<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10
GENERAL FORM FOR
REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
SDS HOLDING CO.
(TO BE RENAMED SYBRON DENTAL SPECIALTIES, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0920985
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
<TABLE>
<S> <C>
1717 WEST COLLINS AVENUE
ORANGE, CALIFORNIA 92867
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(714) 516-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
(ASSOCIATED WITH THE COMMON STOCK)
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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--------------------------------------------------------------------------------
<PAGE> 2
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS.
The information required by this item is contained in the sections entitled
"Introduction," "Risk Factors," "The Distribution," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of SDS
and its Subsidiaries" in the Information Statement attached hereto. Those
sections are incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained in the sections entitled
"Selected Historical Financial Data", "Unaudited Pro Forma Combined Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Information Statement. Those sections are
incorporated herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained in the section entitled
"Business of SDS and its Subsidiaries -- Properties" in the Information
Statement. That section is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Information Statement. That section is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is contained in the sections entitled
"Management of SDS -- Directors" and "Management of SDS -- Executive Officers"
in the Information Statement. Those sections are incorporated herein by
reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained in the sections entitled
"Management of SDS -- Directors' Compensation" and "Executive Compensation" in
the Information Statement. Those sections are incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained in the sections entitled
"Summary," "The Distribution -- Relationship Between Sybron International and
SDS After the Distribution" and "Business of SDS -- Transactions and Agreements
Between Sybron International and SDS" and "Management of SDS -- Certain
Relationships and Related Transactions" in the Information Statement. Those
sections are incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained in the section entitled
"Business of SDS and its Subsidiaries -- Legal Proceedings" in the Information
Statement. That section is incorporated herein by reference.
2
<PAGE> 3
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is contained in the sections entitled
"Summary," "The Distribution -- Manner of Effecting the Distribution," "The
Distribution -- Listing and Trading of Shares of SDS Common Stock," "The
Distribution -- Dividend Policy," "Security Ownership of Certain Beneficial
Owners and Management," and "Description of SDS Capital Stock" in the
Information Statement. Those sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On , 2000, as part of its original incorporation, the
registrant issued 100 shares of its common stock to Sybron International
Corporation for a total consideration of $100, in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. The
section entitled "The Distribution" in the Information Statement is incorporated
herein by reference. Subsequent to the Distribution, Sybron International will
hold no capital stock of the registrant.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained in the sections entitled
"Summary," "The Distribution -- Listing and Trading of Shares of SDS Common
Stock," "The Distribution -- Dividend Policy," "Financing" and "Description of
SDS Capital Stock" in the Information Statement. Those sections are incorporated
herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained in the section entitled
"Liability and Indemnification of Directors and Officers" in the Information
Statement. That section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained (i) in the sections
entitled "Selected Historical Financial Data," "Unaudited Pro Forma Combined
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Information Statement, and (ii) in
the Combined Financial Statements included in the Information Statement and
other financial information incorporated by reference in Item 15 hereof. Those
sections, financial statements and other financial information are incorporated
herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. See "Index to Combined Financial Statements" in
the Information Statement, which is incorporated herein by reference. In
addition, the following financial statement schedule, not included in the
Information Statement, is filed as part of the registration statement:
Independent Auditors' Report
Schedule II -- Valuation and Qualifying Accounts for the years ended
September 30, 1997, 1998 and 1999
(b) Exhibits. See the Exhibit Index following the Signatures page in this
registration statement, which Exhibit Index is incorporated herein by reference.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
SDS HOLDING CO.
By: /s/ FLOYD W. PICKRELL, JR.
------------------------------------
Floyd W. Pickrell, Jr.
President
Date: August 8, 2000
4
<PAGE> 5
SDS HOLDING CO.
(TO BE RENAMED SYBRON DENTAL SPECIALTIES, INC.)
(THE "REGISTRANT")
EXHIBIT INDEX
TO
FORM 10 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 Form of Contribution Agreement, Plan and Agreement of
Reorganization and Distribution between Sybron International
Corporation ("Sybron International") and the Registrant (the
"Contribution Agreement") (filed without exhibits, which
will be filed by amendment)
2.2* Form of General Assignment, Assumption and Agreement
Regarding Litigation, Claims and Other Liabilities between
Sybron International and the Registrant (Exhibit to the
Contribution Agreement)
2.3* Form of Transitional Trade Name Use and License Agreement
between Sybron International and the Registrant (Exhibit
to the Contribution Agreement)
2.4* Form of Insurance Matters Agreement between Sybron
International and the Registrant (Exhibit to the
Contribution Agreement)
2.5* Form of Employee Benefits Agreement between Sybron
International and the Registrant (Exhibit to the
Contribution Agreement)
2.6* Form of Tax Sharing and Indemnification Agreement between
Sybron International and the Registrant (Exhibit to the
Contribution Agreement)
2.7* Form of Interim Administrative Services Agreement between
Sybron International and the Registrant (Exhibit to the
Contribution Agreement)
2.8* Form of Confidentiality and Non-Disclosure Agreement between
Sybron International and the Registrant (Exhibit to the
Contribution Agreement)
3.1* Form of Restated Certificate of Incorporation
3.2* Form of Restated Bylaws
4.1* Form of Rights Agreement between the Registrant and
, as Rights Agent, including the Form of
Certificate of Designation, Preferences and Rights of Series
A Preferred Stock (Exhibit A), Form of Rights Certificate
(Exhibit B) and Form of Summary of Rights (Exhibit C)
4.2* Form of Credit Agreement
10.1 Form of 2000 Long-Term Incentive Plan
10.2 Form of 2000 Outside Directors' Stock Option Plan
10.3 Form of Senior Executive Incentive Compensation Plan
10.4* Form of Executive Employment Agreement
21* Subsidiaries of the Registrant
27.1 Financial Data Schedule (fiscal year ended September 30,
1997)
27.2 Financial Data Schedule (fiscal year ended September 30,
1998)
27.3 Financial Data Schedule (fiscal year ended September 30,
1999)
27.4 Financial Data Schedule (six months ended March 31, 1999)
27.5 Financial Data Schedule (six months ended March 31, 2000)
</TABLE>
---------------
* To be filed by amendment.
<PAGE> 6
EXPLANATORY NOTES
THE INFORMATION CONTAINED IN THIS PRELIMINARY INFORMATION STATEMENT IS
SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT ON FORM 10 RELATING
TO SDS HOLDING CO. (TO BE RENAMED SYBRON DENTAL SPECIALTIES, INC.) COMMON STOCK
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET
BECOME EFFECTIVE. THESE SECURITIES WILL NOT BE ISSUED BEFORE THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS INFORMATION STATEMENT IS NOT AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
There are a number of conditions which must be satisfied before the
Distribution and related transactions described in the Information Statement
occur, including (i) receipt by Sybron International Corporation of a favorable
ruling from the Internal Revenue Service concerning the tax-free nature of the
Distribution, (ii) effectiveness of the registration statement on Form 10, (iii)
appropriate stock market conditions for the Distribution, (iv) financing for the
registrant and Sybron International Corporation as independent companies, (v)
the completion of certain internal restructuring steps, including the transfer
of the current Sybron Dental Specialties, Inc. and its dental businesses to the
registrant, now named SDS Holding Co. but to be renamed Sybron Dental
Specialties, Inc. at the time of the Distribution, (vi) receipt of approval to
list SDS's common stock on the New York Stock Exchange, and (vii) approval by
Sybron International's board of directors of the final terms of the
Distribution. The registration statement on Form 10 and the Information
Statement generally have been prepared on a prospective basis as if such
conditions have been satisfied and under the assumption that, among other
things, the Distribution and related transactions described in the Information
Statement will occur as described. The conditions have not yet been satisfied
and the Distribution and related transactions have not yet occurred, however,
and we cannot be certain that they will occur or will occur exactly as
described. We will amend or supplement the registration statement and
Information Statement to reflect any significant modifications or variations in
the proposed Distribution and related transactions.
<PAGE> 7
[SYBRON LETTERHEAD]
, 2000
Dear Shareholder:
On April 24, 2000, we announced a plan to spin off Sybron International's
dental group as a separate publicly traded company. The spin-off will be
effected by way of a pro rata dividend of the stock of Sybron Dental
Specialties, Inc. ("SDS"), a newly organized Delaware subsidiary of Sybron
International, to Sybron International shareholders. SDS, through its
subsidiaries, will own and operate all of our dental group businesses. On
, 2000, Sybron International's board of directors declared a pro
rata distribution (or spin-off) to Sybron International's shareholders of the
common stock and related preferred stock purchase rights of SDS (the
"Distribution"). Following the Distribution, you will own shares in both SDS,
which will then be an independent public company, and Sybron International,
which will continue to operate the company's laboratory products businesses. As
previously announced, Sybron International intends to change its name to
"Apogent Technologies Inc." following the Distribution. The attached Information
Statement, which is being mailed to all Sybron International shareholders,
describes the Distribution in detail.
Your board of directors has determined that the Distribution is in the best
interest of Sybron International's shareholders. Our dental and laboratory
products businesses are distinct operations with different opportunities,
challenges, strategies and means of doing business. The Distribution will permit
the management of each company to focus on the opportunities specific to the
business of that particular enterprise. We believe this will provide enhanced
growth through both internal expansion and a disciplined acquisition strategy.
Additionally, the Distribution will greatly simplify the business profile of
each of the businesses, allowing investors to more easily evaluate each of the
companies in the future.
Shareholders of record as of , 2000, will receive
shares of SDS common stock for every share of Sybron International common stock
they own (and a cash payment instead of any fractional share of SDS common
stock). SDS share certificates will be mailed beginning , 2000. No
action is required on your part to receive your SDS shares. You will not be
required to pay anything for your SDS shares or to surrender your Sybron
International shares. Based on a ruling we have received from the Internal
Revenue Service, your receipt of SDS shares in the Distribution will be tax-free
for U.S. federal income tax purposes, but any cash that you receive instead of
fractional shares will be taxable to you. You should, of course, consult your
own tax advisor as to the particular consequences of the Distribution to you.
Following the Distribution, we expect that SDS's common stock will be
traded on the New York Stock Exchange and that its ticker symbol will be "SYD."
Sybron International will continue to trade on the New York Stock Exchange, but
after its name becomes Apogent Technologies Inc. it will change its ticker
symbol to "AOT."
Our board of directors and management teams are excited about the
opportunities for both SDS and Sybron International following the Distribution.
We believe that the improved business focus and financial flexibility that will
result from this transaction will benefit our shareholders, customers, and
employees.
Sincerely,
Kenneth F. Yontz
Chairman, President and
Chief Executive Officer
<PAGE> 8
[SYBRON DENTAL SPECIALTIES, INC. LETTERHEAD]
, 2000
Dear Sybron Dental Specialties Stockholder:
On behalf of the entire management and staff of Sybron Dental Specialties,
I am pleased to welcome you as a stockholder in our company.
We are, and will continue to be, a significant force in the dental world
with marquee names such as Kerr(R) and Ormco(R). This spin-off will position us
as the second largest publicly traded dental manufacturing company in the world,
with more than 40% of our sales outside of the United States. Our focus is on
dental consumables and we are very proud of our long history of growth at both
the revenue and earnings lines.
This is a very exciting time and our entire workforce is enthusiastic about
our future. We believe this move represents an opportunity for our employees and
stockholders as well as the customers we serve. Accordingly, we look forward to
building stockholder value through continued growth.
Congratulations on becoming one of the "founding" stockholders in Sybron
Dental Specialties.
Very truly yours,
Floyd W. Pickrell
President and
Chief Executive Officer
<PAGE> 9
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
PRELIMINARY COPY DATED AUGUST 8, 2000
INFORMATION STATEMENT
SYBRON DENTAL SPECIALTIES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
We are providing this Information Statement to you as a shareholder of
Sybron International Corporation ("Sybron International") in connection with the
distribution by Sybron International to its shareholders of all of the
outstanding shares of Sybron Dental Specialties, Inc. ("SDS") common stock and
related preferred stock purchase rights (the "Distribution"). SDS will own and
operate, through its subsidiaries, what is currently Sybron International's
Professional Dental, Orthodontics and Infection Control Products business
segments (the "Dental Business").
We expect to make the Distribution on , 2000, to holders of
record of Sybron International common stock on , 2000. If you are a
Sybron International shareholder at the close of business on the record date,
you will receive shares of SDS common stock and related rights for every
share of Sybron International stock you own on that date (plus cash instead of
any fractional shares). We have applied to list the SDS common stock and related
rights on the New York Stock Exchange under the symbol "SYD." Certificates for
the SDS shares will be mailed to you, or your brokerage account will be credited
with the SDS shares, on or about , 2000. You will not be required to
pay anything for the shares of SDS common stock and related rights distributed
to you, nor will you be required to surrender or exchange any of your shares of
Sybron International common stock. The Distribution is intended to be tax-free
to Sybron International shareholders, except for the receipt of cash in lieu of
fractional shares, and we have received a ruling from the Internal Revenue
Service to that effect.
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR IS SOUGHT. WE
ARE NOT ASKING YOU FOR A PROXY.
Sybron International will continue to own and operate its Labware and Life
Sciences, Clinical and Industrial, Diagnostics and Microbiology and Laboratory
Equipment business segments (the "Laboratory Business") and intends (subject to
shareholder approval) to change its name to "Apogent Technologies Inc." at its
first annual meeting of shareholders after the Distribution. After the name
change it is expected that Sybron International common stock will trade on the
NYSE under the symbol "AOT."
AS YOU REVIEW THIS INFORMATION STATEMENT, YOU SHOULD CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING ON PAGE [9].
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED WHETHER THIS
INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is , 2000.
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION................................................ 1
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION................ 1
SUMMARY..................................................... 4
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS........... 7
RISK FACTORS................................................ 9
Risk Factors Relating to Separating SDS from Sybron
International.......................................... 9
Risk Factors Relating to SDS's Business................... 11
THE DISTRIBUTION............................................ 13
Background of and Reasons for the Distribution............ 13
Distribution Agent........................................ 16
Manner of Effecting the Distribution...................... 16
Federal Income Tax Consequences of the Distribution....... 16
Listing and Trading of Shares of SDS Common Stock......... 17
Dividend Policy........................................... 18
Relationship Between Sybron International and SDS After
the Distribution....................................... 18
Distribution Conditions................................... 19
FINANCING................................................... 20
Arrangements Related to the Distribution.................. 20
Credit Facilities......................................... 20
SELECTED HISTORICAL FINANCIAL DATA.......................... 21
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.......... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 28
General................................................... 28
Special Charges........................................... 28
Sales and Operating Income Growth......................... 30
1999 and the First Half of Fiscal 2000 Acquisitions....... 30
Non-Cash Charges.......................................... 31
International Operations.................................. 31
Legal Proceedings......................................... 32
Results of Operations..................................... 32
Inflation................................................. 40
Liquidity and Capital Resources........................... 40
European Economic Monetary Unit........................... 43
Cautionary Factors........................................ 44
Quantitative and Qualitative Disclosures About Market
Risk................................................... 44
BUSINESS OF SDS AND ITS SUBSIDIARIES........................ 46
General................................................... 46
Business Segments......................................... 47
New Products.............................................. 48
Markets; Distribution..................................... 48
International............................................. 49
Competition............................................... 50
Internet Strategy......................................... 50
Backlog................................................... 50
Research and Development.................................. 51
Employees................................................. 51
</TABLE>
i
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Patents, Trademarks and Licenses.......................... 51
Regulation................................................ 52
Raw Materials............................................. 54
Risks Attendant to Foreign Operations..................... 54
Reliance on Key Distributors.............................. 54
Properties................................................ 55
Legal Proceedings......................................... 55
Transactions and Agreements Between Sybron International
and SDS................................................ 55
MANAGEMENT OF SDS........................................... 58
Directors................................................. 58
Directors Meetings and Committees......................... 59
Directors' Compensation................................... 60
Executive Officers........................................ 60
Certain Relationships and Related Transactions............ 61
EXECUTIVE COMPENSATION...................................... 62
Summary Compensation Table................................ 62
Stock Options............................................. 63
Compensation Plans........................................ 65
Employment Agreements..................................... 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 73
DESCRIPTION OF SDS CAPITAL STOCK............................ 75
Authorized Capital Stock.................................. 75
Common Stock.............................................. 75
Preferred Stock........................................... 75
Preferred Stock Purchase Rights........................... 76
Certificate of Incorporation and Bylaw Provisions That May
Have Anti-Takeover Effects............................. 77
Section 203 of the Delaware General Corporation Law....... 79
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS..... 80
Limitations on Liability of Directors..................... 80
Indemnification and Insurance............................. 80
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 81
2001 ANNUAL MEETING AND STOCKHOLDER PROPOSALS............... 81
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 81
INDEX TO COMBINED FINANCIAL STATEMENTS...................... F-1
</TABLE>
ii
<PAGE> 12
INTRODUCTION
Sybron International Corporation ("Sybron International") is spinning off
its dental business by way of a pro rata distribution to its shareholders of all
of the outstanding shares of Sybron Dental Specialties, Inc. ("SDS") common
stock and related preferred stock purchase rights (the "Distribution"). SDS owns
Pinnacle Products, Inc. and Sybron Dental Management, Inc. (formerly known as
Sybron Dental Specialties, Inc., this subsidiary changed its name in connection
with the Distribution), which in turn own the companies that operate what is
currently Sybron International's Professional Dental, Orthodontics and Infection
Control Products business segments that constitute the Dental Business. Sybron
International plans to change its name to Apogent Technologies Inc. after
completion of the Distribution and upon approval by its shareholders.
When we use the terms "SDS", "we" or "our" in this Information Statement,
we are referring to Sybron Dental Specialties, Inc. and its subsidiaries, except
when we are discussing the SDS common stock (which refers exclusively to SDS),
or as the context otherwise requires. Our fiscal year ends on September 30. All
references to a particular year mean the fiscal year ended on September 30 of
that year, unless we indicate otherwise. In October 1998, Pinnacle Products of
Wisconsin, Inc. merged with a subsidiary of Sybron International formed for that
purpose. The merger was accounted for as a pooling of interests; accordingly,
all financial statements and accompanying notes have been restated to reflect
the merger.
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
The following questions and answers, together with the summary that
follows, highlight important information about the Distribution of SDS stock.
Because these sections are a summary, they may not contain all of the
information that is important to you. You should read the entire Information
Statement for more complete information.
Q: WHO IS SYBRON DENTAL SPECIALTIES, INC.?
A:Sybron Dental Specialties, Inc. is the newly organized Delaware corporation
that, through its subsidiaries, will independently own and operate Sybron
International's Dental Business following the Distribution described in this
Information Statement. Immediately following the Distribution, our
subsidiaries will continue to have leading positions in three business
segments: (a) Professional Dental, (b) Orthodontics and (c) Infection Control
Products.
Q: WHO IS APOGENT TECHNOLOGIES INC.?
A:"Apogent Technologies Inc." is expected to become the new name of Sybron
International shortly after the Distribution. Sybron International plans to
seek approval for the name change from its shareholders at the 2001 annual
meeting. Apogent Technologies will continue to own the subsidiaries in the
four business segments within Sybron International's laboratory products group
that constitute the Laboratory Business: (a) Laboratory and Life Sciences, (b)
Clinical and Industrial, (c) Diagnostics and Microbiology and (d) Laboratory
Equipment. Once the shareholders approve the name change, we expect Apogent
Technologies common stock to trade on the NYSE under the symbol "AOT."
Q: WHAT WILL HAPPEN IN THE DISTRIBUTION?
A:Sybron International is separating its Dental Business from its Laboratory
Business. Sybron International will accomplish this by distributing all of the
outstanding stock of SDS (which, through its subsidiaries, operates the Dental
Business) to the Sybron International shareholders. Sybron International will
retain the Laboratory Business, but it will not retain any shares of SDS stock
following the Distribution. This type of distribution is often called a
spin-off. If you are a Sybron International shareholder on , 2000,
you will receive SDS stock in the Distribution. You will retain your stock in
Sybron International, which will own only the Laboratory Business and will
later change its name to "Apogent Technologies Inc.," once shareholder
approval is obtained at the 2001 annual meeting. Upon completion of the
Distribution, you will own shares in two separately traded public companies,
SDS and Sybron International.
1
<PAGE> 13
Q: WHAT DO I HAVE TO DO?
A: Nothing. No proxy or vote is necessary for the Distribution to occur. You do
not need to, and should not, mail in any certificates for Sybron
International stock in order to receive SDS stock in the Distribution.
Q: WHAT WILL I RECEIVE IN THE DISTRIBUTION?
A: You will receive shares of SDS common stock for every share of Sybron
International stock you own as of the Record Date, with a cash payment
instead of any fractional share of SDS stock. All fractional shares which
would otherwise be distributed to you will be combined with those of all
other Sybron International shareholders and will be sold by EquiServe Trust
Company, N.A., the distribution agent, in the open market at then-current
prices. You will receive your pro-rata portion of the share proceeds shortly
after the Distribution. The shares of SDS stock you receive will also include
associated preferred stock purchase rights that are designed to encourage a
potential acquirer of at least [15%] of SDS's outstanding common stock to
negotiate with the SDS board of directors rather than proceed unilaterally.
For more information about the preferred stock purchase rights, see
"Description of SDS Capital Stock -- Preferred Stock Purchase Rights."
Q: DO I HAVE TO PAY INCOME TAXES ON THE RECEIPT OF MY SDS STOCK?
A: No. Sybron International has received a ruling from the IRS that the receipt
of SDS stock in the Distribution will be tax-free to its U.S. shareholders
for federal income tax purposes. However, any cash that you receive instead
of fractional shares of SDS stock will be taxable to you. See "The
Distribution -- Federal Income Tax Consequences of the Distribution."
Q: WILL SDS STOCK BE LISTED ON ANY EXCHANGE?
A: Yes. SDS has applied for approval to list its stock on the New York Stock
Exchange and will trade under the symbol "SYD." The stock of Sybron
International will also continue to be listed on the New York Stock Exchange.
It will continue to trade under the symbol "SYB" until, assuming it receives
shareholder approval, it changes its name to "Apogent Technologies Inc.,"
after which it will trade under the symbol "AOT."
Q: WHAT WILL HAPPEN TO THE TRADING OF SYBRON INTERNATIONAL AND SDS STOCK?
A: Beginning on or about , 2000, and continuing through
, 2000, you will be able to sell your Sybron International stock
in one of two ways:
- You may sell your Sybron International stock "regular way" with due-bills
for the SDS stock. If you choose to sell your Sybron International stock
this way, you will be giving up your right to receive SDS stock in the
Distribution with respect to the shares sold.
- Alternatively, you may sell your Sybron International stock in an
ex-distribution/"when issued" market which will be without the due-bills.
If you sell your Sybron International stock without due-bills, you will
still receive SDS stock in the Distribution with respect to the shares
sold, but the price you will receive will be the ex-distribution price
reflecting a reduction for the value of the SDS stock that the purchaser
will not receive.
Beginning on , 2000, shares of Sybron International and SDS
stock will be listed and traded separately on the New York Stock Exchange.
You should consult your own broker if you intend to sell your Sybron
International stock during the period referred to above. Make sure that
your broker understands your intentions with respect to such sales.
2
<PAGE> 14
Q: HOW CAN I OBTAIN MORE INFORMATION ABOUT THE DISTRIBUTION?
If you have questions about the Distribution, please contact:
Mr. R. Jeffrey Harris
Vice President, General Counsel and Secretary
Sybron International Corporation
411 East Wisconsin Avenue, Suite 2400
Milwaukee, Wisconsin 53202
(414) 274-6600
or
Ms. Margaret Dunn
EquiServe Trust Company, N.A.
150 Royall Street
Canton, Massachusetts 02021
(781) 575-3120
http://www.equiserve.com
3
<PAGE> 15
SUMMARY
This summary, together with the questions and answers immediately preceding
it, highlight some key information from this Information Statement concerning
the Distribution of SDS common stock by Sybron International. However, it does
not contain all of the information that may be important to you. To better
understand the Distribution and the business and financial position of SDS and
its subsidiaries, you should carefully review this entire document. References
in this Information Statement to "Sybron International" mean Sybron
International Corporation, a Wisconsin corporation, and its subsidiaries.
Distributing Company.......... Sybron International Corporation. After the
Distribution, Sybron International will not own
any shares of SDS stock. Sybron International
intends to change its name to "Apogent
Technologies Inc." if the name change is
approved at its first annual meeting of
shareholders after the Distribution.
Spun-off Company.............. Sybron Dental Specialties, Inc., currently a
wholly owned subsidiary of Sybron
International. After the spin-off, SDS will be
an independent public company.
Distribution Ratio............ You will receive shares of SDS common
stock (plus associated preferred stock purchase
rights issued pursuant to a stockholder rights
plan (collectively with the distributed common
stock, the "Shares")) for every outstanding
share of Sybron International common stock you
owned on the Record Date.
Fractional Shares............. Fractional shares will not be distributed;
instead, EquiServe Trust Company, N.A., as
distribution agent, will aggregate all of the
fractions to which the shareholders are
otherwise entitled and will sell them in the
open market at the then-current market price
for the SDS common stock. Sybron International
shareholders will receive their pro rata share
of the proceeds instead of fractional shares.
Securities to be
Distributed................... Approximately million Shares will be
issued in the Distribution. The Shares to be
distributed will constitute all of the
outstanding Shares of SDS immediately after the
Distribution. See "The Distribution -- Manner
of Effecting the Distribution."
Conditions to the
Distribution.................. The Distribution is subject to a number of
conditions, including:
- a favorable ruling of the Internal
Revenue Service concerning the tax-free
nature of the Distribution;
- registration of the Shares under the
Securities Exchange Act of 1934 and
approval for listing of the Shares on
the NYSE;
- SDS and Sybron International having each
obtained adequate credit facilities to
meet their financial needs as separate
companies;
- appropriate stock market conditions for
the Distribution; and
- approval by Sybron International's board
of directors of the final terms of the
Distribution, including the formal
declaration of the Distribution as a
dividend to Sybron International's
shareholders.
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<PAGE> 16
These conditions have all been satisfied as of
the date of this Information Statement, but
Sybron International's board of directors has
reserved the right to amend, modify or abandon
the Distribution at any time prior to the
Distribution Date.
Record Date................... , 2000 (close of business).
Distribution Date............. , 2000 (12:01 a.m., Central time).
Distribution Agent............ EquiServe Trust Company, N.A., which is the
transfer agent and registrar for SDS common
stock and for Sybron International common
stock.
New York Stock Exchange
Symbol........................ SYD
Trading Market................ Before , 2000, there [will be]
[was] no trading market for SDS common stock.
On that date, trading of shares of SDS common
stock on a "when issued" basis [is expected to
begin] [began].
Tax Consequences.............. Sybron International has received a ruling from
the IRS to the effect that, for federal income
tax purposes, the Distribution will be tax free
to Sybron International shareholders and to
Sybron International, except that shareholders
will owe taxes on the cash they receive instead
of fractional shares. Sybron International
shareholders will apportion their tax basis in
the Sybron International common stock held
immediately before the Distribution between the
Sybron International common stock and the SDS
Shares received in the Distribution, based on
the relative fair market values of each as of
the Distribution Date. A Sybron International
shareholder's holding period for the SDS shares
will include the holding period of the Sybron
International common stock on which the
Distribution is made. See "The Distribution --
Federal Income Tax Consequences of the
Distribution."
Dividends..................... SDS may or may not pay cash dividends on the
SDS common stock. SDS will evaluate its policy
regarding dividends from time to time after the
Distribution. See "The Distribution -- Dividend
Policy."
Risk Factors.................. See "Risk Factors" for a discussion of certain
risks that should be considered in connection
with the Shares received in the Distribution.
Principal Offices of SDS...... 1717 West Collins Avenue, Orange, California
92867. Telephone: (714) 516-7400
Relationship with Sybron
International after the
Distribution................ Sybron International will have no stock
ownership interest in SDS after the
Distribution. SDS and Sybron International will
have entered into several agreements for the
purpose of giving effect to the Distribution
and defining their ongoing relationships. These
include agreements providing for the transfer
to SDS of substantially all of the assets and
liabilities of the Dental Business, pursuant to
which Sybron International and its U.S.
subsidiaries generally will indemnify SDS and
its subsidiaries and affiliates against
liabilities, litigation and claims arising out
of the
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<PAGE> 17
Laboratory Business, and SDS and its U.S.
subsidiaries will indemnify Sybron
International and its subsidiaries and
affiliates against liabilities, litigation and
claims arising out of the Dental Business.
Additional agreements will relate to, among
other things, certain employee benefit matters,
intellectual property rights, certain interim
administrative services, tax matters (including
allocations of tax obligations), insurance, and
other miscellaneous matters. Dennis Brown and
Kenneth F. Yontz will be non-employee directors
of SDS, with Mr. Yontz serving as its chairman
of the board. Mr. Brown is the Vice President
of Finance -- Chief Financial Officer and
Treasurer of Sybron International; Mr. Yontz is
the Chairman of the Board, President and Chief
Executive Officer of Sybron International. See
"The Distribution -- Relationship Between
Sybron International and SDS After the
Distribution" and "Business of SDS and its
Subsidiaries -- Transactions and Agreements
Between SDS and Sybron International."
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<PAGE> 18
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
This report contains various forward-looking statements concerning our
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by us from time to time in other
reports and documents as well as oral presentations. When used in written
documents or oral statements, the words "anticipate", "believe", "continue",
"estimate", "expect", "goal", "objective", "outlook" and similar expressions are
intended to identify forward-looking statements. The statements contained herein
and such future statements involve or may involve certain assumptions, risks and
uncertainties, many of which are beyond our control, that could cause our actual
results and performance to differ materially from what is expected. In addition
to the assumptions and other factors referenced specifically in connection with
such statements, the following factors could impact our business and financial
prospects:
- SDS will initially incur a significant amount of floating rate bank debt,
so it may be adversely affected by increases in interest rates.
- A large portion of our revenue is generated outside the United States,
and we have significant operations outside the United States. We are
therefore subject to factors affecting our international operations,
including relevant foreign currency exchange rates, which can affect the
cost to produce our products or the ability to sell our products in
foreign markets, and the value in U.S. dollars of sales made in foreign
currencies. Other factors include our ability to obtain effective hedges
against fluctuations in currency exchange rates; foreign trade, monetary
and fiscal policies; laws, regulations and other activities of foreign
governments, agencies and similar organizations; risks associated with
having major manufacturing facilities located in countries, such as
Mexico and Italy, which have historically been less stable than the
United States in several respects, including fiscal and political
stability; and risks associated with any economic downturn in other
countries.
- Some of our growth over the past several years has been achieved through
our acquisition program, which has generated 22 acquisitions since 1993.
Our rate of continued growth is therefore subject to factors affecting
our ability to continue pursuing our acquisition strategy and to be
successful with that strategy. These factors include our ability to raise
capital beyond the capacity of our credit facilities or to use our stock
for acquisitions, the cost of the capital required to effect our
acquisition strategy, the availability of suitable acquisition candidates
at reasonable prices, competition for appropriate acquisition candidates
and the relatively small size of such candidates, our ability to realize
the synergies expected to result from acquisitions, and the ability of
our existing personnel to efficiently handle increased transitional
responsibilities resulting from acquisitions.
- We rely on major independent distributors for a substantial portion of
our sales, subjecting our sales and operating performance to volatility
in demand if distributor inventories get out of balance with end user
demand. This situation can arise when distributors merge or consolidate,
or when inventories are not managed to end-user demand.
- Our ability to increase revenues, and to profitably distribute and sell
our products, is subject to a number of risks, including any changes in
our business relationships with our principal distributors, competitive
risks such as the entrance of additional competitors into our markets,
pricing and technological competition, risks associated with the
development and marketing of new products in order to remain competitive
with dental, orthodontic and infection control innovations; and risks
associated with changes in demand for dental services which can be
affected by economic conditions, health care reform, government
regulation, and more stringent limits on expenditures by dental insurance
providers or governmental programs.
- Our business is subject to quarterly variations in operating results
caused by a number of factors, including business and industry
conditions, the timing of acquisitions, distribution chain issues, and
other factors listed here. All these factors make it difficult to predict
operating results for any particular period.
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<PAGE> 19
- We strive to increase our margins by controlling our costs and by
improving our manufacturing efficiencies. There can be no assurance,
however, that our efforts will continue to be successful. Margins can be
affected by many factors, including competition, product mix, and the
effect of acquisitions.
- Our ability to hire and retain competent employees is subject to a number
of risks, including unionization of our non-union employees and changes
in relationships with our unionized employees.
- There is a risk of strikes or other labor disputes at our locations which
are unionized or are subject to national contracts which could affect our
operations.
- Our ability to continue manufacturing and selling those of our products
that are subject to regulation by the United States Food and Drug
Administration or other domestic or foreign governments or agencies is
subject to a number of risks, including the promulgation of stricter laws
or regulations, reclassification of our products into categories subject
to more stringent requirements, or the withdrawal of the approval needed
to sell one or more of our products.
- The impact of changing public and private health care budgets can affect
the demand for or pricing of our products.
- Our business is subject to the risks of claims involving our products and
other legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims.
- Our ability to complete and achieve the expected benefits of the proposed
Distribution, including but not limited to continuing satisfaction of the
conditions to the ruling by the Internal Revenue Service regarding the
tax-free nature of the transaction, the availability of adequate
financing on acceptable terms for both SDS and Sybron International as
separate companies and favorable stock market conditions.
- We may be subject to risks arising from other business and investment
considerations that may be disclosed from time to time in our Securities
and Exchange Commission filings or in other publicly available written
documents.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
8
<PAGE> 20
RISK FACTORS
In addition to the other information in this document, you should carefully
consider the following factors which may affect SDS's financial condition or
results of operations and which may affect the value of SDS stock.
RISK FACTORS RELATING TO SEPARATING SDS FROM SYBRON INTERNATIONAL
SDS'S COMMON STOCK HAS NO PRIOR PUBLIC MARKET, AND IT IS NOT POSSIBLE TO
PREDICT HOW ITS STOCK WILL PERFORM AFTER THE DISTRIBUTION.
There has been no prior trading market for SDS's stock and there can be no
assurance as to the prices at which SDS's common stock will trade. Until the SDS
common stock is fully distributed and an orderly market develops, the prices at
which SDS stock trades may fluctuate significantly. Prices for SDS common stock
will be determined in the trading markets and may be influenced by many factors,
including:
- the depth and liquidity of the market for SDS common stock;
- developments generally affecting the dental industry;
- investor perceptions of SDS and its business;
- the financial results of SDS; and
- general economic and industry conditions.
In addition, the stock market, in general, often experiences substantial
volatility that is often seemingly unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
trading price of SDS common stock.
THE COMBINED PRICES OF SDS STOCK AND SYBRON INTERNATIONAL STOCK, TRADING
SEPARATELY, MAY BE LESS THAN THE CURRENT PRICE OF SYBRON INTERNATIONAL STOCK.
After the Distribution, Sybron International stock will continue to be
listed and traded on the New York Stock Exchange under the symbol "SYB" (until
its trading symbol changes to "AOT" as is expected after shareholder approval of
its planned name change to "Apogent Technologies Inc."). As a result of the
Distribution, the trading price of Sybron International stock is expected to be
lower than the trading price of Sybron International stock immediately before
the Distribution. The combined trading prices of SDS common stock and Sybron
International common stock after the Distribution may be less than, equal to or
greater than the trading price of Sybron International stock prior to the
Distribution.
IF LARGE AMOUNTS OF SDS STOCK ARE SOLD ON THE TRADING MARKETS, THE PRICE OF
SDS STOCK COULD DECLINE SIGNIFICANTLY.
Approximately shares of SDS stock will be distributed to the
Sybron International shareholders, representing all of the outstanding shares of
SDS stock. Substantially all of the shares of SDS stock will be eligible for
immediate resale on the public market. Possible reasons for an increase in sale
activity of SDS stock following the Distribution include:
- Investment criteria of certain investment funds and other large holders
of Sybron International stock may dictate or suggest an immediate sale of
the SDS stock received by them. Certain investment funds use total market
capitalization, industry sector, and other financial measures as criteria
upon which they select or hold stocks. To the extent that SDS stock does
not meet these criteria, the investment funds may decide, or even be
required by their governing policies, to sell any SDS shares received in
the Distribution. Similar factors could also lead to increased sales of
Sybron International stock. Increased sales of the shares of either
company, however, could be offset by purchases by a different investor
group.
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<PAGE> 21
Neither Sybron International nor SDS is able to predict whether substantial
amounts of the stock of either company will be sold in the open market following
the Distribution, or when any sales may occur. Substantial sales of SDS stock,
whether as a result of the Distribution or otherwise, could adversely affect its
market price.
SDS WILL INCUR A SIGNIFICANT AMOUNT OF DEBT WHICH IT MIGHT NOT BE ABLE TO
SERVICE.
At the time of the Distribution, SDS will have approximately $375 million
in bank debt, including approximately $ of new debt that will be used
to reduce the indebtedness of Sybron International. This level of indebtedness
could have significant consequences, including:
- limiting cash flow available for working capital, capital expenditures,
acquisitions and other corporate purposes because a significant portion
of SDS's cash flow from operations must be dedicated to servicing its
debt;
- limiting SDS's ability to obtain additional financing in the future for
working capital or other purposes; and
- limiting SDS's flexibility to react to competitive or other changes in
its industry, and to economic conditions generally.
SDS's ability to pay or refinance its indebtedness will depend upon its future
operating performance, which will be affected by general economic, financial,
competitive, legislative, regulatory and other factors beyond its control.
In addition, the debt covenants to which SDS will be subject may limit its
ability to pay dividends or make certain acquisitions and require it to maintain
debt and interest coverage ratios. See "Financing."
THE SEPARATION OF SDS FROM SYBRON INTERNATIONAL POSES NEW FINANCIAL AND
OPERATIONAL RISKS.
