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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-16057
SYBRON DENTAL SPECIALTIES, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C>
DELAWARE 33-0920985
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 WEST COLLINS AVE.
ORANGE, CALIFORNIA 92867
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(714) 516-7400
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH EACH CLASS 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 registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]* No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the closing sale price of the registrant's Common
Stock on December 15, 2000 as reported on the New York Stock Exchange, was
approximately $480,862,652. Shares of Common Stock held by each executive
officer and director and by each person known to beneficially own more than 5%
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
At December 15, 2000, there were 35,108,649 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on January 31, 2001 have been incorporated by
reference into Part III of this Form 10-K.
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* Deemed to be satisfied pursuant to the staff position set forth in Questions 8
and 9 of SEC Staff Legal Bulletin No. 4 (September 16, 1997). See Item 14(b)
in this Form 10-K.
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SYBRON DENTAL SPECIALTIES, INC.
TABLE OF CONTENTS
TO
2000 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
ITEM PAGE
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<C> <S> <C>
PART I
1 Business.................................................... 1
2 Properties.................................................. 11
3 Legal Proceedings........................................... 12
4 Submission of Matters to a Vote of Security Holders......... 12
Executive Officers of the Registrant........................ 12
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
6 Selected Financial Data..................................... 14
Unaudited Pro Forma Combined Financial Information.......... 16
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 36
8 Financial Statements and Supplementary Data................. 38
9 Changes in and Disagreements with Accountants on Accounting
and Financial and Financial Disclosure.................... 66
PART III
10 Directors and Executive Officers of the Registrant.......... 66
11 Executive Compensation...................................... 66
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 66
13 Certain Relationships and Related Transactions.............. 66
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 66
Signatures.................................................. 68
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Sybron Dental Specialties, Inc. ("SDS" or the "Company") was incorporated
in Delaware on July 17, 2000. 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 (doing business as Apogent Technologies), a
Wisconsin corporation ("Sybron International" or "Apogent"), 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(R) Orthodontics, 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.
Prior to December 11, 2000, SDS had been a wholly owned subsidiary of
Sybron International, and all of SDS's subsidiaries were also wholly owned,
directly or indirectly, by Sybron International. On December 11, 2000, following
a reorganization of certain of Sybron International's subsidiaries (which are
now SDS's subsidiaries), Sybron International spun off its dental business (the
"Dental Business") by way of a pro rata distribution (the "Distribution" or
"Spin-Off") to its shareholders of all the outstanding common stock and related
preferred stock purchase rights of SDS. In order to effect the Distribution, SDS
and Sybron International entered into a number of interrelated agreements. See
"Transactions and Agreements Between Sybron International and SDS" at the end of
this Item 1 for more information regarding those agreements and the
Distribution. As a result of the Distribution, SDS became an independent,
publicly traded company.
When we use the terms "SDS", "Company", "we" or "our" in this Annual
Report, we are referring to Sybron Dental Specialties, Inc. and its subsidiaries
and their respective predecessors that, prior to the Spin-Off, comprised Sybron
International's Dental Business. Our fiscal year ends September 30. All
references to a particular year mean the fiscal year ended September 30 of that
year, unless we indicate otherwise.
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 Division Ormco Corporation, including its Analytic
Endodontics Division
Kerr Italia S.p.A Ormco B.V.
Sybron Canada Limited's Beavers Dental Division Ormodent Group
Pinnacle Products, Inc. Allesee Orthodontic Appliances, Inc.
INFECTION CONTROL PRODUCTS
---------------------------------------------------
Metrex Research Corporation, including its Alden
Scientific Division
</TABLE>
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BUSINESS 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 had an active acquisition program
targeting dental and orthodontic consumables and infection control products.
Since 1993, when we adopted this element of our strategy, through our fiscal
year ended September 30, 2000 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. See Note 13 to our combined financial
statements in Item 8 of this Annual Report. 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.
With the new SDS Credit Facilities (see note 7 to our combined financial
statements in Item 8 of this Annual Report), debt reduction will be an important
priority; however, we will continue to pursue some strategic and select
acquisitions.
The execution of the various elements of our strategy resulted in an
expansion of our business in 2000. Overall sales growth in 2000 was $30.6
million, or 7.9%.
FORWARD-LOOKING STATEMENTS
The description of our businesses included in this Item 1, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this Annual Report, and other portions of this report contain
statements that could be deemed to be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Those
statements, such as the statement made in the immediately preceding section,
"Business Strategy" regarding our intent to pursue our acquisition strategy,
concern, among other things, our intent, belief or current expectations with
respect to our operating and growth strategies, our capital expenditures,
financing or other matters, regulatory matters pertaining to us specifically and
the industry in general, industry trends, competition, risks attendant to
foreign operations, reliance on key distributors, litigation, environmental
matters, and other factors affecting our financial condition or results of
operations. Such forward-looking statements involve certain risks and
uncertainties, many of which are beyond our control, that could cause actual
results to differ materially from those contemplated in the forward-looking
statements. Factors which could cause or contribute to such differences include,
but are not limited to, those discussed in connection with such statements as
well as those described in the section entitled "Cautionary Factors" in Item 7
of this Annual Report.
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 deliver more effective and
efficient
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treatment to their patients. Kerr has expanded its product line through new
product development and through acquisitions. New product development examples
include the Demetron OPTILUX(TM) 501 curing light, Kerr's TAKE 1(R) brand
impression material, POINT 4(TM) brand restorative composite, and OptiBond(R)
Solo Plus bonding agent.
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 the assets 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 51.3%,
49.4% and 50.9% of our combined net sales in 1998, 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 a 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 a separate endodontic direct sales force, with the acquisition of Excellence
in Endodontics, Inc., a manufacturer of products for microscopic endodontic
procedures. We expanded our endodontic business in this segment in 1996 when we
acquired the assets of Analytic Technology Corporation, a manufacturer of
endodontic equipment. In 1998 we added a line of nickel-titanium endodontic
instruments with the acquisition of the dental business of Tycom 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 44.3%, 43.8%
and 42.5% of our combined net sales in 1998, 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 the business of 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 reagents.
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The Infection Control Products business segment accounted for approximately
4.4%, 6.8% and 6.6% of our combined net sales in 1998, 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, an expanded nickel-titanium
wire line, 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 dentists more efficient. The
sales growth resulting from 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 and
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distributors. 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
that 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, Belgium, and Portugal.
Products in our Infection Control Products business segment are
manufactured in the United States and are distributed internationally, primarily
in Canada, where independent sales representatives sell them. These products are
sold in other countries primarily through distributors and agents.
Domestic and international sales of SDS's products by business segment are
as follows:
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YEARS ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
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(IN THOUSANDS)
<S> <C> <C> <C>
Professional Dental:
Domestic........................................... $109,723 $105,629 $126,038
International...................................... 78,611 86,294 86,970
-------- -------- --------
Total Professional Dental Sales............ $188,334 $191,923 $213,008
======== ======== ========
Orthodontics:
Domestic........................................... $ 91,784 $ 95,505 $101,282
International...................................... 70,726 74,396 76,857
-------- -------- --------
Total Orthodontics Sales................... $162,510 $169,901 $178,139
======== ======== ========
Infection Control Products:
Domestic........................................... $ 14,956 $ 24,620 $ 26,141
International...................................... 1,086 1,732 1,491
-------- -------- --------
Total Infection Control Product Sales...... $ 16,042 $ 26,352 $ 27,632
======== ======== ========
Total Net Sales...................................... $366,886 $388,176 $418,779
======== ======== ========
</TABLE>
We have included other financial information about our business segments
and foreign operations in Note 15 to our combined financial statements in Item 8
of this Annual Report.
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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 (a subsidiary of Dentsply), and Unitek (a
subsidiary of 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.
BACKLOG
Our total backlog of orders at September 30, 1998, 1999 and 2000 was
approximately $3.4 million, $3.8 million and $3.4 million, respectively. We
expect all September 30, 2000 backlog orders to be filled in fiscal 2001.
Our backlog by business segment is as follows:
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YEARS ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
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(IN THOUSANDS)
<S> <C> <C> <C>
Professional Dental........................................ $1,654 $2,590 $2,087
Orthodontics............................................... 1,604 1,066 1,250
Infection Control Products................................. 182 134 110
------ ------ ------
Total............................................ $3,440 $3,790 $3,447
====== ====== ======
</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 $7.3 million, $9.4 million and $8.8
million on research and development in 1998, 1999 and 2000, respectively.
Our research and development expenditures by business segment are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1998 1999 2000
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional Dental........................................ $3,880 $4,353 $4,098
Orthodontics............................................... 3,262 4,769 4,321
Infection Control Products................................. 171 303 334
------ ------ ------
Total............................................ $7,313 $9,425 $8,753
====== ====== ======
</TABLE>
EMPLOYEES
Our companies employed approximately 3,400 people at September 30, 2000,
approximately 140 of whom 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
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between the national labor union and 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. We 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.
REGULATION
Medical Devices
Certain of our products are medical devices that 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.
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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 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. We are uncertain as to when, and if, the FDA
will publish its decision on the classification.
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 classified as pesticides and
are subject to regulation by the United States Environmental Protection Agency
("EPA") under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA")
and by various State Environmental Agencies under the laws of those States.
Under FIFRA, no one may sell, distribute or use a pesticide unless it is
registered with 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 are designed to 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
8
<PAGE> 11
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 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 1998, 1999 and
2000, our net sales outside the United States accounted for approximately 41%,
42%, and 39%, respectively, of combined net sales. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- International Operations" and Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk" 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 is 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 of 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.
TRANSACTIONS AND AGREEMENTS BETWEEN SYBRON INTERNATIONAL AND SDS
In order to effect the Distribution, Sybron International and SDS have
entered into a number of interrelated agreements. These agreements define the
ongoing relationship between the parties after the Distribution. Because these
agreements were negotiated while SDS was a wholly owned subsidiary of Sybron
International, they are not the result of negotiations between independent
parties, although the Company and Sybron International have set pricing believed
to be comparable to that set 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.
9
<PAGE> 12
Contribution Agreement
Pursuant to the Contribution Agreement, Plan and Agreement of
Reorganization and Distribution, immediately prior to the Spin-Off, all of the
capital stock of SDM (formerly known as Sybron Dental Specialties, Inc.), which
owns, directly or indirectly, the stock or other equity interests in the
subsidiaries that hold substantially all of the assets and liabilities of the
Dental Business, was transferred by Sybron International to SDS along with
certain other assets relating to the Dental Business. Under this agreement,
prior to such transfer, Sybron International paid SDM the amount necessary to
settle all intercompany loans and advances made to Sybron International by SDM,
and SDM paid Sybron International a dividend of $67.9 million representing
difference between $375 million and the actual allocation of Sybron
International bank debt to SDM as of the Distribution.
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, in general, 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 indemnify SDS and its subsidiaries and affiliates against
liabilities, litigation and claims actually or allegedly arising out of its
Sybron International's 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.
Trade Name Assignment and Transitional Trade Name Use and License Agreement
Pursuant to the Trade Name Assignment and Transitional Trade Name Use and
License Agreement, the unregistered trade name "Sybron" has been 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.
Insurance Matters Agreement
An Insurance Matters Agreement governs 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 Matters
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.
Employee Benefits Agreement
Although no current employees of Sybron International's laboratory business
are expected to become employees of the Dental Business or vice versa, various
Sybron International employee benefit plans have been modified to reflect the
fact that they will no longer cover employees of the Dental Business, and SDS
has created new employee benefit plans on behalf of the Dental Business
employees. The Employee Benefits Agreement sets forth the agreements of SDS and
Sybron International regarding this transition.
Tax Indemnification Agreement
The Tax Sharing and Indemnification Agreement governs 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
10
<PAGE> 13
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, Sybron International and SDS have entered into an
Interim Administrative Services Agreement which governs 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, are comparable to rates SDS
could have achieved through arm's-length negotiations.
Confidentiality and Nondisclosure Agreement
As of the Distribution, SDS and Sybron International have entered into a
Confidentiality and Nondisclosure 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.
ITEM 2. 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.................... 117,620 sq. ft./headquarters, leased
manufacturing and warehouse
PROFESSIONAL DENTAL
Morrisburg, Ontario................... 60,000 sq. ft./manufacturing owned
Morrisburg, Ontario................... 30,000 sq. ft./manufacturing leased
Danbury, Connecticut.................. 30,000 sq. ft./manufacturing, leased
warehouse and offices
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 owned
offices
Mexicali, Mexico...................... 57,000 sq. ft./manufacturing and leased
offices
Glendora, California.................. 66,000 sq. ft./manufacturing leased
Redmond, Washington................... 29,000 sq. ft./manufacturing, leased
warehouse and offices
Uman, Yucatan, Mexico................. 35,000 sq. ft./manufacturing owned
Tijuana, Mexico....................... 32,000 sq. ft./manufacturing owned
Sturtevant, Wisconsin................. 21,000 sq. ft/manufacturing leased
INFECTION CONTROL PRODUCTS
Parker, Colorado...................... 27,000 sq. ft./manufacturing and owned/leased
office
</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
11
<PAGE> 14
expansions through internally generated funds or borrowings under our credit
facilities described in Note 7 to our combined financial statements in Item 8 of
this Annual Report. All of our domestic properties are encumbered under our
Credit Facilities. See "Liquidity and Capital Resources" in Item 7 of this
Annual Report.
ITEM 3. 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 above 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 Note 12 to our combined financial statements in Item 8 of
this Annual Report and "Item 1 Business -- Transactions and Agreements Between
Sybron International and SDS."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages positions and experience of our
executive officers. All executive officers hold office at the pleasure of the
Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND EXPERIENCE
---- --- ------------------------
<S> <C> <C>
Floyd W. Pickrell, 55 President and Chief Executive Officer of SDS since October
Jr. ................... 2000; 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.
Michael R. DePrez........ 59 Executive Vice President of Operations and Chief Information
Officer of SDS since October 2000. 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........... 48 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.
