to Easy Dental(Registered) Plus
software sales with non-interest bearing extended payment terms. Total
unamortized discounts at December 27, 1997 and December 28, 1996 amounted to
$843 and $1,487 based on an imputed interest rate of 8.5% and 8.25%,
respectively. Included in interest income for the years ended December 27, 1997
and December 28, 1996 was approximately $1,216 and $998, respectively, of
imputed interest relating to these non-interest bearing extended payment term
receivables. Imputed interest relating to these receivables was not material for
1995.

NOTE 12--RELATED PARTY TRANSACTIONS

(a) In the ordinary course of business, the Company purchases
pharmaceutical products from certain unconsolidated affiliates. Net purchases
from these affiliates amounted to $17,951, $15,037 and $8,730 in 1997, 1996 and
1995, respectively. Included in Accounts payable at December 27, 1997 and
December 28, 1996 were $890 and $1,523, respectively, for amounts due to these
affiliates for purchases made from them.

(b) The Company also shares certain services with these and other
unconsolidated affiliates which are charged to the affiliates at cost. The
Company charged these affiliates $421, $602 and $891 during 1997, 1996 and 1995,
respectively, for these services. In addition, sales (at cost) to unconsolidated
affiliates were $4,069, $5,832 and $3,784 in 1997, 1996 and 1995, respectively.

(c) The Company recorded interest income of $414, $129 and $88, and
interest expense of $0, $32 and $26 in 1997, 1996 and 1995, respectively,
attributable to transactions with unconsolidated affiliates. Included in Current
Assets - Other are amounts due from unconsolidated affiliates of $9,417 and
$5,154 at December 27, 1997 and December 28, 1996, respectively.

(d) Certain subsidiaries of the Company lease their executive office and
distribution facilities from their respective officers, some of which are
stockholders of the Company, and certain members of their families. Rent expense
attributed to these facilities amounted to $1,937, $1,934 and $1,507 for 1997,
1996 and 1995, respectively.

(e) During 1994, a subsidiary of the Company entered into a sales service
agreement with an entity ("Salesco") owned by an officer of the subsidiary.
Under the terms of this agreement the subsidiary is required to reimburse
Salesco for all reasonable expenses incurred in connection with the services it
provides to the subsidiary and pay a fee to Salesco based upon a formula applied
to its pre-tax profit. Amounts paid during 1997 and 1996 amounted $ 412 and $
340, respectively. Amounts paid under this agreement during 1995 were not
material.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 12--RELATED PARTY TRANSACTIONS (Continued)

(f) The Company purchases products from Schein Dental Equipment Corp.
("SDEC"), formerly owned by a stockholder. In September 1995, the Company
acquired SDEC. Net purchases from SDEC prior to the acquisition amounted to
$1,803 in 1995.

(g) Since 1988, a subsidiary of the Company has been affiliated with Dash
Medical Gloves, Inc., which is owned by an officer of a subsidiary and his
family. Purchases of inventory by the subsidiary from Dash in 1997, 1996 and
1995 totalled $4,323, $4,586 and $4,575, respectively.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 13--SEGMENT AND GEOGRAPHIC DATA

The Company is engaged principally in one line of business, the distribution
of healthcare products to healthcare practitioners and professionals. The
following table presents information about the Company by geographic area. There
were no material amounts of sales or transfers among geographic areas and there
were no material amounts of United States export sales. No one European country
represents a significant geographic area.

