Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 MARCH 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-16057
SYBRON DENTAL SPECIALTIES, INC.
(Exact name of registrant as specified in 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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
At May 8, 2003, there were 38,154,839 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
================================================================================
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements ................................................................ 1
Consolidated Balance Sheets, March 31, 2003 and September 30, 2002 .................. 1
Consolidated Statements of Income for the three months and six months ended
March 31, 2003 and 2002 ......................................................... 2
Consolidated Statement of Stockholders' Equity and Comprehensive Income
for the six months ended March 31, 2003 ......................................... 3
Consolidated Statements of Cash Flows for the six months ended
March 31, 2003 and 2002 ......................................................... 4
Notes to Unaudited Consolidated Financial Statements ................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......................... 31
Item 4. Controls and Procedures ............................................................. 34
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ................................. 35
Item 6. Exhibits and Reports on Form 8-K .................................................... 35
Signature ................................................................................... 36
Certifications .............................................................................. 37
Exhibit Index ............................................................................... 39
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
2003 2002
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 27,310 $ 12,652
Accounts receivable (less allowance for doubtful receivables of
$1,341 and $1,400 at March 31, 2003 and September 30, 2002, respectively) ..... 91,958 80,479
Inventories (note 2) ............................................................. 85,125 89,685
Deferred income taxes ............................................................ 9,023 8,537
Prepaid expenses and other current assets ........................................ 12,079 14,163
------------- -------------
Total current assets .......................................................... 225,495 205,516
------------- -------------
Property, plant and equipment, net of accumulated depreciation of $89,926
and $85,906 at March 31, 2003 and September 30, 2002, respectively ............... 74,819 75,502
Goodwill ............................................................................ 245,601 241,405
Intangible assets, net .............................................................. 17,453 17,711
Deferred income taxes ............................................................... 9,703 6,890
Other assets ........................................................................ 21,788 22,433
------------- -------------
Total assets ..................................................................... $ 594,859 $ 569,457
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 14,842 $ 14,927
Current portion of long-term debt ................................................ 5,291 3,193
Income taxes payable ............................................................. 13,278 3,389
Accrued payroll and employee benefits ............................................ 28,696 24,367
Restructuring reserve (note 3) ................................................... 2,556 4,130
Deferred income taxes ............................................................ 1,710 1,110
Accrued rebates .................................................................. 5,729 5,626
Accrued interest ................................................................. 4,093 4,605
Other current liabilities ........................................................ 10,424 9,018
------------- -------------
Total current liabilities ..................................................... 86,619 70,365
------------- -------------
Long-term debt ...................................................................... 158,352 187,644
Senior subordinated notes ........................................................... 150,000 150,000
Deferred income taxes ............................................................... 18,551 18,334
Other liabilities ................................................................... 18,976 11,971
Commitments and contingent liabilities .............................................. -- --
Stockholders' equity:
Preferred stock, $.01 par value; authorized 20,000,000 shares, none outstanding .. -- --
Common stock, $.01 par value; authorized 250,000,000 shares,
38,033,081 and 37,989,202 issued and outstanding at March 31, 2003
and September 30, 2002, respectively .......................................... 380 380
Additional paid-in capital ....................................................... 70,839 70,329
Retained earnings ................................................................ 93,764 68,592
Accumulated other comprehensive loss ............................................. (2,622) (8,158)
------------- -------------
Total stockholders' equity .................................................... 162,361 131,143
------------- -------------
Total liabilities and stockholders' equity .................................... $ 594,859 $ 569,457
============= =============
See accompanying notes to unaudited consolidated financial statements.
1
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Net sales .......................................... $ 134,267 $ 124,694 $ 254,416 $ 222,459
Cost of sales ...................................... 59,917 54,132 115,491 97,204
--------- --------- --------- ---------
Gross profit ....................................... 74,350 70,562 138,925 125,255
Selling, general and administrative expenses ....... 44,060 39,615 86,774 72,278
Amortization of goodwill and other intangible assets 206 2,511 610 5,029
--------- --------- --------- ---------
Total selling, general and
administrative expenses ................... 44,266 42,126 87,384 77,307
--------- --------- --------- ---------
Operating income ................................... 30,084 28,436 51,541 47,948
Other income (expense):
Interest expense ................................ (5,403) (6,490) (10,979) (13,603)
Amortization of deferred financing fees ......... (400) (211) (821) (443)
Other, net ...................................... 893 (51) 860 82
--------- --------- --------- ---------
Income before income taxes ......................... 25,174 21,684 40,601 33,984
Income taxes ....................................... 9,567 8,457 15,429 13,254
--------- --------- --------- ---------
Net income ................................... $ 15,607 $ 13,227 $ 25,172 $ 20,730
========= ========= ========= =========
Basic earnings per share (note 5) .................. $ 0.41 $ 0.35 $ 0.66 $ 0.55
========= ========= ========= =========
Diluted earnings per share (note 5) ................ $ 0.40 $ 0.34 $ 0.66 $ 0.53
========= ========= ========= =========
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 SIX MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
COMMON STOCK
---------------------- ACCUMULATED
ADDITIONAL OTHER TOTAL TOTAL
NUMBER OF PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) EQUITY INCOME
---------- ---------- ---------- ---------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
Balance at September 30, 2002 ....... 37,989,202 $ 380 $ 70,329 $ 68,592 $ (8,158) $ 131,143
Comprehensive income:
Net income ....................... -- -- -- 25,172 -- 25,172 $ 25,172
Translation adjustment ........... -- -- -- -- 6,852 6,852 6,852
Unrealized loss on
derivative instruments ......... -- -- -- -- (1,316) (1,316) (1,316)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income .......... -- -- -- 25,172 5,536 $ 30,708
==========
Issuance of common stock
from options exercised,
including tax benefit ............ 43,879 -- 510 -- -- 510
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2003 ........... 38,033,081 $ 380 $ 70,839 $ 93,764 $ (2,622) $ 162,361
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
3
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED MARCH 31,
--------------------------
2003 2002
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 25,172 $ 20,730
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ................................................... 5,772 5,234
Amortization of goodwill and other intangible assets ........... 610 5,029
Amortization of deferred financing fees ........................ 821 443
Gain on sales of property, plant and equipment ................. (616) (380)
Provision for losses on doubtful receivables ................... 117 300
Inventory provisions ........................................... 1,736 1,832
Deferred income taxes .......................................... (2,482) 3,849
Tax benefit from issuance of stock under employee stock plan ... 59 135
Changes in assets and liabilities, net of effects of businesses
acquired:
(Increase)/decrease in accounts receivable ..................... (11,420) 5,576
(Increase)/decrease in inventories ............................. 4,212 (9,806)
(Increase)/decrease in prepaid expenses and other current assets 2,084 (3,780)
Decrease in accounts payable ................................... (85) (4,793)
Increase/(decrease) in income taxes payable .................... 9,889 (984)
Increase/(decrease) in accrued payroll and employee benefits ... 4,329 (2,620)
Decrease in restructuring reserve .............................. (1,574) (87)
Increase/(decrease) in accrued interest ........................ (512) 157
Increase/(decrease) in other current liabilities ............... 1,509 (2,877)
Net change in other assets and liabilities ..................... (71) (1,223)
--------- ---------
Net cash provided by operating activities ................... 39,550 16,735
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (2,856) (7,054)
Proceeds from sales of property, plant, and equipment ............. 5,281 505
Net payments for business acquired ................................ -- (8,235)
Payments for intangibles .......................................... (669) (1,171)
--------- ---------
Net cash provided by (used in) investing activities ......... 1,756 (15,955)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility ..................................... 75,500 134,000
Principal payments on credit facility ............................. (104,237) (129,558)
Proceeds from long-term debt ...................................... 3,259 749
Principal payments on long-term debt .............................. (2,126) (542)
Payment of deferred financing fees ................................ (473) --
Cash received from exercise of stock options ...................... 451 481
--------- ---------
Net cash provided by (used in) financing activities ......... (27,626) 5,130
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ......... 978 (586)
Net increase in cash and cash equivalents ............................ 14,658 5,324
Cash and cash equivalents at beginning of period ..................... 12,652 8,319
--------- ---------
Cash and cash equivalents at end of period ........................... $ 27,310 $ 13,643
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest .......................... $ 12,098 $ 13,788
========= =========
Cash paid during the period for income taxes ...................... $ 5,376 $ 12,511
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS 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.