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND EXPERIENCE
---- --- ------------------------
<S> <C> <C>
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 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.
Stephen J. Tomassi....... 48 Vice President -- General Counsel and Secretary of SDS
since October 2000. Joined Sybron International in 1988 as
Corporate Counsel, becoming Assistant General Counsel in
June 1992, and 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.......... 55 Vice President of Human Resources of SDS. Joined Ormco in
October 1983 as Vice President of Human Resources since
October 2000; 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........ 51 Vice President -- Finance, Chief Financial Officer and
Treasurer of SDS since October 2000. 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 since October 2000; 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>
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since our inception, we have not paid any dividends on our Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of this Annual Report,
and Note 7 to our combined financial statements contained in Item 8 of this
Annual Report, for a description of certain restrictions on our ability to pay
dividends. Subject to such limitations, any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our earnings, financial condition and other requirements. We have no current
intention to pay cash dividends on our Common Stock.
Based upon record ownership as of December 15, 2000, the number of record
holders of our Common Stock is 414.
Prior to the Distribution there was no public trading market for our stock.
Commencing November 28, 2000, our Common Stock began to trade on the New York
Stock Exchange on a "when issued" basis under the symbol "SYD." "Regular way"
trading began on December 12, 2000, the day after the Distribution was effected.
The market information set forth below is for the period from November 28, 2000
through December 15, 2000 and is based on NYSE sales prices.
<TABLE>
<CAPTION>
FISCAL 2001 HIGH LOW
----------- ------ ---
<S> <C> <C>
First Quarter (Nov. 28, 2000-Dec. 15, 2000)................. $17.06 $13
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected combined financial information for
the five years in the period ended September 30, 2000. The historical
information shown may not necessarily be indicative of the results of operations
or financial position that would have been obtained if SDS was an independent
company during the periods shown or of SDS' future performance as an independent
company. This selected financial information should be read in conjunction with
our combined financial statements and the notes thereto contained in Item 8 of
this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales............................. $331,190 $358,697 $366,886 $388,176 $418,779
Sybron International charges(a)....... 4,294 3,617 3,620 4,228 2,979
Income before extraordinary item...... 28,451 37,064 27,496 47,294 41,597
Extraordinary item(b)................. -- (269) -- -- --
Net income(c)......................... 28,451 36,795 27,496 47,294 41,597
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Advances and loans to Sybron
International......................... $ 84,137 $ 55,176 $ 29,088 $ 56,777 $ 77,762
Total assets............................. 453,154 452,702 476,287 515,314 545,577
Long-term debt........................... 198,328 259,297 248,175 283,447 298,482
Stockholder's equity..................... 175,403 104,800 129,508 155,595 152,970
</TABLE>
---------------
(a) Represents an allocation of Sybron International's corporate office, general
and administrative expenses.
(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 in Item 8 of this Annual Report.
14
<PAGE> 17
(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, $1.4 million ($0.9 million after
tax) in 1999 for 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" -- Item 7, and Note 11 in
Item 8 of this Annual Report to our combined financial statements); and a
restructuring charge of $9.3 million ($5.8 million after taxes) in
September, 2000 for the closing of the Metrex Parker, Colorado facility, and
the restructuring of the Ormco San Diego and Amersfort/Europe businesses, as
well as inventory and related charges for product exits in fiscal year 2000
in all three business segments.
The comparability of the information reflected in the historical selected
financial data will be significantly affected by the Distribution. See
"Unaudited Pro Forma Combined Financial Information" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
15
<PAGE> 18
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Sybron International transferred its Dental Business to SDS and then spun
off the stock of SDS in the Distribution on December 11, 2000. All historical
combined financial statements of SDS relate to periods in which the various
spun-off businesses operated as direct or indirect subsidiaries of Sybron
International.
The unaudited Pro Forma Combined Statement of Income for SDS for the year
ended September 30, 2000, presents the pro forma combined results of operations
of SDS and its affiliates assuming the transactions contemplated by the
Distribution, including the borrowings incurred by SDS in connection with the
Distribution, had been completed as of October 1, 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" column.
The unaudited Pro Forma Combined Balance Sheet of SDS as of September 30,
2000 presents the pro forma combined financial position of SDS assuming the
transactions contemplated by the Distribution had taken place on September 30,
2000. The adjustments required to reflect the transaction are set forth in the
"Pro Forma Adjustments" column.
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 in Item 8 of in this Annual Report. 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 period
shown.
16
<PAGE> 19
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Net sales............................................... $418,779 $ -- $418,779
Cost of sales:
Cost of product sold.................................. 175,067 -- 175,067
Restructuring charge.................................. 8,646 -- 8,646
Depreciation of purchase accounting adjustments....... 108 -- 108
Total cost of sales..................................... 183,821 -- 183,821
-------- -------- --------
Gross profit............................................ 234,958 -- 234,958
-------- -------- --------
Selling, general and administrative expenses............ 127,869 6,500(a) 134,369
Sybron International charges............................ 2,979 (2,979)(b) --
Restructuring charge.................................... 680 -- 680
Depreciation and amortization of purchase accounting
adjustments........................................... 8,383 -- 8,383
-------- -------- --------
Total selling, general and administrative
expenses.................................... 139,911 3,521 143,432
-------- -------- --------
Operating income........................................ 95,047 (3,521) 91,526
-------- -------- --------
Other income (expense):
Interest expense...................................... (25,899) (13,096)(c) (38,995)
Interest income -- Sybron International............... 852 (852)(d) --
Amortization of deferred financing fees............... (282) (511)(e) (793)
Other, net............................................ 218 -- 218
-------- -------- --------
Income before income taxes.............................. 69,936 (17,980) 51,956
Income taxes............................................ 28,339 (7,192)(f) 21,147
-------- -------- --------
Net income.................................... $ 41,597 $(10,788) $ 30,809
======== ======== ========
Pro forma basic earnings per share:
Before Special Charges................................ $ 1.05(g)
Special Charges....................................... (0.17)
--------
Pro forma basic earnings per share...................... $ 0.88(g)
========
Pro forma diluted earnings per share:
Before Special Charges................................ $ 1.03(g)
Special Charges....................................... (0.16)
--------
Pro forma diluted earnings per share.................... $ 0.87(g)
========
Basic shares outstanding................................ 34,857(g)
Effect of exchange of employee stock options............ 744(g)
--------
Diluted shares outstanding.............................. 35,601(g)
========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
17
<PAGE> 20
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 5,783 $ -- $ 5,783
Accounts receivable, net.............................. 85,767 -- 85,767
Inventories........................................... 74,383 -- 74,383
Deferred income taxes................................. 8,977 -- 8,977
Prepaid expenses and other current assets............. 6,497 -- 6,497
-------- --------- --------
Total current assets.......................... 181,407 -- 181,407
-------- --------- --------
Advances and loans to Sybron International.............. 77,762 (77,762)(h) --
Property, plant and equipment, net...................... 55,326 -- 55,326
Intangible assets....................................... 220,705 -- 220,705
Deferred income taxes................................... 3,410 -- 3,410
Other assets............................................ 6,967 -- 6,967
-------- --------- --------
Total assets.................................. $545,577 $ (77,762) $467,815
======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................................... $ 11,351 $ -- $ 11,351
Current portion of long-term debt..................... 21,761 (5,261)(h) 16,500
Income taxes payable.................................. 5,680 -- 5,680
Accrued payroll and employee benefits................. 13,780 -- 13,780
Restructuring reserve................................. 2,403 -- 2,403
Deferred income taxes................................. 3,225 -- 3,225
Accrued rebate........................................ 5,137 -- 5,137
Other current liabilities............................. 6,539 -- 6,539
-------- --------- --------
Total current liabilities..................... 69,876 (5,261) 64,615
-------- --------- --------
Long-term debt.......................................... 298,482 68,489(h) 366,971
Deferred income taxes................................... 15,414 -- 15,414
Other liabilities....................................... 8,835 -- 8,835
Stockholder's equity.................................... 152,970 (140,990)(h) 11,980
-------- --------- --------
Total liabilities and stockholder's equity.... $545,577 $ (77,762) $467,815
======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
18
<PAGE> 21
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To record the incremental costs directly attributable to the
transaction that would have been incurred by SDS as a publicly held, independent
company if the transaction had taken place on October 1, 1999 (for the year
ended September 30, 2000). SDS would have incurred $4.0 million in compensation
and related costs for employees to perform functions that have historically been
performed at Sybron International's corporate headquarters (legal, tax,
treasury, reporting and insurance, of approximately $1.6 million, $0.9 million,
$0.5 million, $0.5 million and $0.5 million, respectively, on an annual basis)
in fiscal 2000. These functions were performed on a consolidated Sybron
International basis and will need to be duplicated at SDS as a result of the
transaction. 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 in fiscal 2000. The
adjustments are based upon actual historical cost experience of Sybron
International applied to SDS. Although the adjustment is based upon available
historical information, SDS may incur greater or lower selling, general and
administrative expenses in connection with operating as a stand alone company.
(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 bear an annualized interest
rate at 9.91% (Eurodollar rate plus 315 basis points), the actual rate under the
terms of the SDS Credit Facilities. Pro forma adjustments to bank debt in 2000
include the addition of a weighted average amount of $45.9 million of bank debt,
based upon the difference between the pro forma bank debt of $375 million and
the historical weighted average levels of debt of $329.1 million on September
30, 2000. The pro forma interest adjustment was calculated as follows (dollars
in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE AVERAGE PRO FORMA PRO FORMA
BALANCE RATE INTEREST RATE ADJUSTMENT
---------------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 2000
Revolving Credit Facility.............. $139,794 6.9% 10.51% $ 5,067
Term Loan A Tranche.................... 69,372 7.0 9.67 1,852
Term Loan B Tranche.................... 119,915 8.0 9.51 1,810
Additional Debt from the
Distribution......................... 45,919 -- 9.51 4,367
-------- -------
Total........................ $375,000 $13,096
======== =======
</TABLE>
Due to the large amount of floating rate debt the interest rate on the
borrowings under the SDS Credit Facilities will continue to be subject to
changes in interest rates. See Item 7A, "Qualitative and Quantitative
Disclosures about Market Risk -- Interest Rates." The following table reflects
the effect on the unaudited pro forma combined statement of income of an
increase or decrease of 10% from the current estimated interest rate of 9.91% on
an annualized basis.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 2000
-----------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C>
Change in income before income taxes................ $3,716
======
Change in net income................................ $2,211
======
Change in pro forma diluted earnings per Share...... $ 0.06
======
</TABLE>
(d) To eliminate intercompany interest paid to SDS.
(e) To record deferred financing fees had the transaction been completed on
the first day of the period presented.
19
<PAGE> 22
(f) To record income tax benefits attributable to (a), (b), (c), (d) and
(e) above at a statutory rate of 40%.
(g) The pro forma basic 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 period, adjusted in
accordance with the Distribution ratio of one share of SDS for every three
shares of Sybron International common stock held. In connection with the
Distribution, SDS's officers and employees were allowed to exchange their Sybron
International stock options for SDS stock options having an aggregate intrinsic
value (the spread between the market value and exercise price of the option
shares) equal to the aggregate intrinsic value of the Sybron International stock
options exchanged and an exercise price that maintains the ratio of the exercise
price per share to the market value per share of the Sybron International stock
options exchanged.
The aggregate intrinsic value of the SDS stock options was equal to the
aggregate intrinsic value of the Sybron International stock options immediately
before the Spin-Off, and the ratio of the exercise price per share of the SDS
stock options to the market value per share was not less than the ratio of the
exercise price per share to the market value per share of the Sybron
International stock options immediately before the Spin-Off. No modifications
were made to accelerate the vesting or to extend the life of the options. The
intent is to enable SDS officers and employees to maintain but not increase the
economic value of unexercised stock options. Any fractional shares resulting
from the exchange will be paid in cash. The amount of cash paid will be minimal
and will be recorded as compensation expense. Therefore, there will be no
accounting consequence to SDS for the exchange.
Basic and diluted shares used to calculate earnings per share are based
upon the ratio of SDS shares per share of Sybron International issued in
connection with the Distribution. We have used this ratio for the following
reasons: (1) upon the Distribution, each shareholder of Sybron International
received one share of SDS for every three Sybron International shares owned on
the record date; and (2) dilutive SDS options outstanding as of September 30,
2000 were based on September 30, 2000 dilutive Sybron International options (see
explanation in the preceding paragraph).
If the pro forma basic earnings per share were calculated using the total
number of outstanding shares of SDS as of December 12, 2000, the basic earnings
per share, after Special Charges, would remain unchanged at $0.88. The diluted
earnings per share, after accounting for the exchange of employee stock options
in Sybron International to SDS, would be $0.84.
(h) To record a dividend from SDS to Sybron International, estimated at
September 30, 2000 to be $141.0 million net of the repayment of all intercompany
loans and advances and the replacement bank debt of $375 million by SDS. These
amounts are based upon the agreement between the parties providing for the
Spin-Off. See Item 1, "Business -- Transactions and Agreements Between Sybron
International and SDS." The debt amounts are as follows:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of term loan......................... $ 21,386 $ (5,261) $ 16,125
Other current portion of short term debt............. 375 -- 375
-------- -------- --------
Total current portion of short term debt... $ 21,761 $ (5,261) $ 16,500
======== ======== ========
Long-term portion of term loan....................... $183,366 $100,509 $283,875
Revolving credit facility............................ 107,020 (32,020) 75,000
Other long term debt................................. 8,096 -- 8,096
-------- -------- --------
Total long-term bank debt.................. $298,482 $ 68,489 $366,971
======== ======== ========
</TABLE>
SDS does not anticipate any material charges or credits resulting directly
from the Distribution to be included in its statement of income in the
twelve-month period following the Spin-Off.
20
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our combined
financial statements and the accompanying notes contained in Item 8 of this
Annual Report.