1997 United States Europe Consolidated
- ---- ------------- ----------- ------------

Net sales............................. $1,533,096 $165,400 $1,698,496
Operating income ..................... 7,814 * 4,016 11,830
Pre-tax income ....................... 10,785 * 2,130 12,915
Identifiable assets................... 703,822 100,124 803,946
Depreciation and amortization......... 13,596 2,134 15,730
Capital expenditures.................. 19,907 1,955 21,862

1996
- ----
Net sales............................. $1,238,349 $135,994 $1,374,343
Operating income ..................... 39,717 3,396 43,113
Pre-tax income........................ 43,699 2,243 45,942
Identifiable assets................... 598,713 69,526 668,239
Depreciation and amortization......... 10,675 1,969 12,644
Capital expenditures.................. 14,584 1,396 15,980

1995
- ----
Net sales............................. $991,521 $ 99,415 $1,090,936
Operating income ..................... 9,586 ** 2,590 12,176
Pre-tax income ....................... 6,938 ** 1,317 8,255
Identifiable assets................... 428,511 53,190 481,701
Depreciation and amortization......... 8,670 1,333 10,003
Capital expenditures.................. 9,882 3,696 13,578

- ----------------------------------
* Includes merger and integration costs of $50,779.

** Includes special management compensation of $20,797.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 14--EMPLOYEE BENEFIT PLANS

(a) Stock Compensation Plan

The Company established the 1994 Stock Option Plan for the benefit of
certain employees. As amended in May 1997, pursuant to this plan the Company may
issue up to approximately 2,280,000 shares of its Common Stock. The Plan
provides for two classes of options: Class A options and Class B options. A
maximum of 237,897 shares of common stock may be covered by Class A options.
Both incentive and nonqualified stock options may be issued under the Plan.

In 1995, Class A options to acquire 237,897 common shares were issued to
certain executive management at an exercise price of $4.21 per share,
substantially all of which became exercisable upon the closing of the initial
public offering, at which time the excess of the initial public offering price
of $16.00 over the exercise price ($2,805) was charged to special management
compensation expense. The exercise price of all Class B options issued has been
equal to the market price on the date of grant and accordingly no compensation
cost has been recognized. Substantially all Class B options become exercisable
ratably over three years from the date of issuance. The Class A and Class B
options are exercisable up to the tenth anniversary of the date of issuance,
subject to acceleration upon termination of employment.

On May 8, 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Option Plan, under which the Company may grant options to each
director who is not also an officer or employee of the Company, for up to 50,000
shares of the Company's Common Stock. The exercise price and term, not to exceed
10 years, of each option is determined by the plan committee at the time of the
grant. During 1997 and 1996, 2,000 and 10,000 options, respectively were granted
to certain non-employee directors at exercise prices which were equal to the
market price on the date of grant.

Additionally, as a result of the Company's recent acquisition of Sullivan
and MBMI, the Company has assumed their respective stock option plans (the
"Assumed Plans"). Options granted under the Assumed Plans are exercisable for up
to ten years from the date of grant at prices not less than the fair market
value of the respective acquirees' common stock at the date of grant, on a
converted basis.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)

A summary of the Status of the Company's two fixed stock option plans and
the Assumed Plans, and the related transactions for the years ended December 27,
1997, December 28, 1996 and December 30, 1995 is presented below:

December 27, 1997 December 28, 1996 December 30, 1995
---------------------------- -------------------------- ---------------------------

Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- --------

Outstanding at beginning of year 2,713,255 $ 11.68 2,394,584 $ 10.44 1,403,496 $10.63
Granted......................... 1,758,918 27.45 409,595 18.58 1,078,415 12.50
Exercised....................... (279,363) 12.60 (40,895) 8.72 (53,523) 6.57
Forfeited....................... (58,233) 23.25 (50,027) 11.31 (33,804) 12.99
--------- --------- ---------
Outstanding at end of year...... 4,134,577 $ 18.19 2,713,257 $ 11.68 2,394,584 $10.44
========= ========= =========
Options exercisable at year-
end......................... 2,755,010 $ 13.24 2,248,505 $ 7.06 1,829,997 $ 8.99
Weighted-average fair value of
options granted during the
year........................ $ 17.68 $ 12.64 $ 9.71

The following table summarizes information about stock options outstanding
at December 27, 1997:

Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Weighted Average Weighted Weighted
Range of Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------- ---------------- ---------------- -------------- ----------- --------------

