SYBRON DENTAL SPECIALTIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

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

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SYBRON DENTAL SPECIALTIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 33-0920985
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1717 WEST COLLINS AVENUE, ORANGE, CALIFORNIA 92867
(Address of principal executive offices) (Zip Code)

(714) 516-7400
(Registrant's Telephone Number, Including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

At July 31, 2002, there were 37,989,129 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.

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SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to unaudited consolidated financial statements.

1

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to unaudited consolidated financial statements.

2

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

See accompanying notes to unaudited consolidated financial statements.

3

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to unaudited consolidated financial statements.

4

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

1. OVERVIEW AND BASIS OF PRESENTATION

Sybron Dental Specialties, Inc. ("SDS" or the "Company") was
incorporated in Delaware on July 17, 2000. The Company was created to
effect the spin-off by Apogent Technologies Inc. ("Apogent") of its
dental business. As a part of the spin-off, which occurred on December
11, 2000, Apogent transferred to SDS, along with certain other assets,
all of the capital stock of Sybron Dental Management, Inc. ("SDM"),
which owned, directly or indirectly, the stock or other equity interest
in the subsidiaries that held substantially all of the assets and
liabilities of Apogent's then dental business. Apogent then distributed
to its shareholders, by means of pro rata distribution, all of the
Company's outstanding common stock together with related preferred
stock purchase rights (the "spin-off"). As a result, SDS became an
independent, publicly traded company. The subsidiaries of SDS market
their products under brand names such as Kerr(R), belle(TM), Metrex(R),
Ormco(R), Analytic(R) Pinnacle(R), Demetron(R), Hawe(R) and AOA(TM),
which are well recognized in the dental, orthodontics and infection
prevention industries. SDS has three business segments: a) Professional
Dental, b) Orthodontics and c) Infection Prevention.

On June 6, 2002, the Company entered into a new credit facility, which
consists of a revolving credit facility of up to $150 million with a
five-year commitment period, and a $200 million term loan at LIBOR plus
250 basis points with a seven-year maturity. Additionally, the Company
completed the sale of $150 million of 8 1/8% senior subordinated notes
due 2012, in a private offering. The cash proceeds from the term loan
and senior subordinated notes were used to retire the Company's
previous credit facility. The new credit structure provides the Company
with greater financial flexibility and longer-term financing.

As a result of the termination of the previous credit facility on June
6, 2002, approximately $70 million of the Company's current interest
rate swaps could not be re-assigned to the new credit facility and thus
were terminated. Accordingly, the Company recorded a loss on derivative
instruments of approximately $3.8 million (or approximately $2.3
million, net of tax) in other income (expense), which represents the
fair value of the swaps at the termination date. Additionally, under
the Financial Accounting Standards Board's ("FASB") Statement No. 133,
the Company had to re-assign the remaining interest rate swaps as a
result of the specificity of the Company's hedge documentation relating
to the hedged item. Accordingly, a non-cash loss on derivative
instruments of approximately $3.2 million (or approximately $2.0
million, net of tax), representing the fair value of the remaining
swaps at the date of the refinancing, was reclassified from other
comprehensive income (loss) and recorded in other income (expense) to
recognize the loss. However, these swaps were continued and were
simultaneously re-assigned to the new credit facility. The change in
the fair value of these re-assigned swaps from the refinancing date to
June 30, 2002 has been recorded in other comprehensive income (loss).

The unaudited consolidated financial statements reflect the operations
of SDS and its wholly owned subsidiaries and affiliates. The term
"Apogent" as used herein refers to Apogent Technologies Inc. and its
subsidiaries. The Company's fiscal year ends on September 30. All
significant intercompany balances and transactions have been eliminated
in consolidation. The fiscal periods ended June 30, 2002 and June 30,
2001 are hereinafter referred to as "2002" and "2001," respectively.

In the opinion of management, all adjustments, which are necessary for
a fair presentation of the results for the interim periods presented,
have been included. Except as described in notes 2, 4 and 7 below, all
such adjustments were of a normal recurring nature. The results for the
period ended June 30, 2002 are not necessarily indicative of the
results to be expected for the full year. Because certain disclosures
have been omitted from these statements, this information should only
be read in conjunction with the Company's consolidated financial
statements for the years ended September 30, 2001, 2000 and 1999 and
Management's Discussion and Analysis of Financial Condition and Results
of Operations with respect to such years, which have been adjusted to
reflect the change in accounting principle described in note 2, below.

5

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

2. CHANGE IN ACCOUNTING PRINCIPLE

During the quarter ended June 30, 2002, the Company changed its method
of accounting for its domestic inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. The Company
believes the change to FIFO is preferable in the circumstances because
in the current environment of low inflation, it will result in a better
measurement of operating results. In addition, the Company believes
that the change in the method of accounting for domestic inventory
costs is preferable because it provides a better measure of the current
value of its inventory, provides a more accurate reflection of the
Company's financial position and liquidity, and provides a better
matching of manufacturing costs with revenues. It will also allow for
the valuing of inventory consistently throughout the Company. The
Company's historical financial statements have been adjusted for all
relevant prior periods in accordance with Accounting Principles Board
Opinion No. 20, "Accounting Changes" to reflect this change in method
of inventory accounting. The effect of the accounting change on income
as previously reported for the six months ended March 31, 2002, and the
quarter and nine months ended June 30, 2001 is as follows:

The balances of additional paid-in capital and retained earnings as of
September 30, 2001 have been adjusted for the effect (net of income
taxes) of applying retroactively the change in the method of
accounting.

3. INVENTORIES

Inventories at June 30, 2002 and September 30, 2001 are presented
below. Inventories at September 30, 2001 reflect the change in
accounting principle (see note 2).

6

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

4. RESTRUCTURING CHARGES

In September 2001, the Company recorded a restructuring charge of
approximately $2.4 million ($1.5 million after tax) in connection with
the closing of Ormco's San Diego, California manufacturing facility.
The charge consists primarily of severance and termination costs
associated with the planned termination of sixty-three employees who
worked at the facility. As of June 30, 2002, the majority of the
employment terminations were completed under the restructuring plan
with the remainder to be complete by the end of this fiscal year. Of
the $2.4 million restructuring charge, approximately $1.7 million is a
cash related charge for severance and contractual obligations, while
the balance of approximately $0.7 million represents non-cash charges
related to exited capital and other assets. SDS believes that the
proceeds from the planned sale of the San Diego manufacturing facility
will offset the restructuring charge. The proceeds from the planned
sale will be used to pay down debt and reduce interest charges. The
work previously performed at the facility is now being performed at the
Ormco Glendora, California facility. The Company completed the closing
of the facility as of June 30, 2002 and believes it will finalize all
remaining costs by September 30, 2002.

In September 2000, the Company recorded a restructuring charge 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 Prevention business segments, respectively) and severance and
termination costs related to the planned termination of sixty-five
employees (fifty-six located at the Metrex Research Corporation
facility in Parker, Colorado, eight located at the Ormco facility in
San Diego, California, and one located at the Ormco facility in
Amersfort/Europe) as a result of the 2000 restructuring plan. Of the
$9.3 million restructuring charge, approximately $7.8 million
represented non-cash charges related to the exited products and
capital, while the balance of approximately $1.5 million is a cash
related charge for severance and contractual obligations. The Company
completed the 2000 restructuring plan in the first quarter of 2002,
along with the remainder of the cash charges.

In June 1998, SDS recorded a restructuring charge of approximately
$14.6 million (approximately $10.7 million 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 2001 restructuring charge activity since September 30, 2001 and its
components are as follows:

The 2000 restructuring charge activity since September 30, 2000 and its
components are as follows:

The 1998 restructuring charge activity since June 30, 1998 and its
components are as follows:

7

(a) Amount represents the 2001 restructuring charge for severance and
termination costs associated with the 63 employees located at the Ormco
San Diego facility whose employment Ormco planned to terminate as a
result of the 2001 restructuring plan (all of whom were notified before
September 30, 2001 of the intent to terminate their employment). As of
June 30, 2002, the majority of the employment terminations were
completed under the restructuring plan with the remainder to be
completed by the end of this fiscal year. The proceeds from the planned
sale of the Ormco San Diego facility is expected to offset the cost of
closing the facility. The closing of the facility was completed by June
30, 2002. The 2000 restructuring charge represents severance and
termination costs for 65 employees whose employment was terminated
(primarily at the Metrex facility in Parker, Colorado) as a result of
the 2000 restructuring plan. As of September 30, 2001 all employment
terminations were completed under the 2000 restructuring plan. The 1998
restructuring charge represents severance and termination costs related
to the approximately 165 employees whose employment the Company
planned to terminate as a result of the 1998 restructuring plan
(primarily sales and marketing personnel). As of June 30, 2002, 154
employees have been terminated as a result of the 1998 restructuring
plan. An adjustment of approximately $1.2 million 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.

(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.

5. SEGMENT INFORMATION

The Company's operating subsidiaries are engaged in the manufacture and
sale of dental, orthodontics and infection prevention products in the
United States and other countries. The Company's products are
categorized in the following business segments: a) Professional Dental,
b) Orthodontics and c) Infection Prevention.

Information on these business segments is summarized as follows:

8

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

- ----------

(a) Includes the elimination of intergroup activity in the three months ended
June 30, 2002 and 2001.

- ----------

(a) Includes the elimination of intergroup activity in the nine months ended
June 30, 2002 and 2001.

9

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

6. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
are calculated by using the weighted average number of common shares
outstanding adjusted to include the potentially dilutive effect of
outstanding stock options. The basic weighted average number of shares
outstanding were 37,962,934 and 35,834,734 for the quarters ended June
30, 2002 and 2001, respectively. For the nine month periods ended June
30, 2002 and 2001, the basic weighted average number of shares
outstanding were 37,925,138 and 35,359,739, respectively. The number of
incremental diluted shares were 1,566,089 and 1,555,024 for the
quarters ended June 30, 2002 and 2001, respectively. For the nine month
periods ended June 30, 2002 and 2001, the number of incremental diluted
shares were 1,457,542 and 964,428, respectively, and represent the
dilutive effect of options outstanding. There were no anti-dilutive
shares for the quarter ended June 30, 2001. The number of anti-dilutive
shares for the nine month period ended June 30, 2001 was 3,069. There
were no anti-dilutive shares for both the quarter and nine month
periods ended June 30, 2002.

7. EXTRAORDINARY CHARGES

The extraordinary charge recorded in the third quarter of fiscal 2002
is a result of the termination of the Company's previous credit
facility on June 6, 2002. The charge consists of a pre-payment penalty
on the term B loan of approximately $1.0 million, net of tax, and the
amortization of approximately $2.7 million, net of tax, of the
remainder of the deferred financing fees related to the previous credit
facility (see note 1).

The extraordinary item for fiscal 2001 represents the SDS allocation of
the write-off of Apogent's deferred financing fees associated with the
termination of Apogent's credit agreement due to the spin-off.

8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company's domestic subsidiaries are guarantors of the Company's
8 1/8% senior subordinated notes due 2012, on an unsecured senior
subordinated basis. Except to the extent necessary to avoid a
fraudulent conveyance, the note guarantees are full and unconditional.
The notes and the subsidiary guarantees are unsecured and subordinated
to all of the Company's and the Company's guarantor subsidiaries'
existing and future unsubordinated debt, including debt under the new
credit facility entered into on June 6, 2002.

Below are the unaudited condensed consolidating balance sheets as of
June 30, 2002 and September 30, 2001, statements of operations for the
three and nine months ended June 30, 2002 and 2001, and statements of
cash flows for the nine months ended June 30, 2002 and 2001, of Sybron
Dental Specialties, Inc. and its subsidiaries, reflecting the
subsidiary guarantors of the 8 1/8% senior subordinated notes.

Intercompany balances include receivables/payables incurred in the
normal course of business in addition to investments and loans
transacted by subsidiaries of the Company with other subsidiaries or
with the Company.

10

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING BALANCE SHEETS

11

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING BALANCE SHEETS-CONTINUED

12

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

13

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS - CONTINUED

14

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

15

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED

16

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

When we use the terms "we", "us" or "our" in this report, we are
referring to Sybron Dental Specialties, Inc. and its subsidiaries and their
respective predecessors. Our fiscal year ends on September 30 and, accordingly,
all references to quarters refer to our fiscal quarters. The quarters ended June
30, 2002 and 2001 refer to the third quarters of fiscal 2002 and 2001,
respectively.

GENERAL

Our subsidiaries are leading manufacturers of value-added consumable
products for the dental and orthodontic professions and products for use in
infection prevention. Our subsidiaries operate in three business segments:

o Professional Dental. We develop and manufacture a
comprehensive line of consumable products sold through
independent distributors to the dental industry worldwide;

o Orthodontics. We engineer, manufacture, market, and distribute
an array of consumable orthodontic products, and endodontic
products used in root canal therapy, worldwide; and

o Infection Prevention. We develop and manufacture consumable
infection prevention products sold through independent
distributors to the medical and dental markets, principally in
the United States and Canada. Prior to fiscal year 2002 this
segment was referred to as the Infection Control Products
segment. The name was changed to more accurately describe the
products of this segment.

Our primary subsidiaries in each of our business segments are as
follows:

PROFESSIONAL DENTAL ORTHODONTICS INFECTION PREVENTION

Kerr Corporation Ormco Corporation Metrex Research Corporation
Kerr Italia S.p.A. Ormco B.V.
Sybron Canada Limited Ormodent Group
Pinnacle Products, Inc. Allesee Orthodontic Appliances, Inc.
Hawe Neos Holdings S.A.

We strive to consistently grow sales and earnings. Key elements of
our strategy to achieve these goals are: a focus on product innovation, ongoing
cost reduction, and selective acquisitions, while continuing to pursue a
strategy of debt reduction.

Net sales for the fiscal quarter and year to date periods ended June
30, 2002 were higher than from the corresponding prior year periods. Net sales
for the third quarter of fiscal 2002 increased by 11.2% over the corresponding
fiscal 2001 period, while year to date net sales increased by 7.3% over the
comparable prior year period. Operating income for the third quarter of fiscal
2002 increased by 5.6% over the corresponding fiscal 2001 period, while year to
date operating income decreased by 0.3% from the comparable prior year period.

Domestic sales for the quarter and year to date periods ended June 30,
2002 were higher by 6.5% and 4.4%, respectively, over the corresponding fiscal
2001 periods. International sales increased by 19.0% and 11.7% for the quarter
and year to date periods ended June 30, 2002, respectively, over the
corresponding fiscal 2001 periods. Without the effects of currency fluctuations,
international sales growth would have been 15.6% and 11.8% for the quarter and
year to date periods, respectively, over the corresponding fiscal 2001 periods.

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

17

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 partially mitigated by the fact that our 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.

During the quarter ended June 30, 2002, we changed our method of
accounting for our domestic inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. We believe the change to FIFO
is preferable in the circumstances because in the current environment of low
inflation, it will result in a better measurement of operating results. In
addition, we believe that the change in the method of accounting for domestic
inventory costs is preferable because it provides a better measure of the
current value of our inventory, provides a more accurate reflection of our
financial position and liquidity, and provides a better matching of
manufacturing costs with revenues. It will also allow for the valuing of
inventory consistently throughout our company. Our historical financial
statements have been adjusted for all relevant prior periods in accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes" to reflect this
change in method of inventory accounting. The effect of the accounting change on
income as previously reported for the six months ended March 31, 2002, and the
quarter and nine months ended June 30, 2001 is as follows:

The balances of additional paid-in capital and retained earnings as of September
30, 2001 have been adjusted for the effect (net of income taxes) of applying
retroactively the change in method of accounting.

FUTURE CHARGES AND EVENTS

We are formulating a restructuring plan for our European operations
which we expect to finalize in fiscal 2002. The amount of the resulting
restructuring charge, and the portion which will represent cash charges, will
not be known until the plan is finalized. However, based on our current,
preliminary estimates, we expect this charge to be approximately $3.0 million.

We have made some changes in our sales and marketing programs at Kerr
and Metrex which may have a negative impact on our sales and income in the
near-term. The changes made include the termination of Kerr's annual rebate
program for its North American distributors, which rewarded dealers for
purchases made at the end of our fiscal year and the termination of certain
quarter-end incentive programs that were aimed solely at dealers, without a
corresponding incentive to stimulate end-user demand.

These programs were in effect in the fourth quarter of our 2001 fiscal
year and may have stimulated the purchase of product in that quarter. We
anticipate that the termination in the fourth quarter of our current fiscal year
of the Kerr annual rebate program and the quarterly incentive programs will
cause the year-over-year growth for Kerr and Metrex to be negative in the 2002
fiscal fourth quarter which will impact our net income in that quarter.

While the immediate impact of these changes is expected to be negative,
we believe these changes will create a more consistent level of dealer purchases
of our products and enable us to better plan our production and better manage
our inventory levels over time, which should allow us to reduce somewhat our
working capital requirements and manage our business more effectively.