SPECIAL CHARGES
Our results for fiscal 2000 include charges of approximately $9.3 million
($5.8 million after tax) consisting primarily of exited product lines
(approximately $5.3 million, $1.7 million and $0.6 million in the Orthodontics,
Professional Dental and Infection Control Products businesses, respectively),
and severance and termination for approximately sixty-five employees (fifty-six
located at the Metrex Research Corporation facility in Parker, Colorado, eight
located at the Ormco San Diego, California facility, and one located at the
Ormco Amersfort/Europe facility), as a result of the 2000 restructuring plan. Of
the $9.3 million restructuring charges, approximately $7.8 million represent
non-cash charges related to the exited products and capital, while the balance
of approximately $1.5 million are cash related charges for severance and
contractual obligations. These combined charges are collectively referred to
herein as the "2000 Special Charges." The closing and re-location of the Metrex
facility to the Kerr Romulus, Michigan facility, the reduced working capital
related to the exited products, and the headcount reductions at the Ormco
facilities will save the Company approximately $1.7 million pre-tax on an annual
basis, once completed. The Ormco San Diego and Ormco Amersfort restructurings
and the product line exits should be completed in the first quarter of 2001. The
Metrex facility move and closing is anticipated to occur in the third quarter of
2001, along with the majority of the cash charges.
Our results for fiscal 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 SDS 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 and 2000 Special Charges, are referred to as the
"Special Charges." (See Note 11 to the combined financial statements in Item 8
of this Annual Report).
Restructuring activity since June 30, 1998 and its components are as
follows:
<TABLE>
<CAPTION>
LEASE SHUT- INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS DOWN WRITE-OFF ASSETS TAX OBLIGATIONS
(A) (B) COSTS(B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- -------- --------- ------ ---- ----------- ------ -------
<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
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 2000 balance... $ -- $ -- $ -- $ -- $ -- $700 $ -- $ 200 $ 900
====== ==== ==== ====== ====== ==== ==== ====== =======
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
LEASE SHUT- INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS DOWN WRITE-OFF ASSETS TAX OBLIGATIONS
(A) (B) COSTS(B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- -------- --------- ------ ---- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 Restructuring Charge.... $1,300 $ -- $ -- $7,600 $ 200 $ -- $100 $ 100 $ 9,300
2000 Non-Cash Charges........ -- -- -- 7,600 200 -- -- -- 7,800
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 2000 balance... $1,300 $ -- $ -- $ -- $ -- $ -- $100 $ 100 $ 1,500
====== ==== ==== ====== ====== ==== ==== ====== =======
</TABLE>
---------------
(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel). As of
September 30, 1999, 154 employees have been terminated as a result of the
1998 restructuring plan. Payments will continue to certain employees
previously terminated under this restructuring plan. An adjustment of
approximately $1,200 was made in 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. The September 2000 restructuring charge
represents severance and termination costs for approximately 65 terminated
employees (primarily at the Metrex, Parker, Colorado facility) as a result
of the 2000 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.
SALES GROWTH AND OPERATING INCOME GROWTH
Both our net sales and operating income grew in 1999 and 2000 from the
previous corresponding periods. Net sales in 1999 and 2000 increased by 5.8% and
7.9%, respectively, from corresponding prior year periods. Operating income in
1999 and 2000 increased by 46.1% and 0.1%, 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 9.1%, respectively,
over the prior year periods.
Sales grew for the year ended September 30, 2000, both domestically and
internationally. Domestic and international sales increased by 12.3% and 1.8%,
respectively, over the prior year. International sales were negatively impacted
by the strengthening of the U.S. dollar. Without currency effects, international
sales would have increased by 9.6%.
1999 AND 2000 ACQUISITIONS
As discussed in "Business -- General, New Products," we have maintained an
active program of development and introduction of new products. We believe that
new product introductions are important to our ability to maintain our
competitive position. We have also pursued numerous acquisition opportunities,
22
<PAGE> 25
completing 22 acquisitions between 1993 and 2000, three of which we completed in
1999 and three in 2000. Acquisitions completed in 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
ANNUAL SALES PRIOR ACQUISITION
COMPANY TO ACQUISITION DATE DESCRIPTION
------- ------------------ ----------- -----------
<S> <C> <C> <C>
PROFESSIONAL DENTAL
Pinnacle Products of Wisconsin, $11.8 million 10/98 Manufacturer of dental
Inc. ........................... 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 $ 3.5 million 7/99 Manufacturer of reagents
Gulfstream Medical, Inc. ....... 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.
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, resulting in no gain or loss in 1998 and, therefore, 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
23
<PAGE> 26
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, Sybron International 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 fiscal year 2000, Euro options
expiring on March 29, 2000 and June 28, 2000 were sold at a gain of $1.2 million
and the Japanese yen options expiring on March 29, 2000 and June 28, 2000
expired worthless. Approximately $1.1 million of the Euro options gain was
allocated to SDS. Options expiring September 26, 2000 were sold at a profit with
a gain for SDS of approximately $1.4 million. Allocations of gains and losses
were based upon SDS's exposure to the currencies hedged, relative to the
consolidated Sybron International exposure. We expect to continue to employ
measures to protect our earnings from currency volatility through the use of
currency options, forward contracts or similar instruments. Foreign currency
options expire in the quarter they are designed to protect and therefore must be
sold or exercised in the quarter hedged in order not to expire.
The following table sets forth our domestic sales and sales outside the
United States in 1998, 1999 and 2000. See also Note 15 to our combined financial
statements contained in Item 8 of this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic net sales................................... $216,463 $225,754 $253,462
International net sales.............................. 150,423 162,422 165,317
-------- -------- --------
Total net sales............................ $366,886 $388,176 $418,779
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
Year Ended September 30, 2000 Compared to the Year Ended September 30, 1999
NET SALES
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
NET SALES: 1999 2000
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Professional Dental......................................... $191,923 $213,008
Orthodontics................................................ 169,901 178,139
Infection Control Products.................................. 26,352 27,632
-------- --------
Total Net Sales................................... $388,176 $418,779
======== ========
</TABLE>
Overall Company. Net sales for the twelve months ended September 30, 2000
increased by $30.6 million or 7.9% from the corresponding 1999 period. After
adjusting for the impact of the strengthening U.S. Dollar, sales would have
increased by $37.4 million or 9.6% from the corresponding 1999 period.
Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from (a) increased net sales of new products
(approximately $34.8 million) and (b) net sales of products from acquired
companies net of discontinued products (approximately $2.7 million). Increased
net sales were partially offset by (a) decreased net sales of existing products
(approximately $12.0 million), (b) decrease in
24
<PAGE> 27
rebate expense (approximately $.9 million), and (c) unfavorable foreign currency
fluctuations (approximately $3.5 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $7.9
million) and (b) increased net sales of products of an acquired company
(approximately $4.7 million). Increased net sales were partially offset by
unfavorable foreign currency fluctuations (approximately $4.4 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 $3.0 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 the FDA. The impact of the action was mitigated by Metrex's
ability to supply substitute products to its customers (approximately $1.7
million).
GROSS PROFIT
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
GROSS PROFIT: 1999 SALES 2000 SALES
------------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental......................... $105,954 55.2% $120,092 56.4%
Orthodontics................................ 105,448 62.1 102,946 57.8
Infection Control Products.................. 14,208 53.9 11,920 43.1
-------- ---- -------- ----
Total Gross Profit................ $225,620 58.1% $234,958 56.1%
======== ==== ======== ====
</TABLE>
Overall Company. Gross profit for the twelve months ended September 30,
2000 increased by $9.3 million or 4.1% from the corresponding fiscal 1999
period.
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $13.7
million), (b) a favorable product mix (approximately $3.3 million), (c)
inventory valuation adjustments, primarily related to a favorable physical
inventory adjustment (approximately $3.0 million), and (d) an acquired company
net of discontinued product lines (approximately $1.7 million). Increased gross
profit was partially offset by: (a) increased manufacturing overhead
(approximately $2.6 million), (b) the 2000 Special Charges related to exited
products (approximately $1.8 million), (c) unfavorable foreign currency
fluctuations (approximately $1.3 million), (d) an increase in rebate expense
($0.9 million), (e) a LIFO adjustment (approximately $0.7 million), and (f)
other inventory charges (approximately $0.3 million).
Orthodontics. Decreased gross profit in the Orthodontics segment resulted
primarily from: (a) increased manufacturing variances (approximately $5.8
million), (b) the 2000 Special Charges relating primarily to exited product
lines (approximately $5.3 million, (c) unfavorable foreign currency fluctuations
(approximately $4.4 million), and (d) a LIFO adjustment (approximately $1.1
million). The decrease in gross profit was partially offset by (a) an increase
in new product sales (approximately $5.2 million), (b) favorable product mix
increase (approximately $4.8 million), (c) an acquired company (approximately
$2.0 million), (d) inventory adjustments primarily related to a positive
revaluation of standard costs associated with manufacturing (approximately $2.0
million), and (e) a decrease in unit volume of existing products (approximately
$0.1 million).
Infection Control Products. Decreased gross profit in the Infection
Control Products segment resulted primarily from: (a) the 2000 Special Charges
primarily related to exited product lines (approximately $1.5 million), (b)
increased manufacturing overhead (approximately $1.0 million), (c) decreased
volume (approximately $0.9 million), (d) other inventory valuation adjustments
(approximately $0.6 million), (e) product mix (approximately $0.2 million), and
(f) an increase in rebate expense (approximately $0.1 million). Decreased gross
profit was partially offset by the effects of an acquired company (approximately
$2.0 million).
25
<PAGE> 28
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......................... $ 62,406 32.5% $ 64,021 30.1%
Orthodontics................................ 58,327 34.3 64,401 36.2
Infection Control Products.................. 10,581 40.2 11,489 41.6
-------- ---- -------- ----
Total Selling, General and
Administrative Expenses......... $131,314 33.8% $139,911 33.4%
======== ==== ======== ====
</TABLE>
Overall Company. Selling, general and administrative expenses for the year
ended September 30, 2000, increased by $8.6 million or 6.5% from the
corresponding 1999 period.
Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a) higher
selling and marketing expenses (approximately $2.9 million), (b) unfavorable
foreign currency fluctuations (approximately $0.6 million), (c) higher general
and administrative expenses (approximately $0.6 million), and increased
amortization (approximately $0.3 million). The increase was partially offset by:
(a) the non-recurring 1999 Special Charges (approximately $2.0 million), (b) a
decrease in corporate charges based on a lower domestic sales percentage
(approximately $0.5 million), and (c) decreased research and development
expenses and other (approximately $0.3 million).
Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $2.8 million), (b) a non-recurring 1999
reversal of Special Charges (approximately $1.2 million), (c) increased selling,
general and administrative expenses as a result of acquired companies
(approximately $1.2 million), (d) increased selling and marketing expenses
(approximately $0.9 million), (e) unfavorable foreign currency fluctuations
(approximately $0.9 million), (f) the 2000 Special Charges related to severance,
outplacement services and contractual liabilities (approximately $0.4 million),
and (g) increased amortization of intangibles primarily as a result of
acquisitions (approximately $0.3 million). Increased selling, general and
administrative expenses in the Orthodontics segment were partially offset by:
(a) decreased research and development expenses (approximately $0.4 million),
(b) a decrease in corporate charges based on a lower domestic sales percentage
(approximately $0.7 million), and (c) the non-recurring 1999 Special Charges
(approximately $0.5 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 primarily as a result of
acquired companies (approximately $0.4 million), (b) amortization of intangibles
primarily from acquired businesses (approximately $0.3 million), and (c) the
2000 Special Charges (approximately $0.2 million).
OPERATING INCOME
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
OPERATING INCOME: 1999 SALES 2000 SALES
----------------- ------- ---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Professional Dental........................... $43,558 22.7% $56,071 26.3%
Orthodontics.................................. 47,121 27.7 38,545 21.6
Infection Control Products.................... 3,627 13.8 431 1.6
------- ---- ------- ----
Total Operating Income.............. $94,306 24.3% $95,047 22.7%
======= ==== ======= ====
</TABLE>
As a result of the foregoing, operating income in the year ending September
30, 2000 increased by 0.8% or $0.7 million over operating income in the
corresponding 1999 period.
26
<PAGE> 29
INTEREST EXPENSE
Interest expense was $25.9 million in 2000, an increase of $8.8 million
from the corresponding 1999 period. The increase resulted from a higher average
debt balance resulting primarily from funding acquisitions, an increase in
average interest rates primarily due to 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
Income taxes in 2000 were $28.3 million, a decrease of $2.5 million from
the corresponding 1999 period. The decrease resulted primarily from lower
taxable income.
NET INCOME
As a result of the foregoing, we had net income of $41.6 million in 2000,
as compared to net income of $47.3 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 $0.9 million in 2000 due to additional amortization from
the step-up of assets, goodwill and intangibles recorded from the various
acquisitions as well as routine operating capital expenditures.
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 1998.
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).
27
<PAGE> 30
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 55.2%
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 primarily
related to an increase in LIFO reserves, negative physical inventory adjustments
and a negative revaluation of standard costs reflecting the year over year
difference in the annual revaluation of standards to incorporate cost changes
associated with manufacturing our products (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 primarily relating to cost reductions from moving
production of endodontic products from the United States to Mexico
(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 $4.5
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
primarily related to decreases in LIFO reserves, a reduction of obsolescence
partially offset by a negative revaluation of standard costs reflecting the year
over year difference in the annual revaluation of standards to incorporate cost
changes associated with manufacturing our products and physical inventory
adjustments (approximately $0.6 million), (e) favorable foreign currency
fluctuations (approximately $1.0 million), (f) a favorable product mix primarily
attributable to lower manufacturing costs associated with Analytic Endodontics
Corporation products which relocated manufacturing from the United States to
Mexico, resulting in lower costs of production (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 related to an
increase in LIFO reserves (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.
28
<PAGE> 31
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 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) increased general and administrative
expenses (approximately $0.4 million), (d) amortization of intangibles primarily
from acquired businesses (approximately $0.3 million), and (e) an increase in
the allocation of Sybron International overhead (approximately $0.1 million).