$4.21 to 12.59........... 1,173,023 5.1 $ 6.66 1,180,053 $6.64
12.93 to 23.30........... 1,584,055 8.1 16.34 1,285,735 16.09
$24.63 to 36.18.......... 1,377,499 9.3 30.16 289,222 27.51
--------- ---------
4,134,577 7.6 $18.19 2,755,010 $13.24
========= =========

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company and its acquired
subsidiary had accounted for its employee stock options under the fair value
method of SFAS 123. The weighted average fair value of options granted during
1997, 1996 and 1995 was $17.68, $12.64 and $9.71, respectively. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, risk-free interest rates of 6%; volatility factor of the expected
market price of the Company's Common Stock of 30%; and a weighted-average
expected life of the option of 10 years. The same assumptions were used for 1997
except for the risk-free interest rate, which was assumed to be 6.5%.

Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:

1997 1996 1995
-------------- ------------ ----------

Net income (loss)................................................... $(15,014) $26,019 $(2,432)
Net income (loss) per common share:
Basic ...................................................... $ (0.40) $ 0.77 $ (0.09)
Diluted..................................................... $ (0.40) $ 0.74 $ (0.09)
Net income (loss), reflecting special adjustments (1) $(14,608) $26,357 $17,044
Net income (loss) per common share to reflect special
adjustments (1):
Basic ...................................................... $ (0.39) $ 0.78 $ 0.66
Diluted..................................................... $ (0.39) $ 0.75 $ 0.63

(1) Special adjustments include management compensation in 1995 arising from
the value of Class A options which became exercisable upon the closing
of the initial public offering and adjustments for income tax provisions
on previously untaxed earnings of Dentrix and losses of Meer.

(b) Warrants Of An Acquired Subsidiary - MBMI

MBMI's Series 1 Warrants expired in June 1996. Most of these warrants were
exercised at $9.68 per 0.65 shares, on a converted basis. The total net proceeds
from the exercise of all warrants from 1992 (inception) through June 1996 was
approximately $7,900, and resulted in approximately 868,000 shares of MBMI's
common stock being issued, on a converted basis.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)

The Company has qualified contributory and noncontributory profit sharing
and 401(k) plans for eligible employees. Contributions to the plans as
determined by the Board of Directors and charged to operations during 1997, 1996
and 1995 amounted to $5,300, $4,024 and $3,075, respectively.

(d) Employee Stock Ownership Plan (ESOP)

In 1994, the Company established an ESOP and a related trust as a benefit
for substantially all of its domestic employees. This plan supplements the
Company's Profit Sharing Plan. Changes to operations related to this plan were
$1,226, $1,151 and $820 for 1997, 1996 and 1995, respectively. Under this plan,
the Company issued 44,122 and 24,210 shares of the Company's Common Stock to the
trust in 1997 and 1996 to satisfy the 1996 and 1995 contribution . In 1998, the
Company expects to fund the 1997 contribution with shares of the Company's
Common Stock.

(e) Supplemental Executive Retirement Plan

In 1994, the Company instituted a nonqualified supplemental executive
retirement plan for eligible employees. Contributions, as determined by the
Board of Directors and charged to operations, were $112, $84 and $68 for 1997,
1996 and 1995, respectively .

NOTE 15--COMMITMENTS AND CONTINGENCIES

(a) Operating Leases

The Company leases facilities and equipment under noncancelable operating
leases expiring through 2011. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.

Future minimum annual rental payments under the noncancelable leases at
December 27, 1997 are as follows:

1998..................................................... $ 16,959
1999..................................................... 15,587
2000..................................................... 13,636
2001..................................................... 10,294
2002..................................................... 8,577
Thereafter............................................... 35,962
---------
Total minimum lease payments............................. $ 101,015
=========

Total rental expense for 1997, 1996 and 1995 was $19,537, $16,472, and
$13,014, respectively.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

(b) Capital Leases

The Company leases certain equipment under capital leases. The following is
a schedule by years of approximate future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at December 27, 1997.