Prior to October 1, 2002, SDS had three business segments: a) Professional
Dental, b) Orthodontics and c) Infection Prevention. Effective October 1, 2002,
the Company consolidated its Infection Prevention segment into its Professional
Dental segment to reduce costs and coordinate marketing efforts for its
infection prevention products. As a result, all financial information presented
in this quarterly report combines the historical information of the Infection
Prevention and Professional Dental business segments into one reporting segment.
The reported net sales of the Company's Professional Dental and
Orthodontics segments were impacted by the transfer made by the Company between
those segments, of its stainless steel endodontic product line. While the
responsibility for the sales and marketing of those products was handled during
fiscal year 2002 by the Orthodontics segment, the net sales were reported in the
Professional Dental business segment. At the commencement of the Company's 2003
fiscal year it transferred the reporting of those sales to the Orthodontics
business segment. While the transfer impacted the respective results of
operations reported for the Professional Dental and Orthodontics segments, the
transfer did not impact the Company's consolidated results of operations for the
quarter or year to date periods.
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 quarter and year to date
periods ended March 31, 2003 and 2002 refer to the second quarters and year to
date periods of fiscal years 2003 and 2002, respectively. We have reclassified
certain prior year data to conform to the 2003 presentation.
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 note 3 below, all such adjustments were of a
normal recurring nature. The results for the period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year. The
financial statements have been prepared in accordance with the instructions to
Form 10-Q and do not include all of the information and note disclosures
required by accounting principles generally accepted in the United States. This
information should only be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.
2. INVENTORIES
Inventories at March 31, 2003 and September 30, 2002 are presented below.
MARCH 31, SEPTEMBER 30,
2003 2002
------------- -------------
Raw materials and supplies $ 19,781 $ 23,169
Work in process ............ 18,685 23,888
Finished goods ............. 51,481 47,102
Inventory reserves ......... (4,822) (4,474)
------------- -------------
$ 85,125 $ 89,685
============= =============
5
3. RESTRUCTURING CHARGES
In September 2002, the Company recorded a restructuring charge of
approximately $3,666 ($2,353 after tax). The charge was primarily composed of
severance and termination costs associated with the then planned termination of
the employment of 71 employees employed at certain of the Company's European
facilities, as a result of the consolidation of those European facilities into
the Company's Hawe Neos facility in Switzerland. Of the $3,666 in restructuring
charges, approximately $3,064 are cash charges related to severance and
contractual obligations, $300 is a cash charge for tax liabilities included in
income taxes payable, while the balance of approximately $302 are non-cash
charges. As of March 31, 2003 47 of the 71 planned terminations have been
completed. The Company expects to complete the majority of the 2002
restructuring plan by the 2003 fiscal year end.
In September 2001, the Company recorded a restructuring charge of
approximately $2,400 ($1,500 after tax) consisting primarily of the severance
and termination costs associated with the termination of the employment of 63
employees that were employed at Ormco's San Diego, California manufacturing
facility, as a result of the closing of the facility. The Company completed the
closing of the facility as of June 30, 2002 and finalized all remaining costs.
Work previously performed at the facility was absorbed into the Glendora,
California facility.
In June 1998, SDS 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 2002 restructuring charge activity since September 2002 and its
components are as follows:
LEASE SHUT-DOWN INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS COSTS WRITE-OFF ASSETS TAX OBLIGATIONS OTHER TOTAL
--------- -------- --------- --------- ------ ------ ----------- ----- -----
(A) (B) (B) (C) (C) (D) (E)
2002 Restructuring Charge ... $2,347 $ 332 $ -- $ 106 $ 196 $ 300 $ 229 $ 156 $3,666
Fiscal 2002 Non-Cash Charges 70 -- -- -- -- -- -- 43 113
------ ------ ------ ------ ------ ------ ------ ------ ------
September 30, 2002 Balance .. 2,277 332 -- 106 196 300 229 113 3,553
Fiscal 2003 Cash Payments ... 1,068 -- -- -- -- -- 192 15 1,275
Fiscal 2003 Non-Cash Payments -- -- -- 106 196 -- -- -- 302
------ ------ ------ ------ ------ ------ ------ ------ ------
March 31, 2003 Balance ...... $1,209 $ 332 $ -- $ -- $ -- $ 300 $ 37 $ 98 $1,976
====== ====== ====== ====== ====== ====== ====== ====== ======
The 2001 restructuring charge activity since September 2001 and its components
are as follows:
LEASE SHUT-DOWN INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS COSTS WRITE-OFF ASSETS TAX OBLIGATIONS OTHER TOTAL
--------- -------- --------- --------- ------ ------ ----------- ----- -----
(A) (B) (B) (C) (C) (D) (E)
2001 Restructuring Charge ... $1,050 $ -- $ -- $ -- $ 250 $ -- $ 775 $ 325 $2,400
Fiscal 2001 Non-Cash Charges -- -- -- -- 250 -- 100 300 650
------ ------ ------ ------ ------ ------ ------ ------ ------
September 30, 2001 Balance .. 1,050 -- -- -- -- -- 675 25 1,750
Fiscal 2002 Cash Payments ... 875 -- -- -- -- -- 600 -- 1,475
Fiscal 2002 Non-Cash Payments -- -- -- -- 50 -- 75 25 150
Adjustments ................. 175 -- -- -- (50) -- -- -- 125
------ ------ ------ ------ ------ ------ ------ ------ ------
September 30, 2002 and
March 31, 2003 Balance .... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
====== ====== ====== ====== ====== ====== ====== ====== ======
The 1998 restructuring charge activity since June 1998 and its components
are as follows:
LEASE SHUT-DOWN INVENTORY FIXED CONTRACTUAL
SEVERANCE PAYMENTS COSTS WRITE-OFF ASSETS TAX OBLIGATIONS OTHER TOTAL
--------- -------- --------- --------- ------ ------ ----------- ----- -----
(A) (B) (B) (C) (C) (D) (E)
1998 Restructuring Charge ... $4,300 $ 300 $ 400 $4,600 $1,300 $ 700 $ 900 $2,100 $14,600
Fiscal 1998 Cash Payments ... 1,800 -- 100 -- -- -- 300 1,400 3,600
Fiscal 1998 Non-Cash Charges -- -- -- 4,600 1,300 -- -- -- 5,900
------ ------ ------ ------ ------ ------ ------ ------ -------
September 30, 1998 Balance .. 2,500 300 300 -- -- 700 600 700 5,100
Fiscal 1999 Cash Payments ... 1,300 300 300 -- -- -- 300 400 2,600