When the Distribution occurs, SDS will own and operate the Dental Business
and Sybron International will own and operate the Laboratory Business. Neither
company has a recent operating history as a stand-alone entity.
After the Distribution, each company initially will be smaller and less
diversified than was Sybron International prior to the Distribution. The ability
of SDS to satisfy its obligations and maintain profitability will be solely
dependent upon the future performance of the Dental Business (operated by its
own subsidiaries); it will not be able to rely upon the capital resources and
cash flows of the Laboratory Business (operated by subsidiaries of Sybron
International). Similarly, Sybron International will have to depend upon the
performance of the Laboratory Business alone, and it will not be able to rely
upon the capital resources and cash flows of the Dental Business. The future
performance and cash flows of each company will be subject to prevailing
economic conditions in its own markets and to financial, business and other
factors affecting its own business operations, including factors beyond its
control.
The separation of the Dental Business from the Laboratory Business and the
Distribution of SDS to the Sybron International shareholders may result in some
temporary dislocations to the organization and personnel structure of each
company, and will also result in the duplication of some administrative and
managerial personnel and other expenses required for the operation of
independent companies. Accordingly, there can be no assurance that the
Distribution will not alter or disrupt the management and operations of either
SDS or Sybron International, or both.
SDS MAY BE REQUIRED TO SATISFY CERTAIN INDEMNIFICATION OBLIGATIONS TO
SYBRON INTERNATIONAL, OR MAY NOT BE ABLE TO COLLECT ON INDEMNIFICATION RIGHTS
FROM SYBRON INTERNATIONAL.
Under the terms of the Distribution Agreements, SDS and Sybron
International and their respective U.S. subsidiaries have each agreed to
indemnify the other (and related parties) from and after the Distribution with
respect to certain indebtedness, liabilities and obligations. These
indemnification obligations could be significant. The availability of these
indemnities will depend upon the future financial strength of each of the
companies. We cannot determine whether SDS will have substantial
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<PAGE> 22
indemnification obligations to Sybron International and its affiliates after the
Distribution. We also cannot assure you that, if Sybron International has
substantial indemnification obligations to SDS and our affiliates, Sybron
International will have the ability to satisfy those obligations. See "Business
of SDS and its Subsidiaries -- Transactions and Agreements Between Sybron
International and SDS."
IF SYBRON INTERNATIONAL AND SDS DO NOT COMPLY WITH THE CONDITIONS TO THE
IRS RULING, THE DISTRIBUTION OF THE SDS STOCK COULD BE TAXABLE TO YOU.
Sybron International has received rulings from the IRS that, for federal
income tax purposes, certain internal restructurings necessary to effect the
Distribution will be tax-free to Sybron International and SDS. It has also
received a ruling to the effect that the Distribution will be tax-free to the
SDS stockholders. These rulings are subject to the continuing validity of
factual representations made to the IRS and assumptions and conditions set out
in the ruling request. In order to assure that the Distribution will continue to
qualify as tax-free, Sybron International and SDS have also agreed to certain
restrictions on their future actions for a period of time following the
Distribution.
If any of these matters were challenged on audit and the Distribution of
the SDS stock were ultimately determined to be taxable, then:
- corporate level income taxes would be payable by Sybron International (as
the common parent of the consolidated group), based upon the amount by
which the fair market value of the SDS stock distributed to the Sybron
International shareholders exceeds Sybron International's net basis in
the Dental Business; and
- the fair market value of the shares of SDS stock which you receive in the
Distribution would be subject to tax as a dividend.
SDS has agreed to indemnify Sybron International and its shareholders if
SDS's actions or the actions of any of its affiliates result in the tax
liability described above. Sybron International has agreed to indemnify SDS for
any losses it may incur in the event that Sybron International or any of its
affiliates take any action which adversely impacts the tax-free nature of the
Distribution. For more information concerning the tax consequences of the
Distribution, see "The Distribution -- Federal Income Tax Consequences of the
Distribution" and "Business of SDS and its Subsidiaries -- Transactions and
Agreements Between Sybron International and SDS -- Tax Indemnification
Agreement."
RISK FACTORS RELATING TO SDS'S BUSINESS
WE ARE SUBJECT TO PRODUCT LIABILITY LITIGATION AND RELATED RISKS.
Because many of SDS's products are designed for use in and around a
patient's mouth, and because many of these products contain chemicals, metals,
and other materials, we are unavoidably subject to claims and litigation brought
by patients or dental professionals alleging harm caused by use of or exposure
to our products. Our business can also be adversely affected by public
perceptions about the safety of our products, whether or not any concerns are
justified. See "Business of SDS and its Subsidiaries -- Regulation" and
"-- Legal Proceedings."
WE COULD BE HURT BY INTEREST RATE INCREASES.
SDS will have significant debt immediately after the Distribution, all of
which will initially bear floating interest rates. See "Risk Factors Relating to
Separating SDS from Sybron International" above. Any increases in interest rates
will increase our interest expense and, therefore reduce our earnings. Reduced
earnings would probably reduce the market price of our stock.
SDS'S ACQUISITIONS MAY CREATE TRANSITIONAL CHALLENGES.
SDS's business strategy includes continued growth through strategic
acquisitions, which depends upon the availability of suitable acquisition
candidates at reasonable prices and SDS's ability to quickly resolve
transitional challenges. These challenges include integration of product lines,
sales forces and manufacturing facilities and decisions regarding divestitures,
inventory write-offs and other charges. Also, these
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<PAGE> 23
challenges involve risks of employee turnover, disruption in product cycles and
the loss of sales momentum. Although we have substantial experience in managing
these risks, we cannot be certain that we will successfully manage them in the
future.
SDS'S INTERNATIONAL OPERATIONS POSE POLITICAL AND ECONOMIC RISKS.
SDS's international operations pose special risks, including those
associated with:
- new regulatory systems or changes in foreign regulations of dental
products or of dentists, or of the applicable reimbursements for them;
- foreign currency fluctuations;
- trade or currency exchange restrictions;
- potential political and economic instability in some countries; and
- cultural differences.
Foreign currency fluctuations have had significant effects on our net
earnings in the past and may continue to do so. As SDS expands its international
presence, these risks may increase.
WE RELY HEAVILY UPON KEY DISTRIBUTORS, AND COULD LOSE SALES IF ANY OF THEM
STOP DOING BUSINESS WITH US.
A substantial portion of our sales are made through major independent
distributors. Recent mergers and consolidation of our distributors have
temporarily slowed sales of our products in the past and may do so in the
future. The loss of certain of our dental distributors could have a material
adverse effect on our results of operations or financial condition.
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<PAGE> 24
THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
Sybron International is a Wisconsin corporation, incorporated in 1993 to be
the successor by merger in January 1994 to Sybron Corporation, a Delaware
corporation. The merger was accomplished to change Sybron International's
corporate domicile from Delaware to Wisconsin.
The subsidiaries of Sybron International are leading manufacturers of
value-added products in the United States and abroad for seven business segments
that fall into two diverse business groups: (a) the Laboratory Business, owned
through Sybron Laboratory Products Corporation, is engaged in the manufacturing
and sale of laboratory and life science products and (b) the Dental Business,
owned through Sybron Dental Specialties, Inc., is engaged in the manufacturing
and sale of dental products. The business segments, and the primary subsidiaries
in each, are as follows:
Laboratory Business
<TABLE>
<S> <C>
LABWARE AND LIFE SCIENCES CLINICAL AND INDUSTRIAL
Matrix Technologies Corporation Erie Scientific Company
Nalge Nunc International Corporation Chase Scientific Glass, Inc.
National Scientific Company The Naugatuck Glass Company
Nunc A/S Richard-Allan Scientific Company
Molecular BioProducts, Inc. Samco Scientific Corporation
Robbins Scientific Corporation Microm Laborgerate GmbH
Gerhard Menzel Glasbearbeitungswerk
GmbH & Co. K.G.
DIAGNOSTICS AND MICROBIOLOGY LABORATORY EQUIPMENT
Applied Biotech, Inc. Barnstead Thermolyne Corporation
Microgenics Corporation Lab-Line Instruments, Inc.
Alexon-Trend, Inc.
Remel Inc.
Dental Business
PROFESSIONAL DENTAL ORTHODONTICS
Kerr Corporation, including its Ormco Corporation, including its
Demetron Division Analytic Endodontics Division
Kerr Italia S.p.A. Ormco B.V.
Sybron Canada Limited's Ormodent Group
Beavers Dental Division Allesee Orthodontic Appliances, Inc.
Pinnacle Products, Inc.
INFECTION CONTROL PRODUCTS
Metrex Research Corporation, including its Alden Scientific Division
</TABLE>
Since 1993, the Laboratory Business has consistently achieved exceptional
year-over-year growth in sales and profitability and has become Sybron
International's dominant business. By way of illustration, in 1993, the
Laboratory Business accounted for approximately 51% of Sybron International's
consolidated sales; in 1999 that figure increased to approximately 65% and is
expected to approximate 70% for 2000. Much of this growth has been through
acquisitions, with 21 of Sybron International's 27 acquisitions between October
1998 and March 2000 focusing on the Laboratory Business. By contrast, the Dental
Business, while profitable and growing, has come to represent a shrinking
portion of Sybron International's overall business and is growing at a slower
rate than the Laboratory Business. It represented only 35% of Sybron
International's sales in 1999, down from 49% in 1993.
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<PAGE> 25
This growth, and the resulting changes in the predominant characteristics
and focus of Sybron International's businesses, has made it increasingly
difficult to take maximum advantage of the opportunities available to each
business. Accordingly, at meetings of the board of directors on February 2,
2000, and April 24, 2000, the board explored strategic alternatives available
for resolving the difficulties created by the diverging characteristics of the
Laboratory Business and the Dental Business. The board was assisted in this
process by its financial advisors. The board evaluated a number of alternatives,
including the potential advantages and disadvantages of (a) continuing Sybron
International's current structure, including both the Laboratory Business and
the Dental Business, (b) pursuing a sale of either the Laboratory Business or
the Dental Business, (c) pursuing a sale of both businesses or a merger of
Sybron International with a third party, (d) repurchasing Sybron International
common stock in the market, or (e) conducting a spin-off of the Dental Business
to separate it from the Laboratory Business. The board considered and discussed
with its financial advisors a number of financial analyses, including financial
forecasts prepared by company management with respect to the Laboratory Business
and the Dental Business as stand-alone companies. The board also reviewed Sybron
International's most recent stock trading price and trading multiples and the
trading prices and trading multiples of other companies in the laboratory and
life science products and dental products industries. After careful
consideration, on April 24, 2000, the board decided to pursue a spin-off
transaction, subject to a number of conditions. See "-- Distribution Conditions"
below. Sybron International announced the proposed transaction in a press
release later that day.
The primary corporate purpose for the Distribution is to enhance the
success of both the Laboratory Business and the Dental Business by resolving
substantial problems that have evolved, and are exacerbated by, the operation of
both businesses within a single affiliated group of corporations. Sybron
International expects that the separation of the Laboratory Business from the
Dental Business will permit the independent management of each business to adopt
strategies and pursue objectives that are appropriate to its respective
business, recognizing each business's own substantially different financial,
investment and operating characteristics, human resource concerns, return on
invested capital profiles, capital requirements and growth opportunities. The
board specifically concluded that this business purpose is not achievable under
Sybron International's current single corporate group structure, and that it was
not achievable through any alternative nontaxable transaction other than the
Distribution.
The board's decision to pursue the Distribution was based upon the
following factors, among others:
Management Focus
The Laboratory Business and the Dental Business have markedly different
business growth rates, capital requirements, cash flow profiles, strategic goals
and opportunities, and customer bases. As the Laboratory Business has rapidly
expanded in recent years, Sybron International's management and board of
directors have been required to devote to it an ever increasing portion of their
time and attention. The lack of synergy between the Laboratory Business and the
Dental Business detracts from overall management efficiency and creates tensions
between the management and employees of the Laboratory Business, on the one
hand, and the Dental Business on the other, over strategic direction, business
expansion opportunities, employee retention and compensation, and resource
allocation. The Distribution will permit management of each company to focus
solely on its respective business.
Acquisition Criteria and Allocation of Capital and Other Resources to SDS
The Distribution will provide both the Dental Business and the Laboratory
Business the opportunity to adopt acquisition criteria and resource allocation
policies that best reflect the cash flow, investment requirements, competitive
environment, corporate strategy and business objectives of each company.
The dental products industry has been experiencing substantial
consolidation with respect to both product manufacturing and distribution, but
it remains fragmented. SDS is among the leaders in the dental products industry
worldwide. Sybron International believes there are many current and future
acquisition opportunities available for the Dental Business, most of which are
relatively small companies (many of
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<PAGE> 26
which are individually or family controlled), which require significant
management time and attention to evaluate and execute. Sybron International
believes that the Dental Business will be better suited to pursue these
opportunities, and other types of strategic acquisitions and alliances as well,
if it operates as a stand alone business. The Distribution will give the Dental
Business the flexibility in resource allocation (including both capital and
management time and attention) to pursue potential transactions that it believes
are strategically or financially desirable, without being required to satisfy
the acquisition criteria of Sybron International or having to compete with the
Laboratory Business for limited capital and management resources.
Stock as Acquisition Currency
Acquisitions have been, and are expected to continue to be, an important
part of the growth strategy of both businesses. Sybron International believes
that the Distribution will permit each company to use its stock as a more
attractive currency with which to pursue acquisitions. Management of SDS
believes that stockholders in potential target companies often prefer to receive
stock in a corporation focused solely on the dental industry (in which the
target company is engaged) as consideration in an acquisition. Similarly, owners
of acquisition candidates in the laboratory products industry are likely to
prefer stock in a company focused exclusively on their industry and related
businesses. Sybron International believes, based in part on recommendations from
its financial advisors, that following the Distribution, each company will have
more opportunities to pursue acquisitions using stock as currency than Sybron
International would have in the absence of the Distribution.
Capital Structure
Since becoming a public company in 1992, Sybron International has never
paid a dividend to its shareholders, preferring to reinvest its earnings
principally in Laboratory Business acquisitions. Nevertheless, its need to raise
funds for acquisitions and the relative unattractiveness of Sybron International
stock as an acquisition currency have caused Sybron International to be more
highly leveraged than most of its peers in the laboratory and life sciences
industry, limiting its growth.
In connection with the Distribution, Sybron International will refinance
its bank loans and will receive a dividend distribution from SDS. SDS will no
longer be a co-obligor on Sybron International's bank debt after the
Distribution, but it will obtain significant loans of its own to finance its
business and make the dividend distribution to Sybron International. These
transactions are expected to reduce Sybron International's overall leverage,
which is expected to improve its stock price performance and expand its
acquisition opportunities.
Although SDS will initially have increased leverage after the Distribution,
as an independent company it will be free to take advantage of its stable cash
flow to pursue its own strategies to optimize its capital structure over time.
Attraction and Retention of Employees
We believe that the Distribution will significantly enhance the ability of
both Sybron International and SDS to attract, retain and motivate key employees.
Sybron International views stock-based compensation as a fundamental component
of its overall executive compensation program and as a critical tool to align
management rewards with business performance. However, because Sybron
International's stock currently is affected by the performance of both the
Laboratory Business and the Dental Business, it cannot achieve its alignment
goal, particularly because the growth and performance profiles of the two
businesses are so different.
In addition, differences in the competitive environment and industry
compensation practices affecting both the Laboratory Business and the Dental
Business have made it difficult to efficiently motivate and reward key personnel
in the Dental Business. By separating the two businesses, the Distribution will
allow each business to structure its compensation program to meet its own unique
needs and competitive environment.
15
<PAGE> 27
DISTRIBUTION AGENT
The Distribution Agent is EquiServe Trust Company, N.A. Its address and
telephone number are:
EquiServe Trust Company, N.A.
150 Royall Street
Canton, Massachusetts 02021
(781) 575-3120
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made as of 12:01 a.m. central time on
, 2000 (the "Distribution Date") on a pro rata basis to holders of
Sybron International stock as of the close of business on , 2000
(the "Record Date").
On the Distribution Date, the SDS stock will be delivered by Sybron
International to the Distribution Agent. As soon as practicable thereafter, the
Distribution Agent will begin mailing share certificates for the SDS stock which
Sybron International shareholders will receive in the Distribution. You will
receive shares of SDS stock for every share of Sybron International
stock you hold on the Record Date.
No fractional shares of SDS stock will be issued to you. Instead, the
Distribution Agent will aggregate fractional shares into whole shares and sell
them in the open market at then prevailing prices on behalf of everyone who
otherwise would be entitled to receive fractional share interests. You will
receive a cash payment in the amount of your pro rata share of the total sales
proceeds. Proceeds from the sale of fractional shares will be paid by the
Distribution Agent based upon the average gross selling price per share of all
such sales. For more information about the tax consequences of the cash payment
for fractional shares, see "-- Federal Income Tax Consequences of the
Distribution." Sybron International will bear the cost of commissions incurred
in connection with these sales. We expect that the sales will be made as soon as
practicable after the Distribution Date. NEITHER SYBRON INTERNATIONAL, SDS NOR
THE DISTRIBUTION AGENT GUARANTEES THAT YOU WILL RECEIVE ANY MINIMUM SALE PRICE
FOR YOUR FRACTIONAL SHARES OF SDS STOCK, AND NO INTEREST WILL BE PAID TO YOU ON
THE PROCEEDS OF THE SALE.
Based on the number of shares of Sybron International common stock issued
and outstanding at , 2000 and the number of holders of record as of
that date, approximately shares of SDS common stock will be issued
in the Distribution to approximately holders of record. All of the
shares of SDS stock will be fully paid, nonassessable and free of preemptive
rights.
The board of directors of SDS also declared a distribution of one preferred
stock purchase right for every outstanding share of SDS common stock. These
rights will be indicated on your SDS stock certificate. For more information
about the preferred stock purchase rights, see "Description of SDS Capital
Stock -- Preferred Stock Purchase Rights."
No action is necessary on your part in order to receive the shares of SDS
stock and related rights in the Distribution. You do not need to pay any
consideration to Sybron International or SDS and you do not need to surrender or
exchange any shares of Sybron International stock in order to receive your
shares of SDS stock in the Distribution. DO NOT SEND YOUR STOCK CERTIFICATES TO
SYBRON INTERNATIONAL, SDS OR THE DISTRIBUTION AGENT. The Distribution will not
affect the number of outstanding shares of Sybron International stock or the
number of shares of Sybron International stock that you own.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following is a discussion of the material United States federal income
tax consequences of the Distribution. The discussion is based on the Internal
Revenue Code of 1986, as amended, Treasury regulations promulgated thereunder
and judicial and administrative interpretations thereof, all as in effect on the
date hereof, and is subject to any changes in these or other laws occurring
after such date, possibly with retroactive effect. The discussion below is for
general information only and does not address the effect
16
<PAGE> 28
of any state, local or foreign tax laws. Your treatment may vary depending on
your particular situation, and certain holders may be subject to special rules
not discussed below. The following discussion does not address the tax
consequences to you if you are a non-U.S. person. A non-U.S. person is (i) an
alien individual who is not a resident of the United States, (ii) a corporation
or partnership that is not created or organized under the laws of the United
States or of any state, (iii) an estate that is not subject to United States
federal income tax on a net income basis, or (iv) a trust the administration of
which is not subject to primary supervision of a United States court or with
respect to which no United States person has authority to control all
substantial decisions.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE DISTRIBUTION TO YOU, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY STATE, LOCAL OR FOREIGN LAWS AND OF CHANGES IN APPLICABLE TAX LAWS.
SDS has received a private letter ruling from the Internal Revenue Service
generally to the effect that the Distribution and certain internal
restructurings related to the Distribution will qualify as tax-free. The ruling
is based on current law and on certain representations as to factual matters
made by, among others, Sybron International and SDS. Such representations, if
incorrect in material respects, could jeopardize the conclusions reached in the
ruling. Neither Sybron International nor SDS is aware of any facts or
circumstances that would cause any such representations to be untrue or
incorrect in any material respect.
Based on the ruling, the material United States federal income tax
consequences expected to result from the distribution are as follows:
- you will not recognize gain or loss, or include any gain or loss in your
income, solely as a result of the receipt of SDS stock in the
Distribution;
- no gain or loss will be recognized by Sybron International or SDS upon
the Distribution;
- if you hold your Sybron International stock as a capital asset, your
holding period for the SDS stock that you receive in the Distribution
will include the period during which you have held Sybron International
stock;
- your tax basis in your Sybron International stock immediately prior to
the Distribution will be apportioned (based upon relative market values
at the time of the Distribution) between the Sybron International stock
which you hold and the SDS stock that you receive in the Distribution,
including any fractional shares converted into cash; and
- any cash that you receive instead of fractional shares of SDS stock will
be taxable to you as a sale or exchange of the fractional shares.
As soon as practicable after the Distribution, Sybron International will
provide information to you regarding the allocation of tax basis between your
Sybron International stock and your SDS stock.
Applicable Treasury regulations require that you attach to your federal
income tax return for the taxable year of the Distribution a statement
indicating that Section 355 of the Internal Revenue Code of 1986, as amended,
applies to the Distribution. Sybron International will provide you with the
information necessary to comply with this requirement.
For a description of the agreements under which Sybron International and
SDS have provided for various transitional matters, including tax matters, see
"Business of SDS and Its Subsidiaries -- Transactions and Agreements between
Sybron International and SDS."
LISTING AND TRADING OF SHARES OF SDS COMMON STOCK
There is currently no public trading market for SDS common stock. When the
shares are accepted for listing, a "when issued" trading market for SDS common
stock is expected to develop on or shortly before the Record Date. The term
"when issued" means that shares can be traded prior to the time certificates are
actually available or issued. We cannot predict the trading prices for SDS
common stock either before or after the Distribution Date. Until the common
stock is fully distributed and an orderly market develops,
17
<PAGE> 29
the trading prices for SDS's common stock may fluctuate substantially. The
trading prices for SDS common stock will be determined in the securities trading
markets and may be influenced by many factors, including:
- the depth and liquidity of the market for SDS common stock;
- developments generally affecting SDS's business and the dental products
industry in general;
- the impact of the factors referred to in "Risk Factors" beginning on page
[9];
- investor perceptions of SDS and its business;
- SDS's financial results; and
- general economic and market conditions.
The trading prices may also be affected by certain provisions of SDS's
certificate of incorporation, bylaws and the preferred stock purchase rights
which may discourage a potential takeover of SDS. For more information about
these provisions, see "Description of SDS Capital Stock."
SDS has received approval to list its common stock on the NYSE under the
symbol "SYD." The transfer agent and registrar for SDS common stock will be
EquiServe.
As of , 2000, Sybron International had approximately
shareholders of record. Assuming that each shareholder is a
shareholder of record on the Record Date, each of them will become a stockholder
of record of SDS. For certain information regarding options and other
equity-based awards involving SDS common stock which may become outstanding
after the Distribution, see "Executive Compensation." Shares of SDS common stock
distributed to Sybron International shareholders in the Distribution will be
freely transferable under the Securities Act, except for shares of SDS common
stock received by persons who may be deemed to be affiliates of SDS. Persons who
may be deemed to be affiliates of SDS after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with SDS and may include officers and directors, or principal
stockholders, of SDS. After SDS becomes a publicly traded company, securities
held by persons who are its affiliates will be subject to resale restrictions
under the Securities Act. Affiliates of SDS will be permitted to sell shares of
the entity of which they are affiliates only pursuant to an effective
registration statement or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 under the Securities
Act.
DIVIDEND POLICY
SDS has not made any decision as to whether it will or will not pay
dividends following the Distribution, although it expects to evaluate its
dividend policy from time to time after the Distribution and may or may not
choose to implement a dividend program. Dividends will be paid on SDS common
stock only if declared by the SDS board of directors in its sole discretion
following the Distribution. The payment and level of cash dividends, if any,
will be based upon a number of factors, including the operating results, cash
flow, financial requirements and business prospects of SDS, and any limitations
on the payment of dividends in debt covenants to which SDS may be subject. The
actual amount and timing of dividends, if any, will depend upon these and any
other matters SDS's board of directors may deem relevant.
RELATIONSHIP BETWEEN SYBRON INTERNATIONAL AND SDS AFTER THE DISTRIBUTION
Immediately after the Distribution, Sybron International and SDS will be
independent, public companies with no direct relationships between them, except
that (a) Dennis Brown and Kenneth F. Yontz will be non-employee directors of
SDS, with Mr. Yontz serving as the chairman of the board of SDS and (b) the two
companies will be parties to certain agreements intended to assist each of them
in transitioning to stand-alone businesses. Mr. Brown is the Vice President of
Finance -- Chief Financial Officer and Treasurer of Sybron International; Mr.
Yontz is the Chairman of the Board, President and
18
<PAGE> 30
Chief Executive Officer of Sybron International. See "Business of SDS and its
Subsidiaries -- Transactions and Agreements between SDS and Sybron International
and SDS."
DISTRIBUTION CONDITIONS
The Distribution is subject to a number of conditions, including:
- The receipt of a favorable tax ruling from the IRS as to the tax-free
nature of the Distribution and related internal restructurings.
- The registration of the SDS common stock (and associated preferred stock
purchase rights) under the Securities Exchange Act of 1934.
- The approval for listing of the SDS common stock (and associated
preferred stock purchase rights) on the NYSE, subject to official notice
of issuance.
- SDS and Sybron International must each have obtained credit facilities on
acceptable terms and conditions and in amounts expected to be adequate
(together with each company's respective anticipated cash flow) to fund
its capital expenditure, debt service and working capital requirements.
- Stock market conditions must be deemed appropriate by Sybron
International's board of directors, and there must be no legal restraint
or prohibition preventing consummation of the Distribution or related
transactions.
- The approval by the Sybron International board of directors of the final
terms of the Distribution, including the formal declaration of the
Distribution as a dividend of SDS common stock to Sybron International's
shareholders and other specific actions necessary to the Distribution.
As of the date of this Information Statement, these conditions have all
been satisfied. However, Sybron International's board of directors has reserved
the right to amend, modify or abandon the Distribution and related transactions
at any time prior to the Distribution Date.
19
<PAGE> 31
FINANCING
ARRANGEMENTS RELATED TO THE DISTRIBUTION
Prior to the Distribution Date, Sybron International will pay to SDS
approximately $ million to settle all intercompany loans and advances to
Sybron International. SDS will then pay a cash dividend to Sybron International
in an amount equal to the intercompany payment plus the difference between $375
million and the actual allocation of Sybron International bank debt to SDS on
the date of the Distribution. If the Distribution had occurred on March 31,
2000, the amount of the dividend would have been approximately $178.1 million.
This dividend to Sybron International will be financed in part from new
borrowings under the credit facilities to be entered into in connection with the
Distribution (the "SDS Credit Facilities"). Unused amounts under the SDS Credit
Facilities will be available for SDS's working capital requirements and general
corporate purposes (including future acquisition activity). See "Business of SDS
and its Subsidiaries -- Transactions and Agreements Between Sybron International
and SDS."
CREDIT FACILITIES
SDS management expects that SDS will enter into the SDS Credit Facilities
on or prior to the Distribution Date. The SDS Credit Facilities will enable SDS
to borrow funds at variable interest rates on a revolving credit basis up to an
aggregate principal amount of $350 million, subject to the terms and conditions
thereof, and on a variable interest rate basis under a term loan agreement in
the aggregate principal amount of $200 million. SDS expects to pay interest
under the SDS Credit Facilities at the LIBOR Interbank Offered Rate plus 2.0%.
SDS intends to reduce the risk of increases in floating rate debt by entering
into interest rate swap agreements, interest rate options, interest rate caps or
similar instruments to mitigate this risk.
The SDS Credit Facilities are expected to contain numerous financial and
operating covenants, including, among other things, restrictions on investments;
requirements that we maintain certain financial ratios; restrictions on our
ability to incur indebtedness or to create or permit liens or to pay cash
dividends; and limitations on incurrence of additional indebtedness. SDS's
ability to meet our debt service requirements and to comply with such covenants
is dependent upon SDS's future performance, which is subject to financial,
economic, competitive and other factors affecting us, many of which are beyond
our control.
20
<PAGE> 32
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected combined financial information for
SDS for the five years ended September 30, 1999, and the six month periods ended
March 31, 1999 and 2000. The historical financial information may not
necessarily be indicative of the results of operations or financial position
that would have been obtained if SDS had been an independent company during the
periods shown or of SDS's future performance as an independent company. This
selected financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical combined financial statements and the notes thereto contained
elsewhere in this Information Statement. Earnings per share is presented
elsewhere in this Information Statement on a pro forma basis only (see
"Unaudited Pro Forma Combined Financial Information").
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(A):
Net sales................... $301,855 $331,190 $358,697 $366,886 $388,176 $188,529 $201,679
Sybron International
charges................... 5,138 4,294 3,617 3,620 4,228 2,053 2,436
Income before restructuring,
merger, transaction and
integration expenses...... 32,615 33,096 38,897 46,131 50,674 22,065 24,660
Income before extraordinary
items..................... 32,645 29,896 38,897 29,031 49,774 20,397 24,660
Extraordinary items(b)...... (1,155) -- (269) -- -- -- --
Net income(c)............... 31,490 29,896 38,628 29,031 49,774 20,397 24,660
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $413,107 $437,346 $442,358 $467,899 $509,978 $576,570
Long-term debt........................ 170,102 198,328 259,297 248,175 283,447 320,040
Advances and loans to Sybron
International....................... 75,744 70,580 47,620 23,193 53,903 115,178
Stockholder's equity.................. 161,950 160,595 94,456 121,120 150,259 192,192
</TABLE>
---------------
(a) Includes results of acquired companies since their effective dates of
acquisition with the exception of the mergers of LRS and Pinnacle, which
were accounted for as poolings of interest and whose results are included as
if the mergers took place on October 1, 1994. See Note 14 to our combined
financial statements.
(b) Represents the write-off of unamortized financing fees resulting from the
refinancing of Sybron International's debt. See Note 7 to our combined
financial statements.
(c) Includes a restructuring charge of $5.1 million ($3.2 million after tax) in
1996 (relating to the rationalization of certain acquired companies),
special charges (relating to a restructuring charge and merger, transaction
and integration expenses associated with the merger with LRS) of $25.1
million ($17.1 million after tax) in 1998, and $1.4 million ($0.9 million
after tax) in 1999 from merger, transaction and integration expenses
associated with the mergers with Pinnacle and LRS and certain adjustments to
the 1998 restructuring reserve. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 11 to our combined
financial statements.
21
<PAGE> 33
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Sybron International is transferring its Dental Business to SDS and then
spinning off the stock of SDS in the Distribution. The historical consolidated
financial statements of Sybron International include periods during which the
various spun-off businesses operated as direct or indirect subsidiaries of
Sybron International.
The unaudited Pro Forma Combined Statements of Income for SDS for the year
ended September 30, 1999, and the six months ended March 31, 2000, present the
pro forma combined results of operations of SDS and its affiliates assuming the
transactions contemplated by the Distribution, including the borrowing to be
incurred by SDS in connection with the Distribution, had been completed as of
the beginning of 1999, and include all material adjustments necessary to restate
the historical results of SDS on a pro forma basis. The adjustments required to
reflect the transactions are set forth in the "Pro Forma Adjustments" columns.
The unaudited Pro Forma Combined Balance Sheet of SDS as of March 31, 2000,
presents the pro forma combined financial position of SDS assuming the
transactions contemplated by the Distribution had taken place on March 31, 2000.
The adjustments required to reflect the transaction are set forth in the "Pro
Forma Adjustments" columns.
The unaudited pro forma combined financial statements of SDS should be read
in conjunction with the historical combined financial statements and related
notes of SDS included elsewhere in this Information Statement. The pro forma
financial information presented is for informational purposes and may not
necessarily be indicative of SDS's future results of operations or financial
position or reflect what the results of operations or financial position would
have actually been had SDS operated as an independent company during the periods
shown.
22
<PAGE> 34
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................... $388,176 $ -- $388,176
Cost of sales:
Cost of product sold.................................. 162,448 -- 162,448
Depreciation of purchase accounting adjustments....... 108 -- 108
-------- -------- --------
Total cost of sales..................................... 162,556 -- 162,556
-------- -------- --------
Gross profit............................................ 225,620 -- 225,620
-------- -------- --------
Selling, general and administrative expenses............ 118,193 6,500(a) 124,693
Sybron International charges............................ 4,228 (4,228)(b) --
Merger, transaction and integration expenses............ 2,569 -- 2,569
Restructuring charge.................................... (1,177) -- (1,177)
Depreciation and amortization of purchase accounting
adjustments........................................... 7,501 -- 7,501
-------- -------- --------
Total selling, general and administrative expenses...... 131,314 2,272 133,586
-------- -------- --------
Operating income........................................ 94,306 (2,272) 92,034
-------- -------- --------
Other income (expense):................................. -- -- --
Interest expense...................................... (17,074) (17,393)(c) (34,467)
Interest income -- Sybron International............... 1,151 (1,151)(d) --
Amortization of deferred financing fees............... (154) -- (154)
Other, net............................................ (85) -- (85)
-------- -------- --------
Income before income taxes.............................. 78,144 (20,816) 57,328
Income taxes............................................ 28,370 (7,910)(e) 20,460
-------- -------- --------
Net income.............................................. $ 49,774 $(12,906) $ 36,868
======== ======== ========
Pro forma diluted earnings per share.................... $ .92(f)
========
</TABLE>
See accompanying notes to pro forma combined financial statements.
23
<PAGE> 35
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................... $201,679 $ -- $201,679
Cost of sales:
Cost of product sold.................................. 83,816 -- 83,816
Depreciation of purchase accounting adjustments....... 54 -- 54
-------- ------- --------
Total cost of sales..................................... 83,870 -- 83,870
-------- ------- --------
Gross profit............................................ 117,809 -- 117,809
-------- ------- --------
Selling, general and administrative expenses............ 59,799 3,250(a) 63,049
Sybron International charges............................ 2,436 (2,436)(b) --
Depreciation and amortization of purchase accounting
adjustments........................................... 4,168 -- 4,168
-------- ------- --------
Total selling, general and administrative expenses...... 66,403 814 67,217
-------- ------- --------
Operating income........................................ 51,406 (814) 50,592
-------- ------- --------
Other income (expense):................................. -- -- --
Interest expense...................................... (12,287) (4,913)(c) (17,200)
Interest income -- Sybron International............... 406 (406)(d) --
Amortization of deferred financing fees............... (138) -- (138)
Other, net............................................ 203 -- 203
-------- ------- --------
Income before income taxes.............................. 39,590 (6,133) 33,457
Income taxes............................................ 14,930 (2,330)(e) 12,600
-------- ------- --------
Net income.............................................. $ 24,660 $(3,803) $ 20,857
======== ======= ========
Pro forma diluted earnings per share.................... $ .52(f)
========
</TABLE>
See accompanying notes to pro forma combined financial statements.
24
<PAGE> 36
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,375 $ -- $ 3,375
Accounts receivable, net................................. 74,892 -- 74,892
Inventories.............................................. 83,741 -- 83,741
Deferred income taxes.................................... 4,693 -- 4,693
Prepaid expenses and other current assets................ 9,189 -- 9,189
-------- --------- --------
Total current assets............................. 175,890 -- 175,890
-------- --------- --------
Advances and loans to Sybron International................. 115,178 (115,178)(g) --
Property, plant and equipment, net......................... 53,279 -- 53,279
Intangible assets.......................................... 222,405 -- 222,405
Deferred income taxes...................................... 3,410 -- 3,410
Other assets............................................... 6,408 -- 6,408
-------- --------- --------
Total assets..................................... $576,570 $(115,178) $461,392
======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................... $ 8,673 $ -- $ 8,673
Current portion of long-term debt........................ 752 19,669(g) 20,421
Income taxes payable..................................... 8,872 -- 8,872
Accrued payroll and employee benefits.................... 12,035 -- 12,035
Restructuring reserve.................................... 939 -- 939
Deferred income taxes.................................... 2,359 -- 2,359
Other current liabilities................................ 6,701 -- 6,701
-------- --------- --------
Total current liabilities........................ 40,331 19,669 60,000
-------- --------- --------
Long-term debt............................................. 320,040 43,239(g) 363,279
Deferred income taxes...................................... 14,588 -- 14,588
Other liabilities.......................................... 9,419 -- 9,419
Commitments and contingent liabilities..................... -- -- --
Stockholder's equity....................................... 192,192 (178,086)(g) 14,106
-------- --------- --------
Total liabilities and stockholder's equity....... $576,570 $(115,178) $461,392
======== ========= ========
</TABLE>
See accompanying notes to pro forma combined financial statements.
25
<PAGE> 37
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To record the estimated annual additional administrative expenses that
would have been incurred by SDS as a publicly held, independent company. SDS
would have incurred approximately $4.0 million in compensation and related costs
for employees to perform functions that have historically been performed at
Sybron International's corporate headquarters (treasury, tax, reporting,
insurance, legal, etc.). SDS also would have incurred, on an annual basis,
corporate governance costs, stock transfer agent costs, incremental professional
fees, and other costs aggregating approximately $2.5 million.
(b) To remove historical corporate charges which would not have been
incurred if SDS had been an independent company.
(c) To record the incremental interest expense on the funds assumed to be
borrowed under the SDS Credit Facilities. The funds are assumed to bear an
annualized interest rate at 8.75% (a floating rate of LIBOR + 200 basis points),
which is management's estimate of the currently available rate for borrowings
under comparable credit facilities. This rate may change prior to the incurrence
of such debt on or before the Distribution Date; further, after the Distribution
the interest rate on the borrowings under the SDS credit facilities will
continue to be subject to changes in interest rates. The following table
reflects the effect on the pro forma combined statements of income of an
increase or decrease of 10% from the current estimated LIBOR rate of 6.75% on an
annualized basis.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 MARCH 31, 2000
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Change in income before income taxes........... $3,281 $1,641
====== ======
Change in net income........................... $2,034 $1,017
====== ======
Change in pro forma diluted earnings per
share........................................ $ 0.05 $ 0.03
====== ======
</TABLE>
(d) To eliminate intercompany interest paid to SDS.