1998..................................................... $ 849
1999..................................................... 749
2000..................................................... 377
2001..................................................... 124
2002..................................................... 7
------
Total minimum lease payments ............................ 2,106
Less: Amount representing interest at 6.5% to 9%......... 240
------
$1,866
======
(c) Litigation

Various claims, suits and complaints, such as those involving government
regulations and product liability, arise in the ordinary course of the Company's
business. In the opinion of the Company, all such pending matters are without
merit, covered by insurance or are of such kind, or involve such amounts, as
would not have a material adverse effect on the financial statements of the
Company if disposed of unfavorably.

The Company has been named a defendant in eleven cases involving claims made
by healthcare workers who claim allergic reaction relating to exposure to latex
gloves. In each of these cases, the Company acted as a distributor of both brand
name and "Henry Schein" private brand latex gloves which were manufactured by
third parties. To date, discovery in these cases has been limited to product
identification issues. The manufacturers in these cases have withheld
indemnification pending product identification, however the Company is taking
steps to implead those manufacturers into each case in which the Company is a
defendant. The Company believes it is adequately covered by insurance in all
cases, subject to certain self retention limits, and that none of the currently
pending cases should have a material adverse effect on the Company.

(d) Employment, Consulting and Noncompete Agreements

The Company has employment, consulting and noncompete agreements expiring
through 2003 (except for a lifetime consulting agreement with a principal
stockholder which provides for initial compensation of $283 per year, increasing
$25 every fifth year beginning in 2002). The agreements provide for varying base
aggregate annual payments of approximately $7,853 per year which decrease
periodically to approximately $2,538 per year. In addition, some agreements have
provisions for incentive and additional compensation.

\ 47

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes amounted to the following:

Years Ended
------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
-------- --------- ---------
Interest................. $8,354 $5,710 $8,349
Income taxes............. 13,055 14,791 10,858

In conjunction with business acquisitions, the Company used cash as
follows:

Years Ended
-----------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------ ------ ------
Fair value of assets acquired,
excluding cash.................. $ 74,035 $62,149 $ 65,517
Less liabilities assumed and
created upon acquisition........ 31,768 29,927 47,976
--------- ------- --------
Net cash paid..................... $ 42,267 $32,222 $ 17,541
========= ======= ========

In 1995, the Company entered into a note payable of $2,400 in connection
with one of its acquisitions.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share data)

NOTE 17--QUARTERLY INFORMATION (Unaudited)

The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during 1997 and 1996 in the
Company's Quarterly Reports on Form 10-Q as a result of the restatement of the
financial statements to give retroactive effect to the results of the companies
acquired during 1998 and 1997 in business combinations accounted for under the
pooling of interests method of accounting and includes pro forma tax adjustments
relating to Meer in 1997 and 1996 and Dentrix in 1996:

Quarters Ended
------------------------------------------------------------------------
March 29 June 28, September 27, December 27,
1997 1997 1997 1997
----- ------ ------ -----

Net sales.............................. $ 381,681 $ 419,440 $ 439,309 $ 458,066
Gross profit........................... 114,674 125,068 128,878 141,778
Operating income (loss)................ 6,901 13,815 (2,587) (6,299)
Net income (loss)...................... 3,064 8,448 (7,636) (6,060)
Net income (loss) per share:
Basic ............................ $ 0.08 $ 0.23 $ (0.20) $ (0.16)
Diluted ........................... $ 0.08 $ 0.22 $ (0.20) $ (0.16)

Quarters Ended
------------------------------------------------------------------------
March 30, June 29, September 28, December 28,
1996 1996 1996 1996

Net sales.............................. $ 303,986 $ 325,683 $ 357,928 $ 386,746
Gross profit........................... 91,783 98,733 106,151 116,088
Operating income....................... 5,918 9,690 13,271 14,234
Net income ............................ 2,870 6,420 9,225 10,170
Net income per share:
Basic.............................. $0.09 $0.20 $0.26 $0.28
Diluted............................ $0.09 $0.20 $0.25 $0.28
Pro forma net income................... 3,309 6,275 8,969 10,470
Pro forma net income per share:
Basic.............................. $ 0.11 $ 0.20 $ 0.25 $ 0.29
Diluted............................ $ 0.11 $ 0.19 $ 0.24 $ 0.28