Adjustments (a) ............. 1,200 -- -- -- -- -- -- -- 1,200
------ ------ ------ ------ ------ ------ ------ ------ -------
September 30, 1999 Balance .. -- -- -- -- -- 700 300 300 1,300
Fiscal 2000 Cash Payments ... -- -- -- -- -- -- 300 100 400
------ ------ ------ ------ ------ ------ ------ ------ -------
September 30, 2000 and
September 30, 2001 Balance .. -- -- -- -- -- 700 -- 200 900
Fiscal 2002 Cash Payments ... -- -- -- -- -- -- -- 16 16
Fiscal 2002 Non-Cash Payments -- -- -- -- -- -- -- 7 7
------ ------ ------ ------ ------ ------ ------ ------ -------
September 30, 2002 Balance .. -- -- -- -- -- 700 -- 177 877
Fiscal 2003 Non-Cash Changes -- -- -- -- -- -- -- (3) (3)
------ ------ ------ ------ ------ ------ ------ ------ -------
March 31, 2003 Balance ...... $ -- $ -- $ -- $ -- $ -- $ 700 $ -- $ 180 $ 880
====== ====== ====== ====== ====== ====== ====== ====== =======
6
(a) The 2002 restructuring charge consists primarily of the charges for
severance and termination costs associated with the 71 employees primarily
located at several facilities throughout Europe whose employment the
Company has either terminated or plans to terminate as a result of the
2002 European restructuring plan. As of March 31, 2003, the employment of
47 of those 71 employees has been terminated. The 2001 restructuring
charge represents severance and termination costs associated with the 63
employees located at the Ormco San Diego facility whose employment Ormco
terminated as a result of the 2001 restructuring plan. The closing of the
facility was completed by June 30, 2002. The net proceeds (approximately
$5,265) from the sale of the Ormco San Diego facility on January 31, 2003
offset the costs of closing the facility. The 1998 restructuring charge
represents severance and termination costs related to the 154 employees
whose employment was 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.
(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) The 2002 charge represents $300 for tax liabilities included in income
taxes payable. The 1998 charge of $700 represents a statutory tax relating
to assets transferred from an exited sales facility in Switzerland.
(e) Amount represents certain terminated contractual obligations.
4. 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. Effective October 1, 2002, the Company consolidated
the former Infection Prevention segment into the Professional Dental segment and
also transferred the reporting of the sales of its endodontic product line from
its Professional Dental segment to its Orthodontics segment. The prior period
information on the business segments has been adjusted to reflect the
consolidation of the Infection Prevention and Professional Dental segments.
Information on these business segments is summarized as follows:
PROFESSIONAL
DENTAL ORTHODONTICS ELIMINATIONS TOTAL SDS
------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2003
Revenues:
External customer.................................. $ 76,815 $ 57,452 $ -- $ 134,267
Intersegment....................................... 1,332 2,092 (3,424) --
----------- ---------- --------- -----------
Total revenues................................... $ 78,147 $ 59,544 $ (3,424) $ 134,267
=========== ========== ========= ===========
Gross profit.......................................... 42,470 31,880 -- 74,350
Selling, general and administrative expenses.......... 24,793 19,473 -- 44,266
Operating income...................................... 17,677 12,407 -- 30,084
THREE MONTHS ENDED MARCH 31, 2002
Revenues:
External customer.................................. $ 78,325 $ 46,369 $ -- $ 124,694
Intersegment....................................... 198 2,093 (2,291) --
----------- ---------- --------- -----------
Total revenues................................... $ 78,523 $ 48,462 $ (2,291) $ 124,694
=========== ========== ========= ===========
Gross profit.......................................... 45,332 25,230 -- 70,562
Selling, general and administrative expenses.......... 25,140 16,986 -- 42,126
Operating income...................................... 20,192 8,244 -- 28,436
7
PROFESSIONAL
DENTAL ORTHODONTICS ELIMINATIONS TOTAL SDS
------------ ------------ ------------ ------------
SIX MONTHS ENDED MARCH 31, 2003
Revenues:
External customer.................................. $ 147,743 $ 106,673 $ -- $ 254,416
Intersegment....................................... 3,259 4,716 (7,975) --
----------- ---------- --------- -----------
Total revenues................................... $ 151,002 $ 111,389 $ (7,975) $ 254,416
=========== ========== ========= ===========
Gross profit.......................................... 80,873 58,052 -- 138,925
Selling, general and administrative expenses.......... 49,422 37,962 -- 87,384
Operating income...................................... 31,451 20,090 -- 51,541
Segment assets........................................ 421,374 173,485 -- 594,859
SIX MONTHS ENDED MARCH 31, 2002
Revenues:
External customer.................................. $ 136,011 $ 86,448 $ -- $ 222,459
Intersegment....................................... 528 3,888 (4,416) --
----------- ---------- --------- -----------
Total revenues................................... $ 136,539 $ 90,336 $ (4,416) $ 222,459
=========== ========== ========= ===========
Gross profit.......................................... 78,159 47,096 -- 125,255
Selling, general and administrative expenses.......... 43,997 33,310 -- 77,307
Operating income...................................... 34,162 13,786 -- 47,948
5. 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 was 38,018,373 and 37,918,209 for
the quarters ended March 31, 2003 and 2002, respectively. For the six-month
periods ended March 31, 2003 and 2002, the basic weighted average number of
shares outstanding was 38,003,852 and 37,906,240, respectively. The number of
incremental diluted shares was 639,359 and 1,414,577 for the quarters ended
March 31, 2003 and 2002, respectively, which represent the dilutive effect of
options outstanding. For the six month periods ended March 31, 2003 and 2002,
the number of incremental diluted shares was 375,057 and 1,399,569,
respectively. The number of shares issuable upon the exercise of stock options,
which were not included in the calculation because they were anti-dilutive, was
401,609 at a weighted average exercise price of $18.95 per share in the quarter
ended March 31, 2003. For the six-month period ended March 31, 2003, the number
of shares issuable upon the exercise of stock options which were not included in
the calculation because they were anti-dilutive, was 3,132,374 at a weighted
average exercise price of $15.89 per share. There were no anti-dilutive shares
in the quarter or six months ended March 31, 2002.