In addition to the impact that the termination of the incentive
programs will have on our expected 2002 fiscal year fourth quarter results, we
anticipate that sales at Ormco will be lower than we initially planned in the
2002 fiscal fourth quarter. This is the result of slight slowing in the
orthodontia market and the under performance of some elements of our sales
organization. If the sales are lower than currently expected, it will reduce our
gross margins and net income in the quarter.

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RESULTS OF OPERATIONS

QUARTER ENDED JUNE 30, 2002 COMPARED TO THE QUARTER ENDED JUNE 30, 2001

Net Sales

Overall Company. Net sales for the third quarter of fiscal 2002
increased by $12.0 million or 11.2% from the corresponding fiscal 2001 quarter.

Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from: (a) net sales of products from acquired
companies (approximately $6.0 million), (b) net sales of new products
(approximately $1.4 million), (c) increased net sales of existing products
(approximately $1.2 million), (d) favorable foreign currency fluctuations
(approximately $0.7 million), and (e) decreased rebate expense (approximately
$0.1 million).

Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) net sales of new products (approximately $0.8 million), (b)
increased net sales of existing products (approximately $0.7 million), (c)
favorable foreign currency fluctuations (approximately $0.6 million), and (d)
decreased rebate expense (approximately $0.1 million).

Infection Prevention. Increased net sales in the Infection Prevention
segment resulted primarily from net sales of products from an acquired company
(approximately $0.6 million). This increase was partially offset by a decrease
in net sales of existing products (approximately $0.2 million).

Gross Profit

Overall Company. Gross profit for the quarter ended June 30, 2002
increased by $5.8 million or 9.5% from the corresponding fiscal 2001 quarter.

Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) margins relating to the net sales of
products from acquired companies (approximately $3.0 million), (b) a favorable
product mix (approximately $2.5 million), (c) increased unit volume of existing
products (approximately $0.7 million), (d) unit volume relating to new products
(approximately $0.7 million), (e) a favorable exchange rate effect
(approximately $0.3 million), and (f) decreased rebate expense (approximately
$0.1 million). The increase in gross profit was partially offset by: (a)
unfavorable manufacturing variances (approximately $1.9 million) and (b)
inventory reserve adjustments (approximately $0.4 million, of which
approximately $0.4 million is due to increased royalty expense, an increase in
obsolescence of approximately $0.2 million, partially offset by physical
inventory adjustments of approximately $0.2 million).

Orthodontics. Increased gross profit in the Orthodontics segment
resulted primarily from: (a) favorable product mix margins (approximately $1.4
million), (b) a favorable exchange rate effect (approximately $0.6 million), (c)
inventory reserve adjustments (approximately $0.6 million, of which
approximately $1.1 million is due to a decrease in obsolescence, partially
offset by physical inventory adjustments of approximately $0.3 million,
increased royalty expense of approximately $0.1 million, and standard cost
adjustments of approximately $0.1 million), (d) unit volume relating to new
products (approximately $0.5 million), (e) increased net sales of existing
products (approximately $0.4 million) and (f) decreased rebate expense
(approximately $0.1 million). The increase in gross profit was partially offset
by unfavorable manufacturing variances of approximately $2.6 million.

Infection Prevention. Gross profit in the Infection Prevention segment
decreased primarily from: (a) unfavorable manufacturing variances of
approximately $0.3 million and (b) inventory reserve adjustments (approximately
$0.2 million, of which approximately $0.4 million is related to physical
inventory adjustments, partially offset by standard cost revisions of
approximately

19

$0.1 million and a decrease in obsolescence of approximately $0.1 million). The
decrease in gross profit was offset by margins relating to the net sales of
products from the acquired company (approximately $0.3 million).

Selling, General and Administrative Expenses

Overall Company. Selling, general and administrative expenses for the
quarter ended June 30, 2002 increased by $4.4 million or 12.1% from the
corresponding fiscal 2001 quarter.

Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
expenses related to acquisitions (approximately $2.6 million), (b) increased
selling and marketing expenses (approximately $1.0 million), (c) an increase in
amortization expense of goodwill and other intangible assets (approximately $0.2
million), (d) increased general and administrative expenses (approximately $0.2
million), and (e) an increase in expenses relating to foreign currency
fluctuations (approximately $0.1 million).

Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) increased selling and
marketing expenses (approximately $0.2 million), (b) increased general and
administrative expenses (approximately $0.1 million), and (c) increased research
and development expenses (approximately $0.1 million). The increase in selling,
general and administrative expenses was offset by a decrease in expenses related
to foreign currency fluctuations (approximately $0.4 million).

Infection Prevention. Increased selling, general and administrative
expenses in the Infection Prevention segment resulted primarily from: (a)
increased selling and marketing expenses (approximately $0.4 million) and (b) an
increase in amortization expense of goodwill and other intangible assets
(approximately $0.1 million). The increase in selling and marketing expenses was
partially offset by decreased general and administrative expenses (approximately
$0.2 million).

Operating Income

As a result of the foregoing, operating income in the third quarter of
fiscal 2002 increased by 5.6% or $1.4 million above operating income in the
corresponding quarter of fiscal 2001.

Interest Expense

Interest expense was $6.6 million in the third quarter of fiscal 2002,
a decrease of $2.4 million from the corresponding fiscal 2001 quarter. The
decrease resulted from reduced average debt balances in the third quarter of
fiscal 2002 and reduced average interest rates on our credit facility.

Income Taxes

Taxes on income in the third quarter of fiscal 2002 were approximately
$4.9 million, a decrease of $1.5 million for the corresponding fiscal 2001
quarter. The decrease was primarily due to lower taxable earnings, as well as a
decrease in the effective tax rate for the quarter from 40.5% to 39.0%.

20

Income Before Extraordinary Item

As a result of the foregoing, we had income before extraordinary item
of $7.6 million in the third quarter of fiscal 2002. Included in net income
before extraordinary item for the first nine months of fiscal 2002 is a loss of
approximately $4.3 million, net of tax, which is the loss on the interest rates
swaps that were either terminated or re-assigned as a result of the re-financing
of the previous credit facility in the third quarter of fiscal 2002.

Extraordinary Item

In the third quarter of fiscal 2002, we terminated our prior credit
agreement and wrote off the associated deferred financing fees of $2.7 million
(net of tax) and had termination costs of approximately $1.0 million (net of
tax), primarily due to a prepayment penalty of our terminated tranche B term
loan.

Net Income

As a result of the foregoing, we had net income of $3.9 million in the
quarter ended June 30, 2002, as compared to net income of $9.4 million in the
corresponding fiscal 2001 period.

Depreciation and Amortization

Depreciation and amortization of goodwill and other intangible assets
is allocated among the cost of sales, selling, general and administrative
expenses and other expense. Depreciation and amortization of goodwill and other
intangible assets increased $1.2 million in the third quarter of fiscal 2002
compared to the same period in the prior year due to amortization expenses of
goodwill and other intangible assets of acquired companies, as well as increased
depreciation expense due to the addition of new assets.

NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2001

Net Sales

Overall Company. Net sales for the first nine months of fiscal 2002
increased by $23.2 million or 7.3% from the corresponding fiscal 2001 period.

Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from: (a) the net sales of products from acquired
companies (approximately $17.5 million), (b) net sales of new products
(approximately $2.8 million), (c) net sales of existing products (approximately
$1.4 million), and (d) reduced rebate expense (approximately $0.3 million). The
increase in net sales was offset by the loss of the net sales of last year's
exited product lines (approximately $0.8 million).

Orthodontics. Decreased net sales in the Orthodontics segment resulted
primarily from: (a) decreased net sales of existing products (approximately $2.6
million), (b) the loss of the net sales of last year's exited product lines
(approximately $1.3 million), and (c) unfavorable foreign currency fluctuations
(approximately $0.2 million). The decrease in net sales was partially offset by:
(a) net sales of new products (approximately $2.5 million), (b) reduced rebate
expenses (approximately $0.2 million), and (c) the net sales of products from an
acquired company (approximately $0.1 million).

Infection Prevention. Increased net sales in the Infection Prevention
segment resulted primarily from: (a) the net sales of products from an acquired
company (approximately $2.1 million) and (b) increased net sales of existing
products (approximately $1.2 million).

21

Gross Profit

Overall Company. Gross profit for the nine months ended June 30, 2002
increased by $10.3 million or 5.7% from the corresponding fiscal 2001 period.

Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) margins relating to the net sales of
products from acquired companies (approximately $8.9 million), (b) a favorable
product mix (approximately $4.7 million), (c) unit volume relating to new
products (approximately $1.7 million), (d) decreased rebate expense
(approximately $0.3 million), (e) favorable manufacturing variances
(approximately $0.2 million), and (f) increased net sales of existing products
(approximately $0.6 million). The increase in gross profit was partially offset
by: (a) inventory reserve adjustments (approximately $1.6 million, of which
approximately $0.8 million is due to increased royalty expense, standard cost
revisions of approximately $0.3 million, an increase in obsolescence of
approximately $0.3 million and physical inventory adjustments of approximately
$0.2 million) and (b) margins lost from the prior year's exited products lines
(approximately $0.4 million).

Orthodontics. Decreased gross profit in the Orthodontics segment
resulted primarily from: (a) unfavorable manufacturing variances (approximately
$4.1 million), (b) decreased net sales of existing products (approximately $1.6
million), (c) inventory reserve adjustments (approximately $0.8 million, of
which approximately $0.5 million is due to an increase in royalty expense,
physical inventory adjustments of approximately $0.3 million, an increase in
obsolescence of approximately $0.2 million, partially offset by standard cost
revisions of approximately $0.2 million), (d) margins lost from the prior year's
exited products (approximately $0.8 million), (e) unfavorable product mix
margins (approximately $0.4 million), and (e) an unfavorable exchange rate
effect (approximately $0.2 million). The decrease in gross profit was partially
offset by: (a) unit volume relating to new products (approximately $1.5
million), (b) reduced rebate expense (approximately $0.2 million), and (c)
margins relating to the net sales of products from acquired companies
(approximately $0.1 million).

Infection Prevention. Increased gross profit in the Infection
Prevention segment resulted primarily from: (a) increased net sales of existing
products (approximately $1.3 million) and (b) margins relating to the net sales
of products from the acquired company (approximately $1.0 million). The increase
in gross profit was partially offset by: (a) unfavorable manufacturing variances
(approximately $0.3 million) and (b) inventory reserve adjustments
(approximately $0.1 million, of which $0.4 million is related to physical
inventory adjustments, partially offset by a decrease in obsolescence of
approximately $0.2 million, and standard cost revisions of approximately $0.1
million).

Selling, General and Administrative Expenses

Overall Company. Selling, general and administrative expenses for the
nine months ended June 30, 2002 increased by $10.5 million or 9.7% from the
corresponding fiscal 2001 period.

Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
expenses related to acquisitions (approximately $6.6 million), (b) increased
selling and marketing expenses (approximately $1.1 million), (c) increased
amortization expense of goodwill and other intangible assets (approximately $0.8
million), (d) increased general and administrative expenses (approximately $0.4
million), and (e) increased research and development

22

expenses (approximately $0.3 million). The increase in selling, general and
administrative expenses was offset by a decrease in expenses related to foreign
currency fluctuations (approximately $0.3 million).

Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) increased selling and
marketing expenses (approximately $2.1 million), (b) increased research and
development expenses (approximately $0.4 million), and (c) expenses related to
acquisitions (approximately $0.1 million). The increase in selling, general and
administrative expenses was partially offset by: (a) decreased general and
administrative expenses (approximately $1.3 million), (b) a decrease in expenses
related to foreign currency fluctuations (approximately $1.0 million), and (c)
decreased amortization expense of goodwill and other intangible assets
(approximately $0.1 million).

Infection Prevention. Increased selling, general and administrative
expenses in the Infection Prevention segment resulted primarily from: (a)
increased selling and marketing expenses (approximately $0.7 million), (b)
increased amortization expense of goodwill and other intangible assets
(approximately $0.3 million), (c) increased general and administrative expenses
(approximately $0.2 million), and (d) expenses related to acquisitions
(approximately $0.1 million).

Operating Income

As a result of the foregoing, operating income in the first nine months
of fiscal 2002 decreased by 0.3% or $0.2 million below operating income in the
corresponding period of fiscal 2001.

Interest Expense

Interest expense was $20.2 million in the first nine months of fiscal
2002, a decrease of $5.5 million from the corresponding fiscal 2001 period. The
decrease resulted from reduced average debt balances in the first nine months of
fiscal 2002 and reduced average interest rates on our credit facility.

Income Taxes

Taxes on income in the first nine months of fiscal 2002 were $18.1
million, a decrease of $1.4 million from the corresponding fiscal 2001 period,
primarily due to lower taxable income.

Income Before Extraordinary Item

As a result of the foregoing, we had income before extraordinary item
of $28.3 million in the first nine months of fiscal 2002 as compared to income
before extraordinary item of $28.7 million in the corresponding fiscal 2001
period. Included in net income before extraordinary item is a loss of
approximately $4.3 million, net of tax, which is the loss on the interest rates
swaps that were either terminated or re-designated as a result of the
re-financing of the previous credit facility in the third quarter of fiscal year
2002.

Extraordinary Item

In the third quarter of fiscal 2002, we terminated our prior credit
agreement and wrote off the associated deferred financing fees of $2.7 million
(net of tax) and had termination costs of approximately $1.0 million (net of
tax) primarily due to a prepayment penalty on our terminated tranche B term
loan. The extraordinary item of approximately $0.5 million (net of tax) in the
prior fiscal year represents the write off of the associated deferred financing
fees as a result of the termination of Apogent's credit agreement due to the
spin-off of SDS.

23

Net Income

As a result of the foregoing, we had net income of $24.7 million in the
first nine months of fiscal 2002, as compared to net income of $28.2 million in
the corresponding fiscal 2001 period.

Depreciation and Amortization

Depreciation and amortization of goodwill and other intangible assets
is allocated among the cost of sales, selling, general and administrative
expenses and other expense. Depreciation and amortization of goodwill and other
intangible assets increased $1.5 million in the first nine months of fiscal 2002
compared to the same period in the prior year due to amortization of goodwill
and other intangible assets of acquired companies, as well as increased
depreciation expense due to the addition of new assets.

CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies, among others,
affect significant judgments and estimates used in the preparation of our
consolidated financial statements. We base our estimates and judgments on
historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
determining the carrying values of assets and liabilities that are not readily
apparent from other sources and are inherently uncertain. As a result, changes
in estimates, assumptions and general market conditions on which our judgments
and estimates are based, could cause actual results to differ materially from
future expected results.

o Intangible Assets - Intangible assets, other than goodwill, are
recorded at cost and are amortized, using the straight-line method,
over their estimated useful lives. Goodwill (excess of cost over the
net asset value of acquired businesses) recorded prior to June 30,
2001, is amortized over 5 to 40 years, proprietary technology,
trademarks, and other intangibles are amortized over 7 to 40 years, 9
years, and 3 to 17 years, respectively. Goodwill recorded subsequent to
June 30, 2001 is not being amortized to earnings, but is to be reviewed
for impairment on an annual basis in accordance with the implementation
of FASB Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets". We applied SFAS No. 141
"Business Combinations" in our preliminary allocation of the purchase
price of the Surgical Acuity business. We identified and allocated a
value to the purchase of the intangible assets of less than $0.1
million related to licensing agreements, and goodwill related to the
purchase of $5.9 million. The intangible relating to licensing is being
amortized to earnings over a period of 15 years, while the goodwill
related to the purchase is not being amortized to earnings, but
reviewed on an annual basis for impairment, in accordance with SFAS No.
142. See "New Accounting Pronouncements" below for additional
information relating to the treatment of goodwill beginning October 1,
2002.

o Revenue Recognition - We recognize revenue upon shipment of products,
when the risks and rewards of ownership are passed, 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 our sales of Professional Dental products
and Infection Prevention 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. We are not obligated to allow for returns.
Additionally, we accrue rebates based upon our various pricing
programs. These rebates are accounted for as a reduction of revenue.
The allowance for doubtful receivables is reviewed and adjusted
periodically. Accounts that are judged to have a collection uncertainty
are reserved for, in part or in total, based on management's estimate
of the collectable balance.

o Inventories - Periodically we review our inventory for potentially
excess and/or obsolete items by comparing the historical demand to the
expected future demand and adjust our obsolescence reserves
accordingly. If circumstances change (e.g., unexpected shifts in market
demand) there could be a material impact on the net realizable value of
the inventory. Additionally, in the quarter ended June 30, 2002, we
changed our method of accounting for domestic inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
method, and prior period financial statements have been adjusted to
reflect this change in accordance with Accounting Principles Board No.
20 "Accounting Changes." For a further description of this change in
method for accounting for inventories, please see note 2 in the notes
to the unaudited consolidated financial statements in Item 1 above.

o Derivative Financial Instruments - We use derivative financial
instruments to manage our foreign currency, interest rate exposures,
and certain net investments. We 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 our 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

24

agreements is minimized through diversification among counterparties
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 occur 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 fair value of the derivative are highly
inversely correlated with changes in the fair value of the underlying
hedged item at the inception of the hedge and over the life of the
hedge contract.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," and SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 142 requires that goodwill no longer be amortized to
earnings, but instead reviewed for impairment. Under SFAS No. 142, the
amortization of goodwill ceases upon adoption of the statement and is effective
for fiscal years beginning after December 15, 2001. In all cases, the provisions
of SFAS No. 142 shall be initially applied at the beginning of a fiscal year.

