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

RESULTS OF OPERATIONS

Three Months Ended March 30, 1996 compared to Three Months Ended April 1, 1995

Net sales increased $49.4 million, or 36.3%, to $185.4 million for the three months ended March 30, 1996 from $136.0 million for the three months ended April 1, 1995. Of the $49.4 million increase, approximately $22.7 million represented a 31.6% increase in the Company's dental business, $13.2 million represented a 49.1% increase in its medical business, $11.3 million represented a 45.2% increase in its international business, $1.8 million represented a 26.9% increase in its veterinary business and $0.4 million represented a 5.9% increase in the Company's technology business. The dental net sales increase was primarily the result of the Company's increased emphasis on its integrated sales and marketing approach (which coordinates the efforts of its field sales consultants with its direct marketing and telesales personnel), entering the U.S. market for large dental equipment, and acquisitions. Of the approximately $13.2 million increase in medical net sales, approximately $6.1 million, or 46.2%, represented increased net sales to renal dialysis centers, with the effects of acquisitions and increased outbound telesales activity primarily accounting for the balance of the increase in net sales. In the international market, the increase in net sales was primarily due to acquisitions and increased unit volume growth. In the veterinary market, the increase in net sales was primarily due to increased account penetration.

Gross profit increased by $14.6 million, or 36.2%, to $54.9 million for the three months ended March 30, 1996, from $40.3 million for the three months ended April 1, 1995, while gross profit margin remained consistent at 29.6% for the same period. The $14.6 million increase in gross profit was primarily due to increased account penetration and the effects of acquisitions.

Selling, general and administrative expenses increased by $12.9 million, or 34.6%, to $50.2 million for the three months ended March 30, 1996 from $37.3 million for the three months ended April 1, 1995. Selling and shipping expenses increased by $10.5 million, or 44.3%, to $34.2 million for the three months ended March 30, 1996 from $23.7 million for the three months ended April 1, 1995. As a percentage of net sales, selling and shipping expenses increased 1.0% to 18.4% for the three months ended March 30, 1996 from 17.4% for the three months ended April 1, 1995. The increase in selling and shipping expenses as a percentage of net sales was primarily due to an increase in the number of field sales consultants. General and administrative expenses increased $2.4 million, or 17.6%, to $16.0 million for the three months ended March 30, 1996 from $13.6 million for the three months ended April 1, 1995, primarily as a result of acquisitions. As a percentage of net sales, general and administrative expenses decreased 1.4% to 8.6% for the three months ended March 30, 1996 from 10.0% for the three months ended April 1, 1995 due primarily to the relatively fixed nature of general and administrative expenses when compared to the 36.3% increase in sales volume for the same period.

Other Income (Expense) in the aggregate decreased $0.4 million, or 36.4%, to $0.7 million for the three months ended March 30, 1996 from $1.1 million for the three months ended April 1, 1995. This decrease was primarily due to a reduction in interest expense which resulted from a decline in average interest rates to 7.2% for the three months ended March 30, 1996 from 8.0% for the three months ended April 1, 1995 and a $10.7 million decrease in the Company's average borrowings which primarily resulted from the availability of additional equity capital from the Company's initial public offering in November 1995, reduced by cash used for acquisitions.

Equity in earnings of affiliates increased by $0.1 million to $0.1 million for the three months ended March 30, 1996. This increase in equity in earnings of affiliates was primarily due to the acquisition of an unconsolidated affiliate during the fourth quarter of 1995.

For the three months ended March 30, 1996, the Company's provision for taxes was $1.8 million, while pre-tax income was $4.0 million, resulting in an effective tax rate of 44.1%. The difference between the 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 in France, which are not included in the Company's consolidated tax return. For the three months ended April 1, 1995, the Company's provision for taxes was $0.8 million, while pre-tax income was $1.9 million. The effective tax rate of 41.9% for the three months ended April 1, 1995 differed from the Federal statutory rate, primarily due to state income taxes.

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 and special inventory buying opportunities, (b) capital expenditures, and (c) acquisitions. Since sales are strongest during the fourth quarter and special inventory buying opportunities are most prevalent just before the end of the year, the Company's working capital requirements are generally higher from the end of the third quarter to the end of the first quarter of the following year. The Company currently finances its business primarily through a revolving credit facility.

Net cash used in operating activities for the three months ended March 30, 1996 of $16.0 million resulted primarily from a net increase of $19.8 million in working capital offset by net income (adjusted for non-cash charges relating to depreciation and amortization) of $4.2 million. The increase in working capital was primarily due to an increase in accounts receivable resulting from increased sales and extended payment terms, and a decrease in accounts payable partially offset by a decrease in inventory.

Net cash used in investing activities for the three months ended March 30, 1996 of $3.7 million resulted primarily from cash outlays for acquisitions and capital expenditures.

Net cash provided by financing activities for the three months ended March 30, 1996 of $19.7 million resulted primarily from additional bank borrowings of $24.0 million offset in part by repayments.

In addition, with respect to the acquisitions completed during fiscal 1995, as well as certain other acquisitions and ventures which have been completed or for which agreements have been executed, minority shareholders have the right at certain times to require the Company to acquire their shares

at either fair market value or a formula price based on earnings of the entity. One of the acquisitions also provides for contingent consideration of up to approximately $2.0 million if certain financial targets are satisfied.

The Company entered into its $65.0 million main revolving credit facility on July 5, 1995. Borrowings under the facility were $39.0 million at March 30, 1996. At March 30, 1996, the Company's main revolving credit facility was unsecured. In addition, the Company's subsidiaries have revolving credit facilities that total approximately $13.9 million.

The Company believes that its anticipated cash flow from operations, as well as the availability of funds under its existing credit agreements, will provide it with liquidity sufficient to meet its ongoing capital needs for at least the balance of its fiscal year.

Disclosure Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains forward-looking statements based on current expectations that could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation of healthcare practitioners, the impact of healthcare reform, opportunities for acquisitions and the Company's ability to effectively integrate acquired companies, the acceptance and quality of software products, acceptance and ability to manage operations in foreign markets, possible disruptions in the Company's computer systems or telephone systems, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's reports to the Securities and Exchange Commission, which include the Company's Annual Report on Form 10-K for the year ended December 30, 1995. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Form 10-Q and those in the Company's reports previously filed with the Securities and Exchange Commission.