(e) To record income tax benefits attributable to (a), (b), (c) and (d)
above at a statutory rate of 38%.
(f) The pro forma per share information is based upon the weighted average
number of common and common equivalent shares used by Sybron International to
determine its earnings per share for the respective periods, adjusted in
accordance with an assumed Distribution ratio of .3753 shares of SDS for every
share of Sybron International common stock held. The pro forma number of common
and common equivalent shares for SDS both for the year ended September 30, 1999,
and for the six months ended March 31, 2000, is 40.0 million. The actual
Distribution Ratio will not be determined until the Distribution is declared.
In connection with the Distribution, SDS's officers and employees will have
the opportunity to surrender their Sybron International stock options for
conversion into SDS stock options having an aggregate intrinsic value (the
spread between the market value and exercise price of the option shares) and
exercise price equal to the aggregate intrinsic value and exercise price of the
options for the Sybron International stock that they surrender. Unless exercised
prior to the Distribution Date, any options to acquire Sybron International
common stock held by those employees will expire on or shortly after the
Distribution occurs. The number of shares of SDS common stock subject to a new
option and the exercise price per share will be set in a manner that will
maintain, in the aggregate, the excess of market value over the exercise price
of the existing options immediately prior to the Distribution. See "Executive
Compensation -- Stock Options -- Adjustment or Conversion of Options in the
Distribution."
26
<PAGE> 38
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The number of common and common stock equivalent shares to be used by SDS
to compute earnings per share after the Distribution will depend on the market
prices of Sybron International common stock and SDS common stock during the
applicable pricing period.
(g) To record a dividend from SDS to Sybron International, anticipated to
aggregate $178.1 million, which will be applied to settle all intercompany loans
and advances, and to allocate to SDS $375.0 million of Sybron International's
bank debt, as follows:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of term loan................... $ 331 $19,669 $ 20,000
======== ======= ========
Long-term portion of term loan................. 189,041 (9,041) 180,000
Revolving credit facility...................... 122,720 52,280 175,000
-------- ------- --------
Total long-term bank debt...................... $311,761 $43,239 $355,000
======== ======= ========
</TABLE>
(h) SDS does not anticipate any material charges or credits resulting
directly from the transaction to be included in its statement of income in the
twelve month period following the Distribution.
27
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Our goals are to consistently grow our sales and earnings. Key elements of
the strategy we employ to meet our goals include product innovation, ongoing
cost reduction, and growth through acquisitions. Our ability to execute our
goals is subject to a number of risks and influences, many of which are
addressed in this section. You should also see the sections entitled
"Forward-Looking Statements and Cautionary Factors" and "Risk Factors" for other
factors that can affect our growth.
The following discussion should be read in conjunction with our combined
financial statements and the accompanying notes contained elsewhere in this
Information Statement.
SPECIAL CHARGES
Our results for fiscal 1999 and the six months ended March 31, 1999,
include charges of approximately $2.6 million ($1.6 million after tax),
consisting primarily of transaction costs relating to the merger with Pinnacle
Products of Wisconsin, Inc. (the "Pinnacle Merger") associated with non-
stockholder compensation of approximately $1.9 million and integration costs of
approximately $0.7 million associated with the merger with LRS Acquisition Corp.
(the "LRS Merger"), the parent of "A" Company Orthodontics. Our 1999 results
also include income of $1.2 million ($0.8 million after tax) relating to
adjustments made to the 1998 restructuring reserve, consisting of unused
severance. These combined charges and income are collectively referred to herein
as the "1999 Special Charges." The 1999 results have been restated to reflect
the Pinnacle Merger, which was accounted for as a pooling of interests, and all
prior period data has been adjusted to reflect the historical results of
Pinnacle as if the merger took place on October 1, 1996.
Our results for 1998 contain charges with respect to the restructuring of
certain operations of Sybron Dental Specialties, Inc. relating primarily to the
consolidation of Ormco Corporation and "A" Company Orthodontics, and merger,
transaction and integration charges associated with the LRS Merger. These
charges are collectively referred to herein as the "1998 Special Charges," and
together with the 1999 Special Charges, are referred to as the "Special
Charges."
The 1998 Special Charges total $25.1 million ($17.1 million after tax), and
consist of the following items:
(A) $14.6 million ($10.7 million after tax) relates to the consolidation of
Ormco and "A" Company activities after the LRS Merger, and the exiting of
certain product lines. The charge primarily includes severance costs, costs
associated with the closure of Ormco's sales office in Zurich, Switzerland,
and costs associated with the exiting of redundant product lines. In 1999,
this reserve was decreased by approximately $1.2 million for an adjustment
to the original severance estimates. We do not expect any additional
adjustments. Approximately $7.5 million of these charges are cash
expenditures of which $3.6 million was paid in 1998, $2.6 million was paid
in 1999 and $0.4 million was paid in the six months ended March 31, 2000. Of
the remaining $0.9 million, we expect to pay approximately $0.2 million in
the remainder of 2000, and $0.7 million in 2001 and beyond.
These actions eliminated annual costs of approximately $11.0 million.
Savings at SDS resulted from:
- reduced salaries and related employee expenses associated with a
reduction in the number of sales representatives (approximately $2.9
million);
- the elimination of duplicative costs associated with closing the SDS
sales office located in Zurich, Switzerland and the expansion of an
existing "A" Company facility in the Netherlands (approximately $2.4
million);
28
<PAGE> 40
- a reduction in marketing, accounting and information technology, customer
service, administrative and legal costs resulting from the elimination of
duplicative functions at "A" Company and SDS (approximately $1.5 million,
$0.8 million, $0.3 million, $0.1 million and $0.1 million, respectively);
- a reduction of salaries and related expenses associated with the
elimination of executive staff and directors fees at "A" Company
(approximately $1.7 million);
- the subleasing of the "A" Company administrative facility after moving
administrative functions into SDS's existing facility in Orange,
California (approximately $0.6 million);
- the elimination of duplicative costs associated with combining a research
and development office in Michigan with an existing research and
development office in Orange, California (approximately $0.3 million);
and
- costs associated with combining a Japanese sales office into an existing
Japanese sales office (approximately $0.3 million).
SDS has achieved actual savings in line with these expectations. We do not
anticipate, and have not experienced to date, significant offsets to savings in
either increased expenses or reduced revenues.
Restructuring activity since June 30, 1998, and its components are as
follows:
<TABLE>
<CAPTION>
INVENTORY
LEASE SHUT-DOWN WRITE- FIXED CONTRACTUAL
SEVERANCE PAYMENTS COSTS OFF ASSETS TAX OBLIGATIONS
(A) (B) (B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- --------- --------- ------ --- ----------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Restructuring Charge... $4,300 $300 $400 $4,600 $1,300 $700 $900 $2,100 $14,600
1998 Cash Payments.......... 1,800 100 -- -- 300 1,400 3,600
1998 Non-Cash Charges....... -- -- -- 4,600 1,300 -- -- -- 5,900
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 1998
balance................... $2,500 $300 $300 $ -- $ -- $700 $600 $ 700 $ 5,100
1999 Cash Payments.......... 1,300 300 300 -- -- -- 300 400 2,600
Adjustments(a).............. 1,200 -- -- -- -- -- -- -- 1,200
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 1999
balance................... $ -- $ -- $ -- $ -- $ -- $700 $300 $ 300 $ 1,300
2000 Cash Payments.......... -- -- -- -- -- -- 300 100 400
------ ---- ---- ------ ------ ---- ---- ------ -------
March 31, 2000 balance...... $ -- $ -- $ -- $ -- $ -- $700 $ -- $ 200 $ 900
====== ==== ==== ====== ====== ==== ==== ====== =======
</TABLE>
---------------
(a) Amount represents severance and termination costs for approximately 100
terminated employees (primarily sales and marketing personnel). As of
March 31, 2000, 83 employees have been terminated as a result of the
restructuring plan. An adjustment of approximately $1,200 was made in
the third quarter of fiscal 1999 to adjust the accrual primarily
representing over accruals for anticipated costs associated with
outplacement services, accrued fringe benefits, and severance
associated with employees who were previously notified of termination
and subsequently filled other positions. No additional employees will
be terminated under this restructuring plan.
(b) Amount represents lease payments and shutdown costs on exited
facilities.
(c) Amount represents write-offs of inventory and fixed assets associated
with discontinued product lines.
(d) Amount represents a statutory tax relating to assets transferred from
an exited sales facility in Switzerland.
(e) Amount represents certain terminated contractual obligations.
(B) $10.5 million ($6.4 million after taxes) consists of transaction, merger and
integration costs associated with the LRS Merger. We do not anticipate
additional merger and integration costs relating to the LRS or Pinnacle
Mergers.
29
<PAGE> 41
SALES AND OPERATING INCOME GROWTH
Both our net sales and operating income grew in fiscal 1999 and the six
months ended March 31, 2000 from the previous corresponding periods. Net sales
in 1999 and for the six months ended March 31, 2000 increased by 5.8% and 7.0%,
respectively, from corresponding prior year periods. Operating income in 1999
and the six months ended March 31, 2000 increased by 46.1% and 20.3%,
respectively, over the corresponding prior year periods, influenced by the
Special Charges discussed above. Excluding the Special Charges, operating income
increased by 7.7% and 13.1%, respectively, over the prior year periods.
Sales grew for the year ended September 30, 1999, both domestically and
internationally. Domestic and international sales increased by 4.3% and 8.0%,
respectively, over the prior year. International sales were positively impacted
by the weakening of the U.S. dollar and the recovery from economic weakness in
the Asian region. In the first half of fiscal 2000, domestic and international
net sales grew by 12.2% and 0.4%, respectively, over the corresponding prior
year period. International sales were negatively impacted by the strengthening
of the U.S. dollar. Without currency effects, international sales would have
increased by 4.6%.
1999 AND THE FIRST HALF OF FISCAL 2000 ACQUISITIONS
As discussed in "Business of SDS and its Subsidiaries -- General", we have
maintained an active program of product innovation. We believe that new product
introductions are important to our ability to maintain our competitive position.
We have also pursued numerous acquisition opportunities, completing 22
acquisitions since 1993, three of which we completed in 1999 and three in the
first half of fiscal 2000. Acquisitions completed in 1999 and the first half of
fiscal 2000 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
ANNUAL SALES PRIOR ACQUISITION
COMPANY TO ACQUISITION DATE DESCRIPTION
------- ------------------ ----------- -----------
<S> <C> <C> <C>
PROFESSIONAL DENTAL
Pinnacle Products of
Wisconsin, Inc. ........... $11.8 million 10/98 Manufacturer of dental
disposable infection control
products.
Safe-Wave Products, Inc. ..... $ 4.0 million 2/00 Manufacturer of disposable tips
and adapters for air/water
syringes used in dental
operatories.
ORTHODONTICS
Endo Direct Ltd............... $ 0.3 million 7/99 Exclusive distributor of Tycom
Dental endodontic products in
Europe.
LPI Ormco..................... $ 0.3 million 10/99 Distributor of Ormco orthodontic
products in Austria.
Professional Positioners,
Inc. ...................... $ 5.4 million 12/99 Manufacturer of orthodontic
retainers and positioners.
INFECTION CONTROL PRODUCTS
Alden Scientific, Inc. and
Gulfstream Medical,
Inc. ...................... $ 3.5 million 7/99 Manufacturer of reagents and
related infection control
products.
</TABLE>
These acquisitions are consistent with our strategy of acquiring product
lines that can be manufactured in existing facilities, sold through existing
sales and distribution networks, or both. We intend to continue to seek out
acquisition candidates consistent with our strategy. However, there can be no
assurance of the number or size of future acquisitions.
30
<PAGE> 42
NON-CASH CHARGES
Our reported results of operations reflect non-cash charges for goodwill
amortization, other amortization, and depreciation totaling $16.2 million, $16.6
million, $17.5 million, $9.7 million and $9.4 million in the years ended 1997,
1998 and 1999, and the six months ended March 31, 1999 and 2000, respectively.
Depreciation and amortization increased in 1999 due to our acquisition activity
and associated amortization of stepped up assets and goodwill. Depreciation and
amortization decreased in the six months ended March 31, 2000, as compared to
the corresponding 1999 period due to decreased depreciation of assets, partially
offset by our acquisition activity and associated amortization of stepped up
assets and goodwill. As discussed below in "Liquidity and Capital Resources,"
our earnings before interest, taxes, depreciation and amortization ("Adjusted
EBITDA") amounted to $98.0 million, $107.3 million, $114.1 million, $55.1
million and $61.3 million in years ended 1997, 1998 and 1999, and the six months
ended March 31, 1999 and 2000, respectively. Adjusted EBITDA, while not a
generally accepted accounting principles measure, represents, for any relevant
period, net income (except that extraordinary items are excluded) plus (a)
interest expense, (b) provision for income taxes, (c) Special Charges, (d)
depreciation, and (e) amortization, all determined on a consolidated basis and
in accordance with generally accepted accounting principles.
INTERNATIONAL OPERATIONS
Substantial portions of our sales, income and cash flows are derived
internationally. The financial position and the results of operations from
substantially all of our international operations, other than most U.S. export
sales, are measured using the local currency of the countries in which such
operations are conducted and are then translated into U.S. dollars. While the
reported income of foreign subsidiaries will be impacted by a weakening or
strengthening of the U.S. dollar in relation to a particular local currency, the
effects of foreign currency fluctuations are mitigated by the fact that the
subsidiaries' operations are conducted in numerous foreign countries and,
therefore, in numerous foreign currencies. In addition, our U.S. export sales
may be impacted by foreign currency fluctuations relative to the value of the
U.S. dollar as foreign customers may adjust their level of purchases upward or
downward according to the weakness or strength of their respective currencies
versus the U.S. dollar.
From time to time on behalf of SDS, Sybron International has employed
currency hedges to mitigate the impact of foreign currency fluctuations. If
currency hedges are not employed, SDS may be exposed to earnings volatility as a
result of foreign currency fluctuations. In October 1997, on behalf of SDS,
Sybron International employed a series of foreign currency options, with a U.S.
dollar notional amount of approximately $13.6 million at a cost of approximately
$0.4 million. Two of these options were sold in the third quarter of 1998 for
$0.4 million. No gain or loss was allocated to SDS in 1998. The remaining
options expired worthless in the fourth quarter of 1998. These options were
designed to protect SDS from potential detrimental effects of currency movements
associated with the U.S. dollar versus the German mark and the French franc as
compared to the third and fourth quarters of 1997. In October 1998, on behalf of
SDS, Sybron International again decided to employ a series of foreign currency
options with a U.S. dollar notional amount of approximately $45.7 million at a
cost of approximately $0.3 million. These options were designed to protect SDS
from potential detrimental effects of currency movements associated with the
U.S. dollar versus the German mark, French franc, Swiss franc, and Japanese yen
in the second, third and fourth quarters of fiscal 1999 as compared to the
second, third and fourth quarters of 1998. These options were sold or expired
worthless in their respective quarters of fiscal 1999 at a net gain of $1.1
million, all of which was allocated to SDS. In November 1999, we again decided
to employ a series of foreign currency options with a U.S. dollar notional
amount of approximately $38.2 million at a cost of approximately $0.9 million.
These options were designed to protect SDS from potential detrimental effects of
currency movements associated with the U.S. dollar versus the Euro and Japanese
yen in the second, third and fourth quarters of fiscal 2000 as compared to the
second, third and fourth quarters of 1999. In the second quarter of fiscal 2000,
the Euro option expiring on March 29, 2000 was sold at a gain of $0.6 million
and the Japanese yen option expiring on March 29, 2000 expired worthless.
Approximately $0.5 million of the gain was allocated to SDS. We expect to
continue to employ measures to protect our
31
<PAGE> 43
earnings from currency volatility through the use of currency options, forward
contracts or similar instruments.
The following table sets forth our domestic sales and sales outside the
United States in 1997, 1998 and 1999. See also Note 15 to our combined financial
statements contained elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Domestic net sales........................ $208,459 $216,463 $225,754 $104,980 $117,759
International net sales................... 150,238 150,423 162,422 83,549 83,920
-------- -------- -------- -------- --------
Total net sales........................... $358,697 $366,886 $388,176 $188,529 $201,679
======== ======== ======== ======== ========
</TABLE>
LEGAL PROCEEDINGS
SDS's subsidiaries are at any one time subject to a number of lawsuits or
subject to claims arising out of their respective operations. For information
regarding legal proceedings that may influence our performance, see
"Business -- Legal Proceedings."
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1999
Net Sales
<TABLE>
<CAPTION>
FISCAL FISCAL
NET SALES: 1999 2000
---------- ------ ------
(IN THOUSANDS)
<S> <C> <C>
Professional Dental.................................... $ 91,992 $102,822
Orthodontics........................................... 84,950 86,760
Infection Control Products............................. 11,587 12,097
-------- --------
Total Net Sales..................................... $188,529 $201,679
======== ========
</TABLE>
Overall Company. Net sales for the six months ended March 31, 2000
increased by $13.2 million or 7.0% from the corresponding fiscal 1999 period.
After adjusting for the impact of the strengthening U.S. Dollar, sales would
have increased by $16.7 million or 8.9% from the corresponding fiscal 1999
period.
Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from increased net sales of new products
(approximately $13.1 million). Increased net sales were partially offset by: (a)
decreased net sales of existing products (approximately $1.0 million), (b)
unfavorable foreign currency fluctuations (approximately $1.2 million) and (c)
discontinued product lines (net of sales from an acquired company)
(approximately $0.1 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $3.1
million) and (b) increased net sales of products of an acquired company
(approximately $2.0 million). Increased net sales were partially offset by: (a)
decreased net sales of existing products (approximately $1.0 million) and (b)
unfavorable foreign currency fluctuations (approximately $2.3 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from net sales of products of an acquired
company (approximately $2.0 million) partially offset by decreased net sales of
existing products due to dealer consolidations and product life cycle maturities
and from a voluntary suspension of sales of certain products as a result of
issues raised by an FDA
32
<PAGE> 44
inspection of Metrex Research Inc.'s Parker, Colorado facility. The impact of
the action was mitigated by Metrex's ability to supply substitute products to
its customers (approximately $1.5 million).
Gross Profit
<TABLE>
<CAPTION>
FISCAL PERCENT OF FISCAL PERCENT OF
GROSS PROFIT: 1999 SALES 2000 SALES
------------- ------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental............. $ 51,404 55.9% $ 58,586 57.0%
Orthodontics.................... 51,739 60.9% 53,600 61.8%
Infection Control Products...... 6,391 55.2% 5,623 46.5%
-------- ---- -------- ----
Total Gross Profit........... $109,534 58.1% $117,809 58.4%
======== ==== ======== ====
</TABLE>
Overall Company. Gross profit for the six months ended March 31, 2000
increased by $8.3 million or 7.6% from the corresponding fiscal 1999 period.
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $7.3
million) and (b) a favorable product mix (approximately $1.4 million). Increased
gross profit was partially offset by: (a) inventory valuation adjustments
(approximately $0.4 million), (b) increased manufacturing overhead
(approximately $0.7 million), (c) unfavorable foreign currency fluctuations
(approximately $0.3 million) and (d) discontinued product lines (net of an
acquired company) (approximately $0.1 million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) a favorable product mix (approximately $2.8 million), (b)
increased volume (approximately $1.4 million), (c) the effects of an acquired
company (approximately $0.6 million) and (d) decreased manufacturing overhead
(approximately $0.2 million). Increased gross profit was partially offset by:
(a) unfavorable foreign currency fluctuations (approximately $2.3 million) and
(b) inventory valuation adjustments (approximately $0.8 million).
Infection Control Products. Decreased gross profit in the Infection
Control Products segment resulted primarily from: (a) decreased volume
(approximately $0.9 million), (b) costs associated with the product recall
referred to above, including the write-off of inventory (approximately $0.6
million) and (c) increased manufacturing overhead (approximately $0.5 million).
Decreased gross profit was partially offset by the effects of an acquired
company (approximately $1.2 million).
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
SELLING GENERAL AND ADMINISTRATIVE EXPENSES: 1999 SALES 2000 SALES
-------------------------------------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental................... $32,513 35.3% $30,231 29.4%
Orthodontics.......................... 29,373 34.6% 30,966 35.7%
Infection Control Products............ 4,904 42.3% 5,206 43.0%
------- ---- ------- ----
Total Selling General and
Administrative Expenses.......... $66,790 35.4% $66,403 32.9%
======= ==== ======= ====
</TABLE>
Overall Company. Selling, general and administrative expenses for the six
months ended March 31, 2000, decreased by $0.4 million or 0.6% from the
corresponding fiscal 1999 period.
Professional Dental. Decreased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a) the
non-recurring 1999 Special Charges (approximately $2.0 million), (b) decreased
selling and marketing expenses (approximately $0.6 million), (c) reduced general
and administrative expenses (approximately $0.2 million) and (d) decreased
research and development expenses (approximately $0.1 million). Decreased
selling, general and administrative expenses in the
33
<PAGE> 45
Professional Dental segment were partially offset by: (a) increased corporate
overhead allocation (approximately $0.3 million), (b) unfavorable foreign
currency fluctuations (approximately ($0.2 million) and (c) increased
amortization of intangibles primarily as a result of an acquisition
(approximately $0.1 million).
Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $1.4 million), (b) increased selling,
general and administrative expenses as a result of acquired companies
(approximately $0.6 million), (c) increased amortization of intangibles
primarily as a result of acquisitions (approximately $0.4 million), (d)
increased corporate overhead allocation (approximately $0.3 million) and (e)
unfavorable foreign currency fluctuations (approximately $0.1 million).
Increased selling, general and administrative expenses in the Orthodontics
segment were partially offset by (a) the non-recurring 1999 Special Charges
(approximately $0.7 million), (b) decreased research and development expenses
(approximately $0.3 million) and (c) decreased selling and marketing expenses
(approximately $0.2 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
companies (approximately $0.2 million), (b) amortization of intangibles
primarily from acquired businesses (approximately $0.2 million) and (c) an
increase in corporate overhead allocation (approximately $0.1 million).
Increased selling, general and administrative expenses were partially offset by:
(a) decreased selling and marketing expenses (approximately $0.1 million) and
(b) decreased general and administrative expenses (approximately $0.1 million).
Operating Income
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
OPERATING INCOME: 1999 SALES 2000 SALES
----------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental............... $18,891 20.5% $28,355 27.6%
Orthodontics...................... 22,366 26.3% 22,634 26.1%
Infection Control Products........ 1,487 12.8% 417 3.4%
------- ---- ------- ----
Total Operating Income......... $42,744 22.7% $51,406 25.5%
======= ==== ======= ====
</TABLE>
As a result of the foregoing, operating income in the first six months of
fiscal 2000 increased by 20.3% or $8.7 million over operating income in the
corresponding fiscal 1999 period.
Interest Expense
Interest expense was $12.3 million in the first half of fiscal 2000, an
increase of $2.1 million from the corresponding fiscal 1999 period. The increase
resulted from a higher average debt balance and interest rate increases in 2000,
resulting primarily from funding acquisitions and an increase in average
interest rates primarily due from the addition of a Term B Loan in July 1999 and
an increase in the adjusted interbank offered rate for eurodollar deposits which
determines the interest charges on floating rate debt. See "Liquidity and
Capital Resources," below.
Income Taxes
Taxes on income from continuing operations in the first half of fiscal 2000
were $14.9 million, an increase of $2.8 million from the corresponding 1999
period. The increase resulted primarily from increased taxable earnings.
34
<PAGE> 46
Net Income
As a result of the foregoing, we had net income of $24.7 million in the
first half of fiscal 2000, as compared to net income of $20.4 million in the
corresponding 1999 period.
Depreciation and Amortization
Depreciation and amortization expense is allocated among cost of sales,
selling, general and administrative expenses and other expense. Depreciation and
amortization increased $0.3 million in the first half of fiscal 2000 due to a
decrease in the depreciation of existing assets, partially offset by additional
amortization from the step-up of assets, goodwill and intangibles recorded from
the various acquisitions as well as routine operating capital expenditures.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("SFAS 138"). Both statements are effective for financial statements
for periods beginning after June 15, 2000. SFAS 133 and SFAS 138 establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. It is
our intention to adopt SFAS 133 and SFAS 138 in our first quarter of our 2001
fiscal year. We do not believe the adoption of SFAS 133 and SFAS 138 will have a
material impact on our financial position or results of operations.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1998
Net Sales
<TABLE>
<CAPTION>
NET SALES: 1998 1999
---------- ---- ----
(IN THOUSANDS)
<S> <C> <C>
Professional Dental.................................... $188,334 $191,923
Orthodontics........................................... 162,510 169,901
Infection Control Products............................. 16,042 26,352
-------- --------
Total net sales..................................... $366,886 $388,176
======== ========
</TABLE>
Overall Company. Net sales for the year ended September 30, 1999 increased
by $21.3 million or 5.8% from 1998. After adjusting for the impact of the
weakening of the U.S. Dollar, sales would have increased by $20.1 million or
5.5% from 1999.
Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from: (a) increased sales of new products
(approximately $7.8 million) and (b) favorable foreign currency fluctuations
(approximately $0.3 million). Increased sales were partially offset by (a)
decreased sales of existing products (approximately $2.7 million) and (b)
discontinued products lines (approximately $1.8 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) net sales of products of acquired companies net of
discontinued products (approximately $5.0 million), (b) favorable foreign
currency fluctuations (approximately $0.9 million), (c) increased sales of
existing products (approximately $0.8 million) and (d) increased sales of new
products (approximately $0.7 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from: (a) net sales of products of acquired
companies (approximately $7.5 million) and (b) increased sales of existing
products (approximately $2.8 million).
35
<PAGE> 47
Gross Profit
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
GROSS PROFIT: 1998 SALES 1999 SALES
------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental.................. $108,979 57.9% $105,964 52.2%
Orthodontics......................... 93,697 57.7% 105,448 62.1%
Infection Control Products........... 8,625 53.8% 14,208 53.9%
-------- ---- -------- ----
Total gross profit................ $211,301 57.6% $225,620 58.1%
======== ==== ======== ====
</TABLE>
Overall Company. Gross profit at SDS increased by $14.3 million in 1999,
an increase of 6.8% over SDS's 1998 gross profit.
Professional Dental. Decreased gross profit in the Professional Dental
segment resulted primarily from: (a) inventory valuation adjustments
(approximately $5.8 million), (b) exited product lines (approximately $1.7
million) and (c) increased manufacturing overhead (approximately $0.8 million).
The decreased gross profit was partially offset by (a) increased volume
(approximately $2.5 million), (b) the non-recurring 1998 Special Charges
(approximately $1.4 million), (c) a favorable product mix (approximately $1.0
million), and (d) favorable foreign currency fluctuations (approximately $0.4
million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) decreased manufacturing overhead (approximately $4.4
million), (b) the non-recurring 1998 Special Charges (approximately $3.2
million), (c) the effects of acquired companies net of discontinued product
lines (approximately $1.8 million), (d) inventory valuation adjustments
(approximately $0.6 million), (e) favorable foreign currency fluctuations
(approximately $1.0 million), (f) a favorable product mix (approximately $0.5
million) and (g) increased volume (approximately $0.2 million).
Infection Control Products. Increased gross profit in the Infection
Control Products segment resulted primarily from: (a) the effects of acquired
companies (approximately $4.1 million), (b) increased volume (approximately $1.5
million) and (c) the non-recurring 1998 Special Charges (approximately $0.1
million), partially offset by inventory valuation adjustments (approximately
$0.2 million).
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: 1998 SALES 1999 SALES
--------------------------------------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental..................... $ 61,413 32.6% $ 62,406 32.5%
Orthodontics............................ 78,673 48.4% 58,327 34.3%
Infection Control Products.............. 6,679 41.6% 10,581 40.2%
-------- ---- -------- ----
Total selling, general and
administrative expenses............ $146,765 40.0% $131,314 33.8%
======== ==== ======== ====
</TABLE>
Overall Company. Selling, general and administrative expenses at SDS
decreased by $15.5 million in 1999, a decrease of 10.5% from SDS's 1998 selling,
general and administrative expenses.
Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
increased selling and marketing expenses (approximately $3.0 million), (b) the
1999 Special Charges (approximately $1.8 million), (c) increased research and
development expenses (approximately ($0.5 million) and (d) increased
amortization of intangibles primarily as a result of acquisitions (approximately
$0.1 million). These expenses were partially offset
36
<PAGE> 48
by: (a) reduced general and administrative expenses (approximately $1.9
million), (b) non-recurring 1998 Special Charges (approximately $1.2 million),
(c) favorable foreign currency fluctuations (approximately $1.1 million), and
(d) a reduction in the allocation of Sybron International overhead
(approximately $0.3 million).
Orthodontics. Decreased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) non-recurring 1998 Special
Charges (approximately $18.6 million), (b) decreased general and administrative
expenses primarily as a result of the six month benefit of the integration of
"A" Company with Ormco (approximately $2.2 million), (c) decreased selling and
marketing expenses primarily as a result of the six month benefit of the
integration of "A" Company with Ormco (approximately $2.5 million) and (d) the
1999 Special Charges (approximately $0.3 million). Decreased selling, general
and administrative expenses in the Orthodontics segment were partially offset by
(a) increased research and development expenses (approximately $1.5 million),
(b) increased selling, general and administrative expenses as a result of
acquired companies (approximately $1.0 million), (c) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.4 million)
and (d) an increase in the allocation of Sybron International overhead
(approximately $0.3 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
companies (approximately $2.4 million), (b) increased selling and marketing
expenses (approximately ($0.7 million), (c) amortization of intangibles
primarily from acquired businesses (approximately $0.3 million), (d) increased
general and administrative expenses (approximately $0.4 million) and (e) an
increase in the allocation of Sybron International overhead (approximately $0.1
million).
Operating Income
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
OPERATING INCOME: 1998 SALES 1999 SALES
----------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental.................... $47,566 25.3% $43,558 22.7%
Orthodontics........................... 15,024 9.2% 47,121 27.7%
Infection Control Products............. 1,946 12.1% 3,627 13.8%
------- ---- ------- ----
Total operating income.............. $64,536 17.6% $94,306 24.3%
======= ==== ======= ====
</TABLE>
As a result of the foregoing, operating income in 1999 increased by 46.1%
or $29.8 million over operating income in 1998.
Interest Expense
Interest expense was $17.1 million in 1999, a decrease of $3.1 million from
1998. The decrease resulted primarily from a reallocation of debt among the
subsidiaries of Sybron International in 1999 and decreased interest rates.
Because Sybron International (excluding SDS) was more active in acquisition
activity than SDS, a smaller proportion of debt related to the credit facilities
(discussed later) was allocated to SDS.
Income Taxes
Taxes on income from continuing operations were $28.4 million, an increase
of $11.2 million from 1998. The increase resulted primarily from increased
taxable earnings offset partially by a lower effective tax rate.
37
<PAGE> 49
Net Income
As a result of the foregoing, we had net income of $49.8 million in 1999,
as compared to net income of $29.0 million in 1998.
Depreciation and Amortization
Depreciation and amortization expense is allocated among cost of sales,
selling, general and administrative expenses and other expense. Depreciation and
amortization increased $0.9 million in 1999 due to additional depreciation and
amortization from the step-up of assets and goodwill recorded from the various
acquisitions as well as routine operating capital expenditures.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
Net Sales
<TABLE>
<CAPTION>
NET SALES: 1997 1998
---------- ---- ----
(IN THOUSANDS)
<S> <C> <C>
Professional Dental.................................... $185,831 $188,334
Orthodontics........................................... 158,107 162,510
Infection Control Products............................. 14,759 16,042
-------- --------
Total net sales..................................... $358,697 $366,886
======== ========
</TABLE>
Overall Company. Net sales at SDS increased by $8.2 million in 1998, an
increase of 2.3% over SDS's 1997 net sales.
Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from: (a) increased sales of new products
(approximately $4.2 million) and (b) increased sales of existing products
(approximately $4.2 million). Increased sales were partially offset by (a)
unfavorable foreign currency fluctuations (approximately $4.8 million) and (b)
net sales of products of acquired companies net of discontinued product lines
(approximately $1.1 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) net sales of products of acquired companies net of
discontinued product lines (approximately $7.0 million) and (b) increased sales
of new products (approximately $2.3 million). Increased sales were partially
offset by (a) decreased sales of existing products (approximately $2.5 million)
and (b) unfavorable foreign currency fluctuations (approximately $2.4 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from net sales of products of acquired
companies (approximately $4.0 million), partially offset by decreased sales of
existing products (approximately $2.7 million).
Gross Profit
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
GROSS PROFIT: 1997 SALES 1998 SALES
------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental.................. $102,847 55.3% $108,979 57.9%
Orthodontics......................... 94,674 59.9% 93,697 57.7%
Infection Control Products........... 8,334 56.5% 8,625 53.8%
-------- ---- -------- ----
Total gross profit................ $205,855 57.4% $211,301 57.6%
======== ==== ======== ====
</TABLE>
Overall Company. Gross profit at SDS increased by $5.4 million in 1998, an
increase of 2.6% over SDS's 1997 gross profit, as a result of the factors
described in the paragraphs below.
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $5.8
million), (b) inventory valuation adjustments
38
<PAGE> 50
(approximately $3.0 million), (c) favorable manufacturing variances
(approximately $1.0 million), (d) reduced amortization (approximately $0.8
million) and (e) an improved product mix (approximately $0.6 million). Increased
gross profit was partially offset by: (a) unfavorable foreign currency
fluctuations (approximately $2.7 million), (b) the 1998 Special Charges
(approximately $1.4 million) and (c) exited product lines (approximately $1.1
million).
Orthodontics. Decreased gross profit in the Orthodontics segment resulted
primarily from: (a) unfavorable foreign currency fluctuations (approximately
$2.3 million), (b) the 1998 Special Charges (approximately $3.2 million) and (c)
inventory valuation adjustments (approximately $2.6 million). Decreased gross
profit was partially offset by: (a) the effects of acquired companies net of
discontinued product lines (approximately $4.4 million), (b) a favorable product
mix (approximately $1.4 million), (c) an increase in volume (approximately $0.7
million), (d) favorable manufacturing variances (approximately $0.4 million) and
(e) reduced amortization (approximately $0.2 million).
Infection Control Products. Increased gross profit in the Infection
Control Products segment resulted primarily from: (a) the effects of acquired
companies (approximately $2.3 million) and (b) inventory valuation adjustments
($0.2 million). Increased gross profit was partially offset by: (a) decreased
volume (approximately $1.9 million), (b) unfavorable manufacturing variances
(approximately $0.2 million) and (c) the 1998 Special Charges (approximately
$0.1 million).
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
SELLING GENERAL AND ADMINISTRATIVE EXPENSES: 1997 SALES 1998 SALES
-------------------------------------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental.................... $ 57,621 31.0% $ 61,413 32.6%
Orthodontics........................... 63,252 40.0% 78,673 48.4%
Infection Control Products............. 4,928 33.4% 6,679 41.6%
-------- ---- -------- ----
Total selling, general and
administrative expenses........... $125,801 35.1% $146,765 40.0%
======== ==== ======== ====
</TABLE>
Overall Company. Selling, general and administrative expenses at SDS
increased by $21.0 million in 1998, an increase of 16.7% over SDS's 1997
selling, general and administrative expenses.
Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
increased general and administrative expenses (approximately $3.3 million), (b)
1998 Special Charges (approximately $1.2 million), (c) increased selling and
marketing expenses (approximately $0.8 million) and (d) increased research and
development expenses (approximately $0.4 million). These expenses were partially
offset by (a) a reduction in corporate charges (approximately $0.9 million) and
(b) favorable foreign currency fluctuations (approximately $0.9 million).
Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) 1998 Special Charges
(approximately $18.6 million), (b) increased selling, general and administrative
expenses as a result of acquired businesses (approximately $4.8 million), (c)
increased corporate charges (approximately $1.0 million) and (d) increased
general and administrative expenses (approximately $0.1 million). Increased
selling general and administrative expenses were partially offset by (a)
favorable currency fluctuations (approximately $5.1 million), (b) reduced
selling and marketing expenses primarily as a result of the six month benefits
from the integration of "A" Company with Ormco (approximately $2.3 million), (c)
reduced research and development expenses (approximately $1.2 million) and (d)
decreased amortization (approximately $0.5 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment were primarily from: (a)
increased marketing expenses (approximately $0.6 million), (b) increased
amortization of intangibles primarily as a result of acquisitions (approximately
$0.5 million), (c) increased general and administrative expenses (approximately
$0.2 million), (d) increased
39
<PAGE> 51
research and development expenses (approximately $0.2 million), (e) increased
corporate charges (approximately $0.1 million) and (f) increased selling,
general and administrative expenses as a result of acquired businesses
(approximately $0.1 million).
Operating Income
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
OPERATING INCOME: 1997 SALES 1998 SALES
----------------- ---- ---------- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental.................... $45,226 24.3% $47,566 25.3%
Orthodontics........................... 31,422 19.9% 15,024 9.2%
Infection Control Products............. 3,406 23.1% 1,946 12.1%
------- ---- ------- ----
Total operating income.............. $80,054 22.3% $64,536 17.6%
======= ==== ======= ====
</TABLE>
As a result of the foregoing, operating income in 1998 decreased by 19.4%
or $15.5 million from operating income in 1997.
Interest Expense
Interest expense was $20.2 million in 1998, an increase of $0.8 million
over 1997. The increase resulted from a higher average debt balance in 1998,
resulting primarily from funding acquisitions.