OPERATING INCOME
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
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
was recorded at SDS.
INCOME TAXES
Taxes on income from continuing operations were $30.8 million, an increase
of $12.2 million from 1998. The increase resulted primarily from increased
taxable earnings offset partially by a lower effective tax rate.
29
<PAGE> 32
NET INCOME
As a result of the foregoing, we had net income of $47.3 million in 1999,
as compared to net income of $27.5 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.
NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2000 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as modified by Statement of Financial Accounting Standards No. 137
and Statement of Financial Accounting Standards No. 138. These statements
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. The Company has concluded that the adoption of these statements has
no material impact on the Company's financial position or results of its
operations at October 1, 2000.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion No. 25 ("FIN 44"). This Interpretation clarifies the definition of
employee for purposes of applying Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. We adopted FIN 44 during
the year ended September 30, 2000. This adoption did not have a material effect
on our combined financial position or results of operations.
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 the amortization of intangible assets,
including goodwill. Goodwill and intangible assets increased by approximately
$21.6 million in 2000, primarily as a result of continued acquisition activity.
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
30
<PAGE> 33
capital requirements to be similar to those prior to its Spin-Off. In addition,
SDS required capital to service bank debt and related interest allocated in the
Spin-Off of $311.8 million. It is currently SDS's intent to de-leverage and
continue to pursue its acquisition strategy when those acquisitions appear to be
in the best interest of the stockholders and given the level of debt and
interest. 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 13
to our combined financial statements contained in Item 8 of this Annual Report.
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 "Cautionary Factors"
below.
Approximately $62.4 million of cash was generated from operating activities
in 2000, an increase of $11.1 million or 21.6%, from 1999. Increased cash flow
from operating activities resulted primarily from increases in other current
liabilities (approximately $9.8 million), a decrease in inventory levels related
to the reserve for exited product lines (approximately $7.6 million, partially
offset by an increase in inventory levels over the prior year of approximately
$2.4 million), an increase in the inventory provision (approximately $7.6
million relating to Special Charges, partially offset by a decrease in the
provision of approximately $1.0 million), an increase in the restructure reserve
(approximately $4.9 million), higher deferred taxes and income taxes payable
(approximately $4.4 million), higher accrued payroll and employee benefits
(approximately $1.2 million), increased depreciation and amortization over the
previous year (approximately $1.1 million), and an increase in the provision for
doubtful accounts (approximately $0.1 million). The increase in cash from
operating activities was partially offset by a decrease in other assets and
liabilities (approximately $10.1 million), a decrease in net income primarily
due to Special Charges (approximately $0.7 million before Special Charges, and
approximately $5.7 million including Special Charges), decreased accounts
payable (approximately $3.0 million), lower prepaid expenses (approximately $2.2
million), an increase in accounts receivable (approximately $1.0 million), and a
decrease in the gain from the sales of property, plant and equipment
(approximately $0.2 million). Included in the cash flow from operating
activities is the non-cash portion of the Special Charges of approximately $7.8
million, primarily related to the exited product lines. Approximately $32.8
million of cash was used in investing activities in 2000, an increase of $4.4
million, or 15.6%, from 1999. Increased investing activities resulted primarily
from an increase in acquisition activity (approximately $5.9 million), partially
offset by decreased capital expenditures (approximately $1.1 million), and
increased proceeds from sales of property, plant and equipment (approximately
$0.4 million). Approximately $23.0 million of cash was used in financing
activities, primarily from dividends paid to Sybron International (approximately
$58.5 million), an increase in advances to Sybron International (approximately
$21.0 million), partially offset by borrowings under the credit facilities
(approximately $35.1 million) and capital contributions from Sybron
International (approximately $21.4 million).
Credit Facility
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 recorded a portion of
the debt outstanding and related interest under these facilities at SDS or its
affiliates. At September 30, 1999 and 2000, approximately $273.2 and $311.8
million, respectively, of the borrowings under the Sybron International credit
facilities (the "Credit Facilities"), consisting of term loan facilities (the
"Old Tranche A Term Loan" and "Old Tranche B Term Loan") and a revolving credit
facility (the "Old Revolving Credit Facility"), were recorded at SDS and its
affiliates. Under the Old Tranche A Term Loan, SDS and its affiliates had $69.5
million outstanding at both September 30, 1999 and September 30, 2000. Under the
Old Tranche B Term Loan, SDS and its affiliates had $120.0 million and $119.7
million outstanding at September 30, 1999 and 2000, respectively. Under the Old
Revolving Credit Facility, SDS and its affiliates had $83.7 million and
31
<PAGE> 34
$122.6 million outstanding at September 30, 1999 and 2000, respectively. The
cash flows of SDS have been substantially affected by the historical debt (and
related interest expense) and by charges related to an allocation of corporate
operating expenses by Sybron International to SDS. Interest expense at SDS was
$20.2 million, $17.1 million, and $25.9 million during 1998, 1999 and 2000,
respectively. Sybron International corporate operating expenses charged to SDS
were $3.6 million, $4.2 million, and $3.0 million during 1998, 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. Borrowed funds after the Distribution have
a higher interest rate than those historically recorded at SDS by Sybron
International. After the Distribution, SDS will be responsible for the expenses
of being a public company.
Under the new SDS credit facilities (the "SDS Credit Facility") put in
place for the Spin-Off, SDS together with certain of its subsidiaries obtained a
credit facility, which allows for borrowings up to $450 million from ABN AMRO
Bank N.V. and certain other lenders. The SDS Credit Facility is comprised of a
five year tranche A term loan of $150 million (the "Tranche A Term Loan"), a
seven year tranche B term loan of $150 million (the "Tranche B Term Loan"),
under which Kerr and Ormco are borrowers (the "Term Loan Borrowers"), and a five
year revolving credit facility up to $150 million (the "Revolving Credit
Facility"), under which SDM is the borrower.
The Tranche A Term Loan bears interest, at the option of the Term Loan
Borrowers, equal to (a) the higher of (i) the rate from time to time publicly
announced by ABN AMRO Bank N.V. as its prime rate plus 1% to 1.75% depending
upon certain financial conditions or (ii) the federal funds rate plus an
additional 1.5% to 2.25% depending upon certain financial ratios or (b) the
adjusted interbank offered rate for Eurodollar deposits with an additional 2% to
2.75% depending upon certain financial ratios. The highest percentage on the
grid is applicable through June 30, 2001. Repayments under the Tranche A Term
Loan are due in quarterly installments beginning on March 31, 2001. Amounts due
in fiscal 2001, 2002, 2003, 2004 and 2005 are $15 million, $23.75 million,
$28.75 million, $33.75 million and $38.75 million, respectively, with the final
payment of $10 million due in November 2005.
The Tranche B Term Loan bears interest, at the option of the Term Loan
Borrowers, equal to (a) the higher of (i) the rate from time to time publicly
announced by ABN AMRO Bank N.V. as its prime rate plus 2.75% or (ii) the federal
funds rate plus 3.25% or (b) the adjusted interbank offered rate for Eurodollar
deposits plus 3.75%. The highest percentage on the grid is applicable through
June 30, 2001. Repayments under the Tranche B Term Loan are due in quarterly
installments beginning on March 31, 2001. Amounts due in fiscal 2001, 2002,
2003, 2004, 2005, 2006, and 2007 are $1.125 million, $1.5 million, $1.5 million,
$1.5 million, $1.5 million, $53.812 million and $71.25 million, respectively,
with the final payment of $17.813 million due in November 2007.
Borrowings under the Revolving Credit Facility generally bear interest on
the same terms as those under Tranche A Term Loan Facility. In addition, SDS
pays a commitment fee on the average unused portion of the Revolving Credit
Facility ranging between .375% to .5% depending on certain financial ratios.
Until June 30, 2001, the Company pays the highest end of the range. The
Revolving Credit Facility also provides for the issuance of standby letters of
credit and swing line loans of credit as required in the ordinary course of
business, subject to certain sublimits.
The SDS Credit Facility contains 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.
All interest on the historical books of SDS under the Sybron International
Credit Facilities was at floating rates, primarily based on Eurodollar rates
and, as such, SDS was exposed to fluctuations in Eurodollar rates. SDS has not
historically mitigated that risk through derivative instruments. The SDS Credit
Facility is anticipated to use primarily the Eurodollar rates, provided the
rates are more favorable to the Company.
32
<PAGE> 35
Under the SDS Credit Facility, SDS is required to have interest rate protection
within 60 days of November 28, 2000 for a minimum of 50% of the aggregate
outstanding principal amount of the Tranche A Term Loan and Tranche B Term Loan
for not fewer than four years.
The SDS Credit Facility is secured by domestic real and personal property
assets of SDS and its material domestic subsidiaries and a pledge of capital
stock of SDM, Kerr, Ormco and certain material domestic and foreign
subsidiaries.
At the Distribution on December 11, 2000, the sources and uses of funds
were as follows;
<TABLE>
<CAPTION>
SOURCES OF FUNDS:
-----------------
(IN MILLIONS)
<S> <C>
Tranche A Term Loan................. $150.0
Tranche B Term Loan................. 150.0
Revolving Credit Facility........... 75.0
------
$375.0
======
<CAPTION>
USES OF FUNDS:
--------------
(IN MILLIONS)
<S> <C>
Dividend to Sybron International.... $ 67.9
Repayment of Sybron International
Credit Facilities................. 307.1
======
$375.0
======
</TABLE>
Sybron International has historically funded our acquisitions, working
capital requirements, capital expenditure requirements, principal and interest
payments, obligations under the Sale/Leaseback (defined below), 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 Facility. To the
extent that funds are not available from those sources, particularly with
respect to our acquisition strategy, we may raise additional capital.
We believe that the cash flows from operations, unused amounts available
under the SDS Credit Facility, and access to capital markets will be sufficient
to satisfy our 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.
Sale/Leaseback: In 1988 SDM 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 statement 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 is capped at
15%. Beginning January 1, 1999 annual payments increased from $1.3 million to
$1.5 million. The next adjustment will occur January 1, 2004. As a result of the
Distribution, the Sale/Leaseback has been amended to extend the leases an
additional 5 years, increase the basic rent by $0.15 million per year and
provides SDS the option to purchase the leased premises at fair market value
from June 1, 2008 to May 31, 2009.
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 SDS.
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.
33
<PAGE> 36
CAUTIONARY FACTORS
This Annual Report contains various forward-looking statements concerning
our prospects that are based on the current expectations and beliefs of
management. We may also make forward-looking statements 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:
- We have incurred a significant amount of floating rate bank debt as a
result of the Spin-Off, which we may be unable to service or as to which
we may be adversely affected by increases in interest rates. At the time
of the Distribution, we had $375 million in bank debt, including $63
million of new debt used to reduce the indebtedness of Sybron
International. This level of indebtedness could have significant
consequences, including; limiting the cash flow available for working
capital, capital expenditures, acquisitions and other corporate purposes
because a significant portion of our cash flow from operations must be
dedicated to servicing our debt; limiting our ability to obtain
additional financing in the future for working capital or other purposes;
and limiting our flexibility to react to competitive or other changes in
our industry, and to economic conditions generally. Our ability to pay or
refinance our indebtedness will depend upon our future operating
performance, which will be affected by general economic, financial,
competitive, legislative, regulatory and other factors beyond our
control.
- 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 from 1993 to
2000. 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.
- In 2000, approximately 20% of our sales were made through our top five
independent distributors. Mergers and consolidation of our distributors
have temporarily slowed sales of our products in the past and may do so
in the future. We believe that the loss of either Henry Schein, Inc. or
Patterson Dental Co., the only distributors who account for more than 5%
of our sales, could have a temporary material adverse effect on our
results of operations or financial condition until we could find
alternative means to distribute our products.
- 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
34
<PAGE> 37
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.
- 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.
- 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.
Risk Factors Relating to Separating SDS from Sybron International
- If large amounts of SDS stock are sold on the trading markets, the price
of SDS stock could decline significantly. Approximately 35.1 million
shares of SDS stock were distributed to the Sybron International
shareholders, representing all of the outstanding shares of SDS stock.
Substantially all of the shares of SDS stock are eligible for immediate
resale on the public market. Possible reasons for an increase in sale
activity of SDS stock include that the investment criteria of certain
investment funds and other large holders of Sybron International shares
may dictate or suggest an immediate sale of the SDS stock received by
them. For example, 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 their criteria, the investment funds may decide, or even be
required by their governing policies, to sell SDS shares received in the
Distribution.
- SDS's common stock had no trading market prior to the Distribution, and
there can be no assurance as to the prices at which SDS's common stock
will trade. Until an orderly market develops for SDS common stock, 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.
- The separation of SDS from Sybron International poses new financial and
operational risks. As a result of the Distribution, SDS owns and operates
the Dental Business and as such, lacks a recent operating history as a
stand-alone entity. SDS is also smaller and less diversified than was
Sybron International
35
<PAGE> 38
prior to the Distribution. 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.
- SDS may be required to satisfy certain indemnification obligations to
Apogent (Sybron International after the Distribution), or may not be able
to collect on indemnification rights from Apogent. Under the terms of the
Distribution, 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 indemnification
obligations to Apogent and its affiliates after the Distribution. We also
cannot be assured in the event that Apogent has substantial
indemnification obligations to SDS and our affiliates, Apogent will have
the ability to satisfy those obligations.
- If SDS does not comply with the conditions to the IRS ruling, the
Distribution of the SDS stock could be taxable. 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.
Except as may be required by applicable securities laws or regulations, we
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 7A. 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. 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. The
purpose of Sybron International's foreign currency hedging activities was to
protect against the risk that eventual cash flows from foreign activities will
be adversely affected by changes in exchange rates. Recognized gains or losses
on foreign currency option contracts entered into to hedge sales are recorded as
"net sales." Neither SDS nor Sybron International had any foreign currency
exchange option contracts at September 30, 1999 or 2000.