The Company's business is subject to seasonal and other quarterly
influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software, year-end promotions and purchasing
patterns of office-based healthcare practitioners and are generally lower in the
first quarter due primarily to the increased purchases in the prior quarter.
Quarterly results also may be materially affected by a variety of other factors,
including the timing of acquisitions and related costs, the release of software
enhancements, timing of purchases, special promotional campaigns, fluctuations
in exchange rates associated with international operations and adverse weather
conditions. In the fourth quarter of 1996 the Company made adjustments which
increased net income by approximately $2,400. These adjustments, which related
predominately to estimated reserves for premium coupon redemptions, finance
charges receivable, and taxes, resulted from management's updated evaluations of
historical trends (reflecting changes in business practices and other factors)
and other assumptions underlying such estimates. The amounts of such reserves in
prior quarters were based on reasonable estimates reflecting available facts and
circumstances.

HENRY SCHEIN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share data)

NOTE 17--QUARTERLY INFORMATION (Unaudited) (Continued)

Diluted earnings per share calculations for each quarter include the effect
of stock options, when dilutive to the quarter's average number of shares
outstanding for each period, and the sum of the quarters may not necessarily be
equal to the full year earnings per share amount.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Henry Schein, Inc.
Melville, New York

The audits referred to in our report dated February 27, 1998 relating to the
consolidated financial statements of Henry Schein, Inc. and subsidiaries, which
is contained in Item 8 of the Form 10-K and 10-K/A included the audit of the
financial statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based upon our audits.

In our opinion the financial statement schedule presents fairly, in all material
respects, the information set forth therein.

BDO SEIDMAN, LLP

February 27, 1998, except for
information relating to Meer
which is as of August 14, 1998.
New York, New York

HENRY SCHEIN, INC.

Schedule II
Valuation and Qualifying Accounts

Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Add
--------
Balance
at Charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
----------- --------- -------- ---------- ------

Year ended December 28, 1996
Allowance for doubtful
accounts........................... $ 4,423 $ 2,544 $ (275) $ 6,692
Other accounts receivable
allowances(1)...................... 3,875 --- (432) 3,443
-------- ------- ------ -------
$ 8,298 $ 2,544 $ (707) $10,135
======== ======= ====== =======

Year ended December 27, 1997
Allowance for doubtful
accounts........................... $ 6,692 $ 4,321 $(1,544) $ 9,469
Other accounts receivable
allowances(1)...................... 3,443 2,010 --- 5,453
-------- ------- ------ -------
$ 10,135 $ 6,331 $(1,544) $14,922
======== ======= ======= =======

- --------------
(1) Primarily allowance for sales returns and service charges.

SIGNATURES

Pursuant to the requirement 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, in the City of Melville, State of
New York, on November 24, 1998.

Henry Schein, Inc.

By: /s/ Stanley M. Bergman
------------------------------------
Stanley M. Bergman
Chairman, Chief Executive Officer and President

 


                     5

This schedule contains summary financial information extracted from the 
consolidated financial statements and is qualified in its entirety by
reference to such financial statements.

       
                                       
                                   12-MOS
                          DEC-27-1997
                             DEC-28-1996
                               DEC-27-1997
                                          11,813
                                         0
                                  284,727
                                    (9,523)
                                    228,005
                               578,996
                                         126,462
                                  63,307
                                 803,946
                          263,906
                                        116,512
                                0
                                          0
                                           381
                                     423,842
                   803,946
                                      1,698,496
                             1,698,496
                                        1,188,098
                                1,188,098
                               498,568
                                 2,317
                               7,643
                                 12,915
                                    17,670
                             (2,184)
                                       0
                                      0
                                            0
                                    (2,184)
                                       (0)
                                       (0)