6. STOCK-BASED COMPENSATION
As allowed under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company accounts for
stock-based compensation using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends the disclosure requirements in SFAS No. 123 for
stock-based compensation for annual periods ending after December 15, 2002 and
for interim periods beginning after December 15, 2002, including those companies
that continue to recognize stock-based compensation under APB Opinion No. 25. In
addition, SFAS No. 148 provides three alternative transition methods for
companies that choose to adopt the fair value measurement provisions of SFAS No.
123. The Company is currently reviewing whether or not it will adopt the fair
value method of accounting for stock options.
Stock options granted during the three and six months ended March 31, 2003
were 80,000 and 517,527 at a weighted average exercise price of $15.60 and
$14.97 respectively. The weighted average Black-Scholes value of these grants
under the assumptions indicated below was $4.57 and $4.43, respectively, per
option.
The fair value of options granted during the three and six month periods
ended March 31, 2003 and 2002 was determined using the Black-Scholes pricing
model with the following weighted average assumptions:
8
THREE MONTHS SIX MONTHS
------------ ----------
MARCH 31 MARCH 31
-------- --------
2003 2002 2003 2002
-------- -------- -------- --------
Expected lives ........ 4 years 4 years 4 years 4 years
Expected volatility ... 32.552% 30.245% 32.605% 31.552%
Risk-free interest rate 2.475% 3.925% 2.602% 3.990%
Dividend yield ........ -- -- -- --
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):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31 ENDED MARCH 31
-------------- --------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported .................. $ 15,607 $ 13,227 $ 25,172 $ 20,730
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects ...................... 719 684 1,361 1,298
--------- --------- --------- ---------
Pro forma net income: .................... $ 14,888 $ 12,543 $ 23,811 $ 19,432
========= ========= ========= =========
Earnings per share:
Basic - as reported ................. $ 0.41 $ 0.35 $ 0.66 $ 0.55
========= ========= ========= =========
Basic - pro forma ................... $ 0.39 $ 0.33 $ 0.63 $ 0.51
========= ========= ========= =========
Diluted - as reported ............... $ 0.40 $ 0.34 $ 0.66 $ 0.53
========= ========= ========= =========
Diluted - pro forma ................. $ 0.38 $ 0.32 $ 0.62 $ 0.49
========= ========= ========= =========
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.
7. 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 credit facility entered into on June 6, 2002.
Prior to January 1, 2003, SDM was a guarantor subsidiary of the Company's
Senior Subordinated Notes. Effective January 1, 2003, SDM was merged into SDS.
Prior period condensed consolidating financial information has been adjusted to
reflect this merger.
Below are the unaudited condensed consolidating balance sheets as of March
31, 2003 and September 30, 2002, statements of operations for the three and six
months ended March 31, 2003 and 2002, and statements of cash flows for the six
months ended March 31, 2003 and 2002, of Sybron Dental Specialties, Inc. and its
subsidiaries, reflecting the subsidiary guarantors of the Senior Subordinated
Notes.
Certain general corporate expenses have been allocated to the
subsidiaries. As a matter of course, the Company retains certain assets and
liabilities at the corporate level that are not allocated to the subsidiaries
including, but not limited to, certain employee benefit, insurance and tax
liabilities. 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.
9
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2003
---------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents............... $ 552 $ (1,576) $ 28,334 $ -- $ 27,310
Account receivable, net............ 48 51,318 40,592 -- 91,958
Inventories, net................... -- 57,524 27,601 -- 85,125
Other current assets............... 12,199 3,808 5,095 -- 21,102
--------- ----------- --------- --------- ---------
Total current assets.......... 12,799 111,074 101,622 -- 225,495
Property, plant and equipment, net.... 8,622 25,155 41,042 -- 74,819
Goodwill.............................. -- 192,976 52,625 -- 245,601
Intangible assets, net................ 1,004 16,280 169 -- 17,453
Deferred income taxes................. 9,703 -- -- -- 9,703
Investment in subsidiaries
and intercompany balances.......... (212,427) 197,967 91,749 (77,289) --
Other assets.......................... 7,892 11,513 2,383 -- 21,788
--------- ----------- --------- --------- ---------
Total assets.................. $(172,407) $ 554,965 $ 289,590 $ (77,289) $ 594,859
========= =========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Account payable.................... $ 159 $ 9,562 $ 5,121 $ -- $ 14,842
Current portion of long-term debt.. -- 1,480 3,811 -- 5,291
Income taxes payable............... (2,426) 8,437 7,367 (100) 13,278
Accrued expenses and other
current liabilities............. 18,270 18,683 16,255 -- 53,208
--------- ---------- --------- --------- ---------
Total current liabilities..... 16,003 38,162 32,554 (100) 86,619
Long-term debt........................ 19,000 135,356 3,996 -- 158,352
Senior subordinated notes............. 150,000 -- -- -- 150,000
Deferred income taxes................. 17,893 -- 658 -- 18,551
Other liabilities..................... 18,106 175 695 -- 18,976
Commitments and contingent
liabilities........................ -- -- -- -- --
Stockholders' equity (deficit):
Preferred stock................. -- -- -- -- --
Common stock.................... 4,271 53 7,081 (11,025) 380
Additional paid-in capital............ (279,910) 276,712 137,504 (63,467) 70,839
Retained earnings (accumulated deficit) (100,520) 102,646 94,335 (2,697) 93,764
Accumulated other
comprehensive income (loss)........ (17,250) 1,861 12,767 -- (2,622)
--------- ---------- --------- --------- ---------
Total stockholders' equity
(deficit)................... (393,409) 381,272 251,687 (77,189) 162,361
--------- ---------- --------- --------- ---------
Total liabilities and
stockholders' equity
(deficit)................... $(172,407) $ 554,965 $ 289,590 $ (77,289) $ 594,859
========= ========== ========= ========= =========
10
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2002
------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents...................... $ (4) $ (3,928) $ 16,584 $ -- $ 12,652
Account receivable, net................... 298 46,881 33,300 -- 80,479
Inventories, net.......................... -- 64,416 25,269 -- 89,685
Other current assets...................... 11,852 6,907 3,941 -- 22,700
--------- ---------- --------- --------- ---------
Total current assets................. 12,146 114,276 79,094 -- 205,516
Property, plant and equipment, net........... 9,408 26,189 39,905 -- 75,502
Goodwill..................................... -- 192,611 48,794 -- 241,405
Intangible assets, net....................... 1,004 16,527 180 -- 17,711
Deferred income taxes........................ 6,890 -- -- -- 6,890
Investment in subsidiaries
and intercompany balances................. (186,932) 185,948 88,935 (87,951) --