36
<PAGE> 39
In 2001, 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)........................................... 51,000EUR $45,000
Japanese Yen (JPY)................................... 911,000JPY $ 8,400
Australian Dollar (AUD).............................. 13,000AUD $ 7,100
</TABLE>
As a result of these anticipated exposures, SDS plans to review the cost
and benefit of protecting itself from possible detrimental effects of foreign
currency fluctuations. In addition, the SDS Credit Facility allow for borrowings
under the Revolving Credit Facility, up to $100 million in various foreign
currencies.
INTEREST RATES
Our net exposure to interest rate risk consists of floating rate
instruments whose interest rates are determined by the Eurodollar rate. SDS
historically has not managed its interest rate risk. All interest rate risk has
been managed at Sybron International and all derivative contracts are in the
name of Sybron International. At September 30, 2000, SDS had floating rate debt
of approximately $311.8 million.
The model below quantifies our sensitivity to interest rate movements as
determined by the Eurodollar rate. The model assumes a) a base Eurodollar rate
of 6.75% (the "Eurodollar Base Rate") which approximates the September 30, 2000
three month Eurodollar rate, b) the Company's floating rate debt is equal to its
September 30, 2000 floating rate debt balance of $311.8 million, c) the Company
pays interest on floating rate debt equal to the Eurodollar rate plus basis
points, and d) the Eurodollar rate varies by 10% of the Base Rate.
<TABLE>
<CAPTION>
INTEREST EXPENSE INCREASE FROM A 10% INTEREST EXPENSE DECREASE FROM A 10%
INCREASE IN THE EURODOLLAR BASE RATE DECREASE IN THE EURODOLLAR BASE RATE
------------------------------------ ------------------------------------
<S> <C> <C>
Interest rate exposure... $3.7 million $(3.7 million)
</TABLE>
In the future, we expect to enter into transactions that reduce our
exposure from changes in the Eurodollar rate. We expect to enter into interest
rate protection arrangements within sixty days following November 28, 2000
through the use of interest rate swaps in amounts approximately equal to 50
percent of our floating rate debt exposure.
37
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO COMBINED FINANCIAL STATEMENTS
SYBRON DENTAL SPECIALTIES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 39
Combined Balance Sheets as of September 30, 1999 and 2000... 40
Combined Statements of Income for the years ended September
30, 1998, 1999 and 2000................................... 41
Combined Statements of Stockholder's Equity for the years
ended September 30, 1998, 1999 and 2000................... 42
Combined Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000......................... 43
Notes to Combined Financial Statements...................... 44
</TABLE>
38
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Sybron Dental Specialties, Inc.:
We have audited the accompanying combined balance sheets of Sybron Dental
Specialties, Inc. and Affiliates as of September 30, 1999 and 2000, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
------------------------------------
KPMG LLP
Milwaukee, Wisconsin
November 13, 2000, except as to
Note 16 which is as of
December 11, 2000
39
<PAGE> 42
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 14)....................... $ 6,090 $ 5,783
Accounts receivable (less allowance for doubtful
receivables of $2,578 and $2,056 in 1999 and 2000,
respectively) (note 2)................................. 84,210 85,767
Inventories (note 3)...................................... 79,574 74,383
Deferred income taxes (note 4)............................ 5,014 8,977
Prepaid expenses and other current assets................. 6,336 6,497
-------- --------
Total current assets.............................. 181,224 181,407
-------- --------
Advances and loans to Sybron International (note 14)........ 56,777 77,762
Property, plant and equipment, net (notes 5, 7 and 8)....... 57,488 55,326
Intangible assets, net (note 6 and 13)...................... 207,606 220,705
Deferred income taxes (note 4).............................. 5,956 3,410
Other assets (note 10)...................................... 6,263 6,967
-------- --------
Total assets...................................... $515,314 $545,577
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,122 $ 11,351
Current portion of long-term debt (notes 7 and 8)......... 1,571 21,761
Income taxes payable (note 4)............................. 3,918 1,698
Income taxes payable to Sybron International.............. 1,200 3,982
Accrued payroll and employee benefits (note 10)........... 13,412 13,780
Restructuring reserves (note 11).......................... 1,345 2,403
Deferred income taxes (note 4)............................ 2,534 3,225
Accrued rebate............................................ 4,372 5,137
Other current liabilities................................. 9,073 6,539
-------- --------
Total current liabilities......................... 50,547 69,876
-------- --------
Long-term debt (notes 7, 8 and 14).......................... 283,447 298,482
Deferred income taxes (note 4).............................. 14,639 15,414
Other liabilities (note 10)................................. 11,086 8,835
Commitments and contingent liabilities (notes 8, 10, 12 and
13)
Subsequent events (note 16)
Stockholder's equity (notes 7, 14 and 16)................... 155,595 152,970
-------- --------
Total liabilities and stockholder's equity........ $515,314 $545,577
======== ========
</TABLE>
See accompanying notes to combined financial statements.
40
<PAGE> 43
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $366,886 $388,176 $418,779
Cost of sales:
Cost of product sold...................................... 150,848 162,448 175,067
Restructuring charges (note 11)........................... 4,629 -- 8,646
Depreciation of purchase accounting adjustments........... 108 108 108
-------- -------- --------
Total cost of sales............................... 155,585 162,556 183,821
-------- -------- --------
Gross profit................................................ 211,301 225,620 234,958
-------- -------- --------
Selling, general and administrative expenses................ 116,719 118,193 127,869
Sybron International charges (note 14)...................... 3,620 4,228 2,979
Merger, transaction and integration expenses (note 11)...... 10,507 2,569 --
Restructuring charges (note 11)............................. 9,188 (1,177) 680
Depreciation and amortization of purchase accounting
adjustments............................................... 6,731 7,501 8,383
-------- -------- --------
Total selling, general and administrative
expenses........................................ 146,765 131,314 139,911
-------- -------- --------
Operating income............................................ 64,536 94,306 95,047
-------- -------- --------
Other income (expense):
Interest expense (notes 7, 10 and 14)..................... (20,195) (17,074) (25,899)
Interest income -- Sybron International (note 14)......... 1,498 1,151 852
Amortization of deferred financing fees (note 7).......... (101) (154) (282)
Other, net................................................ 444 (85) 218
-------- -------- --------
Income before income taxes.................................. 46,182 78,144 69,936
Income taxes (note 4)....................................... 18,686 30,850 28,339
-------- -------- --------
Net income........................................ $ 27,496 $ 47,294 $ 41,597
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
41
<PAGE> 44
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
ACCUMULATED OTHER TOTAL
CAPITAL RETAINED COMPREHENSIVE STOCKHOLDER'S
ACCOUNTS EARNINGS INCOME (LOSS) EQUITY
-------- -------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 30, 1997............ $108,765 $ -- $ (3,965) $104,800
Comprehensive income:
Net income............................. -- 27,496 -- 27,496
Translation adjustment................. -- -- 469 469
Minimum pension liability adjustment... -- -- (139) (139)
-------- -------- -------- --------
Total comprehensive income..... -- 27,496 330 27,826
Capital contribution from Sybron
International (note 14)................ 49,268 -- -- 49,268
Dividends paid to Sybron International
(note 14).............................. (24,890) (22,335) -- (47,225)
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............ 133,143 -- (3,635) 129,508
Comprehensive income:
Net income............................. -- 47,294 -- 47,294
Translation adjustment................. -- -- (2,615) (2,615)
Minimum pension liability adjustment... -- -- 1,681 1,681
-------- -------- -------- --------
Total comprehensive income..... -- 47,294 (934) 46,360
Capital contribution from Sybron
International (note 14)................ 16,210 -- -- 16,210
Dividends paid to Sybron International
(note 14).............................. -- (36,483) -- (36,483)
-------- -------- -------- --------
Balance at September 30, 1999............ 149,353 10,811 (4,569) 155,595
Comprehensive income:
Net income............................. -- 41,597 -- 41,597
Translation adjustment................. -- -- (7,109) (7,109)
-------- -------- -------- --------
Total comprehensive income..... -- 41,597 (7,109) 34,488
Capital contribution from Sybron
International (note 14)................ 21,399 -- -- 21,399
Dividends paid to Sybron International
(note 14).............................. (6,104) (52,408) -- (58,512)
-------- -------- -------- --------
Balance at September 30, 2000............ $164,648 $ -- $(11,678) $152,970
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
42
<PAGE> 45
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 27,496 $ 47,294 $ 41,597
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 9,760 9,804 10,033
Amortization.......................................... 6,843 7,662 8,491
Loss (gain) on sales of property, plant and
equipment........................................... 987 (19) (195)
Provision for losses on doubtful receivables.......... 1,878 819 936
Inventory provisions.................................. (40) 4,427 11,006
Deferred income taxes................................. (1,366) 5,635 103
Changes in assets and liabilities, net of effects of
businesses acquired:
(Increase) in accounts receivable..................... (5,516) (59) (1,036)
(Increase) decrease in inventories.................... 1,537 (1,950) 3,279
(Increase) decrease in prepaid expenses and other
current assets...................................... 2,363 2,020 (145)
Increase (decrease) in accounts payable............... 2,559 1,266 (1,769)
Increase (decrease) in income taxes payable........... 7,717 (9,378) 562
Increase (decrease) in other current liabilities...... 7,065 (2,125) 7,659
Increase (decrease) in accrued payroll and employee
benefits............................................ 1,628 (664) 530
Increase (decrease) in restructuring reserve.......... 5,100 (3,800) 1,069
Net change in other assets and liabilities............ (2,670) (9,585) (19,693)
--------- --------- ---------
Net cash provided by operating activities........ 65,341 51,347 62,427
Cash flows from investing activities:
Capital expenditures..................................... (9,581) (13,020) (11,968)
Proceeds from sales of property, plant and equipment..... -- 214 609
Net payments for businesses acquired..................... (50,248) (15,538) (21,398)
--------- --------- ---------
Net cash used in investing activities............ (59,829) (28,344) (32,757)
Cash flows from financing activities:
Proceeds from revolving credit facility.................. 194,640 234,040 221,760
Principal payments on revolving credit facility.......... (162,640) (299,320) (182,880)
Proceeds from long-term debt............................. -- 120,000 --
Principal payments on long-term debt..................... (49,572) (33,028) (300)
Dividends paid to Sybron International................... (47,225) (36,483) (58,512)
Capital contributions from Sybron International.......... 49,268 16,210 21,399
Net change in advances and loans to Sybron
International......................................... 26,088 (27,689) (20,985)
Dividends paid by pooled companies....................... (5,161) -- --
Other.................................................... -- (369) (3,464)
--------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 5,398 (26,639) (22,982)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (3,877) 444 (6,995)
Net increase (decrease) in cash and cash equivalents....... 7,033 (3,192) (307)
Cash and cash equivalents at beginning of period........... 2,249 9,282 6,090
--------- --------- ---------
Cash and cash equivalents at end of period................. $ 9,282 $ 6,090 $ 5,783
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 21,449 $ 16,957 $ 25,504
========= ========= =========
Interest received from Sybron International........... $ 1,498 $ 1,151 $ 852
========= ========= =========
Income taxes.......................................... $ 14,783 $ 32,906 $ 27,674
========= ========= =========
Capital lease obligations incurred....................... $ 265 $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
43
<PAGE> 46
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On November 8, 2000, Sybron International Corporation ("Sybron
International") announced that it had declared a pro rata distribution to its
shareholders of the common stock and related preferred stock purchase rights of
Sybron Dental Specialties, Inc. (formerly known as SDS Holding Co.) (the
"Distribution" or "Spin-Off"). Shareholders of record as of November 30, 2000
received one share of Sybron Dental Specialties, Inc. ("SDS") common stock for
every three shares of Sybron International common stock they owned as of the
record date. SDS owns all of the outstanding stock of Sybron Dental Management,
Inc., formerly named Sybron Dental Specialties, Inc. Prior to the Distribution,
Sybron Dental Management, Inc. was a direct wholly-owned subsidiary of Sybron
International. Immediately prior to the Distribution, Sybron International
contributed all of the stock of Sybron Dental Management, Inc. to Sybron Dental
Specialties, Inc. As used in these Notes to the Combined Financial Statements,
the term "SDS" or the "Company" means Sybron Dental Management, Inc. for the
periods prior to the Distribution and Sybron Dental Specialties, Inc. (formerly
known as SDS Holding Co.) for periods after the Distribution.
SDS has presented in these combined financial statements its assets and
liabilities at the same amounts previously presented in the consolidated
financial statements of Sybron International.
The affiliates of SDS 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 SDS and its
wholly owned subsidiaries and affiliates. The term "Sybron International" as
used herein refers to Sybron International Corporation and its subsidiaries. The
Company's fiscal year ends on September 30. All significant intercompany
balances and transactions have been eliminated. The fiscal years ended September
30, 1998, 1999 and 2000 are hereinafter referred to as "1998", "1999" and
"2000", respectively.
(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.
(c) Inventories
Inventories are stated at the lower of cost or market. Elements of cost
included in inventories are: raw materials, direct labor, manufacturing overhead
(which includes indirect labor, fringe benefits, consumable supplies,
depreciation of production equipment and tooling) and retained costs
representing the excess of manufacturing or production costs over amounts
charged to cost of sales. Certain domestic inventories of approximately $63,827
and $63,861 at September 30, 1999 and 2000, 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 20 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
44
<PAGE> 47
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 of acquired businesses (goodwill) are amortized over 5 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 1998, 1999 and 2000.
(f) Revenue Recognition
The Company recognizes revenue upon shipment of products, when persuasive
evidence of a sales arrangement exists, the price to the buyer is fixed and
determinable and collectability of the sales price is reasonably assured. 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.
The Company accrues rebates based upon its various pricing programs.
(g) Income Taxes
The Company is included in the consolidated income tax return filed by
Sybron International, but will be responsible for its own filings after the
Spin-Off. U.S. income tax payments, refunds, credits, provisions and deferred
income tax components have been allocated to SDS in accordance with Sybron
International's tax allocation policy. Such policy allocates income tax
components included in the consolidated income tax return of Sybron
International 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 carry forwards. 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.