We have historically amortized our goodwill and other intangible assets
over their estimated useful lives. Beginning with the adoption of SFAS No. 142,
we will cease amortizing our goodwill and certain intangible assets as defined
in SFAS No. 142. We will adopt SFAS No. 142 as of the beginning of fiscal year
2003 (i.e. October 1, 2002). We recorded amortization expense of goodwill and
other intangible assets in the amount of $7.6 million and $6.6 million for the
nine month periods ended June 30, 2002 and 2001, respectively. Upon adoption of
SFAS No. 142, amortization of goodwill and certain intangible assets will not be
recorded in future periods.

Further, to the extent an intangible asset is identified as having an
indefinite useful life, we will be required to test the intangible asset and
goodwill for impairment in accordance with the provisions of SFAS No. 142 within
the first interim period. Any impairment loss will be measured as of the date of
the adoption and recognized as the cumulative effect of a change in accounting
principle. Impairment will first be assessed by identifying our reporting units
and determining the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets to
those reporting units, and comparing the fair value of each reporting unit to
the reporting unit's carrying amount. To the extent that the carrying amount of
each reporting unit exceeds its fair value, impairment will be measured as the
amount by which the reporting unit's net assets and liabilities (recorded and
unrecorded) exceed its fair value. We have not fully determined the effect of
adopting SFAS No. 142.

SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. We are required and plan to adopt
the provisions of SFAS No. 143 in the quarter ending December 31, 2002. We
believe the adoption of SFAS No. 143 will not have a material impact on our
financial position, results of operations, or cash flows.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under SFAS No. 142.

We are required to adopt SFAS No. 144 no later than our first fiscal
year beginning after December 15, 2001, and plan to adopt its provisions in the
quarter ending December 31, 2002. We do not expect the adoption of SFAS No. 144
for long-lived assets held for use to have a material impact on our consolidated
financial statements because the impairment assessment under SFAS No. 144 is
largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, we cannot determine the potential effects that adoption of SFAS No.
144 will have on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement to classify gains and
losses from the extinguishment of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback

25

transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with earlier adoption encouraged. We expect the only impact of
adopting SFAS No. 145 to be the reclassification of current year and prior year
extraordinary losses to interest expense and income taxes.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
SFAS No. 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. As the
provisions of SFAS No. 146 are required to be applied prospectively after the
adoption date, we cannot determined the potential effects that adoption of SFAS
No. 146 will have on our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the acquisition of Apogent's predecessor in 1987 and the
acquisitions we 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.

Approximately $28.2 million of cash was generated from operating
activities in the first nine months of fiscal 2002, as compared to approximately
$48.2 million from the same period of the prior year. The approximate $20.0
million decrease in cash flows from operations was primarily due to: (a) a
decrease in the net change of income taxes payable from the prior year period of
approximately $9.7 million, (b) an increase in the net change in inventories
from the comparable prior year period of approximately $6.3 million, (c) an
increase in the net change in prepaid expenses and other current assets from the
prior year period of approximately $6.0 million, (d) a decrease in the net
change in accrued payroll and employee benefits for the current year period as
compared to the prior year of approximately $5.8 million, (e) decreased earnings
compared to the prior year period of approximately $3.6 million, (f) a decrease
in the net change in other assets and liabilities of approximately $2.6 million
from the prior year period, (g) a decrease in the net change in accounts payable
from the prior year period of approximately $1.8 million, (h) a decrease in the
net change in other current liabilities from the prior year period of
approximately $0.8 million, (i) a decrease in the provision for losses on
doubtful accounts from prior year period of approximately $0.5 million, (j) a
net change in the gain on sales of property, plant and equipment from the prior
year period of approximately $0.3 million, and (k) a decrease in the net change
in the restructuring reserve of approximately $0.1 million. The decreases in
cash flows from operations were partially offset by the following: (a) an
increase in non-cash charges of approximately $6.9 million, related to the
termination of the previous credit facility (b) an increase in the net change in
deferred income taxes from the prior year period of approximately $4.8 million,
(c) an increase in the net change in accounts receivable from the prior year
period of approximately $2.6 million, (d) an increase in inventory provisions
from the prior year period of approximately $1.3 million, (e) an increase in
amortization expense of goodwill and other intangible assets from the prior year
period of approximately $1.0 million, (f) an increase in depreciation expense
from the prior year period of approximately $0.5 million, and (g) a tax benefit
from issuance of our common stock under our employee stock option plan of
approximately $0.3 million recorded in the fiscal 2002 period.

Approximately $19.9 million of cash was used in investing activities in
the first nine months of 2002, a decrease of approximately $41.2 million from
the same period of fiscal 2001. The decrease was primarily due to: (a) the
decrease in payments for acquisitions from the prior year period of
approximately $43.4 million and (b) increased proceeds from the sales of
property, plant and equipment from the prior year of approximately $0.4 million,
partially offset by an increase in capital expenditures of approximately $2.6
million from the prior year period.

Approximately $0.4 million of cash was provided by financing activities
in the first nine months of fiscal 2002, a decrease of approximately $14.0
million from the prior year period of fiscal 2001. The decrease was primarily
due to: (a) a decrease in the net loan proceeds of approximately $167.0 million
from the prior year period, (b) a decrease in net proceeds from our underwritten
stock offering of approximately $50.1 million, (c) the increase in deferred
financing fees from the prior year period of approximately $5.6 million, (d) a
prepayment penalty and termination costs of approximately $5.3 million related
to the refinancing and (e) the decrease in capital contributions from Apogent
from the prior year period of approximately $4.6 million (as a result of the
spin-off). The decrease in cash provided by financing activities was partially
offset by: (a) net proceeds from the sale of the senior subordinated notes of
$150.0 million, (b) the elimination of cash dividend payments to Apogent in
fiscal 2002 from the prior year period of approximately $67.9 million (as a
result of the spin-off), (c) the net change in advances and loans to Apogent
from the prior year period of approximately $0.4 million (also as a result of
the spin-off), and (d) an increase in cash received from the exercise of stock
options of approximately $0.1 million.

26

Credit Facilities and Senior Subordinated Notes: On June 6, 2002, we
terminated our existing $450 million credit facility and entered into a new
$350.0 million syndicated credit facility for which Credit Suisse First Boston
is the administrative agent. The new credit facility (the "New Credit
Facility"), provides for a five-year $120.0 million revolving credit facility
(the "Revolver"), a seven-year $200.0 million term loan (the "Term Loan B") and
a five-year $30.0 million revolving credit facility (the "Euro Tranche"). Sybron
Dental Management, Inc., Kerr Corporation, Ormco Corporation and Pinnacle
Products, Inc. (the "Domestic Borrowers") will be joint and several borrowers
under the Revolver and the Term Loan B, and Hawe Neos Holding SA will be the
borrower under the Euro Tranche. In addition to the New Credit Facility, we
completed the sale of $150.0 million of 8 1/8% senior subordinated notes due
2012 (the "Senior Subordinated Notes") in a private offering. We used the
proceeds of the Term Loan B, together with proceeds from the issuance of the
Senior Subordinated Notes, to repay all of the $332.9 million of borrowings
outstanding as of June 6, 2002 under our previous credit facility.

The New Credit Facility is jointly and severally guaranteed by Sybron
Dental Specialties, Inc., the Domestic Borrowers and each of our present and
future direct and indirect wholly-owned domestic subsidiaries, and is secured by
substantially all assets of each such entity, including the capital stock of
each domestic subsidiary. In addition, the New Credit Facility is secured by a
pledge of 65% of the capital stock of each of our first-tier material foreign
subsidiaries. The Euro Tranche is also guaranteed by certain foreign
subsidiaries and is secured by a pledge of 100% of the capital stock of certain
foreign subsidiaries and by some of the assets of our Swiss subsidiary, Hawe
Neos Holding SA, certain direct subsidiaries of Hawe Neos and certain of our
other indirect foreign subsidiaries.

The New Credit Facility may be prepaid at any time without penalty
except for LIBOR and Euro-LIBOR breakage costs. Under the New Credit Facility,
subject to certain exceptions, we are required to apply all of the proceeds from
any issuance of debt, half of the proceeds from any issuance of equity, half of
our excess annual cash flow and, subject to permitted reinvestments, all amounts
received in connection with any sale of our assets and casualty insurance and
condemnation or eminent domain proceedings, in each case to repay the
outstanding amounts under the facility.

The Term B Loan amortizes 1% annually for the first six years, payable
quarterly, with the balance to be paid in the seventh year in equal quarterly
installments. The Term B Loan bears interest, at our option, at either (i) a per
annum rate equal to LIBOR, plus between 225 and 275 basis points, or (ii) a per
annum rate equal to a base rate, plus between 125 and 175 basis points, in each
case as determined on a quarterly basis according to the rating of the New
Credit Facility by Standard and Poor's and Moody's. The per annum initial
interest rate for the first six months is equal to LIBOR, plus 250 basis points.
As of June 30, 2002 the amount outstanding on the Term B Loan was $200.0
million. The average interest rate at June 30, 2002 on the Term B Loan was
6.62% after giving effect to the interest rate swap agreements we had in effect
as of that date.

The Revolver bears interest, at our option, at a per annum rate equal
to (i) LIBOR, plus between 175 and 250 basis points, or (ii) the base rate plus
between 75 and 150 basis points, in each case as determined on a quarterly basis
according to a leveraged-based pricing grid with leverage ratios from 1.75x to
3.0x. The per annum initial interest rate on the Revolver for the first six
months will be, at our option, either (i) LIBOR plus 225 basis points or (ii)
the base rate plus 125 basis points.

The Euro Tranche will bear interest, at our option, at Euro-LIBOR or at
base rates with margins identical to those of the Revolver. The annual
commitment fee on the unused portion of the Revolver and the Euro Tranche will
vary between 0.375% to 0.5% based on the quarterly leverage ratio. As of June
30, 2002, there was no outstanding balance under the Revolver or the Euro
Tranche and the amount available under our Revolver was $120.0 million, and the
amount available under the Euro Tranche was $30.0 million.

The New Credit Facility contains certain covenants, including, without
limitation, restrictions on: (i) debt and liens, (ii) the sale of assets, (iii)
mergers, acquisitions and other business combinations, (iv) transactions with
affiliates, (v) capital expenditures, (vi) restricted payments, including
repurchase or redemptions of the notes, and (vii) loans and investments, as well
as prohibitions on the payment of cash dividends to or the repurchase or
redemption of stock from stockholders. The New Credit Facility also has certain
financial covenants, including, without limitation, maximum leverage ratios,
minimum fixed charge coverage ratios, minimum net worth and maximum capital
expenditures.

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. We were in compliance with all such covenants at June
30, 2002.

Prior to June 6, 2002, we had a credit facility that we entered into in
connection with the spin-off on December 11, 2000, which allowed for borrowings
up to $450.0 million from ABN AMRO Bank N.V. and certain other lenders. This
credit facility was composed of a $150.0 million five year tranche A term loan,
a $150.0 million seven year tranche B term loan, under which Kerr and Ormco were
borrowers, and a five year revolving credit facility up to $150.0 million, under
which Sybron Dental Management, Inc., was the borrower.

27

The tranche A term loan bore interest primarily at the adjusted
interbank offered rate for Eurodollar deposits plus 275 basis points. The
tranche B term loan bore interest primarily at the adjusted interbank offered
rate for Eurodollar deposits plus 375 basis points. Borrowings under the
previous revolving credit facility generally bore interest on the same terms as
those under the tranche A term loan, plus we paid a commitment fee on the
average unused portion of the revolving credit facility of 0.5%.

In connection with entering into our New Credit Facility on June 6,
2002, we issued $150.0 million of Senior Subordinated Notes bearing interest at
8 1/8%, maturing on June 15, 2012. The Senior Subordinated Notes are our
unsecured obligations, subordinated in right of payment to all our existing and
future senior debt in accordance with the subordination provisions of the
indenture.

The Senior Subordinated Notes are generally not redeemable at our
option before June 15, 2005. Some limited redemption is allowed if we receive
cash from an equity offering. At any time and from time to time on or after June
15, 2007, we may redeem the Senior Subordinated Notes, in whole or in part, at a
redemption price equal to the percentage of principal amount set forth below
plus accrued and unpaid interest to the redemption date.

As a result of the terms of our New Credit Facility, we are sensitive
to a rise in interest rates. A rise in interest rates would result in increased
interest expense on our outstanding debt. In order to reduce our sensitivity to
interest rate increases, from time to time we enter into interest rate swap
agreements. As of June 30, 2002, we had five interest rate swaps outstanding
aggregating a notional amount of $126.7 million. Under the terms of the swap
agreements, we are required to pay fixed rate amounts equal to the swap
agreement rates listed below. In exchange for the payment of the fixed rate
amounts, we receive floating rate amounts equal to the three-month LIBOR rate in
effect on the date of the swap agreements and the subsequent reset dates. For
the swap agreements, the rate resets on the quarterly anniversary of the swap
agreement dates until the swaps' expiration dates. The net interest rate paid by
us is approximately equal to the sum of the swap agreement rates plus the
applicable LIBOR margin. The swap agreement rates and durations as of June 30,
2002 are as follows:

Our Senior Subordinated Notes bear interest at a fixed rate. This rate
is higher than the current LIBOR rates and, therefore, we are currently looking
at opportunities to swap the interest rate from fixed to floating rate, to
reduce our interest exposure.

We intend to fund 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 our Revolver. To
the extent that funds are not available from those sources, particularly with
respect to our acquisition strategy, we would have to raise additional capital.

While cash provided from operating activities may be impacted by lower
revenues due to the slowing economy and the continued risk of a competitive
market and changes in demand for our products, we believe that our cash flow
from operations, unused amounts available under our New 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.

28

Sale/Leaseback: In 1988, we completed the sale and leaseback (the
"Sale/Leaseback") of our 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 treated as 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
spin-off, the Sale/Leaseback was amended to extend the leases an additional 5
years, increase the basic rent by $0.15 million per year, and provides us the
option to purchase the leased premises at fair market value from June 1, 2008 to
May 31, 2009. We pay all costs of maintenance and repair, insurance, taxes and
all other expenses associated with the properties.

We have 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. We may be obligated to repurchase the property upon the
event of a breach of certain covenants or occurrence of certain other events.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The following table represents a comprehensive list of our contractual
obligations and other commercial commitments for the indicated periods
(calculated as of June 30, 2002);

We believe that the cash flow from our operations, unused amounts
available under our 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.

CAUTIONARY FACTORS

This report contains, and other disclosures that we make from time to
time may contain, forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "anticipate," "believe,"
"continue," "estimate," "expect," "goal," "objective," "outlook," "could,"
"intend," "may," "might," "plan," "potential," "predict," "should," or "will" or
the negative of these terms or other comparable terminology signify
forward-looking statements. You should read statements that contain these words
carefully because they: discuss our future expectations; contain projections of
our future results of operations or our financial conditions; or state other
forward-looking information.

Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by any forward-looking statements. Although we
believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results. 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:

o As of June 30, 2002, we had $363.3 million in total long-term
debt (including current portion), and $126.4 million in
stockholders' equity. This level of indebtedness could have
significant consequences, including: (a) 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; (b) limiting our ability to
obtain additional financing in the future for working capital
or other purposes; (c) limiting our ability to create or
permit liens or to pay cash dividends; and (d) limiting our
flexibility to react to competitive or other changes in our
industry, and to economic conditions generally.