Income Taxes
Taxes on income from continuing operations were $17.2 million, a decrease
of $6.4 million from 1997. The decrease resulted primarily from decreased
taxable earnings primarily due to the 1998 Special Charges, partially offset by
a higher effective tax rate.
Net Income
As a result of the foregoing, we had net income of $29.0 million in 1998,
as compared to net income of $38.6 million in 1997.
Depreciation and Amortization
Depreciation and amortization expense is allocated among cost of sales,
selling, general and administrative expenses and other expense. Depreciation and
amortization increased $0.4 million in 1998 due to additional depreciation and
amortization from the step-up of assets and goodwill recorded from the various
acquisitions as well as routine operating capital expenditures.
INFLATION
We do not believe that inflation has had a material impact on net sales or
income during any of the periods presented above. There can be no assurance,
however, that our business will not be affected by inflation in the future.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the acquisition of Sybron International's predecessor in
1987 and the acquisitions SDS and its affiliates have completed since 1987, we
have increased the carrying value of certain tangible and intangible assets
consistent with generally accepted accounting principles. Accordingly, our
results of operations include a significant level of non-cash expenses related
to the depreciation of fixed assets and
40
<PAGE> 52
the amortization of intangible assets, including goodwill. Goodwill and
intangible assets increased by approximately $6.4 million in 1999, primarily as
a result of continued acquisition activity. We believe, therefore, that Adjusted
EBITDA represents the more appropriate measure of our ability to internally fund
our capital requirements.
Prior to the spin-off, our capital requirements arose principally from our
allocation of the indebtedness incurred in connection with the permanent
financing for the 1987 acquisition of the predecessor to Sybron International
and subsequent refinancings, obligations to pay rent under the Sale/Leaseback
facility (as defined herein), working capital needs, primarily related to
inventory and accounts receivable, capital expenditures, primarily related to
purchases of machinery, the purchase of various businesses and product lines in
execution of our acquisition strategy, payments to be made in connection with
our restructuring in 1998, and the periodic expansion of physical facilities.
Other than the capital requirements related to the permanent financing for the
1987 acquisition of Sybron International's predecessor, SDS expects its future
capital requirements to be similar to those prior to its spin-off. In addition,
SDS will require capital to service bank debt and related interest allocated in
the spin-off which is estimated to be $375 million. It is currently SDS's intent
to continue to pursue its acquisition strategy. If acquisitions continue at our
historical pace, of which there can be no assurance, we may require financing
beyond the capacity of our Credit Facilities (as defined below). In addition,
certain acquisitions previously completed contain "earnout provisions" requiring
further payments in the future if certain financial results are achieved by the
acquired companies. See Note 14 to our combined financial statements contained
in this Information Statement.
The statement contained in the immediately preceding paragraph concerning
our intent to continue to pursue our acquisition strategy is a forward-looking
statement. Our ability to continue our acquisition strategy is subject to a
number of uncertainties, including, but not limited to, our ability to raise
capital beyond the capacity of our Credit Facilities and the availability of
suitable acquisition candidates at reasonable prices. See "Forward-Looking
Statements and Cautionary Factors" in the forepart of this Information
Statement.
Approximately $53.8 million of cash was generated from operating activities
in 1999, a decrease of $12.8 million or 19.2%, from 1998. Decreased cash flow
from operating activities resulted primarily from an increase in taxes paid
(approximately $18.1 million) and increases in net assets (approximately $1.5
million) partially offset by an increase in Adjusted EBITDA (approximately $6.8
million). Approximately $28.3 million of cash was used in investing activities
in 1999, a decrease of $31.5 million, or 52.6%, from 1998. Decreased investing
activities resulted primarily from a decrease in acquisition activity
(approximately $34.7 million) and increased proceeds from sales of property,
plant and equipment (approximately $0.2 million), partially offset by increased
capital expenditures (approximately $3.4 million). Approximately $29.1 million
of cash was used in financing activities, primarily from dividends paid to
Sybron International (approximately $35.9 million), an increase in advances to
Sybron International (approximately $30.7 million), partially offset by
borrowings under the credit facilities (approximately $21.7 million ) and
capital contributions from Sybron International (approximately $16.2 million).
With respect to the 1998 Special Charges of approximately $25.1 million, of
which approximately $18.0 million represents cash expenditures, as of September
30, 1999, we have made cash payments of approximately $16.7 million. The Company
expects to make future cash payments of approximately $0.2 million in fiscal
2000 and approximately $0.7 million in fiscal 2001 and beyond.
Historically, the operations of SDS have been funded through Credit
Facilities (defined below) which were managed by Sybron International. Certain
affiliates of SDS have been obligors under various Credit Facilities (defined
below) and as such, Sybron International has historically allocated a portion of
the debt outstanding and related interest under these facilities to SDS or its
affiliates. At September 30, 1999 and March 31, 2000, approximately $273.2 and
$312.1 million, respectively of the borrowings under the Sybron International
credit facilities (the "Credit Facilities"), consisting of term loan facilities
(the "Tranche A Term Loan" and "Tranche B Term Loan") and a revolving credit
facility (the "Revolving Credit Facility"), were allocated to SDS and its
affiliates. Under the Tranche A Term Loan, SDS and its affiliates were allocated
$69.5 million at both September 30, 1999 and March 31, 2000, respectively. Under
41
<PAGE> 53
the Tranche B Term Loan, SDS and its affiliates were allocated $120 million and
$119.9 million at September 30, 1999 and March 31, 2000. Under the Revolving
Credit Facility, SDS and its affiliates were allocated $83.7 million and $122.7
million at September 30, 1999 and March 31, 2000, respectively. The cash flows
of SDS have been substantially affected by the allocations of debt (and related
interest expense) and by charges related to an allocation of corporate operating
expenses by Sybron International to SDS. Interest expense allocations to SDS
were $19.4 million, $20.2 million, $17.1 million during 1997, 1998 and 1999,
respectively and $10.2 million and $12.3 million for the six-month period ended
March 31, 1999 and 2000, respectively. Sybron International corporate operating
expenses charged to SDS were $3.6 million, $3.6 million, $4.2 million during
1997, 1998 and 1999, respectively and $2.1 million and $2.4 million for the
six-month periods ended March 31, 1999 and 2000, respectively. The interest
expense and corporate operating expense charges are not necessarily indicative
of the interest charges and corporate operating expenses that would have been
incurred by SDS if SDS had been an independent company during the periods
presented and will be eliminated after the Distribution Date. We believe
borrowed funds after the Distribution Date will have a higher interest rate than
those allocated to SDS by Sybron International. After the Distribution Date, SDS
will be responsible for the expenses of being a public company.
Payment of principal and interest with respect to SDS's allocated portion
of the Credit Facilities and the Sale/Leaseback (as defined later herein), and
the credit facilities to be entered into in connection with the Distribution
(the "SDS Credit Facilities"), have been and are anticipated to be our largest
use of operating funds in the future. Prior to the spin-off, the Tranche A Term
Loan and Revolving Credit Facility provided for an annual interest rate, at
Sybron International's option, equal to (a) the higher of (i) the rate from time
to time publicly announced by Chase in New York City as its prime rate, (ii) the
federal funds rate plus 1/2 of 1%, and (iii) the base CD rate plus 1%,
(collectively referred to as "Tranche A ABR") or (b) the adjusted interbank
offered rate for eurodollar deposits ("Eurodollar Rate") plus 1/2% to 7/8% (the
"Tranche A Eurodollar Rate Margin") depending upon the ratio of Sybron
International's total debt to Combined Adjusted Operating Profit (as defined in
the Third Amendment), or (c) with respect to certain advances under Revolving
Credit Facility, the rate set by the competitive bid process among the parties
to the Revolving Credit Facility ("CAF"). The Tranche B Term Loan provided for
an annual interest rate, at Sybron International's option, equal to (a) the
higher of (i) the rate from time to time publicly announced by Chase in New York
City as its prime rate plus 1% to 1 1/4%, (ii) the federal funds rate plus
1 1/2% to 1 3/4%, and (iii) the base CD rate plus 2% to 2 1/4%, depending upon
the ratio of Sybron International's total debt to Combined Adjusted Operating
Profit or (b) the Eurodollar Rate plus 2% to 2 1/4% depending upon the ratio of
Sybron International's total debt to Combined Adjusted Operating Profit. The
average interest rate on the Tranche A Term Loan in 1999 and the six months
ended March 31, 2000 were 6.7% and 6.8%, respectively . The average interest
rate on the Tranche B Term Loan in 1999 and the six months ended March 31, 2000
was 7.7% and 7.9%, respectively. The average interest rate on the Revolving
Credit Facility in 1999 and the six months ended March 31, 2000 was 6.0% and
6.7%, respectively.
SDS management expects to enter into the SDS Credit Facilities prior to the
Distribution Date. The SDS Credit Facilities are expected to allow SDS to borrow
funds at variable interest rates on a revolving credit basis up to an aggregate
principal amount of $350 million, subject to terms and conditions thereof, and
on a variable interest rate basis under a term loan agreement in the aggregate
principal amount of $200 million. Under the SDS Credit Facilities, SDS
management expects to pay interest at the London Interbank Offered Rate plus
2.0%. Prior to the Distribution Date, SDS will receive from Sybron International
approximately $ million to settle all intercompany loans and advances
from/to Sybron International. As of March 31, 2000, such intercompany loans and
advances to Sybron amounted to approximately $115.2 million. In addition, it is
expected that SDS will pay to Sybron International a dividend of approximately
$ million. As of March 31, 2000, such dividend would have amounted to
approximately $178.1 million. This dividend to Sybron International will be
financed in part from new borrowings under the SDS Credit Facilities. Unused
amounts under the SDS Credit Facilities will be available for SDS's working
capital requirements and general corporate purposes (including future
42
<PAGE> 54
acquisition activity). If the Distribution took place on March 31, 2000, the
sources and uses of funds would be as follows:
<TABLE>
<CAPTION>
SOURCES OF FUNDS: USES OF FUNDS:
----------------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
New term loan....................... $200.0 Dividend to Sybron International.... $178.1
New revolving loan.................. 175.0
Repayment from Sybron International
of intercompany loans/advances.... 115.2 Repayment of credit facility........ 312.1
------ ------
$490.2 $490.2
====== ======
</TABLE>
Also as part of the permanent financing for the acquisition of Sybron
International's predecessor in 1987, on December 22, 1988, Sybron International
entered into a sale and leaseback of what were our principal domestic facilities
at that time (the "Sale/Leaseback"). In January 1999, SDS's annual obligation
under the Sale/Leaseback increased from $1.3 million to $1.4 million, payable
monthly. On the fifth anniversary of the leases and every five years thereafter
(including renewal terms), the rent will be increased by the percentage equal to
75% of the percentage increase in the Consumer Price Index over the preceding
five years. The percentage increase of the rent in any five-year period is
capped at 15%. The next adjustment will occur on January 1, 2004. Because Sybron
International is a guarantor of the Sale/Leaseback, we must renegotiate the
terms of the Sale/Leaseback as it applies to us prior to the Distribution. We
expect an increased cost to us as a result of this renegotiation, but we do not
expect the increase to be material.
Sybron International has historically funded our acquisitions, working
capital requirements, capital expenditure requirements, principal and interest
payments, obligations under the Sale/Leaseback, restructuring expenditures,
other liabilities and periodic expansion of facilities, to the extent available,
with funds provided by operations and short-term borrowings under the Revolving
Credit Facility and SDS will continue to finance these needs under the revolving
credit facility portion of the SDS Credit Facilities. To the extent that funds
are not available from those sources, particularly with respect to our
acquisition strategy, we intend to raise additional capital.
The SDS Credit Facilities are expected to contain numerous financial and
operating covenants, including, among other things, restrictions on investments;
requirements that we maintain certain financial ratios; restrictions on our
ability to incur indebtedness or to create or permit liens or to pay cash
dividends; and limitations on incurrence of additional indebtedness. Our ability
to meet our debt service requirements and to comply with such covenants is
dependent upon our future performance, which is subject to financial, economic,
competitive and other factors affecting us, many of which are beyond our
control.
SDS management believes that the cash flows from operations, unused amounts
available under the SDS Credit Facilities, and access to capital markets will be
sufficient to satisfy SDS's future working capital, capital investment,
acquisition and other financing requirements for the foreseeable future.
However, there can be no assurance that will be the case.
EUROPEAN ECONOMIC MONETARY UNIT
On January 1, 1999, eleven of the European Union countries (including four
countries in which we have operations) adopted the Euro as their single
currency. At that time, a fixed exchange rate was established between the Euro
and the individual countries' existing currencies (the "legacy currencies"). The
Euro trades on currency exchanges and is available for non-cash transactions.
The legacy currencies will remain legal tender in the participating countries
during a transition period ending January 1, 2002. Beginning on January 1, 2002,
the European Central Bank will issue Euro-denominated bills and coins for use in
cash transactions. On or before July 1, 2002, the participating countries will
withdraw all legacy bills and coins and use the Euro as their legal currency.
43
<PAGE> 55
Our operating units located in European countries affected by the Euro
conversion intend to keep their books in their respective legacy currencies
through a portion of the transition period. At this time, we do not expect any
reasonably foreseeable consequences of the Euro conversion to have a material
adverse effect on our business operations or financial condition.
CAUTIONARY FACTORS
See "Forward-Looking Statements and Cautionary Factors" in the forepart of
this Information Statement for a discussion of risks and uncertainties that may
cause our actual results and performance to differ materially from what we
currently expect as reflected in our forward-looking statements, both here and
elsewhere in this Information Statement.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates. To reduce our risk from these foreign currency rate
fluctuations, Sybron International has occasionally entered into various hedging
transactions on our behalf, and we expect to do so in the future. We do not
anticipate material changes to our primary market risks other than fluctuations
in magnitude from increased or decreased foreign currency denominated business
activity or floating rate debt levels. We do not use financial instruments for
trading purposes and are not a party to any leveraged derivatives.
Foreign Exchange
Sybron International, on behalf of SDS, has from time to time used foreign
currency options to hedge our exposure from adverse changes in foreign currency
rates. At September 30, 1999 we had no outstanding foreign currency options. Our
foreign currency exposure exists primarily in the Euro and the Japanese Yen
values versus the U.S. dollar. Hedging is accomplished by the use of foreign
currency options, and the gain or loss on these options is used to offset gains
or losses in the foreign currencies to which they pertain. Hedges of anticipated
transactions are accomplished with options that expire on or near the maturity
date of the anticipated transactions. In November 1999 Sybron International, on
behalf of SDS, entered into six foreign currency options to hedge our exposure
to each of the aforementioned currencies, of which four were still in effect as
of March 31, 2000.
In 2000, we expect our exposure from our primary foreign currencies to
approximate the following:
<TABLE>
<CAPTION>
ESTIMATED
EXPOSURE DENOMINATED ESTIMATED
IN THE RESPECTIVE EXPOSURE
CURRENCY FOREIGN CURRENCY IN U.S. DOLLARS
-------- -------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Euro (EUR).................................... 42,000 EUR $44,520
Japanese Yen (JPY)............................ 800,000 JPY 7,619
</TABLE>
As a result of these anticipated exposures, Sybron International entered
into a series of options expiring at the end of the second, third and fourth
quarters of 2000 to protect SDS from possible detrimental effects of foreign
currency fluctuations. Sybron International accomplished this by taking
approximately one-fourth of the exposure in each of the foreign currencies
listed above and purchasing a put option on that currency (giving Sybron
International the right but not the obligation to sell the foreign currency at a
predetermined rate). Sybron International purchased put options on the foreign
currencies at amounts approximately equal to SDS's quarterly exposure. The EUR
options expire on a quarterly basis,
44
<PAGE> 56
at an exchange rate approximately equal to the spot exchange rate at the date of
purchase for each of the respective currencies. The JPY options expire on a
quarterly basis at an exchange rate approximately equal to the prior year's
respective quarters actual exchange rate. In the second and third quarters, the
EUR option was sold and the JPY option expired worthless, in aggregate netting a
gain of $0.5 million. In November 1999, Sybron International acquired the
following put options:
<TABLE>
<CAPTION>
NOTIONAL OPTION STRIKE
CURRENCY AMOUNT(A) EXPIRATION DATE PRICE PRICE(B)
-------- --------- --------------- ------ --------
(IN THOUSANDS, EXCEPT STRIKE PRICES)
<S> <C> <C> <C> <C>
EUR........................ 10,500 March 29, 2000 $250 .9524
EUR........................ 10,500 June 28, 2000 297 .9524
EUR........................ 10,500 September 26, 2000 329 .9524
JPY........................ 200,000 March 29, 2000 9 116.0000
JPY........................ 200,000 June 28, 2000 10 120.0000
JPY........................ 200,000 September 26, 2000 24 115.0000
</TABLE>
---------------
(a) Amounts expressed in units of foreign currency.
(b) Amounts expressed in foreign currency per U.S. dollar.
Our exposure in terms of these options is limited to the purchase price. As
an example, using the Euro contract due to expire at September 26, 2000.
<TABLE>
<CAPTION>
GAIN/(LOSS) GAIN/(LOSS)
EUR EXCHANGE RATE ON OPTION(A) FROM PRIOR YEAR RATE(B) NET GAIN/(LOSS)
----------------- ------------ ----------------------- ---------------
(IN THOUSANDS, EXCEPT EXCHANGE RATE)
<S> <C> <C> <C>
.90 $(329) $ 659 $ 330
.95 (329) 45 (284)
1.0 196 (507) (311)
</TABLE>
---------------
(a) Calculated as (notional amount/strike price) -- (notional amount/exchange
rate) -- premium paid, with losses limited to the premium paid on the
contract.
(b) Calculated as (notional amount/exchange rate) -- (notional amount/prior year
exchange rate of .9539).
45
<PAGE> 57
BUSINESS OF SDS AND ITS SUBSIDIARIES
GENERAL
SDS was incorporated in Delaware on July 17, 2000 to facilitate the
Distribution. Its principal subsidiary, Sybron Dental Management, Inc. ("SDM")
(formerly known as Sybron Dental Specialties, Inc.), a Delaware corporation,
located in Orange, California, was organized in 1993 when Sybron International
Corporation ("Sybron International") grouped the professional dental and
orthodontics companies, Kerr Corporation and Ormco Corporation, under the SDM
umbrella. We later added infection control products in 1995 with the acquisition
of Metrex Research Corporation ("Metrex"). The subsidiaries of SDS market their
products under brand names such as KERR(R), Belle(TM), Metrex(R), ORMCO(R) and
"A" Company Orthodontics(R), PINNACLE(R), DEMETRON(R) and AOA(TM), which are
well recognized in the dental, orthodontics and infection control industries.
SDS has three business segments: a) Professional Dental, b) Orthodontics and c)
Infection Control Products.
BUSINESSES AND PRODUCTS
The subsidiaries of SDS are leading manufacturers of value-added products
for the Professional Dental, Orthodontics and Infection Control Products
segments in the United States and abroad. The primary subsidiaries in each of
our business segments are as follows:
<TABLE>
<CAPTION>
PROFESSIONAL DENTAL ORTHODONTICS
------------------- ------------
<S> <C>
Kerr Corporation, including its Demetron Ormco Corporation, including its Analytic
Division Endodontics Division
Kerr Italia S.p.A Ormco B.V.
Sybron Canada Limited's Beavers Dental Ormodent Group
Division Allesee Orthodontic Appliances, Inc.
Pinnacle Products, Inc.
</TABLE>
<TABLE>
<CAPTION>
INFECTION CONTROL PRODUCTS
--------------------------
<S> <C>
Metrex Research Corporation, including its
Alden Scientific Division
</TABLE>
GROWTH STRATEGY
Our goals are to consistently grow sales and earnings. Key elements of
our strategy to achieve these goals are:
A Focus on Product Innovation. We strive to consistently develop and
introduce new or improved innovative products. We believe that product
innovation is important to our ability to maintain our competitive position
and to fuel internal growth.
Ongoing Cost Reduction. We continuously strive to reduce our costs
through consolidation of manufacturing, marketing, sales and administrative
functions, and through implementation of low cost manufacturing strategies.
Selective Acquisitions. We have an active acquisition program
targeting dental and orthodontic consumables and infection control
products. Since 1993, when we adopted this element of our strategy, we have
made 22 acquisitions (including two mergers) in the United States and
abroad, including three completed in 1999 (including one merger) and three
in 2000 through March 31, 2000. See Note 14 to our combined financial
statements included elsewhere in this Information Statement. We have been
able to use our existing distribution channels to market many of the
product lines we have acquired and we have achieved other synergies, such
as the elimination of duplicative administrative or other functions or the
combining of manufacturing operations, with some of these acquisitions.
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<PAGE> 58
The execution of the various elements of our strategy resulted in an
expansion of our business in 1999. Overall sales growth in 1999 was $21.3
million, or 5.8%. Operating income growth before Special Charges was $95.7
million or 7.7%. Operating margins improved from 17.6% in 1998 to 24.3% in 1999,
largely due to the effect of the Special Charges. Without the Special Charges,
operating margins improved from 24.2% in 1998 to 24.7% in 1999.
BUSINESS SEGMENTS
PROFESSIONAL DENTAL. Products in our Professional Dental business segment
include light cured composite filling materials and bonding agents, amalgam
alloy filling materials, dental burs, impression materials, and curing lights
used in general dentistry, filling materials, instruments and sealers used in
endodontics, waxes, specialty burs, investment and casting materials, equipment
and accessories used in dental laboratories, and disposable infection control
products for dental equipment.
Our Professional Dental products are primarily manufactured by Kerr
Corporation and its affiliates such as the Beavers Dental Company division of
Sybron Canada Ltd. Kerr's products, which are generally sold through independent
dental distributors, are designed to help dentists and endodontists deliver more
effective and efficient treatment to their patients. Kerr has expanded its
product line through new product development and through acquisitions. New
product development examples include Kerr's TAKE 1(R) brand impression material
and POINT 4(TM) brand restorative composite, which have advanced materials and
new delivery features.
Expansion of products in this segment through acquisitions include the 1994
purchase of Demetron Research Corp., a manufacturer of lights used by dentists
to cure composite filling materials applied to teeth. These products
complemented Kerr's line of composite filling materials, which it enhanced by
acquiring E&D Dental Products, Inc. and its line of composites in 1996. Kerr
added to its offering of dental lab products with the acquisition of belle de
st. claire inc. in 1996. In 1997, it added diamond dental burs to the
considerable line of dental burs manufactured by Beavers Dental, with the
acquisition of Precision Rotary Instruments, Inc. In 1999, Pinnacle Products
became a part of our organization, which enabled us to add dental disposable
infection control products such as plastic coverings (barriers) for dental
equipment and filters for evacuation units to this business segment. In the
second quarter of 2000, we added Safe-Wave Products, Inc., a manufacturer of
disposable tips and adapters for air/water syringes used in dental operatories.
The Professional Dental business segment accounted for approximately 51.8%,
51.3% and 49.4% of our combined net sales in 1997, 1998 and 1999, respectively
and approximately 48.8% and 51.0% for the six months ended March 31, 1999 and
2000, respectively.
ORTHODONTICS. Products in our Orthodontics business segment include a
broad range of orthodontic appliances such as brackets, bands and buccal tubes,
wires and elastomeric products as well as endodontic products. Brackets, bands,
buccal tubes and wires are manufactured from a variety of metals to exacting
specifications for standard use or to meet the custom specifications of a
particular orthodontist. Elastomeric orthodontic products include rubber bands
and power chains to consolidate space. Products in this area also include
orthodontic instruments and general orthodontic supply products. These products
have historically been manufactured and marketed by Ormco, which sells its
products directly to orthodontists. Ormco expanded its orthodontics product line
through the acquisition of E.T.M. Corporation (a manufacturer of orthodontic
hand instruments) and Allesee Orthodontic Appliances, Inc. (a manufacturer of
custom-made positioners, retainers and other accessories) in 1994. In 1998, we
significantly enhanced the orthodontics line through the merger with LRS
Acquisition Corp., the parent of "A" Company Orthodontics, which is a
manufacturer and developer of brackets, archwires and related products. We also
expanded our direct business in France by acquiring the Ormodent group of
companies, Ormco's French distributor. In 2000, we again expanded our product
line with the acquisition of Professional Positioners, Inc., a manufacturer of
orthodontic retainers and positioners.
In 1995, we added endodontic products to the Orthodontics segment, which
has its own direct sales force, with the acquisition of Excellence in
Endodontics, Inc., a manufacturer of products for
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<PAGE> 59
microscopic endodontic procedures. We expanded our endodontic business in this
segment in 1996 when we acquired Analytic Technology Corporation, a manufacturer
of endodontic equipment. In 1998 we added a line of titanium endodontic
instruments with the acquisition of Tycom Dental Corporation. In 1999 we
vertically integrated our Tycom product line in Europe with the purchase of Endo
Direct Ltd., the exclusive European importer of Tycom's endodontic products.
The Orthodontics business segment accounted for approximately 44.1%, 44.3%
and 43.8%, of our combined net sales in 1997, 1998 and 1999, respectively and
approximately 45.1% and 43.0% for the six months ended March 31, 1999 and 2000,
respectively.
INFECTION CONTROL PRODUCTS. Products in our Infection Control Products
business segment include high level disinfectants and sterilants, enzymatic
cleaners and instrument care solutions for medical and dental instruments,
surface disinfectant products and antimicrobial skincare products for medical
and dental use. These products are manufactured or supplied by Metrex Research
Corporation, acquired in 1995. Metrex expanded its product line through the
acquisition of the businesses of Micro-Aseptic Products, Inc. (a supplier of
surface disinfectants) in 1996 and Viro Research International, Inc. (a supplier
of skin antisepsis products) in 1998, and through the acquisition of the high
level disinfectant/sterilant business of Cottrell Ltd. in 1998. In 1999, we
acquired Alden Scientific, Inc. and its sister corporation Gulfstream Medical,
Inc., both manufacturers of reagents and related infection control products used
to disinfect kidney dialysis machines. Alden also manufactures chemical
detecting and hematology reagents and calibrating solutions.
The Infection Control Products business segment accounted for approximately
4.1%, 4.4% and 6.8% of our combined net sales in 1997, 1998 and 1999,
respectively and approximately 6.1% and 6.0% for the six months ended March 31,
1999 and 2000, respectively.
NEW PRODUCTS
The business segments of SDS devote considerable resources to the
development and introduction of new products. These efforts are critical to
meeting the needs of today's dentists, endodontists and orthodontists. In the
Professional Dental segment, product development requires diverse technical
expertise and knowledge of various market trends, which SDS and its subsidiaries
possess. Kerr takes advantage of its expertise and knowledge by working closely
with dentists to develop new and improved products. Recently introduced
products, such as its TAKE 1(R) brand impression materials, POINT 4(TM) brand
composites, OPTIBOND(R) SOLO PLUS bonding agent, OPTILUX(TM) 501 curing light,
and its VITALITY SCANNER(TM) brand electronic pulp testers, have significantly
contributed to Kerr's net sales. In the Orthodontics segment, Ormco's sales
force maintains direct contact with orthodontists to identify market trends.
Ormco works closely with orthodontists to improve existing products and develop
new products primarily through its Elite program in which selected orthodontists
assist Ormco in designing, developing and ultimately educating users on new
product and technique innovations. In recent years, Ormco has introduced a
number of new products which have contributed significantly to its sales.
Examples of recently introduced products include the DAMON(TM) II brand
self-ligating bracket, the INSPIRE! ceramic bracket, the expanded titanium wire
forms, compact RPE's (Rapid Palatal Expanders) and the ENDO ANALYZER(TM) brand
diagnostic tool used in endodontics to determine apex location and to perform
pulp testing.
MARKETS; DISTRIBUTION
Products in the Professional Dental business segment including dental
related Infection Control Products are sold both domestically and
internationally through dental distributors. Kerr has 46 sales personnel in the
United States and 50 abroad dedicated to the Professional Dental business
segment sales. The mission of the dental sales force is to provide training and
technical support to dealers and help pull products from the Professional Dental
business segment through the dealer network.
Our Professional Dental companies are committed to increasing their market
share through new product development and promotional activities. Their
activities create demand for new products that make
48
<PAGE> 60
dentists more efficient. This demand for new products is augmented by modest
growth in the domestic market for traditional dental consumables. We also
believe opportunities for growth exist in international markets. As economies in
emerging markets of Eastern Europe, South America and the Far East continue to
develop, their demand for dental products will grow. Our Professional Dental
companies are well positioned to take advantage of such development due to their
extensive experience in selling internationally and the quality of their
existing international dealer network.
Products in the Orthodontics business segment are marketed by approximately
80 direct salespersons in the United States, Canada, Australia, Germany, France,
Japan, Mexico, New Zealand and The Netherlands, and by dealers and distributors
in other parts of the world. Ormco's direct sales force, dealers and
distributors are supported by trade journal advertising, trade shows, seminars
and telemarketing.
The market for traditional orthodontics products is relatively mature
domestically, and is experiencing modest growth. We believe that the
international market for orthodontics products presents a growth opportunity as
worldwide awareness of dental aesthetics grows. As with other health care
markets, over the past few years the orthodontics market has experienced a
consolidation of provider practices and the formation of management
organizations and buying groups, which are intended to bring administrative
efficiencies and buying power to orthodontic practices. We believe Ormco is well
positioned to compete in this environment because its marketing philosophy is
geared toward making orthodontic practices more efficient through product
innovation and customer service.
Products in the Infection Control Products business segment are marketed
primarily to the alternate health care market in the United States and Canada by
independent manufacturers representatives, distributors, and e-commerce to reach
end users. As referred to above, the Infection Control Products business segment
also utilizes the Professional Dental sales force to penetrate the dental
market.
The sales and marketing focus for the Infection Control Products business
segment is on core product growth, acquisition and product development. We
believe revenue growth will come primarily from dental offices, clinics and
teaching hospitals.
We believe we are well positioned to take advantage of the opportunities
which exist to grow our business. Opportunities that apply to all of our
business segments arise from the trends of an increasing worldwide population,
growth in the population of people 65 and older, natural teeth being retained
longer, and increased spending on dental health in developing nations.
INTERNATIONAL
In addition to the United States, products in our Professional Dental
business segment are manufactured at facilities in Canada, Italy and Mexico.
These products are sold internationally through dealers, and supported by sales
offices in Europe (including major offices in the U.K., France and Germany),
Japan, Australia, South America and Mexico.
Prior to 1998, products in our Orthodontics business segment were sold
directly to end users by Ormco's sales force in Australia, New Zealand, Canada,
Germany, Switzerland, Japan and Mexico. Ormco also had exclusive distributors in
key European markets such as Italy, France and Spain. In 1998, Ormco acquired
its distributor in France, the Ormodent group of companies, and now services the
French market directly. In addition, with the "A" Company merger, the
Netherlands now services all of the European countries in which Ormco sells,
other than France.
Products in our Infection Control Products business segment are
manufactured in the United States and are distributed internationally, primarily
in Canada, where they are sold by independent sales representatives. These
products are sold in other countries primarily through distributors and agents.
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<PAGE> 61
Domestic and international sales of SDS's products by business segment are
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Professional Dental:
Domestic........................... $105,131 $109,723 $105,629 $48,237 $ 59,415
International...................... 80,700 78,611 86,294 43,755 43,407
-------- -------- -------- ------- --------
Total........................... $185,831 $188,334 $191,923 $91,992 $102,822
======== ======== ======== ======= ========
Orthodontics:
Domestic........................... $ 89,723 $ 91,784 $ 95,505 $45,860 $ 46,981
International...................... 68,384 70,726 74,396 39,090 39,779
-------- -------- -------- ------- --------
Total........................... $158,107 $162,510 $169,901 $84,950 $ 86,760
======== ======== ======== ======= ========
Infection Control Products:
Domestic........................... $ 13,605 $ 14,956 $ 24,620 $10,883 $ 11,363
International...................... 1,154 1,086 1,732 704 734
-------- -------- -------- ------- --------
Total........................... $ 14,759 $ 16,042 $ 26,352 $11,587 $ 12,097
======== ======== ======== ======= ========
</TABLE>
We have included other financial information about our business segments
and foreign operations in Note 15 to our combined financial statements in this
Information Statement.
COMPETITION
Numerous competitors participate in our business segments, some of which
have substantially greater financial and other resources than ours. There can be
no assurance that we will not encounter increased competition in the future.
We believe our principal competitive advantages in the Professional Dental
business segment include the breadth of our product lines, brand name
recognition, and our programs to educate dentists regarding techniques and
products. Our principal competitors are GC America, Inc., 3M Corporation,
Dentsply International Inc., Espe GmbH & Co., and Ivoclar. In the Orthodontics
business segment, we compete with more than 25 companies in the United States.
We compete primarily on the basis of product quality, the level of customer
service, price and new product offerings. Our competitors include American
Orthodontics, GAC Orthodontics (owned by Dentsply), and Unitek (owned by 3M
Corporation). In the Infection Control Products business segment, our principal
competitive advantages include the breadth of our product lines and our product
quality. Our competitors include Johnson and Johnson, Steris Corporation and
Ecolab, Inc.
INTERNET STRATEGY
SDS's internet strategy is to ensure that its products are available for
ordering over the internet either through its traditional dealer/distributor
networks or directly from SDS depending upon the normal commercial route used by
SDS to reach customers. In addition to ensuring that its products can be ordered
via the internet, SDS has also created a number of websites providing
information on products, special promotions and educational information for
professional practitioners.
BACKLOG
Our total backlog of orders at September 30, 1997, 1998 and 1999 and at
March 31, 1999 and 2000 were approximately $2.9 million, $3.4 million, $3.8
million, $2.7 million and $3.3 million, respectively. We expect all backlog
orders to be filled within the next twelve months.
50
<PAGE> 62
Our backlog by business segment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Professional Dental........................... $1,219 $1,654 $2,590 $1,280 $1,745
Orthodontics.................................. 1,562 1,604 1,066 1,164 1,242
Infection Control Products.................... 118 182 134 293 300
------ ------ ------ ------ ------
Total.................................... $2,899 $3,440 $3,790 $2,737 $3,287
====== ====== ====== ====== ======
</TABLE>
RESEARCH AND DEVELOPMENT
We have a number of research and development programs in our various
business segments, which we consider to be of importance in maintaining our
market positions. We spent approximately $7.9 million, $7.3 million, $9.4
million, $4.7 million and $4.3 million on research and development in 1997,
1998, 1999, and for the six month periods ended March 31, 1999 and 2000,
respectively.
Our research and development expenditures by business segment are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Professional Dental........................... $3,460 $3,880 $4,353 $2,159 $2,023
Orthodontics.................................. 4,486 3,262 4,769 2,433 2,123
Infection Control Products.................... -- 171 303 148 158
------ ------ ------ ------ ------
Total.................................... $7,946 $7,313 $9,425 $4,740 $4,304
====== ====== ====== ====== ======
</TABLE>
EMPLOYEES
Our companies employed approximately 3,400 people at March 31, 2000,
approximately 140 of which are covered by collective bargaining agreements. We
believe our employee relations are generally good. In the United States, Kerr's
140 hourly employees at the Romulus, Michigan facility are members of the UAW.
The labor contract at Kerr will expire on January 31, 2002. Many of our
non-management employees in Europe are subject to national labor contracts which
are negotiated from time to time at the national level between the national
labor union and an employees' council. Once national contracts are set, further
negotiation can take place at the local level. Such negotiations can affect
local operations. We have had no work stoppages related to national contracts.
PATENTS, TRADEMARKS AND LICENSES
Our subsidiaries' products are sold under a variety of trademarks and trade
names. They own all of the trademarks and trade names we believe to be material
to the operation of their businesses, including the KERR(R) trademark, the
ORMCO(R) and "A" Company(R) trademarks and the METREX(R) trademark, each of
which we believe to have widespread name brand recognition in its respective
field and all of which we intend to continue to protect. Our subsidiaries also
own various patents, employ various patented processes and from time to time
acquire licenses from owners of patents to apply patented processes to their
operations or to sell patented products. Except for the trademarks referred to
above, we do not believe any single patent, trademark or license is material to
the operations of our business as a whole.
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<PAGE> 63
REGULATION
Medical Devices
Certain of our products are medical devices which are subject to regulation
by the United States Food and Drug Administration (the "FDA") and by the
counterpart agencies of the foreign countries where our products are sold. Some
of the regulatory requirements of these foreign countries are more stringent
than those applicable in the United States. Pursuant to the Federal Food, Drug,
and Cosmetic Act (the "FDCA"), the FDA regulates virtually all phases of the
manufacture, sale, and distribution of medical devices, including their
introduction into interstate commerce, their manufacture, advertising, labeling,
packaging, marketing, distribution and record keeping. Pursuant to the FDCA and
FDA regulations, certain facilities of our operating subsidiaries are registered
with the FDA as medical device manufacturing establishments.
Medical devices are classified into either Class I, II or III. Pursuant to
section 510(K) of the FDCA, the manufacturer or distributor of a Class I or II
device that is initially introduced commercially on or after May 28, 1976 must
notify the FDA of its intent to commercially introduce the device through the
submission of a premarket notification (a "510(K) Notice"). Before commercial
distribution can begin, the FDA must review the 510(K) Notice and clear the
device for commercial distribution. The FDA normally has 90 days to review the
510(K) Notice and grant or deny clearance to market on the basis that it is or
is not substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(K) Notice may be
significantly delayed. In order to clear a Class I or II device for marketing,
the FDA must determine, from the information contained in the 510(K) Notice and
any additional information that is submitted, that the device is substantially
equivalent to one or more Class I or II devices that are legally marketed in the
United States. Certain Class I and Class II devices are exempt from the 510(K)
premarket notification requirement and manufacturers of such products may
proceed to market without any submission to the FDA. If a device is not
considered "substantially equivalent," it is regulated as a Class III medical
device. In general, a Class III medical device must be expressly approved by the
FDA for commercial distribution pursuant to the submission of a premarket
approval application ("PMA"). A PMA must contain, among other information,
substantial information about the manufacture of the device and data from
adequate and well-controlled clinical trials that demonstrate that the device is
both safe and effective. The PMA approval process is substantially more complex
and lengthy than the 510(K) premarket notification process.