(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 1998, 1999 and 2000 were approximately $7,313, $9,425 and $8,753,
respectively.
45
<PAGE> 48
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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 1998, 1999 and 2000 were approximately $1,355, $22 and
$4,134, 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 $5,423, $3,903 and $4,117 in 1998, 1999 and
2000, 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.
Sybron International, from time to time, entered into foreign exchange
options relating to the anticipated cash flow in local currencies of certain
foreign operations. These options allowed Sybron International to exchange
foreign currencies for U.S. dollars. The purpose of Sybron International's
foreign currency hedging activities was to protect the Company from the risk
that eventual cash flows from foreign activities would be adversely affected by
changes in exchange rates. The recognition of gains or losses on foreign
currency option contracts entered into to hedge sales is recorded as "net
sales". The Company had no foreign exchange option contracts at September 30,
1999 or 2000. The Company plans to review its own foreign currency exposure and
obtain foreign exchange options as deemed appropriate and subsequent to the
Spin-Off.
On October 1, 2000 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as modified by Statement of Financial Accounting Standards No. 137,
and Statement of Financial Accounting Standards No. 138. These statements
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments
46
<PAGE> 49
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
embedded in other contracts and hedging activities. The Company has concluded
that the adoption of these statements has no material impact on the Company's
financial position or results of its operations at October 1, 2000.
(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) Comprehensive Income
The components of other comprehensive income (loss) consist of translation
adjustments and minimum pension liability adjustments and are included on the
accompanying statements of stockholder's equity.
(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 1998, 1999 or 2000. Accounts receivable from these distributors were
less than 10% of the outstanding combined accounts receivable balances at
September 30, 1999 or 2000.
(3) INVENTORIES
Inventories at September 30, 1999 and 2000 consist of the following:
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Raw materials and supplies.................................. $23,036 $24,300
Work in process............................................. 11,107 8,410
Finished goods.............................................. 46,597 44,749
Excess and obsolescence reserves............................ (3,211) (4,347)
LIFO reserve................................................ 2,045 1,271
------- -------
$79,574 $74,383
======= =======
</TABLE>
47
<PAGE> 50
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended September 30, 1998:
U.S., state and local................................. $10,046 $(1,367) $ 8,679
Foreign............................................... 10,069 (62) 10,007
------- ------- -------
$20,115 $(1,429) $18,686
======= ======= =======
Year ended September 30, 1999:
U.S., state and local................................. $14,768 $ 5,636 $20,404
Foreign............................................... 10,564 (118) 10,446
------- ------- -------
$25,332 $ 5,518 $30,850
======= ======= =======
Year ended September 30, 2000:
U.S., state and local................................. $18,380 $ 159 $18,539
Foreign............................................... 9,856 (56) 9,800
------- ------- -------
$28,236 $ 103 $28,339
======= ======= =======
</TABLE>
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
United States........................................... $21,823 $53,904 $48,841
Foreign................................................. 24,359 24,240 21,095
------- ------- -------
Income before income taxes.............................. $46,182 $78,144 $69,936
======= ======= =======
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35 percent to income before income taxes in 1998,
1999 and 2000 as a result of the following:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense......................... $16,163 $27,350 $24,478
Increase (reduction) in income taxes resulting from:
Change in beginning of year valuation allowance for
deferred tax assets allocated to income tax expense... (1,380) (884) --
Amortization of goodwill................................ 1,186 1,332 1,543
Income tax benefit related to merger of nontaxable
entity................................................ (2,302) -- --
State and local income taxes, net of Federal income tax
benefit............................................... 2,751 3,050 2,014
Foreign income taxed at rates higher than U.S. Federal
income................................................ 2,769 2,098 2,473
Foreign tax credits utilized in excess of U.S. tax on
foreign earnings...................................... (686) (1,396) (984)
Net foreign sales corporation benefit................... (1,018) (1,187) (1,257)
Other, net.............................................. 1,203 487 72
------- ------- -------
$18,686 $30,850 $28,339
======= ======= =======
</TABLE>
48
<PAGE> 51
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of deferred income tax (benefit) expense for
1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------ ----
<S> <C> <C> <C>
Deferred tax (benefit)/expense (exclusive of the effects of
other components listed below)............................ $ (49) $6,402 $103
Decrease in the valuation allowance for deferred tax
assets.................................................... (1,380) (884) --
------- ------ ----
$(1,429) $5,518 $103
======= ====== ====
</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, 1999 and 2000 are presented below.
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventories................................................. $ 2,066 $ 1,636
Compensation................................................ 1,821 1,484
Sale/Leaseback.............................................. 3,082 3,021
Employee benefits........................................... 1,993 1,342
Net operating loss carry forwards........................... 1,238 1,393
Warranty and other accruals................................. 2,008 4,904
-------- --------
Total gross deferred tax assets........................... 12,208 13,780
Less valuation allowance.................................. (1,238) (1,393)
-------- --------
Net deferred tax assets................................... 10,970 12,387
-------- --------
Deferred tax liabilities:
Depreciation................................................ (2,503) (2,509)
Purchase accounting......................................... (11,684) (12,320)
Other....................................................... (2,986) (3,810)
-------- --------
Total gross deferred tax liabilities...................... (17,173) (18,639)
-------- --------
Net deferred tax liabilities.............................. $ (6,203) $ (6,252)
======== ========
</TABLE>
The change in the net deferred tax liabilities contains $54 of deferred tax
liabilities related to acquisitions. The valuation allowance for deferred tax
assets as of October 1, 1998 was $2,122. The net change in the total valuation
allowance for the years ended September 30, 1999 and 2000 was a decrease of $884
and an increase of $155, respectively. The valuation allowance relates primarily
to net operating loss carry forwards in certain foreign jurisdictions, in which
there is a history of pre-tax accounting losses. Management is unable to
conclude that there will be pre-tax accounting income in those jurisdictions in
the near term. 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, 2000, the Company has an aggregate of $3,900 of foreign
net operating loss carry forwards from certain foreign jurisdictions, the
majority of which expire between 2002 and 2010.
Accumulated earnings of foreign subsidiaries at September 30, 1998, 1999
and 2000 of approximately $24,000, $35,000 and $38,000, respectively, have been
reinvested in the business and no provision for income taxes has been made for
the repatriation of these earnings.
49
<PAGE> 52
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment at September 30,
1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Land and land improvements.................................. $ 1,809 $ 1,809
Buildings and building improvements......................... 24,895 25,031
Machinery and equipment..................................... 83,019 87,413
Construction in progress.................................... 8,998 7,873
-------- --------
118,721 122,126
Less: Accumulated depreciation.............................. (61,233) (66,800)
-------- --------
$ 57,488 $ 55,326
======== ========
</TABLE>
Commitments for purchases of equipment were approximately $1,300 at
September 30, 1999 and none as of September 30, 2000. Machinery and equipment
includes capitalized leases, net of amortization, totaling $340 and $4 at
September 30, 1999 and 2000, respectively (see note 8).
(6) INTANGIBLE ASSETS
Intangible assets at September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Excess costs over net asset values of businesses acquired
(goodwill)................................................ $230,830 $249,564
Proprietary technology...................................... 9,301 12,189
Trademarks.................................................. 15,477 15,477
Other....................................................... 15,932 15,932
-------- --------
271,540 293,162
Less: Accumulated amortization.............................. (63,934) (72,457)
-------- --------
$207,606 $220,705
======== ========
</TABLE>
(7) LONG-TERM DEBT
Historically, certain affiliates of SDS have been obligors under various
credit agreements and the current credit agreement of Sybron International (the
"Credit Facilities") described below. Sybron International has historically
recorded a portion of debt outstanding under the Credit Facilities on the books
of SDS (see note 14). Amounts below represent the historical balances at SDS:
Long-term debt at September 30, 1999 and 2000 consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Term Loan Facility.......................................... $189,472 $189,172
Revolving Credit Facility................................... 83,720 122,600
Sale/Leaseback Obligation................................... 8,240 8,072
Capital leases and other (See Note 8)....................... 3,586 399
-------- --------
285,018 320,243
Less: Current portion of long-term debt..................... (1,571) (21,761)
-------- --------
$283,447 $298,482
======== ========
</TABLE>
50
<PAGE> 53
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Term Loan Facility: Under the Sybron International Credit Facilities,
prior to the December 11, 2000 Spin-Off, borrowings under the term loans were
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 loans were due in various quarterly
installments of principal and interest through July 31, 2004. Furthermore,
additional reductions were required to be made from the proceeds of certain
other specified borrowings and certain asset sales not in the ordinary course of
business.
Under the new SDS credit facilities (the "SDS Credit Facility") put in
place for the Spin-Off, SDS together with certain of its subsidiaries entered
into a $450 million credit facility. The SDS Credit Facility is comprised of a
five year Tranche A Term Loan of $150 million, a seven year Tranche B Term Loan
of $150 million and a five year Revolving Credit Facility of $150 million.
The Tranche A Term Loan bears interest, at the option of SDS, equal to (a)
the higher of (i) the rate from time to time publicly announced by ABN AMRO Bank
N.V. as its prime rate plus 1% to 1.75% or (ii) the federal funds rate plus an
additional 1.5% to 2.25% depending upon certain financial ratios or (b) the
adjusted interbank offered rate for Eurodollar deposits with an additional 2% to
2.75% depending upon certain financial ratios. The highest percentage on the
grid is applicable through June 30, 2001.
The Tranche B Term Loan bears interest, at the option of SDS, equal to (a)
the higher of (i) the rate from time to time publicly announced by ABN AMRO Bank
N.V. as its prime rate plus 2.75% or (ii) the federal funds rate plus 3.25% or
(b) the adjusted interbank offered rate for Eurodollar deposits plus 3.75%. The
highest percentage on the grid is applicable through June 30, 2001.
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 Term Loan. In addition,
SDS pays a commitment fee on the average unused portion of the Revolving Credit
Facility ranging between .375% to .5% depending on certain financial ratios.
The SDS Credit Facility contains numerous financial and operating
covenants, including, among other things: restrictions on investments;
requirements that SDS maintain certain financial ratios and restrictions on the
ability of SDS and its subsidiaries to create or permit liens, limit the
incurrence of additional indebtedness, or to pay dividends or make other
restricted payments.
All interest on the historical books of SDS under the Sybron International
Credit Facilities was at floating rates, primarily based on the Eurodollar rates
and, as such, SDS was exposed to fluctuation in Eurodollar rates. SDS has not
historically mitigated that risk through derivative instruments. The SDS Credit
Facility is anticipated to use primarily the Eurodollar rates, provided the
rates are more favorable to the Company. Under the SDS Credit Facility, SDS is
required to have interest rate protection within 60 days of November 28, 2000
for a minimum of 50% of the amount of the Tranche A Term Loan and Tranche B Term
Loan for not fewer than four years.
The SDS Credit Facility is secured by domestic real and personal property
assets, and a pledge of capital stock of SDS and certain subsidiaries.
Sale/Leaseback: In 1988 SDM 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 statement 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
51
<PAGE> 54
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
percentage increase to the rent in any five-year period is capped at 15%.
Beginning January 1, 1999 annual payments increased from $1.3 million to $1.5
million. The next adjustment will occur January 1, 2004. As a result of the
Distribution, the Sale/Leaseback has been amended to extend the leases an
additional 5 years, increase the basic rent $0.15 million per year and provide
SDS with the option to purchase the leased premises at fair market value between
June 1, 2008 to May 31, 2009.
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 SDS.
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.
Maturities of Long-Term Debt: In connection with the Spin-Off on December
11, 2000 the Company repaid all intercompany loans and advances to Sybron
International and paid a dividend of $67.9 million to Sybron International.
Additionally, the Company borrowed $375 million under the SDS Credit Facility.
Maturities of long-term debt reflect the SDS Credit Facility and
Sale/Leaseback as of the date of the Spin-Off as follows:
<TABLE>
<CAPTION>
FISCAL SEPTEMBER 30,
------ -------------
<S> <C>
2001........................................................ $ 16,500
2002........................................................ 25,528
2003........................................................ 30,562
2004........................................................ 35,608
2005........................................................ 40,660
Thereafter.................................................. 234,613
--------
$383,471
========
</TABLE>
(8) LEASE COMMITMENTS
As of September 30, 2000, 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>
2001........................................................ $45 $ 4,645
2002........................................................ 5 2,819
2003........................................................ -- 1,870
2004........................................................ -- 1,673
2005........................................................ -- 1,511
Thereafter.................................................. -- 5,403
--- -------
$50 $17,921
=======
Less amounts representing interest.......................... 6
---
Present value of net minimum lease payments................. 44
Less current portion........................................ 39
---
Long-term obligations under capital leases.................. $ 5
===
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
52
<PAGE> 55
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense under operating leases was $3,084, $3,794 and $4,904 in
1998, 1999 and 2000, 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
Sybron International Credit Facilities: The fair value was determined by
estimating the interest rate margins (the premium over the Eurodollar rate) on
each of Sybron International'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 SDS. In 2000 the Sybron International 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 SDS could refinance the Sale/Leaseback given the same maturity
period.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
--------------------- ---------------------
REPORTED ESTIMATED REPORTED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt (including current
portion)................................. $285,018 $271,861 $320,243 $310,074
======== ======== ======== ========
</TABLE>
Derivatives: Sybron International uses derivative financial instruments to
manage its foreign currency exposures. They do 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
Sybron International'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 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: Sybron International historically has entered
into foreign exchange hedging contracts on behalf of SDS to hedge certain sales
commitments and loans made to foreign affiliates denominated in foreign
currencies. The term of these contracts was less than one year. The Company
intends to enter into foreign hedging contracts in the future for the purpose of
protecting the Company from the risk that the eventual cash flows resulting from
foreign activities will be adversely affected by changes in exchange rates, when
determined appropriate. 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, 1999 and 2000, the Company had no foreign exchange
option contracts.