29

In addition, our credit facilities contain numerous
restrictive operating and financial covenants, which could
limit our operating flexibility. 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. Increases in interest rates
would adversely affect our cash flows and therefore our
results of operations. In addition, the terms of any
additional debt or equity financing that we may incur could
restrict our operational flexibility and prevent us from
pursuing business opportunities of value to our stockholders.

o Numerous competitors participate in our business segments,
some of which have substantially greater financial and other
resources than we do. Our principal competitors in the
Professional Dental Business segment include Dentsply
International Inc., 3M Corporation and its affiliate ESPE GmbH
& Co., and Ivoclar Vivadent Group; in the Orthodontics
business segment, our principal competitors include Unitek, a
subsidiary of 3M Corporation, GAC Orthodontics, a subsidiary
of Dentsply, and American Orthodontics; and in the Infection
Prevention business segment, our principal competitors include
Johnson & Johnson, Steris Corporation, and Ecolab, Inc. We may
face increased competition from these or other companies in
the future and we may not be able to achieve or maintain
adequate market share or margins, or compete effectively, in
any of our markets. Any of the foregoing factors could
adversely affect our revenues and operating profits and hinder
our future expansion.

o We measure our financial position and results of operations
from substantially all of our international operations, other
than most U.S. export sales, using local currency of the
countries in which we conduct such operations and then
translate them into U.S. dollars. The reported income of our
foreign subsidiaries will be impacted by a weakening or
strengthening of the U.S. dollar in relation to a particular
local currency. Our U.S. export sales may also be affected by
foreign currency fluctuations relative to the value of the
U.S. dollar as foreign customers may adjust their level of
purchases according to the weakness or strength of their
respective currencies versus the U.S. dollar. In addition, any
future increases in the inflation rate in any country where we
have operations may negatively affect our results of
operations. To the extent these local currencies appreciate
against the U.S. dollar, our business, financial condition and
results of operations could be adversely affected.

o We have engaged in currency hedges to mitigate the impact of
foreign currency fluctuations. If we are unable to, or elect
not to continue to employ currency hedges, it could have a
material adverse effect on our net sales and profitability. As
we expand our international presence, these risks may
increase.

o Our foreign operations include manufacturing facilities in
Canada, Switzerland, Italy, and Mexico. An event that has a
material adverse impact on our foreign operations may
materially adversely affect our operations as a whole. The
business, regulatory and political environments in countries
where we have operations differ from those in the United
States and our foreign operations are exposed to a number of
inherent risks, including but not limited to: changes in
international trade laws, such as the North American Free
Trade Agreement, or NAFTA, affecting our activities in Mexico
and Canada; changes in local labor laws and regulations
affecting our ability to hire, retain, and discharge local
employees; currency exchange restrictions and fluctuations in
the value of foreign currency; potentially adverse tax
consequences; longer payment cycles; greater difficulties in
accounts receivable collection; changing political conditions;
unexpected changes in the regulatory environment; and changes
in general economic conditions in countries, such as Italy and
Mexico, that have historically been less stable than the
United States. If any of these events were to occur, it could
have a material adverse effect on our business, financial
condition and result of operations.

o We may not be able to maintain our level of investment in
research and development as we incur more indebtedness and
greater interest expense. The indenture relating to our Senior
Subordinated Notes and the New Credit Facility permit us to
incur significant amounts of additional debt. If we incur
additional debt, our interest expenses will rise. We may find
we do not have enough available cash to pay for the increased
interest expense and other budgeted expenses. We may need to
reduce our discretionary expenses, including research and
development, which could reduce or delay the introduction of
new products.

o Our business strategy includes continued growth through
strategic acquisitions, which depends upon the availability of
suitable acquisition candidates at reasonable prices and our
ability to quickly resolve transitional challenges. Failure to
consummate appropriate acquisitions would adversely impact our
growth and failure to successfully integrate them would
adversely affect our results. These challenges include
integration of product lines, sales forces and manufacturing
facilities and decisions regarding divestitures, cost
reductions, and realizing other synergies. Also, these
challenges involve risks of employee turnover, disruption in
product cycles and the

30

loss of sales momentum. We cannot be certain that we will
successfully manage them in the future. Also, our New Credit
Facility and the indenture for our Senior Subordinated Notes
limit our ability to consummate acquisitions by imposing
various conditions which must be satisfied.

o Our ability to increase sales, and to profitably distribute
and sell our products, is subject to a number of risks,
including changes in our business relationships with our
principal distributors, competitive risks such as the entrance
of additional competitors into our markets, pricing and
technological competition, risks associated with the
development and marketing of new products in order to remain
competitive 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.

o 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.

o We intend to continue to expand our business over time into
new geographic regions and additional products and services,
subject to the sufficiency of our cash resources and our
ability to comply with the covenants in our various debt
instruments. Our future performance will depend, in large
part, upon our ability to implement and manage our growth
effectively. Our growth in the future will continue to place a
significant strain on our administrative, operational, and
financial resources. We anticipate that, if we are successful
in expanding our business, we will be required to recruit and
hire a substantial number of new managerial, finance,
accounting, and support personnel. Failure to attract and
retain additional management personnel who can manage our
growth effectively would have a material adverse effect on our
performance. To manage our growth successfully, we will also
have to continue to improve and upgrade operational, financial
and accounting systems, controls and infrastructure as well as
expand, train and manage our employees. Our failure to
successfully manage the future expansion of our business could
have a material adverse effect on our revenues and
profitability.

o Our ability to continue manufacturing and selling those of our
products that are subject to regulation by the United States
Food and Drug Administration, state laws 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
costs of complying with these regulations and the delays in
receiving required regulatory approvals or the enactment of
new adverse regulations or regulatory requirements may force
us to cut back our operations, recall products, increase our
costs of regulatory compliance, prevent us from selling a
product or hinder our growth.

o Because many of our products are designed for use in and
around a patient's mouth, and because many of these products
contain chemicals, metals, and other materials, we are subject
to claims and litigation brought by patients or dental
professionals alleging harm caused by the use of or exposure
to our products. We may need to devote substantial amounts of
time and attention to defending ourselves and may also be
required to pay large amounts in settlement or upon judgment.
We may also be required to or may voluntarily recall products,
which would require substantial effort and cost. Litigation
could divert significant amounts of our management's time from
other important matters. Our business could also be adversely
affected by public perceptions about the safety of our
products, whether or not any concerns are justified.

o In fiscal 2001, approximately 24% 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 find alternative means to distribute our
products.

o Our ability to hire and retain competent employees is also
subject to a number of risks, including unionization of our
non-union employees and changes in relationships with our
unionized employees. In particular, many of our non-management
employees in Europe are subject to national labor contracts,
which are negotiated from time to time at the national level
between the national labor union and employees' council. There
is a risk of strikes or other labor disputes at our locations
that are unionized or are subject to national contracts which
could affect our operations.

31

o 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 beyond our control. All these
factors make it difficult to predict operating results for any
particular period.

o 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 written documents.

o Under new accounting pronouncements issued by the Financial
Accounting Standards Board, we will be required to test
goodwill and other intangible assets for impairment on an
annual basis, using new guidelines specified in SFAS No. 142,
and recognize any impairment loss at the date of adoption, as
well as recognize and measure impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by
sale (SFAS No. 144). See "New Accounting Pronouncements" above
for additional information regarding these pronouncements.
While we have yet to fully determine the effects of adopting
SFAS No. 142 and SFAS No. 144, we generally believe the
adoption of these statements will not have a material impact
on our financial position, results of operations, or cash
flows. However, we recognize that until completion of the
evaluation and testing of goodwill, intangibles and other
long-lived assets, there remains a possibility of a material
impact on our future consolidated financial statements.

o Pursuant to the terms of the agreements executed in connection
with our spin-off from Apogent, we and our U.S. subsidiaries,
in general, indemnify Apogent and its subsidiaries and
affiliates against liabilities, litigation and claims actually
or allegedly arising out of the dental business, including
discontinued operations relating to our business. Similarly,
Apogent and its U.S. subsidiaries indemnify us and our
subsidiaries and affiliates against liabilities, litigation
and claims actually or allegedly arising out of Apogent's
business, including discontinued operations related to the
laboratory business, and other items not transferred to us.
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 we will have substantial indemnification
obligations to Apogent and its affiliates in the future. We
also cannot be assured that, if Apogent has substantial
indemnification obligations to us and our affiliates, Apogent
will have the ability to satisfy those obligations.

o In connection with the spin-off, Apogent received rulings from
the Internal Revenue Service that, for federal income tax
purposes, the transactions undertaken in connection with the
spin-off, and the spin-off itself, would be tax free to
Apogent and its shareholders. These rulings are subject to the
validity of factual representations made to the IRS and
assumptions and conditions set out in the ruling request. In
order to assure that the representations made in connection
with the ruling request are true, we have agreed with Apogent
to certain restrictions on future actions for a period of time
following the spin-off. In particular, we have agreed to
continue the active conduct of our historic business for a
minimum of two years, and we have agreed not to issue stock,
merge with another corporation, or dispose of our assets in a
manner that would cause the spin-off to be treated as part of
a plan pursuant to which one or more persons acquire a 50% or
greater interest in our stock. We have agreed to indemnify
Apogent if the spin-off is treated as having been taxable by
reason of any breach of these agreements. Our indemnification
of Apogent for these liabilities may have a material adverse
effect on our financial condition and results of operations.

o 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 written documents.

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.

32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN EXCHANGE CURRENCY RISK MANAGEMENT

We operate internationally; therefore, our earnings, cash flows, and
financial position are exposed to foreign currency risk from foreign currency
denominated receivables and payables, forecasted sales transactions, as well as
net investments in certain foreign operations. These items are denominated in
foreign currencies, including but not limited to the euro, Japanese yen, Swiss
franc, Canadian dollar, and the Australian dollar.

We believe it is prudent to minimize the variability caused by foreign
currency risk. We attempt to minimize foreign currency risk by using derivative
instruments when prudent. We do not use derivative instruments for purposes
other than hedging.

Although we have a U.S. dollar functional currency, a substantial
portion of our sales, income, and cash flow are derived from foreign currencies.
Our foreign currency exposure exists primarily in the euro, Japanese yen,
Canadian dollar, and Australian dollar versus the U.S. dollar. With the
acquisition of Hawe Neos on May 31, 2001, we now consider the Swiss franc a
currency exposure.

For fiscal year 2002, our projected total foreign currency exposure is
approximately 49.8 million euros, 915.7 million Japanese yen, 16.9 million
Canadian dollars, 13.7 million Australian dollars, and 11.8 million Swiss
francs. We have put in place a strategy to manage our euro and yen cash flow
exposure through the use of zero cost collar contracts. There were no such
contracts in place for the Canadian dollar, Australian dollar, and Swiss franc
at June 30, 2002.

In August 2001, we entered into a series of zero cost collar contracts
to hedge intercompany transactions with a remaining notional amount of 10.1
million euros for fiscal year 2002. In addition, we entered into a zero cost
collar contract to hedge a remaining notional amount of 165.0 million Japanese
yen for fiscal year 2002. We are currently evaluating our foreign currency
exposure for the yen for fiscal year 2003. As of June 30, 2002, we entered into
a zero cost collar contract to hedge our intercompany transactions with a
notional amount of 720.0 million Japanese yen for fiscal year 2003.

At June 30, 2002, approximately $0.6 million of loss (net of income
tax) representing the fair value of the zero cost collars, is included in
accumulated other comprehensive income (loss), related to the foreign currency
zero cost collar transactions. In addition, none of the foreign currency cash
flow hedges has been discontinued.

Remaining amounts under the zero cost collar contracts in place as of
June 30, 2002 are as follows (in thousands, except rates):

As of June 30, 2002, the maximum length of time over which we are
hedging our exposure to the variability in future cash flows associated with
foreign currency forecasted transaction is fifteen months for the yen and three
months for the euro.

On July 16, 2002 we entered into a series of zero cost collar contracts
to hedge intercompany transactions with a notional amount of $24.0 million euros
for fiscal year 2003. The contract provides a floor rate of 0.97 euro per dollar
and a ceiling of 1.0305 euro per dollar, starting on October 15, 2002 and
expiring on September 16, 2003.

During the year ending September 30, 2002, approximately $0.6 million
of loss in accumulated other comprehensive income (loss) related to the zero
cost collars are expected to be reclassified into foreign exchange gain as a
yield adjustment of the hedged foreign currency representing the fair value of
the zero cost collars.

33

In September 2001, we entered into a cross currency debt swap
transaction to hedge our net investment in Hawe Neos. The agreement has an
effective date of October 16, 2001, and is a contract to exchange a U.S. dollar
principal amount of $45 million in exchange for a Swiss franc principal amount
of 71.73 million at the termination date of October 16, 2006. The interest rate
to be paid to us on the U.S. dollar principal amount of $45 million is a fixed
rate of 5.79%, and the interest rate to be paid by us on the Swiss franc
principal amount of 71.73 million is a fixed rate of 4.40%, with the interest
payments due quarterly on both the Swiss franc loan and the U.S. dollar loan. On
June 6, 2002 we terminated this cross currency debt swap transaction to satisfy
requirements under our New Credit Facility. As of June 30, 2002, we entered into
four cross currency debt swap transactions to hedge our net investment in Hawe
Neos and one cross currency debt swap to hedge our net investment in SDS Japan.
The agreements to hedge our net investment in Hawe Neos has a total aggregate
notional amount of $45 million and in SDS Japan has a notional amount of $4
million. The mechanics of the new agreements are similar to the original cross
currency debt swap terminated on June 6, 2002. However, the fixed interest rate
to be paid to us in the U.S. dollar leg of the agreements is the rate equal to
the Senior Subordinated Notes rate of 8 1/8% while the fixed interest rate to be
paid by us in the Swiss franc leg of the agreements ranges from 6.39% to 6.45%
and the Japanese yen leg of the agreements is 3.65%.

Following are the details of the new cross currency debt swaps (amounts
in millions, except rates):

At June 30, 2002, the fair value of the cross currency debt swap
transaction was a loss of approximately $0.4 million (net of income tax)
included in translation adjustments.

As a result of terminating the cross currency debt swap transaction to
hedge our net investment in Hawe Neos, we recognized a loss to the translation
adjustment, a component of other comprehensive income (loss) in the amount of
approximately $0.9 million (net of income tax). This amount will remain in
translation adjustment, a component of other comprehensive income (loss) until
sale or upon complete or substantially complete liquidation of our net
investment in Hawe Neos.

INTEREST RATE EXPOSURE--INTEREST RATE RISK MANAGEMENT

We use variable-rate debt (primarily our New Credit Facility) and
Senior Subordinated Notes to finance our operations. These debt obligations
expose us to variability in interest payments due to changes in interest rates.
If interest rates increase, interest expense increases. Conversely, if interest
rates decrease, interest expense also decreases. Under our prior credit
facility, we were required to have interest rate protection for a specified
portion of the outstanding balances for a specified period of time. Although we
paid off and terminated that credit facility, we retained certain of the
interest rate swap agreements we had entered into to manage fluctuations in cash
flows resulting from interest rate risk. These interest rate swaps change a
portion of our variable-rate cash flow exposure to fixed-rate cash flows.

Concurrently with entering into our New Credit Facility, we issued
Senior Subordinated Notes with a fixed interest coupon of 8 1/8%, maturing on
June 15, 2012. The fixed interest on the notes is higher than the current LIBOR
rates, therefore we are currently looking at opportunities to swap the interest
rate from fixed to floating rate, to achieve a more balanced mix of fixed and
floating rates on the outstanding balance of the notes.

We continue to assess our exposure to interest rate risk on an ongoing
basis.

For the quarter ended June 30, 2002, the total net cost of converting
from floating rate (3-month LIBOR) to fixed rate for a portion of the interest
payments under our long-term debt was approximately $1.6 million. At June 30,
2002, approximately $2.3 million loss (net of income tax) is included in
accumulated other comprehensive income (loss). Below is a table listing the
interest expense exposure detail and the fair value of the interest rate swap
agreements as of June 30, 2002 (dollars in thousands):

34

The fair value of interest rate swap agreements designated as hedging
instruments against the variability of cash flows associated with floating-rate,
long-term debt obligations are reported in accumulated other comprehensive
income (loss). These amounts subsequently are reclassified into interest expense
as a yield adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings.

On June 6, 2002 we entered into a new $350.0 million syndicated credit
facility for which Credit Suisse First Boston is the administrative agent. The
New Credit Facility provides for a five-year $120.0 million Revolver, a
seven-year $200.0 million Term Loan B and a five-year $30.0 million Euro Tranche
revolving credit facility. In addition to the New Credit Facility, we completed
the sale of $150.0 million of Senior Subordinated Notes at 8 1/8% interest, due
2012, in a private offering. We used the proceeds of the Term Loan B, together
with proceeds from the issuance of the Senior Subordinated Notes, to repay all
of the $332.9 million of borrowings outstanding as of June 6, 2002 under our
previous credit facility.

As a result of the termination of the previous credit facility on June
6, 2002, approximately $70 million of the Company's current interest rate swaps
could not be re-assigned to the new credit facility and thus were terminated.
Accordingly, the Company recorded a loss on derivative instruments of
approximately $3.8 million (or approximately $2.3 million, net of tax) in other
income (expense), which represents the fair value of the swaps at the
termination date. Additionally, under the Financial Accounting Standards Board's
("FASB") Statement No. 133, the Company had to de-designate two remaining
interest rate swaps as a result of the specificity of the Company's hedge
documentation relating to the hedged item. Accordingly, a non-cash loss on
derivative instruments of approximately $3.2 million (or approximately $2.0
million, net of tax), representing the fair value of the refinancing swaps at
the date of the refinancing, was reclassified from other comprehensive income
(loss) and recorded in other income (expense) to recognize the loss. However,
these swaps were continued and were simultaneously re-assigned to the new credit
facility. The change in the fair value of these re-assigned swaps from the
refinancing date to June 30, 2002 has been recorded in other comprehensive
income (loss).