A medical device, whether exempt from premarket notification, cleared for
marketing under the 510(K) pathway, or cleared pursuant to a PMA approval, is
subject to ongoing regulatory oversight by the FDA to ensure compliance with
regulatory requirements, including, but not limited to, product labeling
requirements and limitations, including those related to promotion and marketing
efforts, current good manufacturing practices and quality system requirements,
record keeping, and medical device (adverse reaction) reporting.
All of our dental and orthodontic products and our high level disinfectants
and sterilants are regulated as Class I or Class II medical devices.
Dental mercury is currently regulated by the FDA as a Class I device (not
exempt from the 510(K) premarket notification requirement), and amalgam alloy is
regulated as a Class II device. In February 1993, the FDA reported to its Dental
Products Advisory Panel that it planned to regulate encapsulated mercury and
amalgam alloy, like those sold by Kerr, as a single Class II device. At the same
time, the FDA planned to propose the reclassification of dental mercury as a
Class II device, so as to conform to the Class II designation for amalgam alloy
and to the planned Class II designation for encapsulated mercury and amalgam
alloy. In October 1994, the FDA's Dental Products Panel of the Medical Devices
Advisory Committee voted unanimously to recommend reclassification of dental
mercury from Class I to Class II. Class II devices, unlike Class I devices, may
be subject to performance standards or special controls. At this time, there are
no performance standards or special controls applicable to
52
<PAGE> 64
mercury or to encapsulated mercury and amalgam alloy, although it is possible
that the FDA could propose special controls during the reclassification process.
With a Class II designation, the amalgam products would continue to be subject
to the 510(K) premarket notification process. The FDA is expected to publish its
decision on the classification in 2000.
All dental amalgam filling materials, including Kerr's dental amalgam
products, contain mercury. The use of mercury in various products, including
dental amalgams, is being examined by various groups and U.S. and foreign
governmental agencies as a part of an effort to reduce the amount of mercury
discharged into the environment. We are aware of at least one foreign government
agency that, as a result of a study it conducted, has proposed a plan which
would discontinue the use of amalgams once a suitable alternative is found.
In addition to the environmental concerns about mercury in dental amalgams,
certain groups have expressed concerns about health effects allegedly caused by
the mercury in amalgams. These groups are active in lobbying state, federal and
foreign lawmakers and regulators to pass laws or adopt regulatory changes or
recommendations regarding the use of dental amalgams. To date, these efforts
have resulted in restrictions on or recommendations against the use of amalgams
in certain clinical situations by health authorities in some countries, even
though such health authorities point out there is no scientific evidence to
suggest that amalgam is causing illness. Such actions have been taken to reduce
human exposure to mercury where other safe and practical alternatives to dental
amalgam exist. In the United States, the FDA's Dental Devices Panel, the
National Institute of Health and the United States Public Health Service have
indicated that the use of amalgams does not cause verifiable adverse effects in
patients who have amalgam fillings. All of these agencies have recommended
further research on the subject and, in large part because of their initiatives,
research with respect to potential health effects of dental amalgams is ongoing
at various places around the world.
Over the Counter Drug Products
Certain of our products, namely our topical anti-microbial infection
control products, are subject to regulation by the FDA as over the counter drug
products. In order to market a product as an over the counter drug, we are
required to comply with certain requirements relating to testing and labeling of
these products. Each new product is listed with the FDA; however, there is no
requirement for premarket submissions or approvals.
Federal Insecticide, Fungicide and Rodenticide Act
Certain of our infection control products are subject to regulation by the
United States Environmental Protection Agency ("EPA") and State Environmental
Agencies under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA")
as pesticides. Under FIFRA, no one may sell, distribute or use a pesticide
unless it is registered by the EPA. Registration includes approval by the EPA of
the product's label, including the claims and instructions for use. The producer
of a pesticide must provide data from tests done according to EPA guidelines.
These tests must determine whether a pesticide has the potential to cause
adverse effects on humans, wildlife, plants and possible ground or surface water
contamination. Testing must also be submitted to support the claims on the
product labeling. Separate registrations must be obtained from the EPA and each
state in which the product is sold. Registrations must be renewed annually. The
regulations also require producers to report adverse events associated with
their products to the EPA. Failure to pay registration fees or provide necessary
testing data, or evidence that the product is the cause of an adverse effect on
humans or the environment, could result in the cancellation of a FIFRA
registration.
Environmental, Health and Safety Matters
Our operations entail a number of environmentally sensitive production
processes. Compliance with environmental laws and regulations along with
regulations relating to workplace safety is a significant factor in our
businesses. Our domestic facilities are subject to federal, state and local laws
and regulations
53
<PAGE> 65
concerning, among other things, solid and hazardous waste disposal, air
emissions and waste water discharge, and our foreign facilities are subject to
local laws and regulations regarding the environment. Our operations are also
subject to regulation relating to workplace safety, both in the United States
and abroad. Violations of any of these laws and regulations or the release of
toxic or hazardous materials used in our operations into the environment could
expose us to significant liability. Similarly, third party lawsuits relating to
environmental and workplace safety issues could result in substantial liability.
RAW MATERIALS
We purchase a wide range of raw materials and supplies from a number of
suppliers and do not rely on sole sources to any material extent. We do not
foresee any significant difficulty in obtaining necessary materials or supplies.
RISKS ATTENDANT TO FOREIGN OPERATIONS
We conduct our businesses in numerous foreign countries and as a result are
subject to risks of fluctuations in exchange rates of various foreign currencies
and other risks associated with foreign trade. For the years 1997, 1998 and 1999
and for the six months ended March 31, 1999 and 2000, our net sales outside the
United States accounted for approximately 42%, 41%, 42%, 44% and 42%,
respectively, of combined net sales. See "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General" for further information concerning the possible effects
of foreign currency fluctuations and currency hedges intended to mitigate their
impact.
RELIANCE ON KEY DISTRIBUTORS
A substantial portion of our sales are made through major independent
distributors. The dental distribution system has experienced significant
consolidation, with two of our largest distributors, Henry Schein, Inc. and
Sullivan Dental Products, Inc., merging in November 1997. This consolidation
continued in 1998, as Henry Schein continued to acquire other dental
distributors, including H. Meer Dental Supply Company. Inventory reduction from
this consolidation with dealers slowed sales of product in our Professional
Dental business segment through the second quarter of 1998. The loss of certain
of our dental distributors could have a material adverse effect on our results
of operations or financial condition. See "Risk Factors -- Reliance on Key
Distributors."
54
<PAGE> 66
PROPERTIES
We operate manufacturing facilities in the United States and certain
foreign countries. The following table sets forth information regarding our
principal properties by business segment. Properties with less than 20,000
square feet of building space have been omitted from this table.
<TABLE>
<CAPTION>
LOCATION OF FACILITY BUILDING SPACE AND USE OWNED OR LEASED
-------------------- ---------------------- ---------------
<S> <C> <C>
Headquarters
Orange, California.............. 104,000 sq. ft./headquarters, manufacturing and
warehouse leased
PROFESSIONAL DENTAL
Morrisburg, Ontario........... 60,000 sq. ft./manufacturing owned
Danbury, Connecticut.......... 30,000 sq. ft./manufacturing, warehouse and offices leased
Romulus, Michigan............. 220,000 sq. ft./manufacturing leased
Scafati, Italy................ 39,000 sq. ft./manufacturing owned
Lakeville, Minnesota.......... 38,000 sq. ft./assembly and warehouse owned
ORTHODONTICS
San Diego, California......... 76,000 sq. ft./manufacturing and offices owned
Mexicali, Mexico.............. 57,000 sq. ft./manufacturing and offices leased
Glendora, California.......... 66,000 sq. ft./manufacturing leased
Redmond, Washington........... 29,000 sq. ft./manufacturing, warehouse and offices leased
Uman, Yucatan, Mexico......... 35,000 sq. ft./manufacturing owned
Tijuana, Mexico............... 32,000 sq. ft./manufacturing owned
INFECTION CONTROL PRODUCTS
Parker, Colorado.............. 27,000 sq. ft./manufacturing and office owned/leased
</TABLE>
We consider our plants and equipment to be well-maintained and suitable for
their purposes. We have, from time to time, expanded and will continue to expand
facilities as the need arises. We expect to fund such expansions through
internally generated funds or borrowings under our credit facilities described
in Note 7 to our combined financial statements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
LEGAL PROCEEDINGS
SDS or its subsidiaries are at any one time parties to a number of lawsuits
or subject to claims arising out of their respective operations, including
products liability, patent and trademark, or other intellectual property
infringement, contractual liability, workplace safety and environmental claims
and cases, some of which involve claims for substantial damages. SDS and its
subsidiaries are vigorously defending lawsuits and other claims against them.
Pursuant to the agreements described below between Sybron International and SDS
relating to the Distribution, we will indemnify Sybron International and its
subsidiaries against costs and liabilities associated with past or future
operations of the Dental Business, and Sybron International will indemnify SDS
and its subsidiaries against costs and liabilities associated with past or
future operations of the Laboratory Business. Based upon the insurance available
under our insurance program and the potential for liability with respect to
claims which are uninsured, we believe that any liabilities which might be
reasonably expected to result from any of SDS's or its subsidiaries' pending
cases and claims would not have a material adverse effect on our results of
operations or financial condition. There can be no assurance as to this,
however, or that litigation having such a material adverse effect will not arise
in the future. See "Risk Factors," Note 13 to our combined financial statements
and "-- Transactions and Agreements Between Sybron International and SDS."
TRANSACTIONS AND AGREEMENTS BETWEEN SYBRON INTERNATIONAL AND SDS
In order to effect the Distribution, Sybron International and SDS have
entered or will enter into a number of interrelated agreements. These agreements
describe the reorganization of Sybron International and define the ongoing
relationship between the parties after the Distribution. Because these
agreements
55
<PAGE> 67
were negotiated while SDS was a wholly owned subsidiary, they are not the result
of negotiations between independent parties, although Sybron International and
SDS have set pricing terms for interim services believed to be comparable to
what could be achieved through arm's-length negotiations. Following the
Distribution, additional or modified agreements, arrangements and transactions
may be entered into and such agreements and transactions will be determined
through arm's-length negotiations.
Contribution Agreement
Pursuant to the Contribution Agreement, Plan and Agreement of
Reorganization and Distribution, immediately prior to the spin-off, the stock or
other equity interests in subsidiaries which hold substantially all of the
assets and liabilities of the Dental Business (other than assets and liabilities
already held by SDS subsidiaries) will be transferred by Sybron International or
its subsidiaries to SDS or SDS's subsidiaries, while the stock or other equity
interests in subsidiaries which hold substantially all of the assets and
liabilities of the Laboratory Business (other than assets and liabilities
already held by Laboratory Business subsidiaries) will be transferred to Sybron
International. Under this agreement, on or prior to the Distribution Date,
Sybron will pay SDS an amount equal to $ in order to settle all
intercompany loans and advances made to Sybron by SDS, and SDS will pay Sybron a
dividend equal to that payment plus the difference between $375,000,000 and the
actual allocation of Sybron bank debt to SDS as of the Distribution Date.
Assignment and Assumption Agreement
Pursuant to the General Assignment, Assumption and Agreement Regarding
Litigation, Claims and Other Liabilities, in general SDS and its U.S.
subsidiaries will indemnify Sybron International and its subsidiaries and
affiliates against liabilities, litigation and claims actually or allegedly
arising out of the Dental Business, including discontinued operations within
those business segments. Similarly, Sybron International and its U.S.
subsidiaries will indemnify SDS and its subsidiaries and affiliates against
liabilities, litigation and claims actually or allegedly arising out of its
Laboratory Business, including discontinued operations within those business
segments, and other items not transferred to SDS. In circumstances in which any
liability of Sybron International and SDS is joint, the parties will share
responsibility for such liability on a mutually agreed basis consistent with the
allocation of the business segments.
Transitional Trade Name Use and License Agreement
Pursuant to the Transitional Trade Name Use and License Agreement, the
unregistered trade name "Sybron" will be transferred to SDS, subject to a
royalty free, nontransferable, nonexclusive license for Sybron International to
continue to use the name for a period of one year after the Distribution. This
is intended to give Sybron International the necessary time to change its name
to Apogent Technologies Inc. and to cease using the name "Sybron" in its and its
subsidiaries' businesses. In addition, SDS will grant to Sybron International
certain rights to continue to use, for a limited period of time and under
certain defined circumstances, Sybron International's existing inventory of
labels, promotional materials, product materials and other materials relating to
Sybron International's existing inventory of products which are already
inscribed or imprinted with the trade name "Sybron." Finally, SDS will grant to
Sybron International a royalty free, nontransferable, nonexclusive license to
use certain SDS trademarks and certain products for nine months after the
Distribution.
Insurance Matters
An Insurance Matters Agreement will govern the rights and obligations of
Sybron International and SDS with respect to various pre-existing contracts
insuring Sybron International and covering risks associated with, or arising out
of, the Dental Business. The types of policies covered by the Insurance
Agreement include, without limitation, automobile liability, comprehensive and
general liability. The Insurance Matters Agreement also establishes certain
procedures for dealing with pending litigation, new litigation and the
resolution of disputes between the parties concerning that agreement.
56
<PAGE> 68
Employee Benefits Agreement
Although no current employees of the Laboratory Businesses are expected to
become employees of the Dental Businesses or vice versa, various Sybron
International employee benefit plans will be modified to reflect the fact that
they will no longer cover employees of the Dental Businesses, and SDS will
create new employee benefit plans on behalf of the Dental Business employees.
The Employee Benefits Agreement will set forth the agreements of SDS and Sybron
International regarding this transition.
Tax Indemnification Agreement
The Tax Sharing and Indemnification Agreement (the "Tax Indemnification
Agreement") will govern the allocation of certain tax responsibilities between
Sybron International and its subsidiaries on the one hand and SDS and its
subsidiaries on the other hand after the Distribution. The Tax Indemnification
Agreement defines each company's rights and obligations with respect to
deficiencies and refunds of federal, state and other taxes relating to the
business operations for tax years (or portions thereof) ending on or prior to
the Distribution and with respect to certain tax attributes of the companies
after the Distribution. The Tax Indemnification Agreement also specifies the
parties' respective obligations in connection with any audit or investigation
concerning any federal, state or other taxes or in the event the Distribution is
subsequently determined not to qualify as tax-free for U.S. federal income tax
purposes.
Interim Administrative Services Agreement
As of the Distribution Date, Sybron International and SDS will enter into
an Interim Administrative Services Agreement which will govern the
administrative and financial services that Sybron International will continue to
provide to SDS on an interim basis and those which SDS will provide to Sybron
International. In general, Sybron International will provide specified
accounting, tax management, legal and cash management services to SDS, and SDS
will provide certain insurance and risk management services to Sybron
International, for a period of up to six months after the Distribution. Each
party will compensate the other parties at negotiated amounts which, SDS
believes, will be comparable to rates SDS could have achieved through
arm's-length negotiations and approximate current intercompany allocations.
Confidentiality and Non-Disclosure Agreement
As of the Distribution Date, SDS and Sybron International will enter into a
Confidentiality and Non-Disclosure Agreement whereby, subject to certain
exceptions, each party will agree to treat as confidential and not disclose
certain proprietary and other confidential information belonging to the other
company.
57
<PAGE> 69
MANAGEMENT OF SDS
DIRECTORS
Under the terms of the SDS certificate of incorporation and bylaws, the
board of directors of SDS will consist of not less than six nor more than nine
individuals. The board will be divided into three, as equal in number as
possible, classes serving staggered terms. At each annual meeting, the
stockholders will elect directors in the class whose term expires at that annual
meeting for a three-year term. The exact number of directors will be fixed from
time to time by resolution of the board. Initially following the Distribution,
the SDS board will consist of six individuals, only one of whom will be an
employee of SDS and one of whom will also be a director of Sybron International.
Information concerning the persons who will serve as directors of SDS following
the Distribution is set forth in the following table.
<TABLE>
<CAPTION>
INITIAL TERM PRINCIPAL OCCUPATION
NAME AGE EXPIRES AND BUSINESS EXPERIENCE
---- --- ------------ -----------------------
<S> <C> <C> <C>
Kenneth F. Yontz..................... 55 Chairman of the Board of SDS. President and
Chief Executive Officer of Sybron
International since October 1987; Chairman of
the Board of Sybron International since
December 1987; President and Chief Executive
Officer of the company formerly known as
Sybron Corporation and acquired by Sybron
International in 1987 from February 1987 until
September 1992; previously Group Vice
President and Executive Vice President of the
Allen-Bradley Company. Director of Playtex
Products, Inc., and Viasystems Group, Inc.
Floyd W. Pickrell, Jr................ 54 President and Chief Executive Officer of SDS.
President of SDM since August 1993; appointed
Chairman of the Board of Kerr Corporation in
August 1993, and Chairman of the Board of
Ormco in February 1993; served as President of
Kerr from August 1993 until November 1998;
joined Ormco in 1978 and served as Ormco's
President from March 1983 until November 1998;
previously served as Ormco's Vice President of
Marketing and as its National Sales Manager.
Dennis Brown......................... 52 Joined Sybron International in January 1993 as
Vice President -- Finance and Chief Financial
Officer and also became Treasurer in October
1993; previously served as President of Allen
Bradley Europe from March 1990 to January
1993, and Treasurer of The Marmon Group, Inc.
from January 1987 to March 1990. Director of
Merge Technologies Incorporated.
William E. B. Siart.................. 53 Chairman of the Board of Excellent Education
Development (a non-profit corporation that
develops and manages charter public schools)
beginning in 2000; President and Chief
Executive Officer of EXED LLC from 1998 until
2000; Chairman and Chief Executive Officer of
First Interstate Bancorp from 1995 to 1996,
having served as President of that corporation
from 1990 until 1995 and in various other
executive positions for that company
</TABLE>
58
<PAGE> 70
<TABLE>
<CAPTION>
INITIAL TERM PRINCIPAL OCCUPATION
NAME AGE EXPIRES AND BUSINESS EXPERIENCE
---- --- ------------ -----------------------
<S> <C> <C> <C>
previously. Director of Western Asset Trust,
Inc., and Pacific American Income Shares, Inc.
James R. Parks....................... 49 Chairman of the Board and Chief Executive
Officer of Laser Pacific Media Corporation, a
public media post production company, since
1994; managing partner of the accounting firm
of Parks Palmer Turner and Yemenidjian, LLP,
and managing director of Parks Palmer Business
Services Inc., a subsidiary of Century
Business Services that is in the business of
providing business consulting, accounting,
merger and acquisition, business valuation,
financial crisis management, and tax services;
Chairman of the Board of Realty Center
Management Corporation, a privately held real
estate management and investment company with
operations in five states. In 1995, a
partnership in which Mr. Parks was an officer
of the corporate general partner and which
held real property, filed for reorganization
under Chapter 11. In 1996, the reorganization
was dismissed and the real property was sold.
[to be named]........................ [information to be added]
</TABLE>
DIRECTORS MEETINGS AND COMMITTEES
The board of directors expects to have four regularly scheduled meetings
per year, but may also hold special meetings, to review significant matters
affecting SDS and to act on matters requiring board approval. Prior to the
Distribution, the SDS board is expected to establish and delegate specific
functions and areas of oversight and management to a compensation committee and
an audit committee. Directors who are also employees or officers of SDS will not
be permitted to serve on either the compensation committee or the audit
committee. A description of these standing committees and the identity of their
expected members follows:
<TABLE>
<CAPTION>
BOARD MEMBER BOARD COMPENSATION AUDIT
------------ ----- ------------ -----
<S> <C> <C> <C>
Kenneth F. Yontz........................................ X
Floyd W. Pickrell, Jr................................... X
Dennis Brown............................................ X
William E.B. Siart...................................... X X X
James R. Parks.......................................... X X X
[to be named]........................................... X X X
</TABLE>
The audit committee is responsible for assisting the board of directors
with respect to its oversight of corporate accounting, reporting practices, and
the quality and integrity of the financial reports of SDS.
The compensation committee is responsible for making recommendations to the
board of directors concerning the compensation of SDS's employees, officers, and
directors, and is authorized to determine the compensation of executive
officers. The committee is authorized to administer the various incentive plans
maintained by SDS and has all powers attendant thereto, including the power to
grant employee stock options.
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<PAGE> 71
DIRECTORS' COMPENSATION
Directors of SDS are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the board of directors or committees thereof. In addition, during
fiscal 2001 each director of SDS who is not also an officer or employee of SDS
or its subsidiaries will receive an annual retainer of $20,000 and a fee of
$1,000 for each meeting of the board of directors at which he or she is present.
Each outside director who is a member of a committee of the board of directors
will also receive a fee of $750 for each meeting of the committee at which he or
she is present. In addition, each outside director is annually granted an option
to purchase 10,000 shares of SDS common stock pursuant to the terms of the SDS
2000 Outside Directors' Stock Option Plan, at an exercise price equal to the
fair market value of the common stock on the date of the grant. The initial
grant will be made on the date of the first meeting of the board following SDS's
2001 annual meeting of shareholders and the exercise price will be determined by
the fair market value of the stock on that date.
EXECUTIVE OFFICERS
Information concerning the executive officers of SDS who are not directors
or nominees for director is set forth in the following table.
<TABLE>
<CAPTION>
NAME AGE POSITION AND EXPERIENCE
---- --- -----------------------
<S> <C> <C>
Michael R. DePrez.................... 59 Executive Vice President of Operations and Chief
Information Officer of SDS. Joined SDM in September 1997
as Vice President of Information Technology and Chief
Information Officer; appointed Executive Vice President
of Operations in May 1999 with continued
responsibilities as Chief Information Officer.
Previously Vice President of Information Technology for
Aramark Corporation and Director of Information
Technology for Mitsubishi Corporation.
Daniel E. Even....................... 47 President of Ormco since November 1998; Executive Vice
President and General Manager of Ormco from 1993 until
November 1998; Director of Allesee Orthodontic
Appliances (since July 1994) and Director and President
of LRS Acquisition Corporation (since April 1998).
Joined Ormco in 1979 and held various management
positions at Ormco including Vice President Marketing
and Research & Development.
A.J. LaSota.......................... 58 Vice President, General Manager and Director of Metrex
Research Corporation since November 1998; General
Manager for Metrex from December 1997 until November
1998. Joined Metrex in September 1995 as Director of
Sales and Marketing. Previously served as founder and
President of Endolap Incorporated (a company in the
business of selling specialty surgical and endoscopy
products), and currently serves as a director of Endolap
Incorporated.
Steven J. Semmelmayer................ 43 President of Kerr Corporation since November 1998;
Executive Vice President and General Manager of Kerr
from 1993 until November 1998; Director and President of
belle de st. claire (since November 1995); Director and
Chief Executive Officer of Pinnacle Products (since
October 1998); and Director and President of Safe Wave
Products (since February 2000). Joined Ormco in 1979 and
held various management positions with Ormco including
national Sales Director prior to being transferred to
Kerr.
</TABLE>
60
<PAGE> 72
<TABLE>
<CAPTION>
NAME AGE POSITION AND EXPERIENCE
---- --- -----------------------
<S> <C> <C>
Stephen J. Tomassi................... 47 Vice President -- General Counsel and Secretary of SDS.
Joined Sybron International in 1988 as Corporate
Counsel, becoming Assistant General Counsel in June of
1992, and has continued to serve in that role until the
Distribution. Previously in private practice from 1984
to 1988 with the law firm of Halling & Cayo.
John A. Trapani...................... 54 Vice President of Human Resources of SDS. Joined Ormco
in October 1983 as Vice President of Human Resources;
appointed Vice President of Human Resources and
Secretary for SDM and Kerr in 1993, and Vice President
Human Resources and Secretary for Ormco in 1994; also
serves as Secretary for a variety of SDS-affiliated
companies. Previously served as Manager of Employee
Relations and Manager of Administration for Rockwell
International B-1 Division; and Manager Disney
University and Manager of Employment for Walt Disney
Productions Studios and WED Enterprises.
Gregory D. Waller.................... 50 Vice President -- Finance, Chief Financial Officer and
Treasurer of SDS. Vice President -- Finance and Director
of SDM since August 1993; Vice President and Treasurer
of Kerr and Ormco since August 1993; Vice
President -- Finance, Director and Treasurer of Metrex
Research Corporation since March 1995. Joined Ormco in
December 1980 as Vice President and Controller; Vice
President of Kerr European Operations from July 1989 to
August 1993.
Frances Zee.......................... 50 Vice President of Regulatory Affairs and Quality
Assurance of SDS; Vice President of Regulatory Affairs
and Quality Assurance of SDM since August 1993; Vice
President of Regulatory Affairs and Quality Assurance
for Kerr and Ormco since January 1994. Joined Ormco in
May 1983 as Manager of Quality Assurance and later
became Director of Regulatory Affairs/Quality Assurance.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One of SDS's subsidiaries has agreed to provide Mr. Tomassi with a
three-year, interest-free loan in the approximate amount of $ for the
purpose of making a down payment on a house to be purchased in connection with
Mr. Tomassi's transfer to California. The subsidiary has also agreed to gross up
Mr. Tomassi's income in an amount equal to any tax obligations incurred by Mr.
Tomassi on the basis of income imputed to him due to the interest-free nature of
the loan.
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<PAGE> 73
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation awarded to, earned by or paid
to SDS's chief executive officer and each of its other four most highly
compensated executive officers for services rendered to SDS and its subsidiaries
("named executive officers") during its most recent fiscal year, except that in
the case of Mr. Tomassi the services were also for the benefit of Sybron
International and its other subsidiaries. Also included in the table is
comparable compensation information for those individuals for fiscal years 1998
and 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS/ COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) SARS (#)(2) TION ($)(3)
--------------------------- ---- ------ ----- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Floyd W. Pickrell, Jr......... 1999 392,500 424,000 12,053 -0- 4,286
President and Chief 1998 363,750 388,500 11,155 578,000 4,286
Executive Officer 1997 336,250 389,425 13,385 -0- 4,071
Stephen J. Tomassi............ 1999 166,000 167,637 2,610 4,500 4,543
Vice President -- General 1998 153,333 104,004 2,610 14,744 4,044
Counsel and Secretary 1997 144,500 116,487 2,610 4,616 3,878
Daniel E. Even................ 1999 171,667 125,928 2,610 14,768 5,588
President, Ormco Corporation 1998 149,667 117,810 2,610 29,592 4,512
1997 140,934 101,774 2,610 4,568 4,503
Steven J. Semmelmayer......... 1999 171,667 125,928 2,610 14,768 5,502
President, Kerr Corporation 1998 150,833 117,810 2,610 29,632 4,151
1997 141,167 102,753 2,610 4,568 4,228
Gregory D. Waller............. 1999 161,000 98,538 2,610 14,488 4,857
Vice President -- Finance, 1998 151,667 94,080 2,610 4,728 4,078
Chief Financial Officer 1997 144,438 97,860 2,610 4,672 4,391
and Treasurer
</TABLE>
---------------
(1) Consists of tax gross-up payments -- amounts reimbursed during the fiscal
year for the payment of taxes with respect to personal benefits. In each
case, the personal benefits do not exceed the SEC's disclosure thresholds
and are therefore not included in the table.
(2) Consists entirely of stock options.
(3) Consists entirely of the company's matching contribution to the 401(k) plan.
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<PAGE> 74
STOCK OPTIONS
Recent Option Grants and Option Exercises
Stock Option Grants. The following table sets forth information concerning
stock options granted by Sybron International during fiscal 1999 to the named
executive officers. No stock options have been granted by SDS.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS/SARS EXERCISE APPRECIATION FOR
GRANTED TO OR BASE OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1)(#) FISCAL YEAR(2) ($/SH) DATE 5% 10%
---- ------------- -------------- -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Floyd W. Pickrell, Jr.... -0- -0- -- -- -- --
Stephen J. Tomassi....... 4,500 0.6 $ 26.75 1/27/2009 6,019 12,038
Daniel E. Even........... 10,000 1.2 25.3125 11/02/2008 32,656 65,313
4,768 0.6 26.75 1/27/2009 6,377 12,754
Steven J. Semmelmayer.... 10,000 1.2 25.3125 11/02/2008 32,656 65,313
4,768 0.6 26.75 1/27/2009 6,377 12,754
Gregory D. Waller........ 10,000 1.2 25.2135 11/02/2008 32,656 65,313
4,488 0.6 26.75 1/27/2009 6,377 12,754
</TABLE>
---------------
(1) Consists entirely of nonqualified stock options granted pursuant to the
Sybron International Corporation Amended and Restated 1993 Long-Term
Incentive Plan. Each of these options vests in equal annual installments on
each of the first four anniversaries following the grant date provided the
optionee is still an employee at that time. Each option was granted with an
exercise price equal to the market value of Sybron International's common
stock on the date of the grant. Unless earlier terminated, these options
expire ten years after the date of the grant. Upon a "change in control" of
the company, the options shall become immediately exercisable. In the
discretion of the committee administering the plan, the exercise price may
be paid by delivery of already owned shares and tax withholding obligations
related to exercise may be satisfied by withholding shares otherwise
deliverable upon exercise, subject to certain conditions. The committee has
the power, subject to the limitations of the plan, to amend the terms and
conditions of any outstanding stock option to the extent such terms and
conditions are within the discretion of the committee as provided in the
plan.
(2) Based on stock option grants made to employees of Sybron International and
its subsidiaries during fiscal 1999 for a total of 812,748 shares of common
stock.
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<PAGE> 75
Stock Option Exercises. The following table sets forth information for
each of the named executive officers concerning Sybron International stock
options exercised during fiscal 1999 and the number and value of Sybron
International stock options outstanding at the end of the fiscal year. No SARs
are outstanding.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(1)
---- ----------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Floyd W. Pickrell,
Jr................... 179,734 3,409,626 238,220 433,500 2,020,766 1,124,412
Stephen J. Tomassi..... -0- -0- 128,034 24,306 2,212,503 146,635
Daniel E. Even......... 73,800 1,478,443 192,786 50,678 3,471,651 286,885
Steven J.
Semmelmayer.......... -0- -0- 289,696 60,712 5,240,666 442,513
Gregory D. Waller...... -0- -0- 35,328 31,848 532,174 236,885
</TABLE>
---------------
(1) Represents unvested options at the end of fiscal 1999.
(2) Based on the September 30, 1999, $27.0938 closing price of the common stock
on the New York Stock Exchange at the end of the fiscal year.
Adjustment or Conversion of Options in the Distribution
The treatment after the Distribution of stock options that are outstanding
prior to the Distribution is described below. This treatment is designed to
preserve, as a general matter, the economic value of each stock option. It is
also designed to provide an incentive for the continuing employees of Sybron
International and its subsidiaries and the continuing employees of SDS and its
subsidiaries to remain employed by their respective companies and to benefit by
their efforts to increase the market value of the stock of that company.
Sybron International intends to adjust the exercise price and the number of
shares subject to options to purchase Sybron International stock held by
continuing directors and employees of Sybron International and its subsidiaries
and certain others (including former employees and any employees of SDS or its
subsidiaries who do not convert their stock options as described below)
(collectively, the "Former Sybron International Employees") as necessary to
reflect the Distribution. The option plans and related option agreements provide
that, if Sybron International's common stock is affected by various events,
including an event like the Distribution, the number of shares subject to
outstanding options and the option price will be adjusted to prevent dilution or
enlargement of rights, all as determined to be appropriate and equitable as
determined by the committee that administers the plans.
Unexercised stock options held by employees of Sybron International and its
subsidiaries and by Former Sybron International Employees will be adjusted to
preserve as closely as possible their respective economic value immediately
prior to the Distribution. Those employees of SDS and its subsidiaries who do
not surrender their options for conversion as described below will have their
Sybron International options adjusted in the same manner as individuals who will
be employees of Sybron International or its subsidiaries, subject to the
termination provisions described below.
The exercise price of each adjusted Sybron International employee stock
option will be determined by multiplying the exercise price prior to the
Distribution by a factor (the "Sybron International Stock Conversion Ratio") the
numerator of which will be the NYSE composite volume weighted average price of
Sybron International common stock trading without SDS for the trading days
during a pricing period to be determined at a future date (the "Per Share
Post-Distribution Sybron International Stock Price") and the denominator of
which will be the NYSE composite volume weighted average price of Sybron
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International common stock trading with SDS for the trading days during the
pricing period (the "Per Share Pre-Distribution Sybron International Stock
Price"). The number of shares of Sybron International common stock subject to
each adjusted option will equal the number of shares subject to the option prior
to the Distribution divided by the Sybron International Stock Conversion Ratio,
rounded down to the nearest whole share. Sybron International will pay the
holder of the adjusted option cash in the amount of the related spread at the
time of adjustment in lieu of any fractional share. All other terms of the
adjusted options will be the same as the terms of the pre-adjustment stock
options. Outstanding options under Sybron International's outside director stock
option plan will be adjusted in the same manner.
Employees of SDS and its subsidiaries who received Sybron International
stock options prior to the Distribution will have the opportunity to surrender
their Sybron International options for conversion into SDS stock options. For
these SDS stock options, the exercise price will equal the exercise price of the
corresponding Sybron International stock option prior to the Distribution,
multiplied by a factor (the "SDS Stock Conversion Ratio") where the numerator is
the NYSE composite volume weighted average price of the SDS common stock for the
trading days during the pricing period (the "Per Share SDS Stock Price") and the
denominator is the Per Share Pre-Distribution Sybron International Stock Price.
The number of shares of SDS common stock subject to each option will equal the
number of shares subject to the corresponding surrendered Sybron International
stock option prior to the Distribution divided by the SDS Stock Conversion
Ratio, rounded down to the nearest whole share. SDS will pay the holder of the
adjusted option cash in the amount of the related spread at the time of
adjustment in lieu of any fractional share. All other terms of these SDS stock
options will be the same as the terms of the Sybron International stock options
from which they were converted. See "-- Compensation Plans -- Principal Terms of
the Long-Term Incentive Plan" below.
Under the terms of the outstanding Sybron International employee stock
options any then unvested options are immediately forfeited when the recipient
ceases to be an employee of Sybron International or its subsidiaries, and any
vested employee stock options expire unless exercised within three months after
the recipient ceases to be an employee of Sybron International and its
subsidiaries as a result of the Distribution (or upon the scheduled expiration
date under the terms of the option, if earlier). Upon the effective date of the
Distribution, the employees of SDS and its subsidiaries will no longer be
employed by Sybron International or its subsidiaries, so any Sybron
International options that they do not surrender for conversion into SDS options
will be subject to these early expiration provisions.
COMPENSATION PLANS
SDS's principal compensation plans for its directors and executive officers
include:
- the Senior Executive Incentive Compensation Plan;
- the 2000 Long-Term Incentive Plan;
- the 2000 Outside Directors' Stock Option Plan;
- the Retirement Security Plan; and
- an unfunded, non-qualified, excess benefits retirement plan.
Each of these plans is summarized below. SDS will also have a 401(k) plan like
Sybron International's.
Principal Terms of the Senior Executive Incentive Compensation Plan
The Sybron Dental Specialties Senior Executive Incentive Compensation Plan
(the "Incentive Plan") is designed to create an incentive for key executives who
the compensation committee of the board of directors has identified as having
the ability to directly influence the financial results of SDS or its
subsidiaries. The pool of individuals eligible to participate in the Incentive
Plan is determined annually by the committee. For fiscal 2001, there are
expected to be approximately 10 eligible participants in the Incentive Plan. The
Incentive Plan is similar to Sybron International's Senior Executive Incentive
Compensation Plan. Information with respect to awards made during fiscal 1999
under the Sybron
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International plan to the named executive officers of SDS is contained in the
Summary Compensation Table above. Because of the differences between the Sybron
International and SDS Incentive Plans, the 1999 awards shown in the table are
not necessarily indicative of the awards that might have resulted under the SDS
Incentive Plan.
An award under the Incentive Plan is calculated by multiplying the
participant's target bonus amount by the applicable success factor. A
participant's target bonus amount is a percentage of the participant's base
salary. The percentage is determined by the participant's salary grade. In no
event may the actual award for any plan participant exceed $2.0 million.
The terms of the Incentive Plan permit the committee to amend the
provisions of the Incentive Plan to further restrict the conditions pursuant to
which awards under the Incentive Plan may be made.
Following is an explanation of the calculation of both the target bonus
amount and the applicable success factor, along with an example of how an award
under the Incentive Plan is calculated.
Target Bonus Amount Calculation. The target bonus amount for a participant
in the Incentive Plan is a percentage of the participant's annual base salary as
of the end of the fiscal year for which the incentive award is payable, which
percentage is based upon salary grade. The target bonus amounts range from 16%
of base salary for a participant at executive salary grade 3 to 55% of base
salary for a participant at executive salary grade 21. For example, an executive
officer with salary grade 13 and a salary of $200,000 would have a target bonus
amount of 39% of the executive's base salary, or $78,000.
Success Factor Calculation. The success factor is calculated by totaling
the percentages by which the actual performance with respect to certain
financial measurement components exceed the goals set forth for such components.
If certain threshold results are not achieved, then the success factor will be
0% and no incentive award will be paid. Certain of the components are subject to
caps regardless of the level of performance.
The financial measurement components of the success factor are as follows:
actual operating income compared to budget (the "Budgeted Operating Income
Component") and growth in operating income over the prior year (the
"Year-Over-Year Growth Component"). The performance threshold for the Budgeted
Operating Income Component is the achievement of at least 90% of the budgeted
amount, at which point this component equals 90%. Performance over 90% and up to
and including 100% of the budgeted amount results in a corresponding increase in
this component. No credit is given for performance over 100% of the budgeted
amount for this component. This limitation means that the portion of the success
factor attributable to this component cannot exceed an aggregate of 100%.