Other assets................................. 8,552 11,749 2,132 -- 22,433
--------- ---------- --------- --------- ---------
Total assets......................... $(148,932) $ 547,300 $ 259,040 $ (87,951) $ 569,457
========== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Account payable........................... $ 873 $ 8,476 $ 5,578 $ -- $ 14,927
Current portion of long-term debt......... -- 1,833 1,360 -- 3,193
Income taxes payable...................... (2,304) 35 5,281 377 3,389
Accrued expenses and other
current liabilities.................... 15,092 18,855 14,909 -- 48,856
--------- ---------- --------- --------- ---------
Total current liabilities............ 13,661 29,199 27,128 377 70,365
Long-term debt............................... 47,000 135,806 4,838 -- 187,644
Senior subordinated notes.................... 150,000 -- -- -- 150,000
Deferred income taxes........................ 17,728 -- 606 -- 18,334
Other liabilities............................ 11,183 173 615 -- 11,971
Commitments and contingent
liabilities............................. -- -- -- -- --
Stockholders' equity (deficit):
Preferred stock........................ -- -- -- -- --
Common stock........................... 4,271 53 7,081 (11,025) 380
Additional paid-in capital................... (280,420) 289,091 135,787 (74,129) 70,329
Retained earnings (accumulated deficit)...... (99,873) 94,242 77,510 (3,287) 68,592
Accumulated other
comprehensive income (loss)............... (12,482) (1,264) 5,475 113 (8,158)
--------- ---------- --------- --------- ---------
Total stockholders' equity (deficit) (388,504) 382,122 225,853 (88,328) 131,143
--------- ---------- --------- --------- ---------
Total liabilities and
stockholders' equity (deficit).... $(148,932) $ 547,300 $ 259,040 $ (87,951) $ 569,457
========== ========== ========= ========= =========
11
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Net sales ..................... $ -- $ 78,582 $ 59,109 $ (3,424) $ 134,267
Cost of sales ................. 266 31,397 31,678 (3,424) 59,917
--------- --------- --------- --------- ---------
Gross profit .................. (266) 47,185 27,431 -- 74,350
Selling, general and
administrative expenses .... 5,695 24,570 13,978 23 44,266
--------- --------- --------- --------- ---------
Operating income (loss) ...... (5,961) 22,615 13,453 (23) 30,084
Other income (expense):
Interest expense ........... (3,456) (1,865) (82) -- (5,403)
Other, net ................. 9,167 (7,735) (939) -- 493
--------- --------- --------- --------- ---------
Income (loss) before income
taxes ..................... (250) 13,015 12,432 (23) 25,174
Income taxes .................. (95) 5,695 4,025 (58) 9,567
--------- --------- --------- --------- ---------
Net income (loss) ............. $ (155) $ 7,320 $ 8,407 $ 35 $ 15,607
========= ========= ========= ========= =========
FOR THE THREE MONTHS ENDED MARCH 31, 2002
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Net sales ..................... $ -- $ 79,692 $ 47,293 $ (2,291) $ 124,694
Cost of sales ................. 225 28,328 27,843 (2,264) 54,132
--------- --------- --------- --------- ---------
Gross profit .................. (225) 51,364 19,450 (27) 70,562
Selling, general and
administrative expenses .... 6,523 24,533 11,074 (4) 42,126
--------- --------- --------- --------- ---------
Operating income (loss) ...... (6,748) 26,831 8,376 (23) 28,436
Other income (expense):
Interest expense ........... (1,318) (5,136) (36) -- (6,490)
Other, net ................. 8,117 (7,405) (974) -- (262)
--------- --------- --------- --------- ---------
Income before income taxes .... 51 14,290 7,366 (23) 21,684
Income taxes .................. 278 6,134 2,412 (367) 8,457
--------- --------- --------- --------- ---------
Net income (loss) ............. $ (227) $ 8,156 $ 4,954 $ 344 $ 13,227
========= ========= ========= ========= =========
FOR THE SIX MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Net sales ..................... $ -- $ 148,993 $ 113,398 $ (7,975) $ 254,416
Cost of sales ................. 522 62,001 60,943 (7,975) 115,491
--------- --------- --------- --------- ---------
Gross profit .................. (522) 86,992 52,455 -- 138,925
Selling, general and
administrative expenses .... 12,299 48,655 26,430 -- 87,384
--------- --------- --------- --------- ---------
Operating income (loss) ...... (12,821) 38,337 26,025 -- 51,541
Other income (expense):
Interest expense ........... (7,211) (3,604) (164) -- (10,979)
Other, net ................. 19,782 (17,829) (1,914) -- 39
--------- --------- --------- --------- ---------
Income (loss) before income
taxes ..................... (250) 16,904 23,947 -- 40,601
Income taxes .................. (95) 8,502 7,122 (100) 15,429
--------- --------- --------- --------- ---------
Net income (loss) ............. $ (155) $ 8,402 $ 16,825 $ 100 $ 25,172
========= ========= ========= ========= =========
12
FOR THE SIX MONTHS ENDED MARCH 31, 2002
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Net sales ..................... $ -- $ 136,116 $ 90,759 $ (4,416) $ 222,459
Cost of sales ................. 454 47,105 54,007 (4,362) 97,204
--------- --------- --------- --------- ---------
Gross profit .................. (454) 89,011 36,752 (54) 125,255
Selling, general and
administrative expenses .... 10,328 44,893 22,115 (29) 77,307
--------- --------- --------- --------- ---------
Operating income (loss) ...... (10,782) 44,118 14,637 (25) 47,948
Other income (expense):
Interest expense ........... (2,421) (11,072) (110) -- (13,603)
Other, net ................. 13,941 (12,395) (1,907) -- (361)
--------- --------- --------- --------- ---------
Income before income taxes .... 738 20,651 12,620 (25) 33,984
Income taxes .................. 1,097 8,231 4,650 (724) 13,254
--------- --------- --------- --------- ---------
Net income (loss) ............. $ (359) $ 12,420 $ 7,970 $ 699 $ 20,730
========= ========= ========= ========= =========
13
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Cash flows provided by
operating activities ............. $ 6,064 $ 20,531 $ 12,842 $ 113 $ 39,550
Cash flows from investing activities:
Capital expenditures ............. -- (1,898) (958) -- (2,856)
Proceeds from sales of property,
plant, and equipment .......... -- 5,234 47 -- 5,281
Payments for intangibles ......... -- (646) (23) -- (669)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities ........ -- 2,690 (934) -- 1,756
Cash flows from financing activities:
Proceeds from credit facility .... 70,500 5,000 -- -- 75,500
Principal payments on credit
facility ...................... (98,500) (5,737) -- -- (104,237)
Proceeds from long-term debt ..... -- -- 3,259 -- 3,259
Principal payments on long-term
debt .......................... -- (88) (2,038) -- (2,126)
Payment of deferred financing fees -- (473) -- -- (473)
Cash received from exercise of
stock options ................. 451 -- -- -- 451
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ........ (27,549) (1,298) 1,221 -- (27,626)
Effect of exchange rate changes on
cash and cash equivalents ........ (3,454) 3,127 1,418 (113) 978
Net change in intercompany
balances ......................... 25,495 (22,698) (2,797) -- --
--------- --------- --------- --------- ---------
Net increase in cash and
cash equivalents ................. 556 2,352 11,750 -- 14,658
Cash and cash equivalents at