The re-assigned interest rate swap agreements are expected to be highly
effective as we expect the hedging relationship to meet the relevant hedge
accounting criteria of SFAS No. 133. The re-assigned interest rate swap
agreements showed no recognizable ineffectiveness for the quarter.

35

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The terms of our New Credit Facility entered into in June 2002 prohibit
the payment of cash dividends and repurchases of any of our equity interests,
including common stock. Our previous credit facility contained similar
prohibitions. The terms of the indenture for our 8 1/8% Senior Subordinated
Notes due 2012, which we issued in June 2002, prohibit the payment of cash
dividends and repurchases of any of our equity interests, including common
stock, except in certain limited circumstances where we meet various financial
tests under the indenture. We have not paid cash dividends on our common stock
in the past and we do not expect to pay cash dividends in the foreseeable
future. For a more complete discussion of our New Credit Facility and our Senior
Subordinated Notes, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" in Item 2
of Part I above.

ITEM 5. OTHER INFORMATION

In the third quarter ended June 30, 2002, we changed our method of
accounting for our domestic inventories from the last-in, first-out (LIFO)
method, to the first-in, first-out (FIFO) method. The following historical
financial information, which is set forth below, has been adjusted to reflect
the change in accounting principle in accordance with Accounting Principles
Board Opinion No. 20, "Accounting Changes": the table of selected consolidated
financial data for the five years in the period ended September 30, 2001, and
the nine month periods ended June 30, 2002 and 2001; the consolidated balance
sheets as of September 30, 2001 and 2000; the consolidated statements of income
for the years ended September 30, 2001, 2000 and 1999; the consolidated
statements of stockholders' equity and comprehensive income for the years ended
September 30, 2001, 2000 and 1999; the consolidated statements of cash flows for
the years ended September 30, 2001, 2000 and 1999; the notes to the consolidated
financial statements for the years ended September 30, 2001, 2000 and 1999; and
the Management's Discussion and Analysis of Financial Condition and Results of
Operations (excluding the discussion of capital resources) for the years ended
September 30, 2001, 2000 and 1999.

SELECTED CONSOLIDATED FINANCIAL DATA

(a) Net sales have been adjusted to include shipping and handling fees
previously reported in selling, general and administrative expenses in
the amount of $4.4 million, $4.1 million, $3.5 million and $3.5 million
for fiscal years ended 2000, 1999, 1998 and 1997, respectively.

(b) Represents an allocation of Apogent's corporate office, general and
administrative expenses.

36

(c) The extraordinary item in current fiscal year ending 2002 represents
the write off of the associated deferred financing fees of $2.7 million
(net of tax) related to the termination of our prior credit agreement
and termination costs of approximately $1.0 million (net of tax)
primarily due to a prepayment penalty on our terminated tranche B loan.
The extraordinary item of approximately $0.5 million (net of tax) in
the prior fiscal year ending 2001 represents the write off of the
unamortized financing fees as a result of the termination of Apogent's
credit agreement due to our spin-off from Apogent. The extraordinary
item of approximately $0.3 million in the fiscal year ended 1997
represents the write-off of unamortized financing fees resulting from
the re-financing of Apogent's debt.

(d) Includes restructuring charges (relating to a restructuring charge and
merger, transaction and integration expenses associated with the merger
with LRS Acquisition Corp.) 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 Products of Wisconsin, Inc. and LRS Acquisition Corp., and
certain adjustments to the 1998 restructuring reserve. A restructuring
charge of $9.3 million ($5.8 million after tax) in 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 2000 in all three of our
business segments; and a $2.4 million ($1.5 million after tax)
restructuring charge related to the closing of the Ormco San Diego,
California facility in fiscal 2001.

(e) Earnings per share data for the four years ended September 30, 2000 to
1997 are computed using the 35,108,649 shares outstanding at December
11, 2000, the date of our spin-off, as the outstanding average number
of shares for each year. This number of outstanding shares is presumed
to be outstanding for each fiscal year 2000 to 1997. Diluted earnings
per share for the years ended September 30, 2000 to 1997 have been
omitted as no Sybron Dental Specialties, Inc. stock options existed
prior to the date of the spin-off and any calculation of diluted
earnings per share would not be meaningful.

37

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SYBRON DENTAL SPECIALTIES, INC.

- --------------------------------------------------------------------------------------------- --------------------
PAGE
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Independent Auditors' Report 37.2
- --------------------------------------------------------------------------------------------- --------------------
Consolidated Balance Sheets as of September 30, 2001 and 2000 38
- --------------------------------------------------------------------------------------------- --------------------
Consolidated Statements of Income for the years ended September 30, 2001, 2000 and 1999 39
- --------------------------------------------------------------------------------------------- --------------------
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years 40
ended September 30, 2001, 2000 and 1999
- --------------------------------------------------------------------------------------------- --------------------
Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999 41
- --------------------------------------------------------------------------------------------- --------------------
Notes to Consolidated Financial Statements 42
- --------------------------------------------------------------------------------------------- --------------------

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Sybron Dental Specialties, Inc.:

We have audited the accompanying consolidated balance sheets of Sybron Dental
Specialties, Inc. and Subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended September 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sybron Dental
Specialties, Inc. and Subsidiaries as of September 30, 2001 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, 2001, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KMPG LLP

Orange County, California
November 19, 2001, except as to note 22
which is as of May 8, 2002 and notes 1(c), 3, 4, 13, 14, 16, 19, and 20
which are as of August 2, 2002

CONSOLIDATED FINANCIAL STATEMENTS

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000

See accompanying notes to consolidated financial statements.

38

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

See accompanying notes to consolidated financial statements.

39

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000 AND 1999

See accompanying notes to consolidated financial statements.

40

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

See accompanying notes to consolidated financial statements.

41

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

On November 8, 2000, Sybron International Corporation, which is now
known as Apogent Technologies Inc. ("Apogent"), 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.). Shareholders of record as of November 30, 2000
received one share of Sybron Dental Specialties, Inc. ("SDS") common stock for
every three shares of Apogent common stock they owned as of the record date. SDS
owns all of the outstanding stock of Sybron Dental Management, Inc. ("SDM"),
formerly named Sybron Dental Specialties, Inc. Prior to the distribution
("spin-off"), Sybron Dental Management, Inc. was a direct wholly-owned
subsidiary of Apogent. Immediately prior to the spin-off, Apogent contributed
all of the stock of Sybron Dental Management, Inc. to Sybron Dental Specialties,
Inc. As used in these Notes to the Consolidated Financial Statements, the term
"SDS" or the "Company" means Sybron Dental Management, Inc. for the periods
prior to the spin-off and Sybron Dental Specialties, Inc. (formerly known as SDS
Holding Co.) for periods after the spin-off. The spin-off was effective on
December 11, 2000.

SDS has presented in these consolidated financial statements its assets
and liabilities at the same amounts previously presented in the consolidated
financial statements of Apogent, except as noted in note 1(c) below.

The subsidiaries of SDS are leading manufacturers of value-added
products for the professional dental, orthodontics, and infection prevention
markets in the United States and abroad (see note 19).

(a) PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR END

The consolidated financial statements reflect the operations of SDS and
its wholly owned subsidiaries. The term "Apogent" as used herein refers to
Apogent 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, 2001, 2000 and 1999 are hereinafter referred to
as "2001", "2000" and "1999", 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

During the quarter ended June 30, 2002, the Company changed its
method of accounting for its domestic inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. The Company believes the
change to FIFO is preferable in the circumstance because in the current
environment of low inflation it will result in a better measurement of
operating results. In addition, the Company believes that the change in the
method of accounting for domestic inventory costs is preferable because it
provides a better measure of the current value of its inventory, provides a more
accurate reflection of the Company's financial position and liquidity, and
provides a better matching of manufacturing costs with revenues. It will also
allow for the valuing of inventory consistently throughout the Company. The
Company's historical financial statements have been adjusted for all relevant
prior periods in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes" to reflect this change in the method of inventory
accounting. The effect of the accounting change on income as previously reported
for the years ended September 30, 2001, 2000 and 1999 are as follows:

42

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The balance of additional paid-in capital as of September 30, 1998 has
been adjusted for the effect (net of income taxes) of applying retroactively the
change in method of accounting.

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.

(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 recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets.

The Company's San Diego, California facility is currently available for
sale and the manufacturing conducted there is planned to be absorbed into the
Glendora, California facility as a part of the Company's 2001 restructuring plan
for the orthodontic segment. Accordingly, the Company has reclassified the
carrying amount of approximately $4.4 million of the facility from property,
plant and equipment to other current assets in the 2001 consolidated balance
sheet. The Company anticipates the sale of the facility to occur in fiscal year
2002.

(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 40, 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 2001, 2000 and 1999.

(f) REVENUE RECOGNITION

The Company recognizes revenue upon shipment of products, when the
risks and rewards of ownership are passed, and 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.
These rebates are accounted for as a reduction of revenue.

43

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In September 2001, in accordance with the Emerging Issues Task Force
("EITF") Issue No. 00-10--"Accounting for Shipping and Handling Fees and Costs",
which requires that all amounts billed to a customer in a sale transaction
related to shipping and handling be recorded as revenue, the Company
reclassified net sales in its consolidated financial statements to include those
amounts previously recorded in selling, general and administrative expenses. The
amounts of shipping and handling fees added to net sales for the years ended
September 30, 2001, 2000 and 1999 were approximately $4.2 million, $4.4 million,
and $4.1 million, respectively. Historically, the Company had recorded shipping
and handling amounts billed to customers as a reduction to selling, general and
administrative expenses. Prior year amounts have been reclassified to conform to
the requirements of the EITF.

(g) INCOME TAXES

The Company was included in the consolidated income tax return filed by
Apogent through December 11, 2000, but has been responsible for its own filings
since the spin-off. U.S. income tax payments, refunds, credits, provisions and
deferred income tax components prior to the spin-off have been allocated to SDS
in accordance with Apogent's tax allocation policy. Such policy allocated income
tax components included in the consolidated income tax return of Apogent 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 period they are incurred. Research and
development costs for 2001, 2000 and 1999 were approximately $8,977, $8,753 and
$9,425, respectively.

(i) FOREIGN CURRENCY TRANSLATION

The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains or
losses, net of applicable deferred income taxes, resulting from such
translations are included in accumulated comprehensive income (loss), a
component of stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in net income. Foreign currency transaction
losses for 2001, 2000 and 1999 were approximately $1,974, $4,134 and $22,
respectively.

(j) PENSIONS

The Company and its subsidiaries 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 (expense) 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 $4,574, $4,117 and $3,903 in 2001,
2000 and 1999, respectively.

(m) USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and

44

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated 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

The Company uses derivative financial instruments to manage its foreign
currency, interest rate exposures, and a certain net investment. The Company
does not hold or issue financial instruments for trading purposes. The notional
amounts of these contracts do not represent amounts exchanged by the parties
and, thus, are not a measure of the Company's risk. The net amounts exchanged
are calculated on the basis of the notional amounts and other terms of the
contracts, such as interest rates or exchange rates, and only represent a small
portion of the notional amounts. The credit and market risk under these
agreements is minimized through diversification among counter parties with high
credit ratings. Depending on the item being hedged, gains and losses on
derivative financial instruments are either recognized in the results of
operations as they occur 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 fair value of the derivative
are highly correlated with changes in the fair value of the underlying hedged
item at the inception of the hedge and over the life of the hedge contract.

(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 (LOSS)

The components of accumulated other comprehensive income (loss) consist
of translation adjustments, minimum pension liability adjustments, and
unrealized gains (losses) on derivative instruments and are included on the
accompanying consolidated statements of stockholders' equity and comprehensive
income.

(q) STOCK-BASED COMPENSATION

The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") SFAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by SFAS No. 123, the Company continues to follow the guidance of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Consequently, compensation related to stock options reflects the
difference between the grant price and the fair value of the underlying common
shares at the grant date. The Company issues stock options to employees with a
grant price equal to the market value of common stock on the grant date. As
required by SFAS No. 123, the Company discloses in Note 13 "Stock-Based
Compensation" the pro forma effect on operations, as if compensation costs were
recorded at the estimated fair value of the stock options granted.

(r) EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted average of common shares
outstanding during the year. Diluted earnings per share are calculated by using
the weighted average of common shares outstanding adjusted to include the
potentially dilutive effect of outstanding stock options.

Basic earnings per share data for fiscal years ended September 30, 2000
and 1999 were based on the 35,108,649 shares outstanding as of the date of the
spin-off on December 11, 2000. Diluted earnings per share for the years ended
September 30, 2000 and 1999 have been omitted as no SDS stock options existed
prior to the date of the spin-off and any calculation of diluted earnings per
share would not be meaningful.

(s) RECLASSIFICATION

Certain amounts in the prior year consolidated financial statements
have been reclassified to conform to the current year presentation.

45

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(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 consolidated
net sales in 2001, 2000 or 1999. Accounts receivable from each of these
distributors was less than 10% of the outstanding consolidated accounts
receivable balances at September 30, 2001 or 2000.

(3) INVENTORIES

Inventories at September 30, 2001 and 2000 consist of the following:

(4) INCOME TAXES

Total income tax expense (benefit) for the years ended September 30,
2001, 2000 and 1999 is allocated as follows:

Income tax expense (benefit) attributable to income from operations
consists of:

The domestic and foreign components of income before income taxes and
extraordinary items are as follows:

Income tax expense attributable to income from operations was $25,510,
$28,652 and $30,490 in 2001, 2000 and 1999 respectively, and differed from the
amounts computed by applying the U.S. Federal income tax rate of 35 percent to
income from operations before income taxes, and extraordinary items in 2001,
2000 and 1999 as a result of the following:

46

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The significant components of deferred income tax expense (benefit)
attributable to income from operations for 2001, 2000 and 1999 are as follows:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 2001 and 2000 are presented below.

The change in the net deferred tax liabilities contains $3,280 of
deferred tax benefit related to the fair values of the Company's derivative
financial instruments. The net change in the total valuation allowance for the
years ended September 30, 2001 and 2000 was a decrease of $418 and an increase
of $155, respectively. The valuation allowance for deferred tax assets as of
October 1, 1999 was $1,238. The valuation allowance relates primarily to net
operating loss carryforwards 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.

47

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

At September 30, 2001, the Company has an aggregate of $2,786 of
foreign net operating loss carry forwards from certain foreign jurisdictions,
the majority of which expire between 2004 and 2010.

Accumulated earnings of foreign subsidiaries at September 30, 2001,
2000 and 1999 of approximately $48,000, $38,000, and $35,000 respectively, have
been reinvested in the business and no provision for income taxes has been made
for the repatriation of these earnings.

(5) PROPERTY, PLANT AND EQUIPMENT

Major classifications of property, plant and equipment at September 30,
2001 and 2000 are as follows:

There were no commitments for purchases of equipment at September 30,
2001 and 2000. Machinery and equipment includes capitalized leases, net of
amortization, totaling $22 and $4 at September 30, 2001 and 2000, respectively
(see note 8).

(6) INTANGIBLE ASSETS

Intangible assets at September 30, 2001 and 2000 are as follows:

(7) LONG-TERM DEBT

Credit Facility: In connection with the spin-off, SDS together with
certain of its subsidiaries entered into a new credit facility (the "SDS 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 $150
million five year tranche A term loan (the "Tranche A Term Loan"), a $150
million seven year tranche B term loan (the "Tranche B Term Loan"), under which
Kerr and Ormco, two of the Company's subsidiaries, are borrowers (the "Term Loan
Borrowers"), and a five year revolving credit facility up to $150 million (the
"Revolving Credit Facility"), under which SDM, another one of the Company's
subsidiaries, is the borrower. Historically, certain affiliates of SDS have been
obligors under various credit agreements of Apogent (the "Credit Facilities")
described below. Apogent has historically recorded a portion of debt outstanding
under the Credit Facilities on the books of SDS. The balance at September 30,
2000 represented the historical balances at SDS. Long-term debt at September 30,
2001 and 2000 consists of the following:

48

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 was applicable through September 30, 2001. The average interest rate at
September 30, 2001 on the Tranche A Term Loan was 7.10%, and the amount
outstanding as of September 30, 2001 on the Tranche A Term Loan was $134.8
million. The final principal payment on the Tranche A Term Loan is due November
2005.

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 average interest rate at September 30, 2001 on the Tranche B Term Loan was
8.75% and the amount outstanding as of September 30, 2001 on the Tranche B Term
Loan was $148.7 million. The final principal payment on the Tranche B Term Loan
is due November 2007.

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. For
the year ended September 30, 2001, the Company paid approximately $0.4 million
in commitment fees. The average interest rate at September 30, 2001 on the
Revolving Credit Facility was 8.91%, and the amount outstanding as of September
30, 2001 under the Revolving Credit Facility was $51.5 million.