The performance threshold for the Year-Over-Year Growth Component is 6%
growth in operating income over the prior year. No credit for this component is
given until 6% growth is achieved, at which level the amount of this component
is 80%. At 8% growth, this component equals 100%. For each percentage point of
growth beyond 8% there is an increase in this component of 12.5 percentage
points. For example, if growth in operating income over the prior year is 12%,
this component would be 150%.
Earnings growth through acquisitions is encouraged by the Incentive Plan
because earnings from acquisitions are included in operating income. However,
operating income is adjusted to offset the imputed cost of funding the
acquisition and the amortization of intangibles associated with the acquisition.
To further control cash flow, certain penalties are applied through an
adjustment to operating income if capital expenditures or investments in working
capital exceed predetermined levels. If a business' capital expenditures exceed
its depreciation, it will be charged an 8% cost of capital on the excess. If a
business' working capital ratio (working capital / sales) exceeds the average
level of its previous four years' working capital ratios, it will be charged an
8% cost of capital on the product of such excess multiplied by its sales.
Calculation of Incentive Award -- Example. As stated above, an incentive
award is calculated by multiplying a participant's target bonus amount by the
applicable success factor. As an example, assume: (1) an executive officer with
a salary of $200,000, at salary grade 13 (which corresponds to a target bonus
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amount of 39% of base salary); (2) SDS achieves operating income of 105% of the
amount budgeted; and (3) SDS achieves operating income growth of 10% over the
prior year's operating income.
This participant's target bonus amount would be $78,000 (i.e., 39% of
$200,000). The applicable success factor would be calculated as follows:
<TABLE>
<S> <C>
- Budgeted Operating Income Component (105% of budget,
capped at 100%)........................................... 100%
- Year-Over-Year Growth Component (10% growth results in a
125% credit for this component)........................... 125%
---
- Success factor (aggregate of the components).............. 225%
</TABLE>
The incentive award would be equal to $175,500, which is $78,000 (the
target bonus amount) multiplied by 225% (the success factor).
Miscellaneous. Awards under the Incentive Plan are paid in cash as soon as
practicable after the financial results for the relevant fiscal year have been
determined. Participants whose employment with SDS and all of its subsidiaries
is terminated, either by the participant or SDS or one of its subsidiaries,
other than for retirement, disability or death, at any time before the incentive
award payments are made with respect to a fiscal year will not be entitled to
receive any award under the Incentive Plan for that fiscal year (even when their
employment terminates after the end of the fiscal year) unless specifically
approved by the committee. Participants who retire, become disabled or die (or
their beneficiaries or legal representatives, if applicable) during a fiscal
year will receive a prorated incentive award that is calculated by multiplying
the participant's incentive award by a percent equal to the percent of the
fiscal year for which the participant was actively employed.
The Incentive Plan is administered by the committee, no member of which is
eligible for an award thereunder. The committee has the authority to interpret
the provisions of the Incentive Plan, identify eligible key employees to
participate therein, and establish rules and regulations and make all
determinations necessary or advisable for the administration of the plan. In the
event of special circumstances of unusual or significant nature outside the
course of normal business operations, the committee may also adjust previously
approved financial objectives of SDS or its subsidiaries, or the amount of an
award earned under the Incentive Plan, if the committee believes the integrity,
purpose and fairness of the Incentive Plan would be better served. However, any
such adjustment made after the beginning of the period in which awards are
earned will not permit the actual awards earned, either by any participant or in
the aggregate, to be greater than they would have been had the financial
objectives approved prior to such period been operative. The committee may at
any time amend, suspend or terminate the Incentive Plan.
Federal Tax Consequences of Incentive Plan Awards. A participant will
realize income at the time an award is paid to the participant under the
Incentive Plan. SDS will be entitled to a deduction for the amount of the award
at the same time provided that, with respect to the deduction to be taken for
any award paid to an executive officer who is subject to Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), which exceeds, when
combined with other compensation paid to that officer, $1 million, the Incentive
Plan qualifies for such deduction under Section 162(m).
Principal Terms of the Long-Term Incentive Plan
General. Under SDS's 2000 Long-Term Incentive Plan (the "Stock Plan"),
Incentive Stock Options and Nonqualified Stock Options (as such terms are
defined below) may be granted to any full-time, non-union employee of SDS or any
of its subsidiaries, including any employee who is a member of the board of
directors, but excluding any director who is not an employee of SDS or any of
its subsidiaries. There are initially expected to be approximately 140 employees
eligible to participate in the Stock Plan. The number of awards to be made
pursuant to the Stock Plan is subject to the discretion of the compensation
committee of the board of directors.
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The total number of shares of SDS common stock authorized for issuance
under the Stock Plan is 5,000,000. Shares available for an award under the Stock
Plan may be either authorized but unissued or reacquired shares. If any award is
canceled, terminates, expires or lapses for any reason, any shares subject to
such award shall again be available under the plan, subject to such rules and
regulations as may be promulgated by the Committee.
In the event of a stock dividend, stock split, recapitalization or other
similar change affecting SDS common stock, the aggregate number and kind of
shares for which awards may thereafter be granted under the Stock Plan and the
number, kind and exercise price of shares subject to outstanding awards shall be
appropriately adjusted.
The Stock Plan becomes effective on the date of the Distribution and will
remain in effect, subject to the right of the board of directors to terminate
it, until all shares subject to the Stock Plan have been purchased or acquired.
In no event, however, may a grant be made under the Stock Plan on or after the
tenth anniversary of the Distribution.
The Plan is administered by the committee, the members of which must at all
times qualify as "outside directors" within the meaning of Section 162(m) of the
Code.
The committee presently is comprised of Messrs. Siart, Parks and
. The committee has authority to determine the size, the
recipients and the terms and conditions of awards under the Stock Plan, and to
establish rules and regulations for the Stock Plan's administration. With the
approval of the board, the committee may, at any time, terminate, amend or
modify the Stock Plan; provided that such amendment, modification or termination
will require the approval of the shareholders of SDS if such approval is
required by any national securities exchange or system on which SDS shares are
then listed or reported or by a regulatory body having jurisdiction.
Stock Options. Stock options may be granted to employees at any time as
determined by the committee. The committee has discretion in determining the
number of shares subject to any options granted; provided, however, that the
number of options that may be awarded to any employee during any fiscal year is
limited to 1,000,000. Options granted under the Stock Plan may be either
"incentive stock options" under Section 422 of the Code, or options that are not
intended to qualify as incentive stock options ("nonqualified stock options").
The exercise price of an option granted under the Stock Plan is determined
by the committee; but the exercise price may not be less than 100% of the Fair
Market Value (as defined in the Plan) of the underlying common stock on the date
of grant. Options granted under the Stock Plan may be exercisable at such times
and subject to such restrictions and conditions as the committee in each
instance approves, but no option granted under the Stock Plan may be exercisable
later than the tenth anniversary date of its grant. Options may be exercised by
the delivery of written notice of exercise to SDS, setting forth the number of
shares with respect to which the option is to be exercised, accompanied by
payment in full of the exercise price. The exercise price may be paid either (i)
in cash, (ii) with the committee's consent, by tendering previously acquired
shares held for at least six months and having a fair market value at the time
of exercise equal to the full exercise price, or (iii) in any combination of the
foregoing. The committee may also allow cashless exercises as permitted under
the Federal Reserve Board's Regulation T, or by any other means the committee
determines to be consistent with the Stock Plan's purpose. Special provisions
are contained in the Stock Plan covering termination of employment, death or
disability of any employee who has outstanding an option granted under the Stock
Plan, as well as the occurrence of a change in control of SDS. All options are
exercisable only by the optionee during the lifetime of the optionee and options
may not be sold, transferred or assigned, other than by will or by the laws of
descent and distribution. However, the committee has the discretion to waive the
transferability restriction.
Principal Terms of the Outside Directors' Stock Option Plan
The 2000 Outside Directors' Stock Option Plan (the "Directors' Plan") will
be administered by the compensation committee of the board of directors.
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A maximum of 250,000 shares of SDS common stock may be issued pursuant to
the exercise of options granted under the Directors' Plan. Shares subject to and
not issued under an option which expires, terminates or is canceled for any
reason shall again become available for the granting of options. The exercise
price at which shares may be purchased under each option shall be 100% of the
Fair Market Value (as defined in the Directors' Plan) of SDS common stock on the
date the option is granted. In the event of a stock dividend, stock split,
recapitalization or other similar change affecting SDS common stock, the
aggregate number and kind of shares for which options may thereafter be granted
under the Directors' Plan and the number, kind and exercise price of shares
subject to outstanding options shall be appropriately adjusted.
Options granted under the Directors' Plan will be treated as nonqualified
stock options for federal income tax purposes.
The granting of options is automatic under the Directors' Plan. Upon the
first meeting of the board of directors following the annual meeting of
stockholders in 2001, 2002, 2003, 2004 and 2005, each person then serving SDS as
a director who is not a full-time employee of SDS or its subsidiaries shall
automatically be granted an option to purchase 10,000 shares (subject to
adjustment for changes affecting the common stock as described above).
Accordingly, all of the present directors except Mr. Pickrell (who is an active
full-time employee), including Messrs. Yontz, Brown, Siart, Parks and
, then serving will receive an option for 10,000 shares under the
Directors' Plan at the meeting of the board of directors following the 2001
annual meeting. No persons other than directors who are not full-time employees
are eligible to receive options under the Directors' Plan.
If at any time there are not a sufficient number of available shares under
the Directors' Plan to grant each outside director an option to purchase the
number of shares specified, each outside director shall receive an option to
purchase an equal number of the remaining available shares, determined by
dividing the remaining available shares by the number of outside directors.
Each option granted under the Directors' Plan will be evidenced by a stock
option agreement between SDS and the grantee containing the terms and conditions
required by the Directors' Plan and such other terms and conditions, not
inconsistent therewith, as the committee may deem appropriate. Each stock option
granted under the Directors' Plan will be exercisable immediately upon grant.
All rights to exercise an option will terminate upon the earlier of ten years
from the date of grant or two years from the date the grantee ceases to be a
director of SDS.
Each option may be exercised in whole or in part from time to time as
specified in the stock option agreement. The exercise price must be paid in full
at the time of exercise. Such payment may be made either in cash or by
delivering shares of SDS common stock, which the optionee or the optionee's
spouse or both have beneficially owned for at least six months prior to the time
of exercise, or a combination of cash and delivered stock.
Generally, an option granted under the Directors' Plan may not be
transferred except by will or the laws of descent and distribution. However, the
committee has the discretion to grant stock options that are transferable to
family members of the grantee or to trusts or partnerships for such family
members, and may amend outstanding options to provide for such transferability.
Each grantee may designate a beneficiary from time to time who shall be entitled
to exercise any options held by the grantee upon death. If no such designation
has been made, the personal representative of the grantee's estate or the
person(s) to whom the option is transferred by will or the laws of descent and
distribution may exercise the option.
The Directors' Plan becomes effective on the date of the Distribution.
Options may be granted under the Directors' Plan until September 30, 2005. On
that date, the Directors' Plan will expire except as to options then
outstanding, which shall remain in effect until they have been exercised or have
expired. The Directors' Plan may be terminated at any time by the board of
directors except with respect to any options then outstanding.
With the approval of the board of directors, the committee may, at any
time, terminate, amend or modify the Directors' Plan; provided that such
amendment, modification, or termination will require the
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approval of the shareholders of SDS if such approval is required by the Code, by
the insider trading rules of Section 16 of the Securities Exchange Act of 1934,
by any national securities exchange or system on which the SDS common stock is
then listed or reported, or by a regulatory body having jurisdiction with
respect thereto.
Material Federal Income Tax Consequences of Stock Options.
The following is a discussion of the material United States federal income
tax consequences of options granted under the Stock Plan and the Directors'
Plan. The discussion is based on the Internal Revenue Code of 1986, as amended,
Treasury regulations promulgated thereunder and judicial and administrative
interpretations thereof, all as in effect on the date hereof, and is subject to
any changes in these or other laws occurring after such date, possibly with
retroactive effect. The discussion below is for general information only and
does not address the effect of any state, local or foreign tax laws. The
discussion only applies to individuals who are citizens or residents of the
United States other than those individuals who are taxed on a residence basis in
a foreign country. Certain individuals may be subject to special rules not
discussed below.
EACH RECIPIENT OF A GRANT SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES OF THE GRANT.
An employee who is granted an option which is an incentive stock option
that qualifies under Section 422 of the Code will not recognize income at the
time of grant or exercise of such option. No federal income tax deduction will
be allowable to SDS upon the grant or exercise of such incentive stock option.
However, upon the exercise of an incentive stock option, any excess in the fair
market price of the common stock over the option price constitutes a tax
preference item that may have alternative minimum tax consequences for the
employee. When the employee sells the shares more than one year after the date
of transfer of the shares and more than two years after the date of grant of the
incentive stock option, the employee will normally recognize a long-term capital
gain or loss equal to the difference, if any, between the sales price of the
shares and the aggregate option price (provided the employee has remained
employed by SDS or its subsidiary at all times from the grant of the option
until three months before its exercise). In such event, we will not be entitled
to a federal income tax deduction with respect to the exercise of the incentive
stock option or the sale of the shares. If the employee does not hold the shares
(or was not an employee) for the required period, when the employee sells the
shares, the employee will recognize ordinary compensation income and possibly
capital gains or losses in such amounts as are prescribed by the Code and we
will generally be entitled to a federal income tax deduction in the amount of
such ordinary compensation income.
An employee or director who is granted an option which is a nonqualified
stock option will not recognize income at the time of grant of such option. In
general, when the optionee exercises such nonqualified stock option, the
optionee will recognize ordinary compensation income equal to the difference, if
any, between the option price paid and the fair market value, as of the date of
option exercise, of the shares of common stock the optionee receives. The tax
basis of such shares to such optionee will be equal to the option price paid
plus the amount includible in the optionee's gross income, and the optionee's
holding period for such shares will commence on the date of exercise. Subject to
the provisions of the Code, we will generally be entitled to a federal income
tax deduction in respect of a nonqualified stock option in an amount equal to
the ordinary compensation income recognized by the optionee upon the exercise of
the nonqualified stock option.
Principal Terms of Pension Benefit Plans
Retirement Plan. SDS has a Retirement Security Plan (the "Retirement
Plan") for certain U.S. employees who are not covered by a collective bargaining
agreement, including its executive officers. The plan is a "career average" type
plan. The benefit formula directly relates to annual salary, length of service
and Social Security covered compensation. To the extent that pension benefits
exceed the benefit limits and limits on covered compensation imposed by the
Employee Retirement Income Security Act of 1974,
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as amended, SDS plans to make the appropriate payments under the unfunded
pension plan described below as they become due. The total compensation covered
by the Retirement Plan (including unfunded amounts) is the amount shown in the
salary and bonus columns of the Summary Compensation Table.
Annual pension benefits expected to be distributed upon retirement
(normally at age 65) to most executive officers of SDS, including the named
executive officers, are equal to the sum of past and future service benefit
formulas. Past service benefit (for service prior to January 1, 1987) is an
amount equal to the sum of (a) 0.0105 times the average annual pay for the
employee's final three years, up to the Social Security covered compensation for
1987, plus (b) 0.015 times the average annual pay for the employee's final three
years, in excess of the Social Security covered compensation in 1987, which sum
is multiplied by the total number of years of credited service before January 1,
1987. The amount so calculated is reduced by the amount of any benefit the
participant is eligible to receive from a prior pension plan or due to
participation in any prior profit sharing plan. Future service benefit (for
service since January 1, 1987) for credited service not in excess of 35 years is
an amount equal to the sum of all future year annual benefits calculated for
each year as 0.0105 times annual pay up to the Social Security covered
compensation for that year, plus 0.015 times annual pay in excess of the Social
Security covered compensation for that year. Future service benefit for credited
service in excess of 35 years is an amount equal to 0.014 times a participant's
annual salary for such year. SDS may from time to time move the past service
formula to a more current date which would have the effect of increasing the
amount of average compensation upon which benefits are calculated.
The following table illustrates the projected annual pension benefits
payable for life (without provision for survivor pension) from the Retirement
Plan and, where applicable, the Unfunded Plan described below, upon retirement
at age 65 to the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
PROJECTED ASSUMED FULL YEARS OF
ANNUAL RETIREMENT ADDITIONAL SERVICE AS OF
NAME OF INDIVIDUAL BENEFIT AT AGE 65* YEARS OF SERVICE SEPT. 30, 1999
------------------ ------------------ ---------------- --------------
<S> <C> <C> <C>
Floyd W. Pickrell, Jr. .......... $228,769 12 26
Stephen J. Tomassi............... $115,989 19 11
Daniel E. Even................... $110,005 19 20
Steven Semmelmayer............... $128,307 23 7
Greg Waller...................... $ 96,322 16 18
</TABLE>
---------------
* Assumes no salary increases.
Unfunded Pension Plan. SDS also maintains an unfunded, non-qualified
retirement plan providing benefits to employees of SDS in excess of the
limitations set forth under section 415 of the Code (the "Unfunded Plan"). The
individuals named in the Summary Compensation Table and executives as a group
are eligible to participate in the Unfunded Plan.
Under the Unfunded Plan, benefits are paid from a Rabbi Trust sponsored by
SDS. Participants are entitled to a monthly benefit upon their retirement equal
to the actuarial value of the benefit that would be payable to the participant
if the provisions of the Retirement Plan dealing with limits on pensions
pursuant to Code section 415 were inapplicable.
The compensation covered by the Unfunded Plan includes salary, bonus, and
deferred compensation payable to the participant for services rendered. The
compensation in the salary and bonus columns of the Summary Compensation Table,
above, includes each of these elements for services to Sybron International.
Benefits under the Unfunded Plan are computed on a straight-life annuity basis,
and are subject to an offset of benefits payable to participants under the terms
of the Retirement Plan.
Treatment of Stock and Other Assets in the Savings and Thrift Plan
Sybron International maintains a Savings and Thrift Plan that qualifies
under Section 401(k) of the Internal Revenue Code and makes its employer
contributions in the form of Sybron International common
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stock. SDS intends to establish a similar plan in connection with the
Distribution and make its employer contributions in SDS common stock. The
Savings and Thrift Plan accounts of the employees of SDS and its subsidiaries
will be transferred from the Sybron International plan to the new SDS plan in
connection with the Distribution. SDS will thereafter make its employer
contributions in the form of SDS common stock. If you are an employee of SDS or
its subsidiaries and you are a participant in the Sybron International plan
immediately prior to the Distribution, you will automatically become a
participant in SDS's plan at the time of the Distribution.
SDS common stock distributed to the Sybron International Savings and Thrift
Plan and to the SDS Savings and Thrift Plan with respect to the shares of Sybron
International common stock held in those plans will be deposited into respective
separate stock funds as soon as possible after the Distribution. The SDS shares
will be allocated appropriately by participant. Once the allocations to
individual accounts have been made, each participant in the Sybron International
Savings and Thrift Plan or the SDS Savings and Thrift Plan may transfer funds
represented by those shares of the company with which the participant is no
longer associated to any of the other self-directed funds available in the
Sybron or SDS Plans, other than the employer stock fund.
EMPLOYMENT AGREEMENTS
SDS expects to enter into employment agreements with each of the executive
officers named in the Summary Compensation Table above effective as of the
Distribution Date. Mr. Pickrell's employment agreement with SDS would replace
his employment contract with Sybron International. The other named executive
officers do not have employment contracts with Sybron International. Under their
respective employment agreements, these executive officers would agree to serve
in their respective executive officer capacities, and each is to devote his full
time to the performance of his duties. The employment agreements will provide
for initial base salaries which are subject to annual merit increases at the
discretion of the compensation committee. In addition, these executives will be
entitled to benefits customarily accorded executives of SDS and its
subsidiaries, including participation in SDS's Senior Executive Incentive
Compensation Plan.
The employment agreements can be terminated at the election of the
executive upon 45 days' advance written notice to SDS, by SDS, or as a result of
the executive's retirement, disability or death. Upon termination of an
executive's employment by SDS for Cause (as defined in the employment agreement)
or by the executive, the executive is entitled to receive any unpaid
compensation through the date of termination. In the event of the executive's
termination of employment by SDS without Cause, the executive will be entitled
to continue to receive the executive's then current base salary for a period of
twelve months following the termination of employment and an amount equal to the
incentive award that would have been earned by the executive for the fiscal year
in which the executive's employment is terminated; adjusted, however, by the
percentage of the fiscal year in which the executive was actively employed. In
the event of the executive's death or permanent disability, the executive, his
beneficiaries or estate, as the case may be, will be entitled to continue to
receive the executive's then current base salary for a period of twelve months
following the termination of employment as a result of such event.
Each of the employment agreements provides that if an event constituting a
"change in control" (as defined in the employment agreement) shall have
occurred, the executive officer is entitled to receive a severance payment equal
to 2.99 times such officer's "base amount," as defined under Section 280G(b)(3)
of the Internal Revenue Code, upon the termination of his employment with SDS or
its subsidiaries unless such termination is (a) because of death or retirement,
(b) by SDS or any of its subsidiaries for total disability or "cause," or (c) by
such executive officer other than for "good reason ." SDS must require any
successor to assume SDS's obligations pursuant to the employment agreements. If
it fails to do this, the executives will be entitled to the same benefits they
would receive if they terminated the employment agreements on the date of
succession for good reason following a change in control. The employment
agreements also subject the executives to confidentiality obligations, and
contain restrictions on their soliciting clients and employees of SDS for a
period of two years following termination of the employment agreement.
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<PAGE> 84
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding SDS stock is currently held by Sybron International.
The following table shows how much Sybron International common stock each
director, director nominee and executive officer of SDS beneficially owned as of
July 1, 2000, as well as how many shares were owned by each person known to us
to beneficially own more than 5% of the outstanding shares of Sybron
International common stock. Holders of Sybron International common stock,
including directors, director nominees, executive officers and more than 5%
beneficial owners, will receive in the Distribution shares of SDS
common stock for each share of Sybron International common stock they hold as of
the close of business on , 2000 (including shares held in the Sybron
International 401(k) plan for the accounts of the executive officers). Then
outstanding Sybron International stock options will be adjusted to reflect the
Distribution or converted into options to acquire SDS common stock on terms
intended to preserve their economic value at that time.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OF SYBRON
INTERNATIONAL PERCENT
NAME OF BENEFICIAL OWNER STOCK OWNED OF CLASS
------------------------ ------------- --------
<S> <C> <C>
Putnam Investments, Inc..................................... 12,726,792(1) 12.1%
One Post Office Square
Boston, Massachusetts 02109
Kenneth F. Yontz............................................ 2,414,215(2) 2.3%
Floyd W. Pickrell, Jr....................................... 704,013(3) *
Dennis Brown................................................ 950,895(4) *
William E. B. Siart......................................... -0- *
James R. Parks.............................................. -0- *
Director 6 [to be named]....................................
Daniel E. Even.............................................. 45,064(5) *
Steven J. Semmelmayer....................................... 40,264(6) *
Stephen J. Tomassi.......................................... 228,429(7) *
Gregory D. Waller........................................... 7,039(8) *
All directors and executive officers as a group (14
persons).................................................. 4,458,928(9) 4.2%
</TABLE>
---------------
* Less than 1%.
(1) Based on Amendment No. to Schedule 13G under the Exchange Act dated
February 7, 2000, and updated pursuant to telephone conversations between
representatives of Sybron International and representatives of Putnam
Investments, Inc.
(2) Includes options to purchase 1,039,924 shares exercisable currently or
within 60 days of the record date, 55,550 shares with respect to which Mr.
Yontz has shared voting power, and 56,704 shares with respect to which Mr.
Yontz has shared investment power.
(3) Includes options to purchase 382,720 shares exercisable currently or within
60 days of the record date, and 1,289 shares with respect to which Mr.
Pickrell has shared investment power.
(4) Includes options to purchase 950,000 shares exercisable currently or within
60 days of the record date, and 895 shares with respect to which Mr. Brown
has shared investment power.
(5) Includes options to purchase 6,250 shares exercisable currently or within 60
days of the record date, and 1,114 shares with respect to which Mr. Even has
shared investment power.
(6) Includes options to purchase 38,278 shares exercisable currently or within
60 days of the record date, 872 shares with respect to which Mr. Semmelmayer
has shared voting power, and 954 shares with respect to which Mr.
Semmelmayer has shared investment power.
(7) Includes options to purchase 135,439 shares exercisable currently or within
60 days of the record date, and 990 shares with respect to which Mr. Tomassi
has shared investment power.
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<PAGE> 85
(8) Includes options to purchase 5,986 shares exercisable currently or within 60
days of the record date and 1,053 shares with respect to which Mr. Waller
has shared investment power.
(9) Includes options to purchase 2,569,065 shares exercisable currently or
within 60 days of the record date, 59,310 shares with respect to which
voting power is shared, and 9,721 shares with respect to which investment
power is shared.
The beneficial ownership information set forth above is based on
information furnished by the specified persons or known to SDS and is determined
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
required for purposes of this Information Statement. It is not necessarily to be
construed as an admission of beneficial ownership for other purposes.
See "Executive Compensation -- Stock Options -- Adjustment or Conversion
of Options in the Distribution" for more information regarding the treatment of
outstanding Sybron International stock options in the Distribution.
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<PAGE> 86
DESCRIPTION OF SDS CAPITAL STOCK
The following is a summary description of the capital stock of SDS and
material terms and provisions affecting the rights of the SDS common stock.
Because this is a summary, it may not contain all of the information that is
important to you. It is subject to the applicable provisions of Delaware law and
of our certificate of incorporation and bylaws. For more complete information,
you should read the forms of the restated certificate of incorporation and
bylaws of SDS that are filed as exhibits to the registration statement of which
this Information Statement is a part.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of SDS will consist of 250,000,000 shares of
common stock, par value $.01 per share, and 20,000,000 shares of preferred
stock, par value $.01 per share. Following the Distribution, we will have
approximately shares of common stock outstanding, none of which will
be owned by Sybron International. There will be no preferred stock outstanding,
but a series of preferred stock will be designated and reserved for issuance in
connection with the stockholder rights plan described under "Preferred Stock
Purchase Rights" below. All shares of SDS common stock issued in the
Distribution will be validly issued, fully paid and nonassessable.
COMMON STOCK
Voting Rights. Each holder of common stock is entitled to one vote for
each share held on all matters to be voted upon by stockholders. Holders of
shares of common stock are not entitled to cumulate their votes in the election
of directors. Directors are elected by a plurality of the votes cast. Generally,
unless a different vote is required by the certificate of incorporation, the
bylaws or Delaware law, all matters to be voted on by stockholders must be
approved by a majority of the votes entitled to be cast by all shares of common
stock present in person or represented by proxy, subject to any voting rights
granted to holders of then outstanding preferred stock. Except as otherwise
provided by law, and subject to any voting rights granted to holders of any
outstanding preferred stock, amendments to SDS's certificate of incorporation
must be approved by the affirmative vote of a majority of the outstanding shares
of common stock, except that amendments of certain provisions of the certificate
of incorporation and any amendments to the bylaws by the stockholders require a
two-thirds vote, as described below.
Dividends. Holders of common stock will share ratably in any dividend
declared by the board of directors with respect to the common stock, subject to
any preferential rights of any outstanding preferred stock.
Liquidation and Dissolution. If SDS is liquidated or dissolved, the
holders of the common stock will be entitled to share in the assets of SDS
available for distribution to stockholders in proportion to the amount of common
stock they own. The amount available for common stockholders is calculated after
payment of liabilities. Holders of any preferred stock will receive their
preferential share of the assets of SDS before the holders of the common stock
receive any assets.
Other Rights. Holders of the common stock have no right to:
- convert the stock into any other security;
- have the stock redeemed; or
- purchase additional stock or maintain their proportionate ownership
interest.
Transfer Agent and Registrar. EquiServe Trust Company, N.A., is the
transfer agent and registrar for the common stock.
PREFERRED STOCK
Our board of directors is authorized to issue preferred stock from time to
time in one or more classes or series and with such voting powers, if any,
designations and preferences for each class or series as are
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<PAGE> 87
stated in the resolutions providing for the designation and issuance of each
class or series adopted by the board. Our certificate of incorporation
authorizes the board of directors to determine, among other things, the voting
(if any), dividend, redemption, conversion and liquidation powers, rights and
preferences and the limitations thereon applicable to each class or series. The
board of directors, without stockholder approval, may issue preferred stock with
voting and other rights that could adversely affect the voting power and other
rights of the holders of the common stock. The ability of the board of directors
to issue preferred stock without stockholder approval could also have the effect
of delaying, deferring or preventing a change in control of SDS or the removal
of existing management. SDS has no present plans to issue any shares of
preferred stock, but will designate and reserve for issuance an appropriate
number of shares of Series A preferred stock in connection with the stockholder
rights plan described below.
PREFERRED STOCK PURCHASE RIGHTS
Under Delaware law, a corporation may create and issue rights entitling the
holders of such rights to purchase from the corporation shares of its capital
stock of any class or classes, unless prohibited by its certificate of
incorporation. The terms of these shares must be stated in the certificate of
incorporation or in a resolution adopted by the board of directors.
The Rights. Prior to the Distribution, SDS expects that its board of
directors will adopt a rights agreement between SDS and , as rights
agent. If the rights agreement is adopted, the board will cause SDS to issue one
preferred stock purchase right with each share of SDS common stock issued in the
Distribution. Each right will entitle the registered holder to purchase from SDS
one one-hundredth of a share of Series A preferred stock for $ , but
this amount may be adjusted in some circumstances. The terms of the rights are
set forth in the rights agreement.
As with most stockholder rights agreements, the terms of our rights
agreement are complex and not easily summarized, particularly as they relate to
the acquisition of our common stock and to exercisability of the rights. This
summary may not contain all of the information that is important to you.
Accordingly, if you want more complete information, you should read the form of
rights agreement that is filed as an exhibit to the registration statement of
which this Information Statement is a part.
Initially, the rights will be attached to certificates representing SDS
common stock issued in the Distribution and shares issued after the
Distribution, and no separate certificates representing the rights will be
distributed. The rights will separate from the common stock and be represented
by separate certificates approximately 10 business days after someone acquires
or commences a tender offer for [15%] or more of the outstanding common stock.
After the rights separate from the common stock, certificates representing
the rights will be mailed to record holders of the common stock. Once
distributed, the rights certificates alone will represent the rights.
All shares of common stock issued prior to the date the rights separate
from the common stock will be issued with the rights attached. The rights are
not exercisable until the date the rights separate from the common stock. The
rights will expire on , 2010, unless earlier redeemed or exchanged
by SDS.
The Series A Preferred Stock. Because of the nature of the dividend,
liquidation and voting rights of the Series A preferred stock, the value of one
one-hundredth interest in a share of Series A preferred stock purchasable upon
exercise of each right should approximate the value of one share of SDS common
stock. Each preferred share will be entitled to a minimum preferential quarterly
dividend payment of $1 per share and an aggregate dividend of 100 times the
dividend declared per share of SDS common stock. If there is a liquidation of
SDS, the holders of the preferred shares will be entitled to a minimum
preferential liquidation payment of $100 per share. Each preferred share will
have 100 votes and will vote together with the SDS common stock, except as
otherwise provided in the rights agreement or by law. If there is any merger,
consolidation or other transaction in which shares of SDS common stock are
exchanged, each preferred share will be entitled to receive 100 times the amount
received per share of SDS common stock. These rights are protected by customary
anti-dilution provisions.
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<PAGE> 88
Triggering Events. If an acquiror obtains or has the right to obtain [15%]
or more of the outstanding shares of SDS common stock, except in connection with
an offer which our board of directors has determined to be at a price that is
fair and not inadequate and otherwise in the best interests of SDS and its
stockholders, then each right will entitle the holder to purchase a number of
shares of SDS common stock with a then current market value of $ for
$ , unless this amount is adjusted (in other words, having a value
equal to two times the exercise price of the right).
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the exercise
price of the right if an acquiror obtains [15%] or more of the outstanding SDS
common stock, and any of the following occurs:
- SDS merges into another entity;
- an acquiring entity merges into SDS; or
- SDS sells more than 50% of its assets or earning power.
Under our rights agreement, any rights that are or were owned by an
acquiror of more than [15%] of our outstanding common stock will be null and
void.
After an acquiror obtains [15%] or more, but less than 50%, of our
outstanding common stock, our board of directors may, at its option, exchange
all or part of the then outstanding and exercisable rights for common shares or
preferred shares. If our board exercises this option, the exchange ratio is one
common share or one one-hundredth of a preferred share per right, adjusted to
reflect any stock split, stock dividend or similar transaction.
Redemption Provisions. Our board of directors, may at its option, redeem
all of the outstanding rights prior to 10 business days following the time that
an acquiror obtains [15%] or more of our outstanding common stock. The
redemption price is $.01 per right, but this amount may be adjusted under some
circumstances. The right to exercise the rights will terminate when our board of
directors orders the redemption of the rights, and then the only right of the
holders of the rights will be to receive the redemption price.
Other Matters. Holders of rights will have no rights as stockholders of
SDS, including the right to vote or receive dividends, simply by virtue of
holding the rights.
The rights agreement may be amended by the board of directors without the
approval of the holders of the rights prior to the date the rights separate from
the common stock. However, after that date, the rights agreement may not be
amended in any manner which would adversely affect the interests of the holders
of the rights, excluding the interest of any acquiror. In addition, no amendment
may be made at a time when the rights are not redeemable.
The rights may have anti-takeover effects. The rights may cause substantial
dilution to a person or group that attempts to acquire SDS. The rights, however,
should not affect any potential acquiror willing to make an offer at a price
that is fair and not inadequate and otherwise in the best interests of SDS and
its stockholders. The rights should not interfere with any merger or other
business combination approved by our board since our board may, at its option,
at any time until 10 business days following the date a stockholder acquires
[15%] or more of our common stock, redeem all the rights. In addition, the
rights should not interfere with a proxy contest.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS THAT MAY HAVE ANTI-TAKEOVER
EFFECTS
Our restated certificate of incorporation (or charter) and bylaws contain
provisions that could make it more difficult to acquire SDS by means of a tender
offer, proxy contest or otherwise. The description set forth below is intended
as a summary only. For complete information you should read the forms of the
restated certificate of incorporation and the bylaws that are filed as exhibits
to the registration statement of which this Information Statement is a part.
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<PAGE> 89
Classified Board of Directors; Number of Directors. Our restated
certificate of incorporation divides the board into three classes. Each class is
to consist as nearly as possible of one-third of the directors. Each director
serves for a term of three years and until his or her successor is elected and
qualified. Under the restated certificate of incorporation, the number of
directors constituting the entire board will be fixed from time to time by the
board of directors, but the number cannot be less than six or more than nine
(plus such number of directors, if any, as may be elected pursuant to the terms
of any preferred stock that may be outstanding).
Removal of Directors by Stockholders; Filling Vacancies. Delaware law
provides that members of a classified board of directors may only be removed for
cause, by a vote of the holders of a majority of the outstanding shares entitled
to vote at an election of directors. The board of directors, acting by a
majority vote of the directors then in office, may fill any newly created
directorships or vacancies on the board of directors.
No Stockholder Action by Written Consent; Special Meetings. Our restated
certificate of incorporation provides that stockholders of SDS may not act by
written consent and may only act at duly called meetings of stockholders. Our
restated certificate of incorporation and bylaws provide that special meetings
of stockholders may be called only by a majority of the board of directors or by
the chairman of the board of directors.
Amendment of Bylaws. Our restated certificate of incorporation provides
that the board of directors is authorized to amend our bylaws, subject to the
right of the stockholders to amend them, but requires the affirmative vote of
the holders of at least two-thirds of the outstanding shares of common stock for
stockholders to amend the bylaws.
Stockholder Vote Required to Amend Certain Provisions of the Certificate of
Incorporation. SDS's restated certificate of incorporation provides that the
affirmative vote of at least two-thirds of the outstanding shares of common
stock is required to amend the provisions of the certificate of incorporation
referred to above relating to:
- the number and classification of directors;
- the prohibition of stockholder action without a meeting and the call of
special meetings; and
- the amendment of the bylaws; and
the provision containing these super-majority voting requirements.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. Our bylaws establish an advance notice procedure with regard to
business proposed to be submitted by a stockholder at any annual or special
meeting of stockholders of SDS, including the nomination of candidates for
election as directors. The procedure provides that a notice of proposed
stockholder business must be timely given in writing to the corporate secretary
of SDS prior to the meeting. To be timely, notice relating to an annual meeting
must be received at the principal executive offices of SDS not less than 60 days
nor more than 90 days before the first anniversary of the prior year's annual
meeting (or by , 20 in connection with the 2001 annual meeting).
Notice to SDS from a stockholder who proposes to nominate a person at a
meeting for election as a director must contain all information relating to the
person that is required to be disclosed in solicitations of proxies for election
of directors, or as otherwise required, under the SEC's proxy rules, and must
include the person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected.
The chairman of a meeting of stockholders may determine that a person is
not nominated in accordance with the nomination procedure, in which case the
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business was not properly brought before the
meeting in accordance with the bylaw procedures, that business will not be
conducted at the meeting. Nothing in the nomination procedure or the business
procedure will preclude discussion by any stockholder
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<PAGE> 90
of any nomination or business properly made or brought before the annual or any
other meeting in accordance with the applicable procedures.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
SDS is a Delaware corporation subject to Section 203 of the Delaware
General Corporation Law. Section 203 provides that, subject to specified
exceptions, the corporation shall not engage in any "business combination" (as
defined in Section 203) with any "interested stockholder" for a three-year
period following the time that the stockholder becomes an interested stockholder
unless:
- prior to that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding some shares); or
- at or subsequent to that time, the business combination is approved by
the board of directors of the corporation and by the affirmative vote of
at least 66 2/3% of the outstanding stock which is not owned by the
interested stockholder.