(10) EMPLOYEE BENEFIT PLANS
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
53
<PAGE> 56
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
make annual contributions in excess of the minimum required contributions
required by applicable regulations in order to avoid any Pension Benefit
Guarantee Corporation ("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>
1999 2000
---- ----
<S> <C> <C>
Discount rate............................................... 7.75% 8.00%
Rate of increase in compensation levels..................... 4% 4%
Expected long-term rate of return on assets................. 10% 10%
</TABLE>
The following assumptions were used in determining the accumulated
postretirement benefit obligation of the Company's postretirement healthcare
plans.
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Discount rate............................................... 7.75% 8.00%
Average increase in medical costs........................... 5.5% 5.5%
</TABLE>
54
<PAGE> 57
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Obligations at beginning of year............. $23,908 $21,238 $ 4,186 $ 4,818
Service cost................................. 1,645 1,920 129 138
Interest cost................................ 1,707 1,993 274 367
Plan amendments.............................. 471 -- -- --
Actuarial (gain) loss........................ (5,863) 3,020 659 (188)
Benefit payments............................. (626) (740) (430) (429)
Foreign exchange rates....................... (4) 20 -- --
------- ------- ------- -------
Obligations at end of year................... $21,238 $27,451 $ 4,818 $ 4,706
Change in fair value of plan assets:
Fair value of plan assets at beginning of
year...................................... $22,663 $23,986 $ -- $ --
Actual return on plan assets................. 1,870 3,504 -- --
Employer contributions....................... 85 2,845 -- --
Benefit payments............................. (626) (740) -- --
Foreign exchange rates....................... (6) 30 -- --
------- ------- ------- -------
Fair value of plan assets at end of year....... $23,986 $29,625 $ -- $ --
Funded status:
Funded status at end of year................. $ 2,748 $ 2,174 $(4,818) $(4,706)
Unrecognized transition asset................ (126) (130) -- --
Unrecognized prior service cost.............. 772 743 -- --
Unrecognized (gain) loss..................... (4,122) (2,416) 271 84
Remaining excess of fair value of plan assets
over projected benefit obligation
recognized as a result of the 1987
acquisition of Sybron Corporation......... 1,067 1,369 (4,547) (4,622)
------- ------- ------- -------
Net amount recognized at measurement date...... 339 1,740 (4,547) (4,622)
Employer contribution paid after measurement
date......................................... -- 442 -- --
------- ------- ------- -------
Net amount recognized at end of year........... $ 339 $ 2,182 $(4,547) $(4,622)
======= ======= ======= =======
</TABLE>
The following table provides the amounts recognized in the Company's
combined balance sheets:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Prepaid (accrued) benefit cost................. $ 3,731 $ 3,839 $(4,547) $(4,622)
Accrued benefit liability...................... (4,459) (3,468) -- --
Remaining excess of fair value of plan assets
over projected benefit obligation recognized
as a result of the 1987 acquisition of Sybron
Corporation.................................. 1,067 1,369 -- --
------- ------- ------- -------
Net amount recognized at measurement date...... 339 1,740 (4,547) (4,622)
Employer contribution paid after measurement
date......................................... -- 442 -- --
------- ------- ------- -------
Net amount recognized in other noncurrent
assets or (liabilities) at September 30. .... $ 339 $ 2,182 $(4,547) $(4,622)
======= ======= ======= =======
</TABLE>
55
<PAGE> 58
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides disclosure of the net periodic benefit cost:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------- --------------------
1998 1999 2000 1998 1999 2000
------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost........................... $ 1,404 $ 1,645 $ 1,920 $103 $129 $138
Interest cost.......................... 1,522 1,707 1,993 270 274 367
Expected return on plan assets......... (2,183) (2,265) (2,249) -- -- --
Amortization of transition asset....... 4 4 4 -- -- --
Amortization of prior service cost..... (6) (6) 31 -- -- --
Amortization of net loss............... (4) 35 41 -- 31 --
------- ------- ------- ---- ---- ----
Net periodic benefit cost.............. $ 737 $ 1,120 $ 1,740 $373 $434 $505
======= ======= ======= ==== ==== ====
</TABLE>
In 1999, the fair value of plan assets exceeded the accumulated benefits
obligations in the retirement security plan. There were no plans with
accumulated benefit obligations in excess of fair value of plan assets at
September 30, 2000.
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, 2000 by approximately
$767 and $98, respectively.
Because more than 60% of the 1998, 1999 and 2000 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 $270, $274, and $367 in 1998, 1999
and 2000, 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 $1,080,
$1,274 and $1,354 for 1998, 1999 and 2000, 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),
selling, general and administrative expenses (approximately $9,200) and income
tax expense (approximately $700).
56
<PAGE> 59
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Restructuring activity relating to the June 30, 1998 restructure charge and
its components are as follows:
<TABLE>
<CAPTION>
LEASE SHUT- INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS DOWN WRITE-OFF ASSETS TAX OBLIGATIONS
(A) (B) COSTS(B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- -------- --------- ------ ---- ----------- ------ -------
<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
------ ---- ---- ------ ------ ---- ---- ------ -------
September 30, 2000
balance................ $ -- $ -- $ -- $ -- $ -- $700 $ -- $ 200 $ 900
====== ==== ==== ====== ====== ==== ==== ====== =======
</TABLE>
In September 2000, the Company recorded a restructuring charge of
approximately $9,300 (approximately $5,800 after tax) representing the exiting
of several product lines and severance and termination costs for approximately
65 employees (primarily at the Metrex Parker, Colorado facility) as a result of
the 2000 restructuring plan. The restructuring charge was classified as
components of cost of sales (approximately $7,700 relating to the write-off of
inventory), and selling, general and administrative expenses (approximately
$1,600).
<TABLE>
<CAPTION>
LEASE SHUT- INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS DOWN WRITE-OFF ASSETS TAX OBLIGATIONS
(A) (B) COSTS(B) (C) (C) (D) (E) OTHER TOTAL
--------- -------- -------- --------- ------ ---- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 Restructuring
Charge................. $1,300 $ -- $ -- $7,600 $200 $ -- $100 $100 $9,300
2000 Non-Cash Charges.... -- -- -- 7,600 200 -- -- -- 7,800
------ ---- ---- ------ ---- ---- ---- ---- ------
September 30, 2000
balance................ $1,300 $ -- $ -- $ -- $ -- $ -- $100 $100 $1,500
====== ==== ==== ====== ==== ==== ==== ==== ======
</TABLE>
---------------
(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel). As of
September 30, 1999, 154 employees have been terminated as a result of the
1998 restructuring plan. Payments will continue to certain employees
previously terminated under this restructuring plan. An adjustment of
approximately $1,200 was made in 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. The September 2000 restructuring charge
represents severance and termination costs for approximately 65 employees
who will be terminated (primarily at the Metrex, Parker, Colorado facility)
as a result of the 2000 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.
57
<PAGE> 60
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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.
(13) ACQUISITIONS
The Company has completed seven acquisitions and two mergers since the
beginning of 1998. The acquired companies are all engaged in businesses related
to the Company (see note 15 for a description of business segments).
1998
Acquisitions
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. Earnout payments of
approximately $2,900 were made in 1998, $1,800 for a 1999 acquisition and $1,100
for previous years' acquisitions. In 2000, an earnout payment of approximately
$1,000 was made. 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 Sybron International's Common Stock (valued at approximately
$88,200 based on Sybron International's closing price on April 9, 1998) for all
of the outstanding shares of LRS 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 years'
acquisitions was $45,603.
<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 Stock
</TABLE>
58
<PAGE> 61
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 future payout of approximately $1,000. 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 Sybron International 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 total goodwill for the acquired companies including earnout payments for
prior years' 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>
2000
Acquisitions
During 2000, the Company completed three acquisitions for cash, which were
accounted for as purchases. The aggregate purchase price of the acquisitions for
the year (which are not significant, individually or in the aggregate), net of
cash acquired, was approximately $16,800. 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 year ended September 30,
2000 for these acquired companies was approximately $15,800 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>
59
<PAGE> 62
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited 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 and 2000 acquisitions had occurred as of the
beginning of 1999, 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 YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Net sales.................................................. $397,927 $421,726
======== ========
Net income................................................. $ 46,713 $ 41,341
======== ========
</TABLE>
(14) TRANSACTIONS WITH SYBRON INTERNATIONAL
Cash management and advances: Prior to the Distribution, Sybron
International managed 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 were collected or
funded from a centralized treasury operation and were either credited or charged
to SDS. Advances to and collections from SDS were indirectly charged or credited
with interest as such advances to or collections from SDS were applied to
borrowings or repayments under the Credit Facilities. On an annual basis,
outstanding balances were cleared via an intercompany dividend to or capital
contribution from Sybron International.
Dividends paid to and capital contributions from Sybron International: See
combined statements of changes in stockholder's equity.
Sybron International Credit Facilities: Sybron International has
historically recorded a portion of its outstanding debt (and associated interest
expense) under its Credit Facilities to certain of its subsidiaries, including
the operations of SDS. SDS's historical debt outstanding under the Credit
Facilities at September 30, 1999 and 2000 was $273,192 and $311,772,
respectively. SDS's historical interest expense was $16,732, $15,420 and $24,443
in 1998, 1999 and 2000, respectively.
Sybron International Charges: Sybron International performed certain
functions for the Company (legal, tax, treasury, consolidation accounting,
financial reporting and insurance) and therefore charged its corporate office,
general and administrative expenses to its subsidiaries. SDS's share of such
costs amounted to $3,620, $4,228 and $2,979 in 1998, 1999 and 2000,
respectively. Services performed at the corporate office generally benefited the
domestic operations, and therefore Sybron International corporate office,
general and administrative expenses were generally charged based on SDS's
domestic revenues as a percentage of total Sybron International domestic
revenues. Because general and administrative expenses at Sybron International
generally benefit domestic operations, Sybron International considered this
method to be a reasonable basis for allocation.
60
<PAGE> 63
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
2000:
Sybron Holdings A/S.................................. $ 1,773 5.50% On Demand
</TABLE>
These amounts are included in advance and loans to Sybron International on the
accompanying combined balance sheets.
(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 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 rubber bands 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.
61
<PAGE> 64
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The corporate office general and administrative expenses have been
allocated to the segments on the basis of domestic net sales.
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>
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........................ 225,788 204,082 46,417 -- 476,287
Expenditures for property, plant and
equipment........................... 5,470 4,039 72 -- 9,581
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........................ 229,670 222,204 63,440 -- 515,314
Expenditures for property, plant and
equipment........................... 6,571 6,116 333 -- 13,020
</TABLE>
62
<PAGE> 65
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INFECTION
PROFESSIONAL CONTROL TOTAL
DENTAL ORTHODONTICS PRODUCTS ELIMINATIONS SDS
------------ ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
2000
Revenues:
External customer................... $213,008 $178,139 $27,632 $ -- $418,779
Intersegment........................ 1,049 5,774 41 (6,864) --
-------- -------- ------- ------- --------
Total revenues.............. $214,057 $183,913 $27,673 $(6,864) $418,779
======== ======== ======= ======= ========
Gross profit.......................... 120,092 102,946 11,920 -- 234,958
Selling, general and admin............ 64,021 64,401 11,489 -- 139,911
Operating income...................... 56,071 38,545 431 -- 95,047
Depreciation and amortization......... 8,496 7,943 2,085 -- 18,524
Interest income -- Sybron
International....................... 682 170 -- -- 852
Interest expense...................... 17,071 8,828 -- -- 25,899
Segment assets........................ 250,020 231,997 63,560 -- 545,577
Expenditures for property, plant and
equipment........................... 6,412 5,038 518 -- 11,968
</TABLE>
No customer accounted for more than 10% of net sales for the three reported
periods.
The Company's international operations are conducted principally in Europe.
Inter-geographic sales are made at prices approximating market.
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
United States:
Customers.......................................... $216,463 $225,754 $253,461
Inter-geographic................................... 14,357 14,527 17,399
-------- -------- --------
230,820 240,281 270,860
-------- -------- --------
Europe:
Customers.......................................... 84,363 86,975 83,624
Inter-geographic................................... 53,052 42,497 44,802
-------- -------- --------
137,415 129,472 128,426
-------- -------- --------
All other areas:
Customers.......................................... 66,060 75,447 81,693
Inter-geographic................................... 11,150 11,966 12,607
-------- -------- --------
77,210 87,413 94,300
Inter-geographic sales............................... (78,559) (68,990) (74,807)
-------- -------- --------
Total net sales............................ $366,886 $388,176 $418,779
======== ======== ========
Net Property:
United States...................................... $ 37,418 $ 38,628 $ 35,203
Europe............................................. 3,727 3,763 3,297
All other areas.................................... 13,276 15,097 16,826
-------- -------- --------
Total net property......................... $ 54,421 $ 57,488 $ 55,326
======== ======== ========
</TABLE>
63
<PAGE> 66
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUBSEQUENT EVENTS
Distribution. On December 11, 2000 the ("Distribution Date"), Sybron
International completed the Spin-Off of SDS. Just prior to the Spin-Off, SDS
paid a cash dividend of approximately $67,900 to Sybron International as well as
a non-cash dividend equal to the net intercompany payable to SDS and its
affiliates from Sybron International on the Distribution Date. On the
Distribution Date, SDS borrowed approximately $375,000 under the SDS Credit
Facility (approximately $307,100, the amount equal to the outstanding amounts
under the Sybron International Credit Agreement attributable to SDS on the
Distribution Date including accrued interest, plus the cash dividend of $67,900
from SDS to Sybron International). See note 7 regarding terms and amount of the
SDS Credit Facility. In connection with the Distribution, 1,320,515 Sybron
International employee stock options held by employees of SDS were exchanged for
2,331,214 SDS employee stock options.