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. As of September 30, 2001, SDS was in compliance with all
such covenants.

All interest on the historical books under the Apogent Credit
Facilities was at floating rates, primarily based on the Eurodollar rates and,
as such, exposed the Company to fluctuations in Eurodollar rates. The Company
has not historically mitigated that risk through derivative instruments. Under
the SDS Credit Facility, the Company is required to have interest rate
protection for a minimum of 50% of the of the aggregate outstanding principal
amount of the Tranche A Term Loan and Tranche B Term Loan for not fewer than
four years. The Company is currently meeting this obligation.

The SDS Credit Facility is secured by domestic real and personal
property assets, and a pledge of capital stock of SDS, Kerr and Ormco, and
certain other material domestic and foreign SDS subsidiaries.

Under the Apogent Credit Facilities, prior to the December 11, 2000
spin-off, borrowings under the term loans were collateralized by the capital
stock of Apogent'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.

Sale/Leaseback: In 1988, the Company 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.

49

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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
spin-off, the Sale/Leaseback has been amended to extend the leases an additional
5 years, increase the basic rent by $.15 million per year, and provide 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 the Company.

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.

Stock Offering: On June 8, 2001, we sold 2,650,000 shares of common
stock in an underwritten public offering generating net proceeds of
approximately $50.0 million, which were primarily used to repay money borrowed
under the Revolving Credit Facility to finance the acquisitions of Hawe Neos
Holdings S.A. ("Hawe Neos") and OBF Technologies, Inc. ("OBF").

Maturities of Long-Term Debt: In connection with the spin-off on
December 11, 2000 the Company settled all intercompany loans and advances with
Apogent by way of a non-cash dividend of $78.2 million, and paid a cash dividend
of $67.9 million to Apogent. Additionally, the Company borrowed $375 million
under the SDS Credit Facility.

Maturities of long-term debt reflect the SDS Credit Facility,
Sale/Leaseback, and other long-term debt as of September 30, 2001 as follows:

(8) LEASE COMMITMENTS

As of September 30, 2001, 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:

Amortization of assets held under capital leases is included with
depreciation expense.

50

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Rental expense under operating leases was $6,056, $4,904 and $3,794 in
2001, 2000 and 1999, respectively.

(9) FAIR 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

Credit Facilities: The fair value of the SDS Credit Facility as of
September 30, 2001 approximates the carrying amount, as the interest rates are
variable and approximate rates that the Company could obtain under similar terms
at the balance sheet date.

The fair value of the Apogent Credit Facilities was determined by
estimating the interest rate margins (the premium over the Eurodollar rate) on
each of Apogent'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 Apogent 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.

Derivatives: The Company had interest rate swaps, a cross currency debt
swap and foreign exchange zero cost collars in place at September 30, 2001 (see
note 10). The fair values of these instruments were provided by third party
broker/bankers. The Company had no derivatives in place at September 30, 2000.

The estimated fair values of the Company's financial instruments have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized in a current market exchange. The use of different market assumptions
or estimation methodologies may have a material impact on the estimated fair
value amounts.

(10) DERIVATIVES

FOREIGN EXCHANGE CURRENCY RISK MANAGEMENT

SDS operates internationally; therefore, its earnings, cash flows, and
financial position are exposed to foreign currency risk from foreign currency
denominated receivables and payables, forecasted sales transactions, as well as
net investments in certain foreign operations. These items are denominated in
foreign currencies, including but not limited to the Euro, Yen, Swiss franc,
Canadian dollar, and the Australian dollar.

The Company believes it is prudent to minimize the variability caused
by foreign currency risk. Management attempts to minimize foreign currency risk
by using derivative instruments when prudent. The Company does not use
derivative instruments for purposes other than hedging.

Although the Company has a U.S. dollar functional currency, a
substantial portion of its sales, income, and cash flow are derived from foreign
currencies. The Company's foreign currency exposure exists primarily in the
Euro, Japanese Yen, Canadian dollar, and Australian dollar versus the U.S.
dollar. With the acquisition of Hawe Neos. on May 31, 2001, the Company now
considers the Swiss franc a currency exposure.

For fiscal year 2002, the Company's projected total foreign currency
exposure is approximately 49.8 million Euros, 915.7 million Japanese Yen, 16.9
million Canadian dollars, 13.7 million Australian dollars, and 11.8 million
Swiss franc. The Company has put in place a strategy to manage its Euro and Yen
cash flow exposure through the use of zero cost collar contracts. There were no
such contracts in place for the Canadian dollar, Australian dollar, and Swiss
franc for fiscal year 2002.

51

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In August 2001, the Company entered into a series of zero cost collar
contracts to hedge intercompany transactions with a total notional amount of
40.2 million Euros for fiscal year 2002. In addition, the Company entered into a
zero cost collar contract to hedge a total notional amount of 660.0 million
Japanese Yen for fiscal year 2002.

For fiscal year 2001, approximately $0.03 million of loss, net of
income tax, representing the fair value of the zero cost collars, was recorded
in accumulated other comprehensive income (loss), related to the foreign
currency zero cost collar transactions. In addition, none of the foreign
currency cash flow hedges have been discontinued.

Zero cost collar contracts in place as of September 30, 2001 are as
follows (in thousands, except rates):

As of September 30, 2001, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows
associated with foreign currency forecasted transaction is twelve months.

During the year ending September 30, 2002, approximately $0.05 million
of losses in accumulated other comprehensive income (loss) related to the zero
cost collars are expected to be reclassified into foreign exchange loss as a
yield adjustment of the hedged foreign currency representing the fair value of
the zero cost collars.

In September 2001, the Company entered into a cross currency debt swap
transaction to hedge its net investment in Hawe Neos. The agreement has an
effective date of October 16, 2001, and is a contract to exchange a U.S. dollar
principal amount of $45 million in exchange for a Swiss franc principal amount
of 71.73 million at the termination date of October 16, 2006. The interest rate
to be paid to the Company on the U.S. dollar principal amount of $45 million is
a fixed rate of 5.79%, and the interest rate to be paid by the Company on the
Swiss franc principal amount of 71.73 million is a fixed rate of 4.40%, with the
interest payments due quarterly on both the Swiss franc loan and the U.S. dollar
loan.

For fiscal year 2001, the fair value of the cross currency debt swap
transaction gain (net of income tax) included in translation adjustments was
$580.

INTEREST RATE EXPOSURE--INTEREST RATE RISK MANAGEMENT

The Company uses variable-rate debt to finance its operations. These
debt obligations expose the Company to variability in interest payments due to
changes in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense also
decreases. Under the SDS Credit Facility, the Company is required to have
interest rate protection for a minimum of fifty percent of the aggregate
outstanding principal amount of the Tranche A Term Loan and Tranche B Term Loan
for not fewer than four years.

To meet this requirement, management has entered into several interest
rate swap agreements to manage fluctuations in cash flows resulting from
interest rate risk.

The interest rate swaps change the variable-rate cash flow exposure on
the Tranche A Term Loan and Tranche B Term Loan to fixed-rate cash flows by
entering into receive-variable, pay-fixed interest rate swaps.

The Company does not enter into speculative contracts and continues to
assess its exposure to interest rate risk on an ongoing basis.

For fiscal year ended 2001, the total net cost of converting from
floating rate (3-month LIBOR) to fixed rate from a portion of the interest
payments of the debt obligation was $575. Below is a table listing the interest
expense exposure detail (in thousands):

52

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The fair value of interest rate swap agreements designated as hedging
instruments of the variability of cash flows associated with floating-rate,
long-term debt obligations are reported in accumulated other comprehensive
income (loss). These amounts subsequently are reclassified into interest expense
as a yield adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings.

During the year ending September 30, 2002, approximately $3.6 million
of losses in accumulated other comprehensive income (loss) related to the
interest rate swaps are expected to be reclassified into interest expense as a
yield adjustment of the hedged debt obligation.

During the year ended September 30, 2001, an approximate $5.4 million
loss (net of income tax) was recorded in accumulated other comprehensive income
(loss). Fair value of the interest rate swap agreements as of September 30, 2001
are as follows (in thousands):

(11) 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 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. Eligible employees who reached age 55 prior to January 1, 1996 will
become eligible for postretirement health care benefits only if they reach
retirement age while working for SDS. The Company accrues, as current costs, the
future lifetime retirement benefits for qualifying active employees. The
postretirement health care plans for Kerr Corporation, a subsidiary of SDS,
currently follow a policy instituted by the predecessor of Apogent 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. This plan covers all qualifying active
SDS employees as of the date of the spin-off, and employees retiring after the
spin-off and their dependents.

The following assumptions were used in determining the funded status of
our defined benefit pension plans:

53

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following assumptions were used in determining the accumulated
postretirement benefit obligation of the Company's postretirement healthcare
plans.

54

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table provides the amounts recognized in the Company's
consolidated balance sheets:

The following table provides disclosure of the net periodic benefit cost:

At September 30, 2001 all plans except the Sybron Canada Pension Plan
had benefit obligations in excess of fair value. 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's contributions are
not frozen would increase the accumulated postretirement benefit obligation and
service and interest cost components as of September 30, 2001 by approximately
$1,156 and $140, respectively. Similarly, a decrease of one percentage point in
the per capita cost of health care costs would decrease the accumulated
postretirement benefit obligation and service and interest cost components as of
September 30, 2001 by approximately $919 and $93, respectively.

Because more than 60% of the 2001, 2000 and 1999 net periodic
postretirement benefit costs relate to interest costs, the Company has
classified such interest costs as interest expense. This resulted in a non-cash
increase in interest expense of approximately $359, $367, and $274 in 2001, 2000
and 1999, respectively.

Savings Plans: Employees in the United States are eligible to
participate in contributory savings plans maintained by the Company under
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code").
Company matching contributions under the plans, net of forfeitures, were
approximately $1,467, $1,354 and $1,274 for 2001, 2000 and 1999, respectively.

(12) RESTRUCTURING AND MERGER AND INTEGRATION CHARGES

In September 2001, the Company recorded a restructuring charge of
approximately $2,400 (approximately $1,500 after tax) representing severance and
termination costs for approximately 63 employees (primarily at the San Diego,
California facility) as a result of the 2001 restructuring plan. The
restructuring charge was classified as components of cost of sales
(approximately $1,300 relating to manufacturing severance and exited capital),
and other expenses (approximately $1,100).

Restructuring activity relating to the September 30, 2001 restructure
charge and its components are as follows:

55

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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).

Restructuring activity relating to the September 30, 2000 restructure
charge and its components are as follows:

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).

Restructuring activity relating to the June 30, 1998 restructure charge
and its components are as follows:

- ----------

(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel) related
to the June 1998 restructuring plan. As of September 30, 2001, 154
employees have been terminated as a result of the 1998 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. As of September 30, 2001 all terminations were
completed under the 2000 restructure plan. The September 2001
restructuring charge represents

56

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

severance and termination costs for approximately 63 employees to be
terminated at the Ormco San Diego facility as a result of the September
2001 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.

(13) STOCK-BASED COMPENSATION

In connection with the spin-off, officers and employees were allowed to
exchange their Apogent 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 Apogent stock
options exchanged immediately prior to the spin-off and an exercise price that
maintained the ratio of the exercise price per share to the market value per
share of the Apogent stock options exchanged immediately prior to the spin-off.
For these SDS stock options, the exercise price and the number of shares of SDS
common stock subject to each option were determined by adjusting the exercise
price and the number of shares subject to the corresponding Apogent stock option
exchanged under an adjustment formula, designed to preserve the aggregate
intrinsic value and exercise price to market value relationship referred to
above, based on the relationship between the trading prices on the New York
Stock Exchange of Apogent common stock and SDS common stock trading on a "when
issued" basis, during the period of "when issued" trading ending on the date of
the spin-off. Other than the adjustment of the exercise price and the number of
shares subject to each option, the terms of the SDS stock options received in
exchange for Apogent stock options are the same as the terms of the Apogent
stock options for which they were exchanged. The SDS stock options issued in
exchange for Apogent stock options were issued under SDS's 2000 Long-Term
Incentive Plan.

Under SDS's 2000 Long-Term Incentive Plan (the "2000 Stock Plan"),
incentive stock options and nonqualified stock options may be granted to any
full-time, non-union employee of SDS or any of its subsidiaries, including any
employee who is a member of the Board of Directors, but excluding any director
who is not an employee of SDS or any of its subsidiaries. Subject to the terms
and provisions of the plan, options may be granted to eligible employees
selected by the compensation committee of the Board of Directors, which
administers the plan. The committee has the discretion to determine the number
of shares subject to options granted and the terms and conditions of the
options. The exercise price of an option granted under the plan is determined by
the committee, but may not be less than 100% of the fair market value of the
underlying SDS common stock on the date of grant.

The total number of shares of SDS common stock authorized for issuance
under the 2000 Stock Plan is 5,450,000. Shares available for an award under the
2000 Stock Plan may be either authorized but unissued or reacquired shares. If
any award is canceled, terminates, expires or lapses for any reason, any shares
subject to such award shall again be available under the plan, subject to such
requirements as may be promulgated by the compensation committee. The number of
options that may be awarded to any employee during any fiscal year is limited to
1,000,000.

On September 25, 2001, SDS established the Sybron Dental Specialties,
Inc. 2001 Long-Term Incentive Plan (the "2001 Stock Plan"). The 2001 Stock Plan
permits the granting of nonqualified stock options to any full-time, non-union
employee of SDS or any of its subsidiaries, excluding officers or directors of
SDS. Subject to the terms and provisions of the 2001 Stock Plan, options may be
granted to eligible employees selected by the compensation committee of the
Board of Directors, which administers the 2001 Stock Plan. The committee has the
discretion to determine the number of shares subject to options granted and the
terms and conditions of the options. The exercise price of an option granted
under the 2001 Stock Plan is determined by the committee, but may not be less
than 100% of the fair market value of the underlying SDS common stock on the
date of grant.

The total number of shares of SDS common stock authorized for issuance
under the 2001 Stock Plan is 1,000,000. Shares available for an award under the
2001 Stock Plan may be either authorized but unissued or reacquired shares. If
any award is canceled, terminates, expires or lapses for any reason, any shares
subject to such award shall again be available under the 2001 Stock Plan,
subject to such requirements as may be promulgated by the compensation
committee.

Options granted under the 2000 Stock Plan and the 2001 Stock Plan are
exercisable up to ten years from date of grant. Stock options vest under the
plans subject to the restrictions and conditions that the compensation committee
approves. Typically the vesting schedule is 25% per year based on the date of
grant. The Apogent options that were exchanged under the 2000 Stock Plan
maintained their original vesting schedule, which typically also vest at 25% per
year based on the date of grant.

57

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The 2000 Outside Directors' Stock Option Plan (the "Directors' Plan")
is administered by the compensation committee of the Board of Directors. A
maximum of 300,000 shares of SDS common stock may be issued pursuant to the
exercise of nonqualified stock options granted under the Directors' Plan. Shares
subject to and not issued under an option which expires, terminates or is
canceled for any reason shall again become available for the granting of options
under the Directors' Plan. These options are exercisable up to ten years from
date of grant and vest on the date of grant.

The granting of options is automatic under the Directors' Plan. Upon
the first meeting of the Board of Directors following the annual meeting of
stockholders in 2001 through 2005, each person then serving SDS as a member of
the Board of Directors who is not a full-time employee of SDS or its
subsidiaries shall automatically be granted an option to purchase 10,000 shares
of SDS common stock (subject to appropriate adjustment for stock splits and
other changes affecting the common stock). If there is not a sufficient number
of remaining available shares under the Directors' Plan to grant each outside
director an option to purchase the number of shares specified, each outside
director shall receive an option to purchase an equal number of the remaining
available shares, determined by dividing the remaining available shares by the
number of outside directors. The exercise price at which share may be purchased
under each option shall be 100% of the fair market value of SDS common stock on
the date the option is granted.

At September 30, 2001, 1,421,264 shares of common stock were reserved
for future stock option grants under the above plans.

The following is a summary of the stock option activity since December
11, 2000 (spin-off):

If the Company had elected to recognize compensation cost based on the
fair value at the date of grant, consistent with the method as prescribed by
SFAS No. 123, net income would have changed to the pro forma amounts indicated
below (in thousands, except per share data):

The pro forma net income may not be representative of future
disclosures since the estimated fair value of stock options granted subsequent
to the spin-off are amortized to expense over the vesting period, which was only
a partial year in 2001, and additional options may be granted in varying
quantities in future years. For fiscal years ended prior to September 30, 2001,
the pro forma net income would be the same as the actual income reported, as
there were no SDS options in existence prior to the spin-off.

The fair value of options granted during 2001 was determined using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate based on an average 4-year United States treasury note yield at the date of
grant (5.17% average rate), an expected life of 4 years, stock price volatility
of 31.32% and no dividend yield.