Except as specified in Section 203, an "interested stockholder" is
generally defined as:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation, at any time within the three-year period
immediately prior to the relevant date; and
- the affiliates and associates of any such person.
Under some circumstances, Section 203 makes it more difficult for a person
who would be an interested stockholder to effect various business combinations
with a corporation for a three-year period.
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LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATIONS ON LIABILITY OF DIRECTORS
Our restated certificate of incorporation provides that no director of SDS
shall be personally liable to SDS or any of its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent that
exemption from liability or limitation of liability is not permitted under the
Delaware General Corporation Law, as now in effect or as amended in the future.
As presently in effect, the Delaware General Corporation Law does not
eliminate or limit the liability of any director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends, unlawful stock purchases or
redemptions; or
- for any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law is amended in the future to
authorize the further elimination or limitation of director liability, the
liability of directors will be limited or eliminated in accordance with those
changes. Any repeal or modification of the director liability provisions of our
charter will not have any effect on a director's liability with respect to acts
or omissions occurring prior to the repeal or modification.
INDEMNIFICATION AND INSURANCE
Delaware Law. SDS is incorporated under the laws of the State of Delaware.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any person who was, is or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation), by reason of the fact that the person
is or was an officer, director, employee or agent of such corporation, or is or
was serving at the request or such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding, provided the person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his or her conduct was
illegal.
A Delaware corporation may indemnify any person who was, is or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation by reason of the fact that the person
was a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit, provided the
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation.
To the extent that a present or former director or officer has been
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him or her against the expenses which the
officer or director has actually and reasonably incurred.
Section 145 also authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any
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<PAGE> 92
liability asserted against the person and incurred by the person in any such
capacity, arising out of his or her status as such, whether or not the
corporation would otherwise have the power to indemnify him or her under Section
145.
Certificate of Incorporation. In our restated certificate of incorporation,
we have agreed to indemnify our directors and officers to the fullest extent
authorized or permitted by the Delaware General Corporation Law, as now in
effect or as in effect at a future date. Any repeal or modification of the
director and officer indemnification provisions of our charter will not have any
effect on directors' or officers' rights to indemnification with respect to acts
or omissions occurring prior to the repeal or modification.
Insurance. The directors and officers of SDS will be covered by directors'
and officers' insurance policies maintained by SDS.
INDEPENDENT PUBLIC ACCOUNTANTS
SDS anticipates that KPMG LLP will be its independent auditors following
the Distribution. KPMG has audited the financial statements of Sybron
International since 1987.
2001 ANNUAL MEETING AND STOCKHOLDER PROPOSALS
SDS's bylaws provide that stockholders desiring to nominate candidates for
directors or to present a proposal or bring other business before an SDS
stockholders' meeting must give advance written notice not less than 60 nor more
than 90 days before the first anniversary of the prior year's annual meeting (or
by , 20 , in connection with the 2001 annual meeting). In each case,
the notice must be given to the corporate secretary of SDS at SDS's principal
executive offices, 1717 West Collins Avenue, Orange, California 92867. The 2001
annual meeting of SDS stockholders is expected to be held on , 2001.
To be considered timely, notice of any stockholder nomination or proposal must
be received no earlier than , 20 and no later than , 20 .
To be considered for inclusion in SDS's proxy statement and form of proxy for
that meeting, any proposal must also comply in all respects with the rules and
regulations of the SEC.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form 10 with the SEC with respect
to the shares of our common stock (and associated preferred stock purchase
rights) that Sybron International shareholders will receive in the Distribution.
This Information Statement is a part of that registration statement and, as
allowed by SEC rules, does not include all of the information you can find in
the registration statement or the exhibits to the registration statement. For
additional information relating to us and the Distribution, reference is made to
the registration statement and the exhibits to the registration statement.
Statements contained in this Information Statement as to the contents of any
contract or document referred to are not necessarily complete and in each
instance, if the contract or document is filed as an exhibit to the registration
statement, reference is made to the copy of the contract or other document filed
as an exhibit to the registration statement. Each statement is qualified in all
respects by the relevant reference.
After the Distribution, we will file annual, quarterly and special reports,
proxy statements and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. The registration statement
is, and any of these future filings with the SEC will be, available to the
public over the Internet at the SEC's website at You may read and copy any filed
document at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room.
We maintain an Internet site at http://www.sybrondental.com. Our website
and the information contained on that site, or connected to that site, is not
incorporated into this Information Statement or the registration statement.
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INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of September 30, 1998 and 1999
and March 31, 2000 (unaudited)............................ F-3
Combined Statements of Income for the years ended September
30, 1997, 1998 and 1999 and the six months ended March 31,
1999 and 2000 (unaudited)................................. F-4
Combined Statements of Stockholder's Equity for the years
ended September 30, 1997, 1998 and 1999 and the six months
ended March 31, 2000 (unaudited).......................... F-5
Combined Statements of Cash Flows for the years ended
September 30, 1997, 1998 and 1999 and the six months ended
March 31, 1999 and 2000 (unaudited)....................... F-6
Notes to Combined Financial Statements...................... F-7
</TABLE>
F-1
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sybron International Corporation:
We have audited the accompanying combined balance sheets of Sybron Dental
Specialties, Inc. and affiliates as of September 30, 1998 and 1999, and the
related combined statements of income, stockholder's equity, and cash flows for
each of the years in the three-year period ended September 30, 1999. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 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 provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Sybron Dental
Specialties, Inc. and affiliates as of September 30, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
July 20, 2000
F-2
<PAGE> 95
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999 AND MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1998 1999 2000
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,282 $ 6,090 $ 3,375
Accounts receivable (less allowance for doubtful
receivables of $3,614, $2,578 and $2,457 in 1998, 1999
and 2000, respectively) (note 2)....................... 83,069 84,210 74,892
Inventories (note 3)...................................... 74,476 79,574 83,741
Deferred income taxes (note 4)............................ 7,218 5,014 4,693
Prepaid expenses and other current assets................. 8,401 6,336 9,189
-------- -------- --------
Total current assets................................. 182,446 181,224 175,890
-------- -------- --------
Advances and loans to Sybron International (note 13)........ 23,193 53,903 115,178
Property, plant and equipment, net (notes 5 and 7).......... 54,421 57,488 53,279
Intangible assets (note 6).................................. 198,607 207,606 222,405
Deferred income taxes (note 4).............................. 3,035 3,494 3,410
Other assets................................................ 6,197 6,263 6,408
-------- -------- --------
Total assets......................................... $467,899 $509,978 $576,570
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,855 $ 13,122 $ 8,673
Current portion of long-term debt (notes 7 and 8)......... 15,520 1,571 752
Income taxes payable (note 4)............................. 15,229 5,118 8,872
Accrued payroll and employee benefits (note 10)........... 14,284 13,412 12,035
Restructuring reserve (note 11)........................... 5,037 1,345 939
Deferred income taxes (note 4)............................ 1,988 2,534 2,359
Other current liabilities (notes 11 and 13)............... 11,238 13,445 6,701
-------- -------- --------
Total current liabilities............................ 75,151 50,547 40,331
-------- -------- --------
Long-term debt (notes 7 and 8).............................. 248,175 283,447 320,040
Deferred income taxes (note 4).............................. 11,326 14,639 14,588
Other liabilities (note 10)................................. 12,127 11,086 9,419
Commitments and contingent liabilities (notes 8, 10 and
12).......................................................
Stockholder's equity........................................ 121,120 150,259 192,192
-------- -------- --------
Total liabilities and stockholder's equity........... $467,899 $509,978 $576,570
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE> 96
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999 AND
THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
-------------------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $358,697 $366,886 $388,176 $188,529 $201,679
Cost of sales:
Cost of product sold.................... 151,740 150,848 162,448 78,941 83,816
Restructuring charge (note 11).......... -- 4,629 -- -- --
Depreciation of purchase accounting
adjustments.......................... 1,102 108 108 54 54
-------- -------- -------- -------- --------
Total cost of sales....................... 152,842 155,585 162,556 78,995 83,870
-------- -------- -------- -------- --------
Gross profit.............................. 205,855 211,301 225,620 109,534 117,809
-------- -------- -------- -------- --------
Selling, general and administrative
expenses................................ 115,536 116,719 118,193 58,606 59,799
Sybron International charges (note 13).... 3,617 3,620 4,228 2,053 2,436
Merger, transaction and integration
expenses (note 11)...................... -- 10,507 2,569 2,691 --
Restructuring charge (note 11)............ -- 9,188 (1,177) -- --
Depreciation and amortization of purchase
accounting adjustments.................. 6,648 6,731 7,501 3,440 4,168
-------- -------- -------- -------- --------
Total selling, general and administrative
expenses................................ 125,801 146,765 131,314 66,790 66,403
-------- -------- -------- -------- --------
Operating income.......................... 80,054 64,536 94,306 42,744 51,406
-------- -------- -------- -------- --------
Other income (expense):
Interest expense (notes 7 and 10)....... (19,392) (20,195) (17,074) (10,165) (12,287)
Interest income - Sybron International
(note 13)............................ 1,642 1,498 1,151 710 406
Amortization of deferred financing fees
(note 7)............................. (101) (101) (154) (64) (138)
Other, net.............................. 249 444 (85) (659) 203
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item...................... 62,452 46,182 78,144 32,566 39,590
Income taxes (note 4)..................... 23,555 17,151 28,370 12,169 14,930
Income before extraordinary item.......... 38,897 29,031 49,774 20,397 24,660
Extraordinary item:
Write-off of unamortized deferred
financing fees (net of income tax
benefit of $165) (note 7)............ (269) -- -- -- --
-------- -------- -------- -------- --------
Net income................................ $ 38,628 $ 29,031 $ 49,774 $ 20,397 $ 24,660
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE> 97
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998
AND 1999 AND THE SIX MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
CAPITAL RETAINED INCOME STOCKHOLDER'S
ACCOUNTS EARNINGS (LOSS) EQUITY
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996................... $123,754 $34,911 $ 1,930 $160,595
Comprehensive income:
Net income.................................... -- 38,628 -- 38,628
Translation adjustment........................ -- -- (4,353) (4,353)
Minimum pension liability adjustment.......... -- -- (1,542) (1,542)
-------- ------- ------- --------
Total comprehensive income...................... -- 38,628 (5,895) 32,733
Capital contribution from Sybron
International................................. 12,520 -- -- 12,520
Dividends paid to Sybron International.......... (37,853) (67,905) -- (105,758)
Dividends paid by "A" Company prior to the
merger........................................ -- (845) -- (845)
Dividends paid by Pinnacle Products of
Wisconsin, Inc. prior to the merger........... -- (4,789) -- (4,789)
-------- ------- ------- --------
Balance at September 30, 1997................... 98,421 -- (3,965) 94,456
Comprehensive income:
Net income.................................... -- 29,031 -- 29,031
Translation adjustment........................ -- -- 469 469
Minimum pension liability adjustment.......... -- -- (139) (139)
-------- ------- ------- --------
Total comprehensive income...................... -- 29,031 330 29,361
Capital contribution from Sybron
International................................. 49,268 -- -- 49,268
Dividends paid to Sybron International.......... (22,934) (23,870) -- (46,804)
Dividends paid by "A" Company prior to the
merger........................................ -- (479) -- (479)
Dividends paid by Pinnacle Products of
Wisconsin, Inc. prior to the merger........... -- (4,682) -- (4,682)
-------- ------- ------- --------
Balance at September 30, 1998................... 124,755 -- (3,635) 121,120
Comprehensive income:
Net income.................................... -- 49,774 -- 49,774
Translation adjustment........................ -- -- (2,615) (2,615)
Minimum pension liability adjustment.......... -- -- 1,681 1,681
-------- ------- ------- --------
Total comprehensive income...................... -- 49,774 (934) 48,840
Capital contribution from Sybron
International................................. 16,210 -- -- 16,210
Dividends paid to Sybron International.......... -- (35,911) -- (35,911)
-------- ------- ------- --------
Balance at September 30, 1999................... 140,965 13,863 (4,569) 150,259
Comprehensive income:
Net income (unaudited)........................ -- 24,660 -- 24,660
Translation adjustment (unaudited)............ -- -- (3,125) (3,125)
-------- ------- ------- --------
Total comprehensive income (unaudited).......... -- 24,660 (3,125) 21,535
Capital contribution from Sybron International
(unaudited)................................... 20,398 -- -- 20,398
-------- ------- ------- --------
Balance at March 31, 2000 (unaudited)........... $161,363 $38,523 $(7,694) $192,192
======== ======= ======= ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE> 98
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999 AND
THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 38,628 $ 29,031 $ 49,774 $ 20,397 $ 24,660
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 9,378 9,760 9,804 6,178 5,127
Amortization........................................... 6,798 6,843 7,662 3,497 4,293
Loss (gain) on sales of property, plant and
equipment............................................ 214 987 (19) 102 (68)
Provision for losses on doubtful receivables........... 798 1,878 819 456 350
Inventory provisions................................... 606 (40) 4,427 673 1,684
Deferred income taxes.................................. (1,715) (1,723) 5,487 5,041 179
Extraordinary item..................................... 269 -- -- -- --
Changes in assets and liabilities, net of effects of
businesses acquired:
(Increase) decrease in accounts receivable........... (11,972) (5,516) (59) 4,840 9,438
(Increase) decrease in inventories................... (4,570) 1,537 (1,950) (309) (5,168)
(Increase) decrease in prepaid expenses and other
current assets..................................... (7,515) 2,363 2,020 (2,029) (2,856)
Increase (decrease) in accounts payable.............. 91 2,559 1,266 (2,376) (4,447)
Increase (decrease) in income taxes payable.......... 9,817 7,717 (9,378) (3,756) 3,771
Increase (decrease) in other current liabilities..... (2,984) 7,065 (2,125) (2,913) (8,028)
Increase (decrease) in accrued payroll and employee
benefits........................................... 139 1,628 (664) (6,493) (1,321)
Increase (decrease) in restructuring reserve......... -- 5,100 (3,800) (1,644) (400)
Net change in other assets and liabilities........... (2,465) (2,608) (9,468) (5,940) (859)
--------- --------- --------- -------- --------
Net cash provided by operating activities............ 35,517 66,581 53,796 15,724 26,355
Cash flows from investing activities:
Capital expenditures..................................... (12,582) (9,581) (13,020) (2,232) (4,227)
Proceeds from sales of property, plant and equipment..... 258 -- 214 135 455
Net payments for businesses acquired..................... (12,673) (50,248) (15,538) (2,867) (17,907)
--------- --------- --------- -------- --------
Net cash used in investing activities................ (24,997) (59,829) (28,344) (4,964) (21,679)
Cash flows from financing activities:
Proceeds from revolving credit facility.................. 154,560 194,640 234,040 106,120 128,000
Principal payments on revolving credit facility.......... (98,200) (162,640) (299,320) (78,200) (89,000)
Proceeds from long-term debt............................. 20,876 -- 120,000 (34,905) --
Principal payments on long-term debt..................... (14,396) (49,572) (33,028) -- (3,227)
Dividends paid to Sybron International................... (105,758) (46,804) (35,911) -- --
Capital contributions from Sybron International.......... 12,520 49,268 16,210 2,867 20,398
Net change in advances and loans to Sybron
International.......................................... 22,960 24,427 (30,710) (10,291) (61,275)
Dividends paid by pooled companies....................... (5,634) (5,161) -- -- --
Other.................................................... 1,967 -- (369) -- --
--------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities......................................... (11,105) 4,158 (29,088) (14,409) (5,104)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (1,841) (3,877) 444 (710) (2,287)
Net increase (decrease) in cash and cash equivalents....... (2,426) 7,033 (3,192) (4,359) (2,715)
Cash and cash equivalents at beginning of period........... 4,675 2,249 9,282 9,282 6,090
--------- --------- --------- -------- --------
Cash and cash equivalents at end of period................. $ 2,249 $ 9,282 $ 6,090 $ 4,923 $ 3,375
========= ========= ========= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid to unaffiliated third parties.............. $ 21,240 $ 21,449 $ 16,957 $ 10,502 $ 11,505
========= ========= ========= ======== ========
Interest paid to Sybron International.................... $ 1,642 $ 1,498 $ 1,151 $ 710 $ 406
========= ========= ========= ======== ========
Income taxes............................................. $ 28,914 $ 14,783 $ 32,906 $ 9,834 $ 12,990
========= ========= ========= ======== ========
Capital lease obligations incurred......................... $ 671 $ 265 $ -- $ -- $ --
========= ========= ========= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE> 99
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
AND THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On April 24, 2000, Sybron International Corporation announced its intention
to spin off its dental group as a separate publicly traded company by way of a
pro rata distribution of Sybron Dental Specialties, Inc. stock to Sybron
International Corporation shareholders. Subsequently, it was determined to
effect the spin-off by way of a pro rata distribution of the stock of a newly
organized corporation which owns all of the stock of Sybron Dental Specialties,
Inc. In connection with the spin-off, the existing Sybron Dental Specialties,
Inc. will be renamed Sybron Dental Management, Inc. and the spun-off company
will be named Sybron Dental Specialties, Inc. These combined financial
statements relate to the existing Sybron Dental Specialties, Inc. and its
affiliates.
The spin-off is subject to a number of conditions, including (i) receipt by
Sybron International Corporation of a favorable ruling from the Internal Revenue
Service concerning the tax-free nature of the distribution, (ii) effectiveness
of a registration statement registering the stock of SDS (as defined below)
under the Securities Exchange Act of 1934, including an information statement
that would be sent to Sybron International Corporation's shareholders in
connection with the distribution, (iii) appropriate stock market conditions for
the distribution, and (iv) approval by Sybron International Corporation's Board
of Directors of the final terms of the distribution, including, without
limitation, the formal declaration of a dividend to Sybron International
Corporation's shareholders and other specific actions necessary for the
distribution.
The affiliates of Sybron Dental Specialties, Inc. are leading manufacturers
of value-added products for the Professional Dental, Orthodontics, and Infection
Control markets in the United States and abroad. (see note 15)
(a) Principles of Combination and Fiscal Year End
The combined financial statements reflect the operations of Sybron Dental
Specialties, Inc., which is comprised of wholly owned subsidiaries of Sybron
International Corporation ("Parent"). Sybron Dental Specialties, Inc. consists
of Sybron Dental Specialties, Inc., its wholly owned subsidiaries, and certain
other affiliated companies owned by Parent but directly managed by Sybron Dental
Specialties, Inc. The term "Company" or "SDS" as used herein refers to the
operations of Sybron Dental Specialties, Inc. and its affiliates, unless the
context otherwise requires. The term "Sybron International" as used herein
refers to Sybron International Corporation and its subsidiaries, including SDS,
unless the context otherwise requires. All significant intercompany balances and
transactions have been eliminated. The Company's fiscal year ends on September
30. The fiscal years ended September 30, 1997, 1998 and 1999 are hereinafter
referred to as "1997", "1998" and "1999", respectively. In October 1998,
Pinnacle Products of Wisconsin, Inc. ("Pinnacle") merged with a subsidiary of
Sybron International formed for that purpose (the "Pinnacle Merger"). The
Pinnacle Merger was accounted for as a pooling of interests. All financial
statements and accompanying notes have been restated to reflect the Pinnacle
Merger.
(b) Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
investments in debt obligations with original maturities of three months or
less.
F-7
<PAGE> 100
(c) Inventories
Inventories are stated at the lower of cost or market. Certain domestic
inventories of approximately $43,723 and $63,543 at September 30, 1998 and 1999,
respectively, are valued on the last-in, first-out (LIFO) method. The remaining
inventories are valued on the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided over the estimated useful lives of
depreciable assets (5 to 45 years for land improvements, buildings and building
improvements, and 3 to 12 years for machinery and equipment) using the straight-
line method. The Company assesses the recoverability of assets by comparing the
carrying amount of an asset to future net cash flows expected to be generated by
that asset. If such assets are considered impaired, the impairment to be
recognized is measured by the amount by which the carrying amounts of the assets
exceed the fair market value of the assets.
(e) Intangible Assets
Intangible assets are recorded at cost and are amortized, using the
straight-line method, over their estimated useful lives. Excess costs over net
asset values acquired (goodwill) are amortized over 10 to 40 years, proprietary
technology, trademarks, and other intangibles are amortized over 7 to 20, 9
years, and 3 to 17 years, respectively. The Company assesses the recoverability
of its goodwill by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected undiscounted future
cash flows of the acquired businesses. If projected future cash flows indicate
that unamortized goodwill will not be recovered, an adjustment would be made to
reduce the net goodwill to an amount equal to projected future cash flows
discounted at the Company's incremental borrowing rate. Cash flow projections
are based on trends of historical performance and management's estimate of
future performance, giving consideration to existing and anticipated competitive
and economic conditions. No adjustments to goodwill were made in 1997, 1998 and
1999.
(f) Revenue Recognition
The Company recognizes revenue upon shipment of products. A large portion
of the Company's sales of Professional Dental products is sold through
distributors. Revenues associated with sales to distributors are also recognized
upon shipment of products when all risks and rewards of ownership of the product
are passed. The Company is not obligated to allow for returns.
(g) Income Taxes
The Company is included in the consolidated income tax return filed by its
Parent. U.S. income tax payments, refunds, credits, provisions and deferred
income tax components have been allocated to SDS in accordance with Parent's tax
allocation policy. Such policy allocates income tax components included in the
consolidated income tax return of Parent to SDS to the extent such components
were generated by or related to SDS.
Income taxes are accounted for under the asset and liability method wherein
deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-8
<PAGE> 101
(h) Research and Development Costs
Research and development costs are charged to selling, general and
administrative expenses in the year they are incurred. Research and development
costs for 1997, 1998 and 1999 were approximately $7,946, $7,313 and $9,425,
respectively.
(i) Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains or
losses, net of applicable deferred income taxes, resulting from such
translations are included in stockholder's equity. Gains and losses resulting
from foreign currency transactions are included in net income. Foreign currency
transaction losses for 1997, 1998 and 1999 were approximately $5,054, $1,355 and
$22, respectively.
(j) Pensions
The Company and its affiliates participate in various pension plans
covering substantially all employees. U.S. and Canadian pension obligations are
funded by payments to pension fund trustees. Other foreign pensions are funded
as expenses are incurred. The Company's policy is generally to fund the minimum
amount required under the Employee Retirement Income Security Act of 1974, as
amended, for plans subject thereto.
(k) Deferred Financing Fees
Deferred financing fees are capitalized and amortized as a separate
component of other income over the life of the related debt agreements.
(l) Advertising Costs
Advertising costs included in selling, general and administrative expenses
are expensed as incurred and were $6,027, $5,423 and $3,903 in 1997, 1998 and
1999, respectively.
(m) 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.
(n) Derivative Financial Instruments
Derivative financial instruments are used by the Company in the management
of its foreign currency exposures.
The Company, from time to time, enters into foreign exchange options
relating to the anticipated cash flow in local currencies of certain foreign
operations. These options allow the Company to exchange foreign currencies for
U.S. dollars. The purpose of the Company's foreign currency hedging activities
is to protect the Company from the risk that eventual cash flows from foreign
activities will be adversely affected by changes in exchange rates. The
recognition of gains or losses on foreign currency option contracts entered into
to hedge sales are recorded as "net sales". The Company had no foreign exchange
option contracts at September 30, 1998 or 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). In June 2000, the FASB issued
F-9
<PAGE> 102
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS 138"). Both
statements are effective for financial statements for periods beginning after
June 15, 2000. SFAS 133 and SFAS 138 establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. The Company intends to adopt
SFAS 133 and SFAS 138 in the first quarter of fiscal year 2001. The Company has
concluded that the adoption of SFAS 133 and SFAS 138 will have no material
impact on the Company's financial position or results of its operations.
(o) Environmental Expenditures
Environmental expenditures that relate to current ongoing operations or to
conditions caused by past operations are expensed. The Company determines its
liability on a site by site basis and records a liability at the time when the
liability is probable and can be reasonably estimated. The estimated liability
is not reduced for possible recoveries from insurance carriers.
(p) Interim Financial Statements
In the opinion of management, all adjustments which are necessary for a
fair statement of the results for the interim periods presented have been
included. All such adjustments were of a normal recurring nature. The results of
the six month period ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
(2) BUSINESS AND CREDIT CONCENTRATIONS
Certain of the Company's Professional Dental products are sold through
major distributors, none of which has exceeded 10% of the Company's combined net
sales in 1997, 1998 or 1999. Accounts receivable from these distributors were
less than 10% of the outstanding combined accounts receivable balances at
September 30, 1998 or 1999. (see note 15)
(3) INVENTORIES
Inventories at September 30, 1998, 1999 and March 31, 2000 consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------ -----------
1998 1999 2000
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and supplies........................ $21,182 $23,036 $34,239
Work in process................................... 12,734 11,107 10,483
Finished goods.................................... 43,840 46,597 41,184
Excess and obsolescence reserves.................. (4,424) (3,211) (3,811)
LIFO reserve...................................... 1,144 2,045 1,646
------- ------- -------
$74,476 $79,574 $83,741
======= ======= =======
</TABLE>
(4) INCOME TAXES
Total income tax expense (benefit) for the years ended September 30, 1997,
1998 and 1999 is allocated as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income from continuing operations.................. $23,555 $17,151 $28,370
Extraordinary item................................. (165) -- --
------- ------- -------
$23,390 $17,151 $28,370
======= ======= =======
</TABLE>
F-10
<PAGE> 103
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended September 30, 1997:
U.S., state and local............................ $17,736 $(1,763) $15,973
Foreign.......................................... 7,534 48 7,582
------- ------- -------
$25,270 $(1,715) $23,555
======= ======= =======
Year ended September 30, 1998:
U.S., state and local............................ $ 8,805 $(1,661) $ 7,144
Foreign.......................................... 10,069 (62) 10,007
------- ------- -------
$18,874 $(1,723) $17,151
======= ======= =======
Year ended September 30, 1999:
U.S., state and local............................ $12,319 $ 5,605 $17,924
Foreign.......................................... 10,564 (118) 10,446
------- ------- -------
$23,883 $ 5,487 $28,370
======= ======= =======
</TABLE>
The domestic and foreign components of income from continuing operations
before income taxes and extraordinary item are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
United States...................................... $47,296 $21,823 $53,904
Foreign............................................ 15,156 24,359 24,240
------- ------- -------
Income before income taxes and extraordinary
item............................................. $62,452 $46,182 $78,144
======= ======= =======
</TABLE>
Income tax expense attributable to income from continuing operations
differed from the amounts computed by applying the U.S. Federal income tax rate
of 35 percent to income from continuing operations before income taxes and
extraordinary item in 1997, 1998 and 1999 as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense.................... $21,859 $16,163 $27,350
Increase (reduction) in income taxes resulting
from:
Change in beginning of year valuation allowance for
deferred tax assets allocated to income tax
expense.......................................... 679 (1,380) (884)
Amortization of goodwill........................... 1,039 1,186 1,332
State and local income taxes, net of Federal income
tax benefit...................................... 3,152 2,463 3,050
Foreign income taxed at rates higher than U.S.
Federal income................................... 928 2,769 2,098
Foreign tax credits utilized in excess of U.S. tax
on foreign earnings.............................. (102) (37) (975)
Net foreign sales corporation benefit.............. (1,075) (1,017) (1,187)
Other, net......................................... (2,925) (2,996) (2,414)
------- ------- -------
$23,555 $17,151 $28,370
======= ======= =======
</TABLE>
F-11
<PAGE> 104
The significant components of deferred income tax benefit attributable to
income from continuing operations for 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax (benefit) expense (exclusive of the
effect of the other component listed below)....... $(2,394) $ (343) $6,371
Increase (decrease) in the valuation allowance for
deferred tax assets............................... 679 (1,380) (884)
------- ------- ------
$(1,715) $(1,723) $5,487
======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1998 and 1999 are presented below.
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories................................................ $ 1,933 $ 2,066
Compensation............................................... 842 1,821
Sale/Leaseback............................................. 2,888 3,082
Foreign tax credit carryforwards........................... 421 --
Net operating loss carryforwards........................... 1,701 1,238
Warranty and other accruals................................ 4,590 1,539
------- -------
Total gross deferred tax assets.......................... 12,375 9,746
Less valuation allowance................................. (2,122) (1,238)
------- -------
Net deferred tax assets.................................. 10,253 8,508
------- -------
Deferred tax liabilities:
Depreciation............................................... 1,771 5,283
Purchase accounting........................................ 9,221 8,904
Other...................................................... 2,322 2,986
------- -------
Total gross deferred tax liabilities..................... 13,314 17,173
------- -------
Net deferred tax liability............................... $ 3,061 $ 8,665
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1997 was
$3,502. The net change in the total valuation allowance for the years ended
September 30, 1998 and 1999 was a decrease of $1,380 and $884, respectively. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
At September 30, 1999, the Company has an aggregate of approximately $2,300
of foreign net operating loss carry forwards from certain foreign jurisdictions,
the majority of which expire between 2002 and 2008.
Accumulated earnings of foreign subsidiaries at September 30, 1997, 1998
and 1999 of approximately $19,000, $24,000, and $32,000, respectively, have been
reinvested in the business and no provision for income taxes has been made for
the repatriation of these earnings.
F-12
<PAGE> 105
(5) PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment at September 30,
1998, 1999 and March 31, 2000 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1998 1999 2000
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements..................... $ 1,631 $ 1,809 $ 1,809
Buildings and building improvements............ 23,473 24,895 24,110
Machinery and equipment........................ 78,626 83,019 83,666
Construction in progress....................... 5,435 8,998 8,545
-------- -------- --------
109,165 118,721 118,130
Less: Accumulated depreciation................. (54,744) (61,233) (64,851)
-------- -------- --------
$ 54,421 $ 57,488 $ 53,279
======== ======== ========
</TABLE>
Commitments for purchases of equipment were approximately $1,300 at
September 30, 1999. Machinery and equipment includes capitalized leases, net of
amortization, totaling $585 and $340 at September 30, 1998 and 1999,
respectively. (see note 8)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which specifies the
accounting treatment provided for computer software costs depending upon the
type of cost incurred. This statement was adopted by the Company effective
October 1, 1999 with no material impact on the Company's financial position or
results of its operations.
(6) INTANGIBLE ASSETS
Intangible assets at September 30, 1998,1999 and March 31, 2000 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1998 1999 2000
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
Excess costs over net asset values acquired
(goodwill)................................... $214,872 $230,830 $247,514
Proprietary technology......................... 19,124 9,301 9,301
Trademarks..................................... 15,458 15,477 15,477
Other.......................................... 15,940 15,932 18,344
-------- -------- --------
265,394 271,540 290,636
Less: Accumulated amortization................. (66,787) (63,934) (68,231)
-------- -------- --------
$198,607 $207,606 $222,405
======== ======== ========
</TABLE>
The increase in goodwill from 1998 to 1999 was primarily due to
acquisitions accounted for as purchases. The decrease in proprietary technology
was due to the write-off of fully amortized proprietary technology and the
related accumulated amortization.
(7) LONG-TERM DEBT
Certain affiliates of SDS are obligors under various credit agreements and
the current Credit Agreement of Sybron International described below. Sybron
International has historically allocated a portion of debt outstanding under the
Credit Agreement to SDS. (see note 13) Amounts below represent the historical
allocations between Sybron International and SDS.
F-13
<PAGE> 106
Long-term debt at September 30, 1998, 1999 and March 31, 2000 consists of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- MARCH 31,
1998 1999 2000
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
Term Loan Facility............................. $102,500 $189,472 $189,372
Revolving Credit Facility...................... 149,000 83,720 122,720
Sale/Leaseback Obligation...................... 8,390 8,240 8,160
Capital leases and other (See Note 8).......... 3,805 3,586 540
-------- -------- --------
263,695 285,018 320,792
Less: Current portion of long-term debt........ (15,520) (1,571) (752)
-------- -------- --------
$248,175 $283,447 $320,040
======== ======== ========
</TABLE>
TERM LOAN FACILITY: Borrowings under the term loan are collateralized by
the capital stock of Sybron International's domestic subsidiaries and by 65% of
the stock held by the domestic affiliates in their direct foreign affiliates.
The term loan is due in various quarterly installments of principal and interest
through July 31, 2004. Furthermore, additional reductions are required to be
made from the proceeds of certain other specified borrowings and certain asset
sales not in the ordinary course of business.
Approximately $271,000 of Sybron International's Term Loan Facility
(Tranche A) of which approximately $69,372 million was allocated to SDS and its
affiliates at both September 30, 1999 and March 31, 2000, bears interest, at the
option of Sybron International, equal to (a) the higher of (i) the rate from
time to time publicly announced by Chase Manhattan Bank in New York City as its
prime rate, (ii) the federal funds rate plus 1/2%, and (iii) the base CD rate
plus 1% or (b) the adjusted interbank offered rate for Eurodollar deposits plus
1/2% to 7/8% depending upon certain financial ratios. For the year ended
September 30, 1999 and the six months ended March 31, 2000 the average rates
were 6.7% and 6.8%, respectively. Approximately $300,000 at September 30, 1999
and $299,750 at March 31, 2000 of the Term Loan Facility (Tranche B) of which
$120,000 and $119,900 were allocated to SDS at September 30, 1999 and March 31,
2000, respectively, bears interest, at the option of Sybron International, equal
to (a) the higher of (i) the rate from time to time publicly announced by Chase
Manhattan Bank in New York City as its prime rate plus 1% to 1 1/4%, (ii) the
federal funds rate plus 1 1/2% to 1 3/4%, and (iii) the base CD rate plus 2% to
2 1/4% depending upon certain financial ratios. For the year ended September 30,
1999 and the six months ended March 31, 2000, the average rates were 7.7% and
7.9%, respectively.
REVOLVING CREDIT FACILITY: The Credit Agreement also provides to Sybron
International a Revolving Credit Facility of up to $600,000, of which Sybron
International had approximately $281,100 and $377,000 outstanding at September
30, 1999 and March 31, 2000, respectively. The Revolving Credit Facility amounts
allocated to SDS at September 30, 1999 and March 31, 2000 were approximately
$83,720 and $122,720, respectively. The Revolving Credit Facility also provides
for the issuance of standby letters of credit and commercial letters of credit
as required in the ordinary course of business. Borrowings under the Revolving
Credit Facility generally bear interest on the same terms as those under Tranche
A of the Term Loan Facility. In addition, Sybron International pays a commitment
fee on the average unused portion of the Revolving Credit Facility ranging
between .225% to .15% depending on certain financial ratios. Standby letters of
credit outstanding were approximately $1,353, $1,297 and $1,232 at September 30,
1998, 1999 and March 31, 2000, respectively.
The Credit Agreement contains numerous financial and operating covenants,
including, among other things: restrictions on investments; requirements that
Sybron International maintain certain financial ratios; restrictions on the
ability of Sybron International and its subsidiaries to create or permit liens,
or to pay dividends or make other restricted payments (as defined) in excess of
$50,000 plus 50% of the consolidated net income of Sybron International for each
fiscal quarter ending after June 30, 1995, less any dividends paid or other
restricted payments made after June 22, 1994; and limitations on incurrence of
additional indebtedness including interest rate swaps.
F-14
<PAGE> 107
SALE/LEASEBACK: On December 22, 1988, SDS completed the sale and leaseback
(the "Sale/ Leaseback") of its then principal domestic manufacturing and office
facilities with an unaffiliated third party. The transaction has been accounted
for as a financing for financial statements purposes thus the facilities remain
in property, plant and equipment. The transaction was a sale for income tax
purposes. The financing obligation is being amortized over the initial 25-year
lease term.
The initial term of each lease is 25 years with five five-year renewal
options. On the fifth anniversary of the leases and every five years thereafter
(including renewal terms), the rent is increased by the percentage equal to 75%
of the percentage increase in the Consumer Price Index over the preceding five
years. The percentage increase to the rent in any five-year period will be
capped at 15%. Beginning January 1, 1999 annual payments increased to $1,463.
The next adjustment will occur January 1, 2004.
The Company pays all costs of maintenance and repair, insurance, taxes and
all other expenses associated with the properties. In addition, each of the
leases is unconditionally guaranteed by Sybron International.
Under the terms of the Sale/Leaseback, Sybron International is restricted
as to the payment of dividends on its Common Stock. The Company has the option
to purchase the facilities according to the terms of any bona fide offer
received by the lessor from a third party at any time during the term of the
leases. The Company may be obligated to repurchase the property upon the event
of a breach of certain covenants or occurrence of certain other events.
DEBT ASSUMED IN LRS MERGER: In connection with the LRS Merger, the Company
assumed debt. Such debt totaled $34,311 at September 30, 1997. This amount
consisted of senior debt of $14,450, $18,000 of subordinated debt and other debt
of $1,861 primarily pertaining to various capital leases and a mortgage. Both
the senior and subordinated debt were payable to certain stockholders of LRS.
All of these financing arrangements were extinguished simultaneously with the
LRS Merger.
MATURITIES OF LONG-TERM DEBT: As of September 30, 1999, maturities of
long-term debt, including capital leases, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
FISCAL 1999
------ -------------
<S> <C>
2000........................................................ $ 1,571
2001........................................................ 14,461
2002........................................................ 140,487
2003........................................................ 48,491
2004........................................................ 71,237
Thereafter.................................................. 8,771
--------
$285,018
========
</TABLE>
For purposes of this disclosure, 2002 includes full repayment of the SDS
allocation of the Revolving Credit Facility at its September 30, 1999 balance of
$83,720.