beginning of period .............. (4) (3,928) 16,584 -- 12,652
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period .................... $ 552 $ (1,576) $ 28,334 $ -- $ 27,310
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest ...................... $ 1,350 $ 10,657 $ 91 $ -- $ 12,098
========= ========= ========= ========= =========
Cash paid during the period for
income taxes .................. $ 10 $ 367 $ 4,999 $ -- $ 5,376
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2002
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Cash flows provided by (used in)
operating activities .................. $ (10,564) $ 16,109 $ 11,214 $ (24) $ 16,735
Cash flows from investing activities:
Capital expenditures .................. (834) (2,960) (3,260) -- (7,054)
Proceeds from sales of property,
plant, and equipment ............... -- 502 3 -- 505
Net payments for businesses acquired .. -- (8,235)
-- -- (8,235)
Payments for intangibles .............. -- (622) (549) -- (1,171)
--------- --------- --------- --------- ---------
Net cash used in
investing activities ............. (834) (11,315) (3,806) -- (15,955)
Cash flows from financing activities:
Proceeds from credit facility ......... 134,000 -- -- 134,000
Principal payments on credit
facility ........................... (101,000) (28,558) -- -- (129,558)
Proceeds from long-term debt .......... -- -- 749 -- 749
Principal payments on long-term
debt ............................... -- (461) (81) -- (542)
Proceeds from the exercise of
stock option ....................... 481 -- -- -- 481
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............. 33,481 (29,019) 668 -- 5,130
Effect of exchange rate changes on
cash and cash equivalents ............. 520 (288) (842) 24 (586)
Net change in intercompany
balances .............................. (23,107) 21,108 1,999 -- --
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ...................... (504) (3,405) 9,233 -- 5,324
Cash and cash equivalents at
beginning of period ................... 490 1,726 6,103 -- 8,319
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period ......................... $ (14) $ (1,679) $ 15,336 $ -- $ 13,643
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest ........................... $ 2,299 $ 11,438 $ 51 $ -- $ 13,788
========= ========= ========= ========= =========
Cash paid during the period for
income taxes ....................... $ 9,204 $ -- $ 3,307 $ -- $ 12,511
========= ========= ========= ========= =========
8. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations. SFAS
No. 141 specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from goodwill.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized to earnings, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121 and subsequently,
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of October 1, 2002. Upon adoption of SFAS No. 142, the Company
was required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS No. 141 for recognition separate from goodwill.
Intangible Assets
The Company was required to reassess the useful lives and residual values
of all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset was identified as having an indefinite useful life, the Company
was required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value
15
of an intangible asset with an indefinite life. Any impairment loss is to be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period. The Company did not
record any impairment charge upon the adoption of SFAS No. 142.
Goodwill
In connection with the SFAS No. 142 transitional goodwill impairment
evaluation, SFAS No. 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption, October 1, 2002. To accomplish this, the Company identified its
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of October 1, 2002. The Company
then determined the fair value of each reporting unit and compared it to the
carrying amount of the reporting unit. The Company has determined that no
goodwill impairment was indicated as of October 1, 2002.
The Company recorded amortization expense of goodwill and certain other
intangible assets in the amount of $2,268 and $4,441 for the three and six
months ended March 31, 2002. No amortization expense was recorded for goodwill
or those certain other intangible assets deemed to have indefinite lives for the
three month or six month periods ended March 31, 2003 because those items are
no longer being amortized under the provisions of SFAS No. 142.
Tables
The following table reconciles previously reported net income as if the
provisions of SFAS No. 142 were in effect in fiscal 2002:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, 2002 ENDED MARCH 31, 2002
-------------------- --------------------
Reported net income............................. $ 13,227 $ 20,730
Add back: goodwill and other intangibles
amortization, net of taxes................... 1,383 2,709
---------- ---------
Adjusted net income........................... $ 14,610 $ 23,439
Reported basic earnings per share............... $ 0.35 $ 0.55
Add back: goodwill amortization, net of taxes... 0.04 0.07
---------- ---------
Adjusted basic earnings per share............. $ 0.39 $ 0.62
Reported diluted earnings per share............. $ 0.34 $ 0.53
Add back: goodwill amortization, net of taxes... 0.04 0.07
---------- ---------
Adjusted diluted earnings per share........... $ 0.38 $ 0.60
SFAS No. 141 and SFAS No. 142 also require that the Company disclose the
following information related to its intangible assets still subject to
amortization. The following table details the balances of the amortizable
intangible assets as of March 31, 2003:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Proprietary technology.. $ 14,687 $ 8,679 $ 6,008
Other................... $ 16,347 $ 14,612 $ 1,735
Additionally, SFAS No. 142 requires that the Company disclose the
estimated intangible asset amortization for each of the five twelve-month
periods subsequent to March 31, 2003. The following table represents the
estimated amortization (calculated as of March 31, 2003) for each of the five
twelve-month periods indicated:
TWELVE-MONTH PERIODS ENDING MARCH 31,
-----------------------------------------------
2004 2005 2006 2007 2008
-------- -------- ------ ------ ------
Amortization of intangible assets..... $ 1,143 $ 958 $ 790 $ 729 $ 689
16
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
transaction, and makes other non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002. Accordingly, the Company will reclassify the extraordinary item
reported in the third quarter of fiscal year 2002 and prior year extraordinary
losses to refinancing expenses and income taxes that were recorded as the result
of a loss from the extinguishment of indebtedness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When we use the terms "SDS," "we," "us," "Company," or "our" in this
report, unless the context requires otherwise, we are referring to Sybron Dental
Specialties, Inc. and its subsidiaries and their respective predecessors that
comprised Apogent's dental business prior to the spin-off. Our fiscal year ends
on September 30 and, accordingly, all references to quarters refer to our fiscal
quarters. The quarters ended March 31, 2003 and 2002 refer to the second
quarters of fiscal 2003 and 2002, respectively.