The following table summarizes information regarding options
outstanding and options exercisable at September 30, 2001:

58

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(14) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net
income per common share:

Earnings per share data for the years ended September 30, 2000 and 1999
is computed based on the 35,108,649 shares outstanding at December 11, 2000, the
date of the spin-off, as the outstanding average number of shares for each year.
This number of shares is presumed to be outstanding for each fiscal year ended
2000 and 1999. Diluted earnings per share for the years ended September 30, 2000
and 1999 have been omitted as no SDS stock options existed prior to the date of
the spin-off and any calculation of diluted earnings per share would not be
meaningful.

Weighted average shares issuable upon the exercise of stock options,
which were not included in the calculation, were four thousand in 2001 because
they were antidilutive.

(15) COMMITMENTS AND CONTINGENT LIABILITIES

The Company 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. The
Company and its subsidiaries are vigorously defending lawsuits and other claims
against them. 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, even if it is unable to recover amounts that it expects to recover
with

59

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

respect to those pending cases and claims through insurance, indemnification
arrangements, or other sources. There can be no assurance as to this, however,
or that litigation having such a material adverse effect will not arise in the
future.

(16) ACQUISITIONS

The Company has completed nine acquisitions and one merger since the
beginning of 1999. The acquired companies are all engaged in businesses related
to the Company (see note 19 for a description of business segments).

2001

ACQUISITIONS

During 2001, the Company completed four acquisitions for cash, all of
which were accounted for as purchase business combinations. The aggregate
purchase price of the acquisitions (which are not significant, individually or
in the aggregate), net of cash acquired, was approximately $51,498. The results
of these acquisitions are included in the Company's results of operations as of
the date they were acquired. The total goodwill and intangibles for these
acquired companies was approximately $37,409 and are being amortized over 5 to
30 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.

2000

ACQUISITIONS

During 2000, the Company completed three acquisitions for cash, all of
which were accounted for as purchase business combinations. The aggregate
purchase price of the acquisitions (which are not significant, individually or
in the aggregate), net of cash acquired, was approximately $16,800. The results
of these acquisitions were included in the Company's results of operations as of
the date they were acquired. The total goodwill and intangibles 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.

60

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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 through 2002
and are accounted for as additional goodwill. Earnout payments of approximately
$1,000, $1,000, and $4,900 were made in 2001, 2000, and 1999, respectively. All
cash acquisitions were accounted for as purchase business combinations. The
results of the cash acquisitions were included in the Company's results of
operations as of the date they were acquired. The Pinnacle Merger, a merger
between Pinnacle Products of Wisconsin, Inc. ("Pinnacle") and a subsidiary of
Apogent 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.

The following unaudited pro forma financial information presents the
consolidated results of the operations of the Company and the purchased
businesses referred to above as if the 2001 and 2000 acquisitions had occurred
as of the beginning of 2000, after giving effect to certain adjustments,
including amortization of goodwill, additional depreciation expense, increased
interest expense on debt related to the acquisitions 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 acquired companies constituted
a single entity during such periods.

(17) STOCKHOLDERS' EQUITY

Stock Offering: On June 8, 2001, the Company sold 2,650,000 shares of
common stock in an underwritten public offering generating net proceeds of
approximately $50.0 million, which were primarily used to repay funds borrowed
to finance the acquisitions of Hawe Neos and OBF.

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 spin-off 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

61

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

OTHER COMPREHENSIVE INCOME (LOSS)

(18) TRANSACTIONS WITH APOGENT

Cash management and advances: Prior to the spin-off, Apogent 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 in the normal
course of business. 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 and on the date of spin-off, outstanding balances were cleared via an
intercompany dividend to or capital contribution from Apogent.

Dividends paid to and capital contributions from Apogent: On December
11, 2000, Apogent completed the spin-off of SDS. Just prior to the spin-off, SDM
paid Apogent a cash dividend of $67.9 million representing the difference
between $375 million and the actual allocation of Apogent bank debt to SDM as of
the spin-off, and SDM settled all intercompany loans and advances made to
Apogent by SDM by way of a non-cash dividend to Apogent of $78.2 million,
resulting in the settlement of the intercompany operating account. In addition,
SDS paid $307.1 million to Chase Manhattan Bank to satisfy the obligations
attributable to it under the Apogent Credit Facilities.

To accomplish the above transactions, on December 11, 2000, the date of
the spin-off, SDS borrowed approximately $375 million under the SDS Credit
Facility. All of this caused more indebtedness to be placed on the Company's
books than historically had been allocated from Apogent. See consolidated
statements of changes in stockholders' equity.

Apogent Credit Facilities: Apogent 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,
2000 was $311,772 and SDS's historical interest expense was $24,443 in 2000. As
part of the spin-off, the Company entered into the SDS Credit Facility (see note
7) and the Apogent Credit Facilities were paid off.

Apogent Charges: Apogent 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 $730, $2,979 and $4,228 in 2001, 2000 and 1999, respectively. Services
performed at the corporate office generally benefited the domestic operations,
and therefore Apogent corporate office, general and administrative expenses were
generally charged based on SDS's domestic revenues as a percentage of total
Apogent domestic revenues. Because general and administrative expenses at
Apogent generally benefited domestic operations, Apogent considered this method
to be a reasonable basis for allocation.

Intercompany Loans with Apogent: The loan due from Apogent at September
30, 2000 was as follows:

62

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

This amount is included in loans to Apogent on the accompanying 2000
consolidated balance sheet. As a result of the spin-off there were no
outstanding loans with Apogent as of September 30, 2001.

(19) SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 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 No. 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 subsidiaries 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.

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:

63

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

64

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(20) QUARTERLY FINANCIAL INFORMATION

- ------------

(a) Net sales have been adjusted to include the reclassification of
shipping and handling fees from selling, general and administrative
expenses for each quarter in 2001 and 2000.

(b) Restructuring charges were recorded in the amount of $2,379 and $9,326
in the fourth quarter of 2001 and 2000, respectively.

(c) Earnings per share data for quarters in the fiscal year ended September
30, 2000 were calculated using the 35,108,649 shares outstanding as of
the date of the spin-off on December 11, 2000. Diluted earnings per
share for quarters in the fiscal year ended September 30, 2000 have
been omitted as no SDS stock options existed prior to the date of the
spin-off and any calculation of diluted earnings per share would not be
meaningful.

(d) In the third quarter of fiscal 2002, the Company changed its inventory
costing method from the LIFO method to the FIFO method. All previously
reported results have been restated to reflect the retroactive
application of this accounting change (see note 1 (c)).

(21) EXTRAORDINARY ITEM

Due to the spin-off of SDS, Apogent terminated its credit agreement and
wrote off the associated deferred financing fees. This resulted in an after tax
write-off of $0.5 million that was allocated to SDS and treated as an
extraordinary item in the 2001 consolidated statement of income.

(22) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Below are the condensed consolidating balance sheets, statements of
operations, and statements of cash flows of Sybron Dental Specialties, Inc. for
the fiscal years ended September 30, 2001, 2000 and 1999.

Intercompany balances include receivables/payables incurred in the
normal course of business in addition to investments and loans transacted
between subsidiaries of the Company or with Sybron Dental Specialties, Inc.

65

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS

66

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS

67

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

69

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

70

\
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

71

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

72

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

73

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR FISCAL YEARS 2001, 2000 AND 1999 (REVISED TO REFLECT THE CHANGE
IN ACCOUNTING PRINCIPLE)

The following management's discussion and analysis of financial
condition and results of operations relates to fiscal years 2001, 2000 and 1999,
and has been revised to reflect our change in our method of accounting for
domestic inventory discussed above. The discussion should be read in conjunction
with our consolidated financial statements and related notes included in this
Item 5.

THE SPIN-OFF

Prior to December 11, 2000, we were a wholly owned subsidiary of
Sybron International Corporation, which is now known as Apogent Technologies
Inc. On December 11, 2000, Sybron International spun off its dental business by
way of a pro rata distribution to its shareholders of all of our outstanding
common stock together with related preferred stock purchase rights. As a result
of the spin-off, we became an independent, publicly traded company.

RESTRUCTURING CHARGES

Our results for fiscal 2001 include restructuring charges of
approximately $2.4 million ($1.5 million after tax) consisting primarily of
severance and termination for the approximately sixty-three employees located at
Ormco's San Diego, California manufacturing facility whose employment the
company planned to terminate as a result of the closing of the facility. Of the
$2.4 million restructuring charges, approximately $1.7 million are cash related
charges for severance and contractual obligations, while the balance of
approximately $0.7 million represents non-cash charges related to exited capital
and other assets. We believe the anticipated sale of the San Diego manufacturing
facility will offset the restructuring charge; the proceeds from the sale will
be used to pay down debt and reduce interest charges. Work functions previously
performed at the facility were absorbed into our Glendora, California facility.
The closing was completed as of June 30, and we believe all the costs associated
with the closing will be finalized by September 30, 2002.

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 costs related to the planned termination of
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 represented non-cash charges related to the
exited products and capital, while the balance of approximately $1.5 million
were cash related charges for severance and contractual obligations. We
completed the 2000 restructuring plan in the first quarter of 2002, and we paid
the remainder of the associated 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. 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. (See Note 12
to the consolidated financial statements).

Restructuring activity since June 30, 1998 and its components are as follows (in
thousands):

74

- ----------

(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel) whose
employment the Company planned to terminate under the 1998
restructuring plan. As of September 30, 2001, 154 employees have been
terminated as a result of the 1998 restructuring plan. An adjustment of
approximately $1.2 million 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) whose employment the Company
planned to terminate as a result of the 2000 restructuring plan. As of
September 30, 2001 all terminations were completed under the 2000
restructuring plan. The September 2001 restructuring charge represents
severance and termination costs for approximately 63 employees at the
Ormco San Diego facility whose employment the Company planned to
terminate as a result of the September 2001 restructuring plan (all of
whom were notified before September 30, 2001 of the intent to terminate
their employment). The proceeds from the planned sale of the Ormco San
Diego facility is expected to offset the cost of closing the facility.
No significant changes are expected to be made to the September 2001
restructure 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

Net sales in 2001 and 2000 were higher than the previous
corresponding periods. Net sales in 2001 and 2000 increased by 3.9% and 7.9%,
respectively, from corresponding prior year periods. Including restructuring
charges, operating income in 2001 and 2000 increased by 3.9% and 2.6%,
respectively, over the corresponding prior year periods. Excluding the
restructuring charges, operating income decreased by 4.1% in 2001, and increased
by 10.9% in 2000 over the prior year periods. In 2001, as a result of the
spin-off, we incurred additional expenses such as corporate governance costs,
stock transfer agent costs, incremental

75

professional fees and other costs in connection with operating as a stand alone
company from the prior year, when we were a wholly owned subsidiary of Apogent.

In May of 2000, the Emerging Issues Task Forces ("EITF") reached
a consensus on Issue No. 00-10--"Accounting for Shipping and Handling Fees and
Costs" that all amounts billed to a customer in a sale transaction related to
shipping and handling, if any, represents revenues earned for the goods provided
and should be classified as revenue. Historically, we have recorded our shipping
and handling amounts billed to our customers as a reduction to selling, general
and administrative expenses. In September 2001, in accordance with Issue No.
00-10, we adjusted our net sales to include those amounts previously
recorded as a reduction to selling, general and administrative expenses. The
amounts added to net sales and reclassified from selling, general and
administrative expenses for years ended September 30, 2001, 2000 and 1999, were
approximately $4.2 million, $4.4 million and $4.1 million, respectively.

Sales grew for the year ended September 30, 2001, both
domestically and internationally. Domestic and international sales increased by
4.5% and 2.9%, 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 9.1%.

Partially offsetting the increase in net sales for the year ended
September 30, 2001 was a decrease of 1.1% over the prior year net sales in the
orthodontic business segment. A slight slowing in the orthodontia market, as
well as some areas in the sales organization that have been identified by
management as needing some improvements resulted in the decrease in net sales.
We have initiated some management changes within the Ormco sales organization to
address the decrease in sales.

ACQUISITIONS

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, completing 26 acquisitions between
1993 and 2001, four of which we completed in 2001 and three in 2000.
Acquisitions completed in 2001 and 2000 are as follows:

76

INFECTION PREVENTION

Fiscal year 2001

OBF Technologies, Inc....................... $3.0 million 6/01 Product line used in the management of
biohazardous and hazardous liquid medical
waste.

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 we employ currency hedges to mitigate the
impact of foreign currency fluctuations. In August 2001, we hedged our foreign
currency exposure to protect against currency fluctuations in fiscal 2002 by
securing monthly zero cost collars with a notional amount of approximately $36.6
million for the Euro and a notional amount of approximately $5.5 million for the
Japanese Yen. No currency gain or loss was recognized in the consolidated
statement of income for the year ended September 2001; however, a currency loss
of $0.03 million (net of income tax), representing the fair value of the zero
cost collars, was recorded in accumulated other comprehensive income (loss), a
component of stockholders' equity (See Note 10 to the consolidated financial
statements). Additionally, in September 2001, we entered into a cross currency
debt swap transaction to hedge our net investment in Hawe Neos. The agreement
entered into on September 20, 2001, with an effective date of October 16, 2001,
is a contract to exchange a U.S. dollar principal amount of $45 million in
exchange for a Swiss franc principal amount of 71.7 million at the termination
date of October 16, 2006. For fiscal year 2001, the fair value of the cross
currency debt swap transaction gain (net of income tax) included in the
cumulative translation adjustments was $0.58 million. 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 for fiscal year
2002. Apogent, prior to the spin-off, had also employed currency hedges on
behalf of SDS. In November 1999, Apogent 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 Apogent
exposure. There were no outstanding derivative financial instruments as of
September 30, 2000 and 1999.

The following table sets forth our domestic sales and sales
outside the United States in 2001, 2000 and 1999. See also Note 19 to our
consolidated financial statements.

77

RESULTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 2000

Net Sales

Overall Company. Net sales for the twelve months ended September
30, 2001 increased by $16.4 million or 3.9% from the corresponding 2000 period.
After adjusting for the impact of the strengthening U.S. dollar, sales would
have increased by $26.7 million or 6.3% from the corresponding 2000 period.

Professional Dental. Increased net sales in the Professional
Dental segment resulted primarily from: (a) the net sales of products from
acquired companies (approximately $10.1 million), (b) net sales of new products
(approximately $8.5 million), (c) increased net sales of existing products
(approximately $4.1 million), and (d) decreased rebate expense (approximately
$0.7 million). The increase in net sales was partially offset by: (a)
unfavorable foreign currency fluctuations (approximately $4.9 million), (b) the
loss of the net sales of last year's exited product lines (approximately $2.4
million) and (c) decreased shipping and handling fees (approximately $0.2
million).

Orthodontics. Decreased net sales in the Orthodontics segment
resulted primarily from: (a) decreased net sales of existing products
(approximately $7.8 million), (b) unfavorable foreign currency fluctuations
(approximately $5.3 million), and (c) a loss of the net sales of last year's
exited product lines (approximately $2.9 million). The decrease in net sales was
partially offset by: (a) net sales of new products (approximately $13.0
million), and (b) the net sales of products from acquired companies
(approximately $1.1 million).

Infection Prevention. Increased net sales in the Infection
Prevention segment was due primarily to: (a) increased net sales of existing
products (approximately $1.3 million) and (b) the net sales of products from the
acquired company (approximately $1.1 million).

Overall Company. Gross profit for the twelve months ended
September 30, 2001 increased by $9.3 million or 3.9% from the corresponding
fiscal 2000 period.

Professional Dental. Increased gross profit in the Professional
Dental segment resulted primarily from: (a) margins relating to the net sales of
products from acquired companies (approximately $6.1 million), (b) increased
unit volume relating to new products (approximately $5.0 million), (c) increased
net sales of existing products (approximately $2.4 million), (d) a decrease in
restructuring charge (approximately $1.8 million), (e) decreased rebate expense
(approximately $0.7 million), and (f) inventory reserve adjustments
(approximately $0.7 million of which approximately $0.6 million is related to a
standard cost adjustment, and approximately $0.4 million is due to physical
inventory adjustments, partially offset by an increase in obsolescence of
approximately $0.2 million, and an increase in royalty expense of approximately
$0.1 million). The increased gross profit was partially offset by: (a)
unfavorable manufacturing variances (approximately $4.4 million), (b) an
unfavorable exchange rate effect (approximately $2.6 million), (c) margins lost
from the prior year's exited products lines (approximately $1.2 million), and
(d) an unfavorable product mix (approximately $0.3 million).

78

Orthodontics. Decrease gross profit margins were primarily due
to: (a) unfavorable exchange rate (approximately $5.3 million), (b) decreased
sales volume of existing products (approximately $4.4 million), (c) inventory
adjustments (approximately $2.8 million, due to an increase in royalty expense
of approximately $1.7 million, an increase in obsolescence of approximately $1.5
million, and approximately $0.3 million increase in standard cost revisions
partially offset by approximately $0.7 million related to physical inventory
adjustments, (d) unfavorable product mix margins (approximately $1.9 million),
and (e) margins lost from last year's exited products (approximately $1.6
million). The decreased gross profits were partially offset by: (a) unit volume
relating to new products (approximately $7.8 million), (b) a decrease in
restructuring charge (approximately $4.0 million), (c) favorable manufacturing
variances (approximately $1.0 million), and (d) margins relating to net sales of
products from acquired companies (approximately $0.5 million).