F-15
<PAGE> 108
(8) LEASE COMMITMENTS
As of September 30, 1999, minimum rentals, excluding rent payments under
the Sale/Leaseback described in note 7, under capital and noncancellable
operating leases consisting primarily of machinery and equipment, and building
leases are:
<TABLE>
<CAPTION>
FISCAL CAPITAL OPERATING
------ ------- ---------
<S> <C> <C>
2000........................................................ $245 $ 3,847
2001........................................................ 70 3,167
2002........................................................ 5 1,750
2003........................................................ -- 1,514
2004........................................................ -- 1,419
Thereafter.................................................. -- 4,915
---- -------
$320 $16,612
=======
Less amounts representing interest.......................... 46
----
Present value of net minimum lease payments................. 274
Less current portion........................................ 212
----
Long-term obligations under capital leases.................. $ 62
====
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
Rental expense under operating leases was $3,524 $3,084 and $3,794 in 1997,
1998 and 1999, respectively.
(9) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate fair value due to
the short maturity of those instruments except as follows:
Long-Term Debt
TERM LOAN FACILITY AND REVOLVING CREDIT FACILITY: The fair value was
determined by estimating the interest rate margins (the premium over the
Eurodollar Rate) on each of the Company's allocation of the Tranche A Term Loan
Facility, Tranche B Term Loan Facility and the Revolving Credit Facility for
companies with credit risk similar to that of the Company. In 1999 the Company's
spread over the Eurodollar Rate was 75 basis points for the Tranche A Term Loan
Facility and the Revolving Credit Facility and a spread of the Eurodollar Rate
plus 200 basis points on the Tranche B Term Loan Facility.
SALE/LEASEBACK: The fair value was determined by estimating the interest
rate at which the Company could refinance the Sale/Leaseback given the same
maturity period.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
---------------------- ----------------------
REPORTED ESTIMATED REPORTED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt
(including current portion)......... $263,695 $263,716 $285,018 $281,018
======== ======== ======== ========
</TABLE>
DERIVATIVES: The Company uses derivative financial instruments to manage
its foreign currency exposures. The Company does not hold or issue financial
instruments for trading purposes. The notional amounts of these contracts do not
represent amounts exchanged by the parties and, thus, are not a measure of the
Company's risk. The net amounts exchanged are calculated on the basis of the
notional amounts and other terms of the contracts, such as interest rates or
exchange rates, and only represent a small portion of the notional amounts. The
credit and market risk under these agreements is minimized through
diversification among counter parties with high credit ratings. Depending on the
item being
F-16
<PAGE> 109
hedged, gains and losses on derivative financial instruments are either
recognized in the results of operations as they accrue or are deferred until the
hedged transaction occurs. Derivatives used as hedges are effective at reducing
the risk associated with the exposure being hedged and are designated as a hedge
at the inception of the derivative contract. Accordingly, changes in the market
value of the derivative are highly correlated with changes in the market value
of the underlying hedged item at the inception of the hedge and over the life of
the hedge contract.
FOREIGN EXCHANGE CONTRACTS: The Company enters into foreign exchange
hedging contracts to hedge certain sales commitments and loans made to foreign
affiliates denominated in foreign currencies. The term of these contracts is
less than one year. The purpose of the Company's foreign currency hedging
activities is to protect the Company from the risk that the eventual cash flows
resulting from foreign activities will be adversely affected by changes in
exchange rates. The recognition of gains and losses on contracts entered into to
hedge sales commitments are included in net income as an adjustment to net
sales. At September 30, 1998 and 1999, the Company had no foreign exchange
option contracts.
(10) EMPLOYEE BENEFIT PLANS
Effective September 30, 1999, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". This standard only modifies the financial statement
presentation of the Company's pension and post retirement benefit obligations
and does not impact measurement of such obligations.
PENSION AND OTHER POSTRETIREMENT BENEFITS: The Company participates in
various defined benefit pension plans covering substantially all of its U.S.
employees. The benefits are generally based on various formulas, the principal
factors of which are years of service and compensation. The Company's funding
policy is to generally make annual contributions in excess of the minimum
required contributions required by applicable regulations in order to avoid any
PBGC variable premium payments. Plan assets are invested primarily in U.S.
stocks, bonds and international stocks. In addition to the defined benefit
plans, the Company provides certain health care benefits for certain Kerr
Corporation employees which are funded as costs are incurred. These eligible
employees who reached age 55 prior to January 1, 1996 will become eligible for
postretirement health care only if they reach retirement age while working for
the Company. The Company accrues, as current costs, the future lifetime
retirement benefits for qualifying active employees. The postretirement health
care plans for Kerr Corporation, an affiliate of the Company, currently follow a
policy instituted by the predecessor of Sybron International Corporation in 1986
where the Company's contributions were frozen at the levels equal to Kerr
Corporation's contributions on December 31, 1988, except where collective
bargaining agreements prohibited such a freeze. Employees of SDS are also part
of a retirement security pension plan which will be retained by Sybron
International. After the spin-off, SDS will duplicate this plan and will retain
the pension liabilities for all qualifying active SDS employees and future
retiring employees and their dependents.
The following assumptions were used in determining the funded status of the
Company's defined benefit pension plans:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Discount rate............................................... 7.0% 7.75%
Rate of increase in compensation levels..................... 4% 4%
Expected long-term rate of return on assets................. 10% 10%
</TABLE>
F-17
<PAGE> 110
The following assumptions were used in determining the accumulated
postretirement benefit obligation of the Company's postretirement healthcare
plans.
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Discount rate............................................... 6.75% 7.75%
Average increase in medical costs........................... 5.5% 5.5%
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligations:
Obligations at beginning of year...................... $20,047 $23,908 $ 3,720 $ 4,186
Service cost.......................................... 1,404 1,645 103 129
Interest cost......................................... 1,521 1,707 270 274
Plan amendments....................................... -- 471 -- --
Actuarial (gain) loss................................. 1,812 (1,990) 477 659
Benefit payments...................................... (579) (626) (384) (430)
Foreign exchange rates................................ (297) (4) -- --
------- ------- ------- -------
Obligations at end of year............................ $23,908 $25,111 $ 4,186 $ 4,818
Change in fair value of plan assets:
Fair value of plan assets at beginning of year........ $20,952 $22,663 $ -- $ --
Actual return on plan assets.......................... 2,563 1,870 -- --
Employer contributions................................ 131 85 -- --
Benefit payments...................................... (579) (626) -- --
Foreign exchange rates................................ (404) (6) -- --
------- ------- ------- -------
Fair value of plan assets at end of year.............. $22,663 $23,986 $ -- $ --
Funded status:
Funded status at end of year.......................... $(1,245) $(1,125) $(4,186) $(4,818)
Unrecognized transition asset......................... (121) (126) -- --
Unrecognized prior service cost....................... 295 772 -- --
Unrecognized (gain) loss.............................. 1,382 (249) (357) 271
Remaining excess of fair value of plan assets over
projected benefit obligation recognized as a result
of the 1987 acquisition of Sybron Corporation...... 1,137 1,067 -- --
------- ------- ------- -------
Net amount recognized at end of year.................... $ 1,448 $ 339 $(4,543) $(4,547)
======= ======= ======= =======
</TABLE>
The following table provides the amounts recognized in the Company's
combined balance sheets:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- ------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid (accrued) benefit cost............................ $3,455 $3,731 $(4,543) $(4,547)
Accrued benefit liability................................. (5,068) (4,459) -- --
Intangible asset.......................................... 243 -- -- --
Accumulated other comprehensive income-minimum pension
liability adjustment.................................... 1,681 -- -- --
Remaining excess of fair value of plan assets over
projected benefit obligation recognized as a result of
the 1987 acquisition of Sybron Corporation.............. 1,137 1,067 -- --
------ ------ ------- -------
Net amount recognized in other noncurrent assets or
(liabilities) at September 30........................... $1,448 $ 339 $(4,543) $(4,547)
====== ====== ======= =======
</TABLE>
F-18
<PAGE> 111
The following table provides disclosure of the net periodic benefit cost:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------- --------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost..................................... $1,353 $1,404 $1,645 $ 95 $103 $129
Interest cost.................................... 1,503 1,522 1,707 252 270 274
Expected return on plan assets................... (1,774) (2,183) (2,265) -- -- --
Amortization of transition asset................. -- 4 4 -- -- --
Amortization of prior service cost............... 20 (6) (6) -- -- --
Amortization of net loss......................... 83 (4) 35 -- -- 31
------ ------ ------ ---- ---- ----
Net periodic benefit cost........................ $1,185 $ 737 $1,120 $347 $373 $434
====== ====== ====== ==== ==== ====
</TABLE>
In 1998, accumulated benefit obligations exceeded the fair value of plan
assets in the retirement security plan by approximately $924. There were no
plans with accumulated benefit obligations in excess of fair value of plan
assets at September 30, 1999.
An increase of one percentage point in the per capita cost of health care
costs associated with the plans for which the Company contributions are not
frozen would increase the accumulated postretirement benefit obligation and
service and interest cost components as of September 30, 1999 by approximately
$787 and $76, respectively.
Because more than 60% of the 1997, 1998 and 1999 net periodic
postretirement benefit costs relate to interest costs, the Company has
classified such interest costs as interest expense. This results in a non-cash
increase in interest expense of approximately $252, $270 and $274 in 1997, 1998
and 1999, respectively.
SAVINGS PLANS: Employees in the United States are eligible to participate
in contributory savings plans maintained by the Company under Section 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). Company matching
contributions under the plans, net of forfeitures, were approximately $969,
$1,080 and $1,274 for 1997, 1998 and 1999, respectively.
(11) RESTRUCTURING AND MERGER AND INTEGRATION CHARGES
In June 1998, the Company recorded a restructuring charge of approximately
$14,600 (approximately $10,700 after tax) for the rationalization of certain
acquired companies, combination of certain duplicate production facilities,
movement of certain customer service and marketing functions, and the exiting of
several product lines. The restructuring charge was classified as components of
cost of sales (approximately $4,600 relating to the write-off of inventory
discussed below), selling, general and administrative expenses (approximately
$9,200) and income tax expense (approximately $700).
F-19
<PAGE> 112
Restructuring activity since June 30, 1998 and its components are as
follows:
<TABLE>
<CAPTION>
LEASE SHUT-DOWN INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS COSTS WRITE-OFF ASSETS TAX OBLIGATIONS
(A) (B) (B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- --------- --------- ------ --- ----------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Restructuring Charge......... $4,300 $300 $400 $4,600 $1,300 $700 $900 $2,100 $14,600
1998 Cash Payments................ 1,800 -- 100 -- -- -- 300 1,400 3,600
1998 Non-Cash Charges............. -- -- -- 4,600 1,300 -- -- -- 5,900
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 1998 balance........ $2,500 $300 $300 $ -- $ -- $700 $600 $ 700 $ 5,100
1999 Cash Payments................ 1,300 300 300 -- -- -- 300 400 2,600
Adjustments(a).................... 1,200 -- -- -- -- -- -- -- 1,200
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 1999 balance........ $ -- $ -- $ -- $ -- $ -- $700 $300 $ 300 $ 1,300
2000 Cash Payments (unaudited).... -- -- -- -- -- -- 300 100 400
------ ---- ---- ------ ------ ---- ---- ------ -------
March 31, 2000 balance
(unaudited)..................... $ -- $ -- $ -- $ -- $ -- $700 $ -- $ 200 $ 900
====== ==== ==== ====== ====== ==== ==== ====== =======
</TABLE>
---------------
(a) Amount represents severance and termination costs for approximately 100
terminated employees (primarily sales and marketing personnel). As of
September 30, 1999, 87 employees have been terminated as a result of the
restructuring plan. An adjustment of approximately $1,200 was made in the
third quarter of fiscal 1999 to adjust the accrual primarily representing
over accruals for anticipated costs associated with outplacement services,
accrued fringe benefits, and severance associated with employees who were
previously notified of termination and subsequently filled other Company
positions. No additional employees will be terminated under this
restructuring plan.
(b) Amount represents lease payments and shutdown costs on exited facilities.
(c) Amount represents write-offs of inventory and fixed assets associated with
discontinued product lines.
(d) Amount represents a statutory tax relating to assets transferred from an
exited sales facility in Switzerland.
(e) Amount represents certain terminated contractual obligations.
The Company expects to make future cash payments of approximately $200 in
fiscal 2000 and approximately $700 in fiscal 2001 and beyond.
In 1998, the Company incurred $10,507 (approximately $6,400 after tax or
$.06 per share on a diluted basis) of costs associated with the merger,
transition and integration of the "A" Company (See note 14). Components of the
Company's $10,507 of merger and integration costs include severance obligations
and certain transaction related compensation predominantly pursuant to existing
employment agreements (approximately $4,000), transition expenses of moving from
"A" Company's San Diego, California offices to existing offices in Orange,
California, including relocating certain employees, relocating equipment and
notifying customers (approximately $1,800), legal, accounting and environmental
assessment fees (approximately $1,500), redundant terminated unrelated third
party consulting contracts (approximately $1,000) and other miscellaneous
integration costs (approximately $2,200). All merger, transition and integration
costs were recognized as incurred.
In 1999, the Company incurred $2,569 ($1,618 after tax), of costs
associated with the Pinnacle Merger principally related to non-shareholder
compensation (approximately $1,900) and with the continued integration of "A"
Company into Ormco (approximately $700). All merger and integration costs were
recognized as incurred. The Company does not expect any additional merger and
integration costs associated with the Pinnacle Merger or the integration of "A"
Company.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
The Company or its affiliates are at any one time parties to a number of
lawsuits or subject to claims arising out of their respective operations,
including products liability, patent and trademark or other intellectual
property infringement, contractual liability, workplace safety and environmental
claims and
F-20
<PAGE> 113
cases, some of which involve claims for substantial damages. The Company and its
affiliates are vigorously defending lawsuits and other claims against them.
Based upon the insurance available under an insurance program and the potential
for liability with respect to claims which are uninsured, the Company believes
that any liabilities which might reasonably be expected to result from any of
the pending cases and claims would not have a material adverse effect on the
results of operations or financial condition of the Company. There can be no
assurance as to this, however, or that litigation having such a material adverse
effect will not arise in the future. The Company does not reduce legal or
contractual liabilities for possible recoveries from insurance companies.
(13) TRANSACTIONS WITH SYBRON INTERNATIONAL
CASH MANAGEMENT AND ADVANCES: Sybron International manages the cash not
considered necessary for current operating requirements of its subsidiaries,
including the operations of SDS. Cash collected from and cash payments to the
operations of SDS are collected or funded from a centralized treasury operation
and are either credited or charged to SDS. No interest is charged or credited on
advances to or collections from SDS. On an annual basis, outstanding balances
are cleared via an intercompany dividend to or capital contribution from Sybron
International. (See note 7 for interest charges at SDS).
DIVIDENDS PAID TO SYBRON INTERNATIONAL: See combined statements of changes
in stockholder's equity.
SYBRON INTERNATIONAL CREDIT FACILITIES: Sybron International allocates a
portion of its outstanding debt (and associated interest expense) under its
Credit Facilities to certain of its subsidiaries, including the operations of
SDS. Such allocations have been based upon management's estimates of historical
valuations of the individual subsidiaries adjusted for changes such as
acquisition activity. Management considers this to be a reasonable basis for
allocation. SDS's allocation of debt outstanding under the Credit Facilities at
September 30, 1998 and 1999 was $251,500 and $273,192, respectively. SDS's
allocation of interest expense was $13,822, $16,732 and $15,420 in 1997, 1998
and 1999, respectively.
SYBRON INTERNATIONAL CHARGES: Sybron International allocates its corporate
office general and administrative expenses to its subsidiaries. SDS's share of
such costs amounted to $3,617, $3,620 and $4,228 in 1997, 1998 and 1999,
respectively. Sybron International corporate office general and administrative
expenses are allocated based SDS's domestic revenues as a percentage of total
Sybron International domestic revenues. Sybron International considers this
method to be a reasonable basis for allocation.
F-21
<PAGE> 114
INTERCOMPANY LOANS WITH SYBRON INTERNATIONAL: Loans due from (to) Sybron
International at September 30, 1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
AMOUNT RATE MATURITY
------ ---- --------
<S> <C> <C> <C>
1997:
Sybron Holdings A/S.............................. 18,470 8.00% On Demand
Sybron Deutchland GmbH........................... 583 6.25% 12/31/97
Sybron Deutchland GmbH........................... 470 3.75% On Demand
Erie Electroverre................................ (2,152) 3.75% 12/1/97
1998:
Sybron Holdings A/S.............................. 21,098 8.00% On Demand
Sybron Deutchland GmbH........................... 342 6.50% 12/31/98
Sybron Deutchland GmbH........................... 1,497 6.50% 8/3/99
Sybron Deutchland GmbH........................... 493 3.75% On Demand
1999:
Sybron Holdings A/S.............................. 11,472 5.50% On Demand
Electrothermal................................... 1,647 8.00% 8/9/00
Sybron Deutchland GmbH........................... 1,367 6.50% 8/3/00
Sybron U.K. ..................................... 554 8.00% 7/30/00
Sybron Deutchland GmbH........................... 454 3.75% On Demand
Sybron Deutchland GmbH........................... 110 6.50% 12/31/99
Nalge U.K. ...................................... (1,071) 0.00% None
</TABLE>
(14) ACQUISITIONS
The Company has completed seven acquisitions and two mergers since the
beginning of 1997. The acquired companies are all engaged in businesses related
to the Company.
1997
During 1997, the Company completed the acquisition of Precision Rotary
Instruments ("PRI") for approximately $7,700 (which was not significant). This
acquisition was accounted for as a purchase. The results of PRI were included as
of the date it was acquired. The following table outlines sales and operating
income for the most recent available twelve-month period prior to acquisition,
and total assets at the most recent available date prior to acquisition.
Additional goodwill of approximately $11,700 was recorded in 1997 from the PRI
acquisition and from payments under earnout provisions from previous years'
acquisitions of approximately $4,900.
<TABLE>
<CAPTION>
OPERATING TOTAL TYPE OF
BUSINESS SEGMENT DATE SALES INCOME ASSETS ACQUISITION
---------------- ---- ----- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Company Acquired
PROFESSIONAL DENTAL:
-----------------
Precision Rotary
Instruments................. February 1997 4,361 975 1,198 Asset
</TABLE>
---------------
See note 15 for a description of business segments.
1998
During 1998, the Company completed four acquisitions for cash. In addition,
the Company completed one transaction for stock (the "LRS Merger"). The
aggregate cash purchase price of the acquisitions, (none of which individually
or aggregated was significant) was approximately $47,400. The Company may be
subject to future purchase price adjustments based upon earnout provisions under
two of the purchase and sale agreements. Such earnout provisions had a maximum
potential payout of approximately $4,800. The earnout provisions are subject to
the achievement of certain financial goals and are not contingent upon
employment. The earnouts, if achieved, are payable in the years 1999 through
2001 and will be
F-22
<PAGE> 115
accounted for as additional goodwill. Earnout payments of approximately $2,900
were made in 1998, $1,800 for a 1999 acquisition and $1,100 for previous years
acquisitions. All cash acquisitions were accounted for as purchases. The results
of the cash acquisitions were included as of the date they were acquired. The
LRS Merger, a merger between LRS Acquisition Corp. ("LRS"), the parent of "A"
Company Orthodontics ("A" Company), and a subsidiary of the Company formed for
that purpose, was accounted for as a pooling of interests. Under the terms of
the merger agreement LRS shareholders received 3,215,982 shares of the Parent's
Common Stock (valued at approximately $88,200 based on the Parent's closing
price on April 9, 1998) for all of the outstanding shares of LRS. The LRS Merger
has been accounted for as a pooling of interests. Results from LRS are included
as of October 1, 1994, the first full year of LRS' operations. The following
table outlines sales and operating income for the most recent available
twelve-month period prior to acquisition, and total assets at the most recent
available date prior to acquisition, for each of the acquired companies
accounted for as purchases. The total goodwill for the acquired companies and
earnouts from previous year's acquisitions was $45,603. In the first half of
fiscal 2000, an earnout payment of approximately $1,000 was made, reducing the
maximum future earnout payments from 1998 acquisitions to $2,000.
<TABLE>
<CAPTION>
OPERATING TOTAL TYPE OF
BUSINESS SEGMENT DATE SALES INCOME ASSETS ACQUISITION
---------------- ---- ----- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Company Acquired
ORTHODONTICS:
-----------
Ormodent Group............ December 1997 21,545 1,797 10,332 Stock
Tycom Dental
Corporation............. July 1998 8,000 N/A 2,380 Asset
INFECTION CONTROL
PRODUCTS:
-----------------------
Viro Research
International, Inc...... February 1998 3,266 337 1,076 Stock
The high level
disinfectant/ sterilant
business of Cottrell
Ltd..................... July 1998 7,500 N/A 366 Asset
</TABLE>
---------------
See note 15 for a description of business segments.
1999
Acquisitions
During 1999, the Company completed two acquisitions for cash. In addition,
the Company completed one transaction for stock (the "Pinnacle Merger"). The
aggregate cash price of the acquisitions (none of which individually or
aggregated was significant) was approximately $10,600. The Company may be
subject to future purchase price adjustments based upon an earnout provision
under one of the purchase and sale agreements. Such earnout provision has a
maximum potential payout of approximately $2,000. The earnout provision is
subject to the achievement of certain financial goals and is not contingent upon
employment. The earnout, if achieved, is payable in the years 2000 through 2002
and will be accounted for as additional goodwill. Earnout payments of
approximately $4,900 were made in 1999. All cash acquisitions were accounted for
as purchases. The results of the cash acquisitions were included as of the date
they were acquired. The Pinnacle Merger, a merger between Pinnacle Products of
Wisconsin, Inc. ("Pinnacle") and a subsidiary of the Company formed for that
purpose, was accounted for as a pooling of interests. Results from Pinnacle are
included from the first day of the first reporting periods. The following table
outlines sales and operating income for the most recent date prior to the
acquisition, and total assets at the most recent available date prior to
acquisition, for each of the acquired companies. The type of acquisition refers
to whether the Company purchased assets or the stock of the acquired companies.
The
F-23
<PAGE> 116
total goodwill for the acquired companies including earnout payments for prior
year's acquisitions was $14,200.
<TABLE>
<CAPTION>
OPERATING TOTAL TYPE OF
BUSINESS SEGMENT DATE SALES INCOME ASSETS ACQUISITION
---------------- ---- ----- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Company Acquired
ORTHODONTIC:
-----------
Endo Direct Ltd................... July 1999 338 8 395 Stock
INFECTION CONTROL PRODUCTS:
-----------------------
Alden Scientific, Inc. and
Gulfstream Medical, Inc......... July 1999 3,519 1,569 1,058 Asset
</TABLE>
---------------
See note 15 for a description of business segments.
On October 29, 1998, Sybron completed the merger of Pinnacle Products of
Wisconsin, Inc. ("Pinnacle") and a subsidiary of Sybron formed for that purpose
(the "Pinnacle Merger") and a related purchase of real estate used in Pinnacle's
operations. Pinnacle is a manufacturer of dental disposable infection control
products and is included in the Professional Dental business segment.
Under the terms of the merger agreement and the related real estate
purchase agreement the Pinnacle shareholder received 1,897,418 shares of the
Parent's common stock, including 50,461 shares for the purchase of the real
estate owned by the shareholder and used in the operations of Pinnacle. The
Pinnacle Merger and related real estate transaction was valued at approximately
$46,000 (based on the Parent's closing stock price on October 29, 1998).
The merger has been accounted for as a pooling of interests. Accordingly,
the Company's historical financial information was restated to include the
financial results of Pinnacle. Pinnacle was an S corporation for income tax
purposes and therefore did not pay U.S. federal income taxes. Pinnacle will be
included in the Company's U.S. federal income tax return effective October 29,
1998. No significant net deferred tax liability and corresponding charges to
income tax expense are expected as Pinnacle's net taxable temporary differences
are expected to be insignificant.
Separate net sales and net income amounts of the merged entities are
presented in the following table. In addition, the table includes pro forma net
income, which reflects the elimination of the nonrecurring merger and
integration costs and the inclusion of income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1997 1998
---- ----
<S> <C> <C>
Net sales:
The Company............................................ $347,791 $355,077
Pinnacle............................................... 10,906 11,809
-------- --------
Total.................................................... $358,697 $366,886
======== ========
Net income:
The Company............................................ $ 33,634 $ 23,275
Pinnacle............................................... 4,994 5,756
-------- --------
Pinnacle pro forma income tax expense(a)............... (1,998) (2,302)
-------- --------
Pro forma net income..................................... $ 36,630 $ 26,729
Pinnacle pro forma income tax expense(a)................. 1,998 2,302
-------- --------
Net income as reported................................... $ 38,628 $ 29,031
======== ========
</TABLE>
---------------
(a) Prior to the merger, Pinnacle was an S corporation and, therefore, income
tax expense was not reflected in its historical net income.
F-24
<PAGE> 117
The following pro forma financial information presents the combined results
of the operations of the Company and the purchased businesses referred to above
as if the 1999 acquisitions had occurred as of the beginning of 1998, after
giving effect to certain adjustments, including amortization of goodwill,
additional depreciation expense, increased interest expense on debt related to
the acquisition and related tax effects. The pro forma information does not
necessarily reflect the results of operations that would have occurred had the
Company and the purchased companies listed above constituted a single entity
during such periods.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1998 1999
---- ----
<S> <C> <C>
Net sales................................................ $370,743 $391,097
======== ========
Net income............................................... $ 29,230 $ 49,918
======== ========
</TABLE>
Subsequent to September 30, 1999, the Company completed three acquisitions
for cash which were accounted for as purchases. The aggregate purchase price of
the acquisitions for the quarter and year to date periods (which are not
significant, individually or in the aggregate), net of cash acquired, was
approximately $16,800 million. There are no future purchase price adjustments
with respect to earnout provisions for any of these transactions. The results of
these acquisitions were included as of the date they were acquired. The total
goodwill and intangibles for the six month period ended March 31, 2000 for these
acquired companies was approximately $15.9 million and will be amortized over 5
to 20 years. The following unaudited table outlines the sales, operating income
and total assets for the most recent available twelve-month period prior to each
cash acquisition.
<TABLE>
<CAPTION>
(UNAUDITED)
OPERATING TOTAL TYPE OF
BUSINESS SEGMENT DATE SALES INCOME ASSETS ACQUISITION
---------------- ---- ----- --------- ------ -----------
<S> <C> <C> <C> <C> <C>
Company Acquired
PROFESSIONAL DENTAL:
--------------------------
Safe-Wave, Inc............ February 2000 $4,046 $869 $1,269 Stock
ORTHODONTICS:
--------------------------
Pro Positioners, Inc...... December 1999 $5,405 $529 $2,338 Stock
LPI Ormco................. October 1999 $ 300 N/A N/A Asset
</TABLE>
---------------
See note 15 for a description of business segments.
(15) SEGMENT INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual and interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS 131 in 1999 and has restated the
previously reported annual segment operating results to conform to the
Statement's management approach and to reflect the Pinnacle Merger.
The Company's operating affiliates are engaged in the manufacture and sale
of dental products in the United States and other countries. Dental products are
categorized in the business segments of a) Professional Dental, b) Orthodontics
and c) Infection Control Products. A description of the business segments
follows:
Products in the Professional Dental business segment include light cured
composite filling materials and bonding agents, amalgam alloy filling materials,
dental burs, impression materials, and curing lights
F-25
<PAGE> 118
used in general dentistry, filling materials, instruments and sealers used in
endodontics, waxes, specialty burs, investment and casting materials, equipment
and accessories used in dental laboratories and disposable infection control
products for dental equipment.
Products in the Orthodontics business segment include a broad range of
orthodontic appliances such as brackets, bands and buccal tubes, wires and
elastomeric products. Brackets, bands, buccal tubes and wires are manufactured
from a variety of metals to exacting specifications for standard use or to meet
the custom specifications of a particular orthodontist. Elastomeric orthodontic
products include rubberbands and power chains to consolidate space. Products in
this area also include orthodontic instruments and general orthodontic supply
products. Orthodontics also includes certain endodontic products.
Products in the Infection Control Products business segment include high
level disinfectants and sterilants, and enzymatic cleaners and instrument care
solutions for medical and dental instruments, surface disinfectant products and
antimicrobial skincare products for medical and dental use.
Inter-business segment sales are not material. Information on these
business segments is summarized as follows:
<TABLE>
<CAPTION>
INFECTION
PROFESSIONAL CONTROL TOTAL
DENTAL ORTHODONTICS PRODUCTS ELIMINATIONS SDS
------------ ------------ --------- ------------ -----
<S> <C> <C> <C> <C> <C>
1997
Revenues:
External customer..................... $185,831 $158,107 $14,759 $ -- $358,697
Intersegment.......................... 1,431 3,290 -- (4,721) --
-------- -------- ------- ------- --------
Total revenues................... $187,262 $161,397 $14,759 $(4,721) $358,697
======== ======== ======= ======= ========
Gross profit............................ 102,847 94,674 8,334 -- 205,855
Selling, general and admin.............. 57,621 63,252 4,928 -- 125,801
Operating income........................ 45,226 31,422 3,406 -- 80,054
Depreciation and amortization........... 8,250 7,404 522 -- 16,176
Interest income -- Sybron
International......................... 123 1,519 -- -- 1,642
Interest expense........................ 10,804 8,585 3 -- 19,392
Expenditures for property, plant and
equipment............................. 11,370 1,124 88 -- 12,582
1998
Revenues:
External customer..................... $188,334 $162,510 $16,042 $ -- $366,886
Intersegment.......................... 813 4,023 -- (4,836) --
-------- -------- ------- ------- --------
Total revenues................... $189,147 $166,533 $16,042 $(4,836) $366,886
======== ======== ======= ======= ========
Gross profit............................ 108,979 93,697 8,625 -- 211,301
Selling, general and admin.............. 61,413 78,673 6,679 -- 146,765
Operating income........................ 47,566 15,024 1,946 -- 64,536
Depreciation and amortization........... 7,783 7,831 989 -- 16,603
Interest income -- Sybron
International......................... 165 1,333 -- -- 1,498
Interest expense........................ 13,336 6,858 1 -- 20,195
Segment assets.......................... 222,236 200,136 45,527 -- 467,899
Expenditures for property, plant and
equipment............................. 5,470 4,039 72 -- 9,581
</TABLE>
F-26
<PAGE> 119
<TABLE>
<CAPTION>
INFECTION
PROFESSIONAL CONTROL TOTAL
DENTAL ORTHODONTICS PRODUCTS ELIMINATIONS SDS
------------ ------------ --------- ------------ -----
<S> <C> <C> <C> <C> <C>
1999
Revenues:
External customer..................... $191,923 $169,901 $26,352 $ -- $388,176
Intersegment.......................... 592 3,967 -- (4,559) --
-------- -------- ------- ------- --------
Total revenues................... $192,515 $173,868 $26,352 $(4,559) $388,176
======== ======== ======= ======= ========
Gross profit............................ 105,964 105,448 14,208 -- 225,620
Selling, general and admin.............. 62,406 58,327 10,581 -- 131,314
Operating income........................ 43,558 47,121 3,627 -- 94,306
Depreciation and amortization........... 8,499 7,656 1,311 -- 17,466
Interest income -- Sybron
International......................... 144 1,007 -- -- 1,151
Interest expense........................ 12,032 5,041 1 -- 17,074
Segment assets.......................... 227,480 219,827 62,671 -- 509,978
Expenditures for property, plant and
expenditure........................... 6,571 6,116 333 -- 13,020
SIX MONTHS ENDED MARCH 31, 1999
Revenues:
External customer..................... $ 91,992 $ 84,950 $11,587 $ -- $188,529
Intersegment.......................... 196 2,074 -- (2,270) --
-------- -------- ------- ------- --------
Total revenues................... $ 92,188 $ 87,024 $11,587 $(2,270) $188,529
======== ======== ======= ======= ========
Gross profit............................ 51,404 51,739 6,391 -- 109,534
Selling, general and admin.............. 32,513 29,373 4,904 -- 66,790
Operating income........................ 18,891 22,366 1,487 -- 42,744
SIX MONTHS ENDED MARCH 31, 2000
Revenues:
External customer..................... $102,822 $ 86,760 $12,097 -- $201,679
Intersegment.......................... 439 2,672 4 (3,115) --
-------- -------- ------- ------- --------
Total revenues................... $103,261 $ 89,432 $12,101 $(3,115) $201,679
======== ======== ======= ======= ========
Gross profit............................ 58,586 53,600 5,623 -- 117,809
Selling, general and admin.............. 30,231 30,966 5,206 -- 66,403
Operating income........................ 28,355 22,634 417 -- 51,406
Segment assets.......................... 266,370 245,619 64,581 -- 576,570
</TABLE>
F-27
<PAGE> 120
The Company's international operations are conducted principally in Europe.
Inter-geographic sales are made at prices approximating market.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net Sales:
United States:
Customers..................................... $208,459 $216,463 $225,754
Inter-geographic.............................. 13,076 14,357 14,527
-------- -------- --------
221,535 230,820 240,281
-------- -------- --------
Europe:
Customers..................................... 74,209 84,363 86,975
Inter-geographic.............................. 50,193 53,052 42,497
-------- -------- --------
124,402 137,415 129,472
-------- -------- --------
All other areas:
Customers..................................... 76,029 66,060 75,447
Inter-geographic.............................. 10,885 11,150 11,966
-------- -------- --------
86,914 77,210 87,413
Inter-geographic sales.......................... (74,154) (78,559) (68,990)
-------- -------- --------
Total net sales.......................... $358,697 $366,886 $388,176
======== ======== ========
Net Property:
United States................................. $ 42,049 $ 37,418 $ 38,628
Europe........................................ 2,504 3,727 3,763
All other areas............................... 8,931 13,276 15,097
-------- -------- --------
Total net property............................ $ 53,484 $ 54,421 $ 57,488
======== ======== ========
</TABLE>
(16) COMPREHENSIVE INCOME
Effective October 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which modifies the financial statement presentation of comprehensive income and
its components. SFAS 130 requires that a combined statement of comprehensive
income be included in the combined financial statements to present all changes
in stockholder's equity in the periods presented other than changes resulting
from transactions relating to the Company's stock. The components of other
comprehensive income (loss) consist of translation adjustments and minimum
pension liability adjustments and are included on the statement of stockholder's
equity.
F-28
<PAGE> 121
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1998
Net sales................................... $90,568 $ 91,469 $88,293 $ 96,556 $366,886
======= ======== ======= ======== ========
Gross profit................................ $53,050 $ 53,355 $46,519 $ 58,377 $211,301
======= ======== ======= ======== ========
Net income (loss)........................... $ 9,980 $ 10,308 $(4,756) $ 13,499 $ 29,031
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1999
Net sales................................... $91,917 $ 96,612 $96,510 $103,137 $388,176
======= ======== ======= ======== ========
Gross profit................................ $52,365 $ 57,169 $57,290 $ 58,796 $225,620
======= ======== ======= ======== ========
Net income.................................. $ 8,870 $ 11,527 $13,289 $ 16,088 $ 49,774
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
------- -------
<S> <C> <C> <C> <C> <C>
2000
Net sales................................... $93,364 $108,315
======= ========
Gross profit................................ $54,099 $ 63,710
======= ========
Net income.................................. $10,412 $ 14,248
======= ========
</TABLE>
Amounts in 1998 were adjusted to reflect the Pinnacle Merger. The Pinnacle
Merger was accounted for as a pooling of interests. The results of operations of
Pinnacle were combined with the previously reported results of the Company as if
the merger occurred on the first day of the first reporting period.
F-29
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sybron International Corporation:
On July 20, 2000, we reported on the combined balance sheets of Sybron
Dental Specialties, Inc. and affiliates as of September 30, 1998 and 1999, and
the related combined statements of income, stockholder's equity, and cash flows
for each of the years in the three-year period ended September 30, 1999, which
are included in the Information Statement. In connection with our audits of the
aforementioned combined financial statements, we also audited the related
financial statement schedule as listed in Item 15. 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 on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic combined financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
July 20, 2000
S-1
<PAGE> 123
SCHEDULE
II
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997
Deducted from asset accounts:
Allowance for doubtful
receivables...................... $1,899 $ 798 $ -- $ 632(a) $2,065
====== ======= ====== ========= ======
Inventory reserves................. $3,994 $ 1,870 $ -- $ 1,071(b) $4,793
====== ======= ====== ========= ======
Legal reserves........................ $1,666 $ 1,494 $ -- $ 1,913(c) $1,247
====== ======= ====== ========= ======
Restructuring reserve................. $2,046 $ -- $ -- $ 1,573(c) $ 473
====== ======= ====== ========= ======
Year ended September 30, 1998
Deducted from asset accounts:
Allowance for doubtful
receivables...................... $2,065 $ 1,878 $ 87(d) $ 416(a) $3,614
====== ======= ====== ========= ======
Inventory reserves................. $4,793 $ 1,409 $ -- $ 1,778(b) $4,424
====== ======= ====== ========= ======
Legal reserves........................ $1,247 $ (200) $ -- $ 501(c) $ 546
====== ======= ====== ========= ======
Restructuring reserve................. $ 473 $14,600 $ -- $10,036(e) $5,037
====== ======= ====== ========= ======
Year ended September 30, 1999
Deducted from asset accounts:
Allowance for doubtful
receivables...................... $3,614 $ 819 $313(d) $ 2,168(a) $2,578
====== ======= ====== ========= ======
Inventory reserves................. $4,424 $ 5,317 $ -- $ 6,530(b) $3,211
====== ======= ====== ========= ======
Legal reserves........................ $ 546 $ (109) $ -- $ 153(c) $ 284
====== ======= ====== ========= ======
Restructuring reserve................. $5,037 $(1,177) $ -- $ 2,515(f) $1,345
====== ======= ====== ========= ======
</TABLE>
---------------
Note: Above additions and deductions include the effects of foreign currency
rate changes.
(a) Uncollectible accounts written off, net of recoveries.
(b) Inventory written off.
(c) Net disbursements.
(d) Reserves of acquired businesses.
(e) Net disbursements including write-offs of $4,600 and $1,300 for inventory
and fixed assets, respectively.
(f) Net disbursements including an adjustment of $1,200 for unused severance.
S-2