Shareholder Rights Plan. On December 8, 2000, the Board of Directors
adopted a Rights Agreement pursuant to which Rights are distributed as a
dividend at the rate of one Right for each share of common stock, par value $.01
per share, of the Company outstanding upon consummation of the Distribution on
December 11, 2000, or issued thereafter. Each Right initially will entitle
stockholders to buy one one-hundredth of a share of a series of preferred stock
for sixty-five dollars. The Rights generally will be exercisable if a person or
group acquires beneficial ownership of 15 percent or more of the Company's
common stock or commences a tender or exchange offer upon consummation of which
such person or group would beneficially own 15 percent or more of the Company's
common stock. Thereafter, or if thereafter the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each Right will entitle its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquirer having a value of
twice the exercise price of the Right. The Rights are attached to the common
stock unless and until they become exercisable and will expire on December 11,
2010, unless earlier redeemed by the Company for $.01 each, or exchanged by the
Company as provided in the Rights Agreement.
SDS Credit Facility. As a result of the Spin-Off, SDS was required to
obtain its own credit facility, which was entered into on November 28, 2000 with
initial funding taking place on December 11, 2000. For a description of the SDS
Credit Facility, see Note 7.
Sale/Leaseback. The Sybron International Sale/Leaseback was renegotiated
as a result of the Spin-Off. The new agreement is not materially different from
the previous agreement. For a description of the new agreement, see Note 7.
Agreements Between Sybron International and SDS. In order to effect the
Distribution, Sybron International and SDS entered into a number of interrelated
agreements. These agreements define the ongoing relationship between the parties
after the Distribution.
64
<PAGE> 67
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
------- -------- -------- -------- ----------
(UNAUDITED)
<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....................... $ 8,600 $ 11,133 $ 12,484 $ 15,077 $ 47,294
======= ======== ======== ======== ========
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
------- -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
2000
Net sales........................ $93,364 $108,315 $104,986 $112,114 $418,779
======= ======== ======== ======== ========
Gross profit..................... $54,099 $ 63,710 $ 60,643 $ 56,508 $234,958
======= ======== ======== ======== ========
Net income....................... $ 9,963 $ 13,635 $ 11,275 $ 6,724 $ 41,597
======= ======== ======== ======== ========
</TABLE>
65
<PAGE> 68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 of Form 10-K with respect to
directors and executive officers is incorporated herein by reference to such
information included in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held January 31, 2001 (the "2001 Annual Meeting Proxy
Statement"), under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance", and to the information under the
caption "Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 of Form 10-K is incorporated herein
by reference to such information included in the 2001 Annual Meeting Proxy
Statement under the captions "Executive Compensation" and "Election of
Directors -- Directors' Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 of Form 10-K is incorporated herein
by reference to such information included in the 2001 Annual Meeting Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Any information called for by Item 13 of Form 10-K is incorporated herein
by reference to such information included in the 2001 Annual Meeting Proxy
Statement under the captions "Election of Directors" or "Certain Relationships
and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed. The following documents are filed as part of this
Annual Report or incorporated by reference as indicated:
1. The combined financial statements of Sybron Dental Specialties, Inc. and
its subsidiaries filed under Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 39
Combined Balance Sheets as of September 30, 1999 and 2000... 40
Combined Statements of Income for the years ended September
30, 1998, 1999 and 2000................................... 41
Combined Statements of Stockholder's Equity for the Years
ended September 30, 1998, 1999 and 2000................... 42
Combined Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000......................... 43
Notes to Combined Financial Statements...................... 44
</TABLE>
66
<PAGE> 69
2. Financial Statement Schedules.
The following report and financial statement schedule should be read in
conjunction with the combined financial statements set forth in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
Schedules other than those listed above are omitted because they are not
applicable or because the required information is given in the combined
financial statements and notes thereto.
3. Exhibits and Exhibit Index.
See the Exhibit Index included as the last part of this report, which is
incorporated herein by reference. Each management contract and compensatory plan
or arrangement required to be filed as an exhibit to this report is identified
in the Exhibit Index by an asterisk following its exhibit number.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the year for
which this report is filed.
SDS did not become a reporting company under the Securities Exchange Act of
1934 until its registration statement on Form 10 became effective on November 9,
2000, but it has substantially the same assets, business and operations as the
dental business segments of its former parent, Sybron International Corporation,
about which Sybron International has reported segment data and other financial
and narrative disclosures in its Exchange Act periodic reports for at least 12
months prior to the December 11, 2000 date of the Distribution.
67
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
December 22, 2000
SYBRON DENTAL SPECIALTIES, INC.
By /s/ FLOYD W. PICKRELL, JR.
-----------------------------------
Floyd W. Pickrell, Jr.,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Principal Executive Officer:
/s/ FLOYD W. PICKRELL, JR. President and Chief December 22, 2000
----------------------------------------------------- Executive Officer
Floyd W. Pickrell, Jr.
Principal Financial Officer and Principal Accounting
Officer:
/s/ GREGORY D. WALLER Vice President -- Finance, December 22, 2000
----------------------------------------------------- Chief Financial Officer
Gregory D. Waller and Treasurer
All of the members of the Board of Directors:
*
-----------------------------------------------------
Dennis Brown
*
-----------------------------------------------------
Donald N. Ecker
*
-----------------------------------------------------
Robert W. Klemme
*
-----------------------------------------------------
James R. Parks
*
-----------------------------------------------------
Floyd W. Pickrell, Jr.
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
-----------------------------------------------------
William E. B. Siart
*
-----------------------------------------------------
Kenneth F. Yontz
*By: /s/ GREGORY D. WALLER December 22, 2000
-------------------------------------------------
Gregory D. Waller
Attorney and Agent for each member of the Board of
Directors of Sybron Dental Specialties, Inc. under
Powers of Attorney dated December 8, 2000
</TABLE>
69
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Sybron Dental Specialties, Inc.:
On November 13, 2000, except as to note 16 to the combined financial
statements which is as of December 11, 2000, we reported on the combined balance
sheets of Sybron Dental Specialties, Inc. and Affiliates as of September 30,
1999 and 2000, 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, 2000, which are included in this Annual Report on Form 10-K. In
connection with our audits of the aforementioned combined financial statements,
we also audited the related financial statement schedule as listed in Item 8.
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
November 13, 2000
S-1
<PAGE> 73
SCHEDULE II
SYBRON DENTAL SPECIALTIES, INC. AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
====== ======= ==== ======= ======
YEAR ENDED SEPTEMBER 30, 2000
Deducted from asset accounts:
Allowance for doubtful
receivables...................... $2,578 $ 936 $ 16(d) $ 1,474(a) $2,056
====== ======= ==== ======= ======
Inventory reserves.................. $3,211 $ 2,642 $ -- $ 1,506(b) $4,457
====== ======= ==== ======= ======
Legal reserves........................ $ 284 $ 106 $ -- $ 166(c) $ 224
====== ======= ==== ======= ======
Restructuring reserve................. $1,345 $ 9,328 $ -- $ 8,270(g) $2,403
====== ======= ==== ======= ======
</TABLE>
---------------
Note: Above additions and deductions include the effects of foreign currency
rate changes.
(a) Non-collectable 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 disbursement including an adjustment of $1,200 for unused severance.
(g) Net disbursements, including write-off of $7,600 and $200 for inventory and
fixed assets, respectively.
S-2
<PAGE> 74
SYBRON DENTAL SPECIALTIES, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-16057)
EXHIBIT INDEX
TO
2000 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
------- ----------- ------------------- --------
<C> <S> <C> <C>
2.1 Contribution Agreement, Plan and X
Agreement of Reorganization and
Distribution, dated as of November
28, 2000, between Sybron
International Corporation ("Sybron
International"), the Registrant and
Sybron Dental Management, Inc.
(excluding the forms of the ancillary
agreements attached thereto as
exhibits, definitive copies of which
are filed as Exhibits 2.2 through 2.8
below)
2.2 General Assignment, Assumption and X
Agreement Regarding Litigation,
Claims and Other Liabilities, dated
as of December 11, 2000, between
Sybron International and the
Registrant
2.3 Trade Name Assignment and X
Transitional Trade Name Use and
License Agreement, dated as of
December 11, 2000, between Sybron
International and the Registrant
2.4 Insurance Matters Agreement, dated as X
of December 11, 2000, between Sybron
International and the Registrant
2.5 Employee Benefits Agreement, dated as X
of December 11, 2000, between Sybron
International and the Registrant
2.6 Tax Sharing and Indemnification X
Agreement, dated as of December 11,
2000, between Sybron International
and the Registrant
2.7 Interim Administrative Services X
Agreement, dated as of December 11,
2000, between Sybron International
and the Registrant
2.8 Confidentiality and Nondisclosure X
Agreement, dated as of December 11,
2000, between Sybron International
and the Registrant
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
------- ----------- ------------------- --------
<C> <S> <C> <C>
3.1 (a) Restated Certificate of Exhibit 3.1 to Amendment No. 2 to the
Incorporation of the Registrant Registrant's Registration Statement
on Form 10/A filed on November 9,
2000 (File No. 1-16057) (the "Form
10/A No. 2")
(b) Certificate of Designation, X
Preferences and Rights of Series A
Preferred Stock
3.2 Bylaws of the Registrant Exhibit 3.2 to the Form 10/A No. 2
4.1 Restated Certificate of Incorporation Exhibits 3.1 and 3.2 hereto
and Bylaws of the Registrant
4.2 Rights Agreement, dated as of Exhibit 4 to the Registrant's Current
December 8, 2000, between the Report on Form 8-K dated December 8,
Registrant and EquiServe Trust 2000 and filed on December 12, 2000
Company, N.A., 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)
4.3 Credit Agreement dated as of November X
28, 2000 (the "Credit Agreement") by
and among Sybron Dental Management,
Inc. ("SDM"), the Subsidiary Swing
Line Borrowers from time to time
parties thereto, Kerr Corporation
("Kerr"), Ormco Corporation
("Ormco"), the Registrant, the
institutions from time to time
parties thereto as Lenders, ABN AMRO
Bank N.V. (the "Administrative
Agent"), The Chase Manhattan Bank, as
Syndication Agent, the First Union
National Bank, as Documentation Agent
4.4 Guaranty dated as of December 11, X
2000 by SDM, Kerr, Ormco, Metrex
Research Corporation ("Metrex") and
Pinnacle Products, Inc. ("Pinnacle")
in favor of the Administrative Agent
4.5 Security Agreement dated as of X
December 11, 2000 by the Registrant,
SDM, Kerr, Ormco, Metrex and Pinnacle
in favor of the Administrative Agent
4.6 Pledge Agreement dated as of December X
11, 2000 by the Registrant, SDM,
Pinnacle, LRS Acquisition Corp. and
Kerr to the Administrative Agent
</TABLE>
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<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
------- ----------- ------------------- --------
<C> <S> <C> <C>
4.7 Patent Security Agreements dated as X
of December 11, 2000 by each of Kerr,
Ormco, Pinnacle and Metrex in favor
of the Administrative Agent
4.8 Trademark Security Agreements dated X
as of December 11, 2000 by each of
Kerr, Ormco, Pinnacle and Metrex in
favor of the Administrative Agent
4.9 Fee Mortgage dated as of December 11, X
2000 by Metrex in favor of the
Administrative Agent
4.10 Fee Mortgage dated as of December 11, X
2000 by Pinnacle in favor of the
Administrative Agent
4.11 Fee Mortgage dated as of December 11, X
2000 by Ormco in favor of the
Administrative Agent
10.1* 2000 Long-Term Incentive Plan Exhibit 10.1 to the Form 10/A No. 2
10.2* Form of Nonqualified Stock Option X
Agreement under the 2000 Long-Term
Incentive Plan
10.3* 2000 Outside Directors' Stock Option Exhibit 10.2 to the Form 10/A No. 2
Plan
10.4* Form of Director Nonqualified Stock X
Option Agreement under the 2000
Outside Directors' Stock Option Plan
10.5* Senior Executive Incentive Exhibit 10.3 to the Form 10/A No. 2
Compensation Plan
10.6* Form of Executive Employment Exhibit 10.4 to the Form 10/A No. 2
Agreement with executive officers
10.7* Form of Indemnification Agreement for Exhibit 10.5 to the Form 10/A No. 2
directors and executive officers
10.8* Promissory Note in favor of Sybron X
Dental Specialties, Inc. from Stephen
J. Tomassi
10.9 Lease Agreement dated December 21, Exhibit 10(bb) to Sybron
1988 between CPA:7 and CPA:8, as Corporation's Registration Statement
landlord, and Ormco Corporation; as on Form S-1 (No. 33-3324640)
tenant
10.10 Lease Agreement dated December 21, Exhibit 10(dd) to Sybron
1988 between CPA:7 and CPA:8, as Corporation's Registration Statement
landlord, and Kerr Manufacturing on Form S-1 (No. 33-24640)
Company, as tenant
10.11 Tenant Agreement dated December 21, Exhibit 10(rr) to Sybron
1988 between New England Mutual Life Corporation's Registration Statement
Insurance Company, as lender, and on Form S-1 (No. 33-24640) Form S-1
CPA:7 and CPA:8, as landlord, and (No. 33-24640)
Ormco Corporation, as tenant
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
------- ----------- ------------------- --------
<C> <S> <C> <C>
10.12 Environmental Risk Agreement dated Exhibit 10(xx) to Sybron
December 21, 1988 from Sybron Corporation's Registration Statement
Corporation and Ormco Corporation, as on Form S-1 (No. 33-24640)
indemnitors, to New England Mutual
Life Insurance Company, as lender,
and CPA:7 and CPA:8, as Borrowers
10.13 Environmental Risk Agreement dated Exhibit 10(zz) to Sybron
December 21, 1988 from Sybron Corporation's Registration Statement
Corporation and Kerr Manufacturing on Form S-1 (No. 33-24640)
Company, as indemnitors, to New
England Mutual Life Insurance
Company, as lender, and CPA:7 and
CPA:8, as Borrowers
21 Subsidiaries of the Registrant X
23 Consent of KPMG LLP X
24 Powers of Attorney of directors of X
the Registrant
27 Financial Data Schedule (fiscal year X
September 30, 2000)
</TABLE>
---------------
* Denotes management contract or executive compensation plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
EI-4