Infection Prevention. Gross profit in the Infection Prevention
segment increased due to: (a) a decrease in restructuring charge (approximately
$1.5 million), (b) increased volume relating to existing products (approximately
$1.0 million), (c) the margins relating to the net sales of products from
acquired companies (approximately $0.6 million), (d) inventory adjustments
(approximately $0.4 million, of which approximately $0.5 million is due to a
favorable physical inventory adjustment, and a decrease in standard cost of
approximately $0.2 million, partially offset by and $0.3 million obsolescence
adjustment), (e) reduced manufacturing variance costs (approximately $0.2
million), and (f) unit volume related to new product sales (approximately $0.1
million).

Overall Company. Selling, general and administrative expenses for
the year ended September 30, 2001 increased by $5.6 million or 3.9% from the
corresponding 2000 period.

Professional Dental. Increased selling, general and
administrative expenses in the Professional Dental segment resulted primarily
from: (a) increased general and administrative expenses (approximately $3.0
million), (b) increased selling, general and administrative expenses related to
acquisitions (approximately $2.3 million), and (c) increased amortization
(approximately $1.1 million). These increases were partially offset by: (a)
favorable foreign currency fluctuations (approximately $2.7 million), (b)
decreased selling and marketing expenses (approximately $0.1 million), and (c)
decreased research and development expenses and other expenses (approximately
$0.1 million).

Orthodontics. Increased selling, general and administrative
expenses in the Orthodontics segment resulted primarily from: (a) increased
selling and marketing expenses (approximately $2.6 million), (b) increased
general and administrative expenses (approximately $1.3 million), and (c)
increased selling, general and administrative expenses related to acquisitions
(approximately $0.1 million). Partially offsetting these increases were: (a)
favorable foreign currency fluctuations (approximately $2.6 million), (b)
decreased amortization (approximately $0.5 million), and (c) a decrease in
restructuring charges (approximately $0.4 million).

Infection Prevention. Increased selling, general and
administrative expenses in the Infection Prevention segment resulted primarily
from: (a) increased general and administrative expenses (approximately $1.0
million), (b) increased selling and marketing expenses (approximately $0.7
million), and (c) increased amortization (approximately $0.1 million). Partially
offsetting these increases was a decrease in restructuring charges
(approximately $0.3 million).

79

Operating Income

As a result of the foregoing, operating income for the year ended
September 30, 2001 increased by 3.9% or $3.7 million over operating income for
the corresponding 2000 period.

Interest Expense

Interest expense was $33.5 million in 2001, an increase of $7.6
million from the corresponding 2000 period. The increase resulted from a higher
average debt balance and higher average interest rates on our credit facility,
primarily due to the December 11, 2000 spin-off. See "Liquidity and Capital
Resources" below.

Income Taxes

Income taxes in 2001 were $25.5 million, a decrease of $3.1
million from the corresponding 2000 period. The decrease resulted primarily from
lower taxable income, as well as a decrease in the effective tax rate to 40.1%
for the year ended September 30, 2001 as compared to 40.5% for the corresponding
prior year period.

Income Before Extraordinary Item

As a result of the foregoing, we had income before extraordinary
item of $38.1 million in 2001, as compared to net income of $42.1 million in the
corresponding 2000 period.

Extraordinary Item

Due to the spin-off of SDS, Apogent terminated its credit
agreement and wrote off the associated deferred financing fees. This resulted in
an after tax write-off of $0.5 million that was allocated to SDS.

Net Income

As a result of the foregoing, we had net income of $37.6 million
in 2001, as compared to net income of $42.1 million in the corresponding 2000
period.

Earnings Per Share

Basic earnings per share for the year ended September 30, 2001
were $1.05 per share, while fully diluted earnings per share were $1.01 per
share. For the year ended September 30, 2000, basic earnings per share of $1.20
were computed using the 35,108,649 shares outstanding as of the date of the
spin-off on December 11, 2000. Diluted earnings per share for the year ended
September 30, 2000 have been omitted as no SDS stock options existed prior to
the date of the spin-off and any calculation of diluted earnings per share would
not be meaningful.

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 $0.5 million in 2001 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.

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YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 1999

Net Sales

Overall Company. Net sales for the twelve months ended September
30, 2000 increased by $30.9 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 $37.7 million or 9.6% from the corresponding 1999 period.

Professional Dental. Increased net sales in the Professional
Dental segment resulted primarily from: (a) 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) increased 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) net sales of new products (approximately $7.9
million), (b) net sales of products of an acquired company (approximately $4.7
million), and (c) increase shipping and handling fees (approximately $0.2
million). Increased net sales were partially offset by unfavorable foreign
currency fluctuations (approximately $4.4 million).

Infection Prevention. Increased net sales in the Infection
Prevention 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

Overall Company. Gross profit for the twelve months ended
September 30, 2000 increased by $11.3 million or 4.9 % 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), (d) net sales of products of
an acquired company net of discontinued product lines (approximately $1.7
million), and (e) increased shipping and handling fees (approximately $0.1
million). Increased gross profit was partially offset by: (a) increased
manufacturing overhead (approximately $2.6 million), (b) the 2000 restructuring
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), and (e) other inventory charges (approximately
$0.3 million).

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Orthodontics. Decreased gross profit in the Orthodontics segment
resulted primarily from: (a) increased manufacturing variances (approximately
$5.8 million), (b) the 2000 restructuring charges relating primarily to exited
product lines (approximately $5.3 million), and (c) unfavorable foreign currency
fluctuations (approximately $4.4 million). The decrease in gross profit was
partially offset by (a) increased unit volume relating to new products
(approximately $5.2 million), (b) favorable product mix increase (approximately
$4.8 million), (c) net sales of products of 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), (e) increased shipping and handling fees (approximately $0.2 million),
and (f) a decrease in unit volume of existing products (approximately $0.1
million).

Infection Prevention. Decreased gross profit in the Infection
Prevention segment resulted primarily from: (a) the 2000 restructuring 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 $0.7 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: (a) the effects of an acquired company
(approximately $2.0 million) and (b) increased shipping and handling fees
(approximately $0.1 million).

Selling, General and Administrative Expenses

Overall Company. Selling, general and administrative expenses for
the year ended September 30, 2000, increased by $8.9 million or 6.6% 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 $3.0 million),
(b) unfavorable foreign currency fluctuations (approximately $0.6 million), (c)
higher general and administrative expenses (approximately $0.6 million), and (d)
increased amortization (approximately $0.3 million). The increase was partially
offset by: (a) the 1999 restructuring charges (approximately $2.0 million), (b)
a decrease in corporate charges from Apogent based on a lower domestic sales
percentage (approximately $0.5 million), and (c) decreased research and
development expenses and other expenses (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) increased
selling, general and administrative expenses as a result of acquired companies
(approximately $1.4 million), (c) a 1999 reversal of restructuring charges
(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 restructuring 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 from Apogent based on a lower domestic sales
percentage (approximately $0.7 million), and (c) the 1999 restructuring charges
(approximately $0.5 million).

Infection Prevention. Increased selling, general and
administrative expenses in the Infection Prevention segment resulted primarily
from: (a) increased selling, general and administrative expenses primarily as a
result of acquired companies (approximately $0.5 million), (b) amortization of
intangibles primarily from acquired businesses (approximately $0.3 million), and
(c) the 2000 restructuring charges (approximately $0.2 million).

82

Operating Income

As a result of the foregoing, operating income for the year ended
September 30, 2000 increased by 2.6% or $2.4 million from operating income for
the corresponding 1999 period.

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 allocated from Apogent 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 determine the interest charges on
floating rate debt. See "Liquidity and Capital Resources" below.

Income Taxes

Income taxes in 2000 were $28.7 million, a decrease of $1.8
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 $42.1 million
in 2000, as compared to net income of $46.8 million in the corresponding 1999
period.

Earnings Per Share

Basic earnings per share for the years ended September 30, 2000
and 1999 were $1.20 per share and $1.33 per share, respectively, which were
computed using the 35,108,649 shares outstanding as of the date of the spin-off
on December 11, 2000. Diluted earnings per share for the years ended September
30, 2000 and 1999 have been omitted as no SDS stock options existed prior to the
date of the spin-off and any calculation of diluted earnings per share would not
be meaningful.

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.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets," and in
June 2001, SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No.
141 requires that all business combinations be accounted for under a single
method -- the purchase method. Use of the pooling-of-interests method is no
longer permitted. SFAS No. 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead reviewed for
impairment. Under SFAS No. 142, the amortization of goodwill ceases upon
adoption of the Statement and is effective for fiscal years beginning after
December 15, 2001, which for calendar year-end companies will be January 1,
2002. Early application is permitted for entities with fiscal years beginning
after March 31, 2001, provided that the first interim financial statements have
not been previously issued. In all cases, the provisions of SFAS No. 142 shall
be initially applied at the beginning of a fiscal year.

83

We have historically amortized our goodwill and other intangible
assets over their estimated useful lives. Beginning with the adoption of SFAS
No. 142, we will cease amortizing our goodwill and certain intangible assets as
defined in SFAS No. 142. We anticipate adopting SFAS No. 142 as of the beginning
of fiscal year 2003 (i.e. October 1, 2002). We recorded amortization expense in
the amount of $9.2 million and $8.5 million for the years ended September 30,
2001 and 2000, respectively. Upon adoption of SFAS No. 142, amortization of
goodwill and certain intangible assets will not be recorded in future periods.
Additionally, we will be required to evaluate our existing intangible assets and
goodwill and to make any necessary reclassifications in order to conform to the
new criteria in SFAS No. 141 for recognition of identifiable intangible assets
apart from goodwill and to reassess the useful lives of such assets.

Further, to the extent an intangible asset is identified as
having an indefinite useful life, we will be required to test the intangible
asset and goodwill for impairment in accordance with the provision of SFAS No.
142 within the first interim period. Any impairment loss will be measured as of
the date of the adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. Impairment will first be
assessed by identifying our reporting units and determining the carrying value
of each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets to those reporting units, and comparing
the fair value of each reporting unit to the reporting unit's carrying amount.
To the extent that the carrying amount of each reporting unit exceeds its fair
value, impairment will be measured as the amount by which the reporting unit's
net assets and liabilities (recorded and unrecorded) exceed its fair value. We
have not fully determined the effect of adopting SFAS No. 142.

SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. We are required and plan to
adopt the provisions of SFAS No. 143 for the quarter ending December 31, 2002.
We believe the adoption of SFAS No. 143 will not have a material impact on our
financial position, results of operations, or cash flows.

In August 2001, the FASB issued FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets (Statement
144)", which supersedes both FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121)" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30)", for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, "Goodwill and Other Intangible Assets".

We are required to adopt Statement 144 no later than the year
beginning after December 15, 2001, and plan to adopt its provisions for the
quarter ending December 31, 2002. We do not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on our consolidated
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, we cannot determine the potential effects that adoption of Statement
144 will have on our consolidated financial statements.

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

As a result of the acquisition of Apogent's predecessor in 1987
and the acquisitions SDS and its subsidiaries have completed since 1987, we have
increased the carrying value of certain tangible and intangible assets
consistent with current 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. During fiscal 2001, goodwill and intangible assets
increased by approximately $41.1 million, primarily as a result of continued
acquisition activity.

84

Approximately $60.6 million of cash was generated from operating
activities in 2001, as compared to approximately $62.4 million for the same
period of the prior year. The approximate $1.8 million decrease in cash flows
from operations was primarily due to: (a) a decrease in the net change in
inventory provisions from the prior year period of approximately $8.8 million
(of which approximately $7.6 million decrease from the prior year was related to
the 2000 exited product lines), (b) an increase in the net change in prepaid
expenses from the prior year period of approximately $6.4 million, (c) an
increase in the net change in inventories from the prior year period of
approximately $4.7 million, (d) a decrease in net income from the prior year
period of approximately $4.4 million, (e) the net change in other current
liabilities from the prior year of approximately $2.7 million, (f) a decrease in
the net change in restructuring reserve from the prior year period of
approximately $0.7 million, (g) a decrease in depreciation expense from the
prior year period of approximately $0.3 million, and (h) a decrease in the net
change in income taxes payable from the prior year period of approximately $0.1
million. The decreases in cash flow were partially offset by: (a) a net increase
in the net change in other assets and liabilities from the prior year period of
approximately $14.1 million, (b) a net increase in the net change in accounts
payable from the prior year period of approximately $6.7 million, (c) a net
increase in the net change in accrued payroll and employee benefits from the
prior year period of approximately $4.1 million, (d) an increase in amortization
from the prior year period of approximately $0.7 million, (e) a decrease in
the gain on sales of property, plant and equipment from the prior year period of
approximately $0.4 million, and (f) a net increase in the provision for losses
on doubtful accounts from the prior year period of approximately $0.3 million.

Approximately $65.8 million of cash was used in investing
activities in 2001, an increase of approximately $33.0 million from the same
period in the prior year (primarily due to additional payments for acquisitions
from the prior year period of approximately $30.1 million, increased capital
expenditures from the prior year period of approximately $2.4 million, and lower
proceeds from sales of property, plant and equipment from the prior year period
of approximately $.5 million). Approximately $4.5 million of cash was provided
by financing activities in 2001 as compared to cash used in the prior year
period financing activities of approximately $23.0 million. In 2000, increased
investing activities resulted primarily from an increase in acquisition activity
(approximately $5.9 million), partially offset by a decrease in capital
expenditures (approximately $1.1 million), and increased proceeds from sales of
property, plant and equipment (approximately $0.4 million).

In 2001, the approximate $27.5 million increase in cash provided
by financing activities from the prior year period was primarily attributed to:
(a) the net proceeds from our underwritten stock offering of approximately $50.0
million, (b) the net change in advances and loans to Apogent from the prior year
period of approximately $20.6 million, (c) a net change in other financing
activities from the prior year period of approximately $3.4 million, and (d) an
increase in cash received from the exercise of stock options of approximately
$1.3 million. The cash provided by the preceding financing activities were
partially offset by: (a) a decrease in the capital contributions from Apogent
over the prior year of approximately $16.8 million, (b) an increase in loan
activity from the prior year period of approximately $16.1 million, (c) an
increase in the cash dividend payment to Apogent from the prior year period of
approximately $9.4 million, and (d) the payment of deferred financing fees
related to the our prior credit facility of approximately $5.5 million. In 2000,
approximately $23.0 million of cash was used in financing activities, primarily
from dividends paid to Apogent (approximately $58.5 million), an increase in
advances to Apogent (approximately $21.0 million), partially offset by
borrowings under the Apogent credit agreement, of which certain of our
subsidiaries were obligers, (approximately $35.1 million) and
capital contributions from Apogent (approximately $21.4 million).

The reduction in paid-in capital since September 30, 2000
primarily reflects the payment of $67.9 million in cash dividends to Apogent as
a result of the spin-off, and the settlement of all intercompany loans and
advances with Apogent by way of a non-cash dividend of approximately $78.2
million as a result of the spin-off, partially offset by the net proceeds from
the June 8, 2001 underwritten stock offering of approximately $50 million.

85

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

See the Exhibit Index following the Signature page in this
report, which is incorporated herein by reference.

(b) Reports on Form 8-K:

A Form 8-K dated May 10, 2002, was filed on May 13, 2002 to
report, under Item 5, "Other Events and Regulation FD Disclosure," an amendment
of our audited and interim financial statements. Our audited consolidated
financial statements for each year in the three year period ended September 30,
2001 and for the six months ended March 31, 2002 and 2001, were amended to add a
new note, "Condensed Consolidating Financial Information" to comply with Rule
3-10 of Regulation S-X. A complete copy of the adjusted financial statements was
filed as an exhibit.

A Form 8-K dated May 13, 2002, was filed on May 13, 2002 to
report, under Item 5, "Other Events and Regulations FD Disclosure," our
intention to offer for sale $150 million of senior subordinated notes due 2012
in a private offering. A copy of the related press release was filed as an
exhibit.

88

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

SYBRON DENTAL SPECIALTIES, INC
(Registrant)

Date: August 6, 2002 /s/ GREGORY D. WALLER
------------------------------------------------
Gregory D. Waller
Vice President - Finance,
Chief Financial Officer & Treasurer*

* executing as both the principal financial
officer and the duly authorized officer of
the Company.

89

SYBRON DENTAL SPECIALTIES, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-16057)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002

* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has
omitted certain agreements with respect to long-term debt. The Registrant
agrees to furnish a copy of any such agreements to the Securities and Exchange
Commission upon request.