GENERAL
We are a leading global manufacturer and marketer of a broad range of
consumable dental products and related small equipment, as well as a
manufacturer and distributor of products for use in infection prevention in both
the medical and dental markets. On October 1, 2002, we consolidated our
Infection Prevention segment into our Professional Dental business segment to
reduce costs and coordinate marketing efforts for our infection prevention
products. As a result of this consolidation, our subsidiaries now operate in two
business segments:
- Professional Dental. We develop and manufacture a variety of
branded dental consumable products and consumable infection
prevention products sold through independent distributors to
the dental industry worldwide as well as to medical markets;
and
- Orthodontics. We develop, manufacture, and market an array of
consumable orthodontic products and endodontic products to
orthodontic and endodontic specialists worldwide.
All financial information presented in this quarterly report combines the
historical information of the Infection Prevention and Professional Dental
business segments into the Professional Dental reporting segment.
Our primary subsidiaries in each of our business segments are as follows:
PROFESSIONAL DENTAL ORTHODONTICS
------------------- ------------
Kerr Corporation Ormco 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.
Metrex Research Corporation
It is our goal to become a premier global supplier of high quality dental
products. Key elements of our strategy to achieve this goal are: a focus on
developing innovative products, a consistent effort to improve our efficiency, a
constant attempt to increase revenue opportunities within the existing
marketplace and expand the marketplace through product innovation, and the
pursuit of strategic acquisitions, while continuing to focus on debt reduction
strategies.
RESULTS OF OPERATIONS
OVERVIEW
Our net sales for the quarter and six month periods ended March 31, 2003
increased by 7.7% and 14.4%, respectively, from the corresponding fiscal 2002
periods. Of the 7.7% increase in net sales for the quarter ended March 31, 2003
from the prior year period, favorable currency fluctuations accounted for 5.3%
of the increase, internal growth was 1.1% of the increase with the remainder
coming primarily from our one acquisition last year, Orascoptic. Of the 14.4%
increase in net sales for the six month period ended March 31, 2003,
17
internal growth accounted for 7.3% of the increase, favorable foreign currency
fluctuations accounted for 4.3% of the increase in net sales, and the remainder
was primarily from our acquisition of Orascoptic. Operating income for the
second quarter and first six months of fiscal 2003 increased by 5.8% and 7.5%,
respectively, from the corresponding fiscal 2002 periods.
Our operating income for our second fiscal 2003 quarter was $30.1
million. In the corresponding quarter of our 2002 fiscal year, our operating
income was $28.4 million. Our fiscal 2002 second quarter operating income
included a $2.3 million charge of amortization of goodwill and other intangible
assets, which are not being amortized this year due to the adoption of SFAS No.
142 on October 1, 2002. Operating income for the first six months of fiscal 2003
and 2002 was $51.5 million and $47.9 million, respectively. For the first six
months of fiscal 2002, operating income included a charge of $4.5 million of
amortization of goodwill and other intangible assets, which are not being
amortized this fiscal year.
Our domestic sales for the quarter and six month periods ended March 31,
2003 increased by 1.6% and 11.2%, respectively, from the corresponding fiscal
2002 periods. International sales increased by 16.8% and 18.9% for the quarter
and year to date periods, respectively, from the corresponding fiscal 2002
periods. Without the effect of currency fluctuations, international sales growth
would have been 3.6% and 8.4% for the quarter and year to date periods,
respectively, from the corresponding fiscal 2002 periods.
We believe that our increase in revenue is a result, in part, of the
changes we made throughout our organization in the second half of the last
fiscal year, the introduction of our new LED curing light and the increased
average tenure of our sales force in the United States for our Orthodontics
segment. We expect to see continued revenue growth this year, but do not expect
it to be at the same level as our first six months of fiscal 2003. In fact, we
anticipate the revenue related to sales of the LED curing light to trend
downwards in the last half of fiscal 2003 and we expect the weakening economy in
Latin America and Asia, as well as regulatory health reimbursement programs in
Germany, to have a somewhat negative impact on the Orthodontic segment sales for
the rest of our 2003 fiscal year.
The reported net sales of our Professional Dental and Orthodontics
segments were impacted by the transfer we made between those segments at the
commencement of the 2003 fiscal year, of our stainless steel endodontic product
line. While the responsibility for the sales and marketing of those products was
handled during fiscal year 2002 by the Orthodontics segment, the net sales were
reported in our Professional Dental business segment. As a result of this
transfer, the operating results of the Professional Dental segment for fiscal
year 2003 reflects the decrease of the sales of the endodontic product line from
the prior year fiscal period, while the operating results of the Orthodontic
segment reflects the increase in net sales in fiscal year 2003 from the prior
year fiscal period. While the transfer impacted the respective results of
operations we reported for the Professional Dental and Orthodontics segments for
fiscal 2003, there was no impact on our consolidated results of operations for
the quarter or year to date periods. We did not adjust the prior period
information reported for our Professional Dental and Orthodontics segments to
reflect the transfer of the endodontic product line.
During the second quarter of fiscal 2003, we transitioned the handling of
orders and shipping of product from two Professional Dental locations (Germany
and France) in Europe to our Hawe Neos facility in Switzerland and closed those
locations. The Hawe facility is handling orders in numerous languages and
shipping products to numerous points throughout Europe. We anticipate closing
the Professional Dental European office located in the United Kingdom during the
third quarter of this fiscal year. We have not experienced, nor do we presently
expect any disruptions in our ability to accept and ship orders, but we cannot
be certain until the closings and the integration by Hawe is complete.
QUARTER ENDED MARCH 31, 2003 COMPARED TO THE QUARTER ENDED MARCH 31, 2002
NET SALES
FISCAL FISCAL
NET SALES: 2003 2002
-------- --------
(IN THOUSANDS)
Professional Dental ..... $ 76,815 $ 78,325
Orthodontics ............ 57,452 46,369
-------- --------
Total Net Sales ......... $134,267 $124,694
======== ========
Overall Company. Net sales for the second quarter of fiscal 2003 increased
by $9.6 million or 7.7% from the corresponding fiscal 2002 quarter.
Professional Dental. Decreased net sales in the Professional Dental
segment resulted primarily from: (a) decreased net sales of existing products
(approximately $6.7 million) and (b) the transfer of the endodontic product
sales to the Orthodontics segment
18
(approximately $2.7 million). The decrease in net sales was partially offset by:
(a) favorable foreign currency fluctuations (approximately $3.9 million), (b)
net sales of new products (approximately $2.7 million), (c) net sales of
products from an acquired company (approximately $1.0 million) and (d) reduced
rebate expense (approximately $0.3 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $6.0
million), (b) the transfer of the endodontic product sales from the Professional
Dental segment (approximately $2.8 million), (c) favorable foreign currency
fluctuations (approximately $2.7 million) and (d) net sales of new products
(approximately $1.3 million). The increase in net sales was partially offset by
increased rebate expense (approximately $1.7 million).
GROSS PROFIT
FISCAL PERCENT OF FISCAL PERCENT OF
GROSS PROFIT: 2003 SALES 2002 SALES
------------ --------- ----- --------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental $ 42,470 55.3% $ 45,332 57.9%
Orthodontics........ 31,880 55.5 25,230 54.4
---------- ----- --------- -----
Total Gross Profit.. $ 74,350 55.4% $ 70,562 56.6%
========== ===== ========= =====
Overall Company. Gross profit for the quarter ended March 31, 2003
increased by $3.8 million or 5.4% from the corresponding fiscal 2002 quarter.
Professional Dental. Decreased gross profit in the Professional Dental
segment resulted primarily from: (a) decreased net sales of existing products
(approximately $4.0 million), (b) the transfer of the endodontic product line
from the Professional Dental segment to the Orthodontics segment (approximately
$1.7 million), (c) an unfavorable product mix (approximately $1.4 million) and
(d) unfavorable manufacturing variances (approximately $0.5 million). The
decrease in gross profit was partially offset by: (a) favorable foreign currency
fluctuations (approximately $2.2 million), (b) unit volume relating to new
products (approximately $1.5 million), (c) margins relating to net sales of
products from an acquired company (approximately $0.5 million), (d) reduced
rebate expense (approximately $0.3 million), (e) inventory reserve adjustments
(approximately $0.1 million, primarily due to a decrease in obsolescence) and
(f) decreased royalty expense (approximately $0.1 million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $3.3
million), (b) favorable foreign currency fluctuations (approximately $2.7
million), (c) the transfer of the endodontic product line from the Professional
Dental segment to the Orthodontics segment (approximately $1.7 million), (d)
unit volume relating to new products (approximately $0.8 million), (e) inventory
reserve adjustments (approximately $0.7 million, of which approximately $0.6
million is due to a decrease in obsolescence and physical inventory adjustments
of approximately $0.2 million, partially offset by approximately $0.1 million in
standard cost revisions) and (f) a favorable product mix (approximately $0.3
million). The increase in gross profit was partially offset by: (a) increased
rebate expense (approximately $1.5 million), (b) unfavorable manufacturing
variances (approximately $1.1 million) and (c) increased royalty expense
(approximately $0.2 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SELLING, GENERAL AND FISCAL PERCENT OF FISCAL PERCENT OF
ADMINISTRATIVE EXPENSES: 2003 SALES 2002 SALES
----------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental.......... $ 24,793 32.3% $ 25,140 32.1%
Orthodontics................. 19,473 33.9 16,986 36.6
---------- ---- ---------- ----
Total Selling, General and
Administrative Expenses.. $ 44,266 33.0% $ 42,126 33.8%
========== ==== ========== ====
Overall Company. Selling, general and administrative expenses for the
quarter ended March 31, 2003 increased by $2.1 million or 5.1% from the
corresponding fiscal 2002 quarter. As of October 1, 2002, we adopted SFAS No.
142 "Goodwill and Other Intangible Assets" and have ceased the amortization of
goodwill and other intangible assets resulting in decreased amortization expense
from the corresponding prior year period of approximately $2.3 million.
Professional Dental. Decreased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
decreased amortization expense of goodwill and other intangible assets
(approximately $1.7 million), (b) decreased selling and marketing expenses
(approximately $0.5 million), (c) decreased general and administrative expenses
(approximately $0.1 million) and (d) decreased research and development expenses
(approximately $0.1 million). The decrease in selling, general and
19
administrative expenses was partially offset by: (a) an increase in expenses
relating to foreign currency fluctuations (approximately $1.5 million) and (b)
increased expenses of an acquired company (approximately $0.5 million).
Orthodontics. Increased selling, general and administrative expenses in
the Orthodontics segment resulted primarily from: (a) increased selling and
marketing expenses (approximately $1.7 million), (b) increased expenses related
to foreign currency fluctuations (approximately $0.9 million), (c) increased
research and development expenses (approximately $0.3 million) and (d) increased
general and administrative expenses (approximately $0.2 million). The increase
in selling, general and administrative expenses was partially offset by a
decrease in amortization expense of goodwill and other intangible assets
(approximately $0.6 million).
OPERATING INCOME
FISCAL PERCENT OF FISCAL PERCENT OF
OPERATING INCOME: 2003 SALES 2002 SALES
---------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental...... $ 17,677 23.0% $ 20,192 25.8%
Orthodontics............. 12,407 21.6 8,244 17.8
---------- ---- ---------- ----
Total Operating Income... $ 30,084 22.4% $ 28,436 22.8%
========== ==== ========== ====
As a result of the foregoing, operating income in the second quarter of
fiscal 2003 increased by 5.8% or $1.6 million from operating income in the
corresponding quarter of fiscal 2002.
INTEREST EXPENSE
Interest expense was $5.4 million in the second quarter of fiscal 2003, a
decrease of $1.1 million from the corresponding fiscal 2002 quarter. The
decrease resulted from reduced average debt balances in the second quarter of
fiscal 2003 and reduced average interest rates on our credit facility.
INCOME TAXES
Taxes on income in the second quarter of fiscal 2003 were approximately
$9.6 million, an increase of $1.1 million from the corresponding fiscal 2002
quarter. The increase was primarily due to higher taxable earnings, partially
offset by a decrease in the effective tax rate for the quarter from 39.0% in
fiscal 2002 to 38.0% in fiscal 2003.
NET INCOME
As a result of the foregoing, we had net income of $15.6 million in the
quarter ended March 31, 2003, as compared to net income of $13.2 million in the
corresponding fiscal 2002 period.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of goodwill (prior to October 1, 2002) and
other intangible assets is allocated among the cost of sales, selling, general
and administrative expenses and other expense. Amortization of goodwill and
other intangible assets decreased $2.3 million in the second quarter of fiscal
2003 compared to the same period in the prior year primarily due to our
discontinuing the amortization of goodwill and certain other intangible assets
in accordance SFAS No. 142. Depreciation increased by $0.5 million compared to
the same period in the prior year.
SIX MONTHS ENDED MARCH 31, 2003 COMPARED TO THE SIX MONTHS ENDED MARCH 31,
2002
NET SALES
FISCAL FISCAL
NET SALES: 2003 2002
--------- ---------- ----------
(IN THOUSANDS)
Professional Dental.... $ 147,743 $ 136,011
Orthodontics........... 106,673 86,448
---------- ----------
Total Net Sales........ $ 254,416 $ 222,459
========== ==========
20
Overall Company. Net sales for the first six months of fiscal 2003
increased by $32.0 million or 14.4% from the corresponding fiscal 2002 period.
Professional Dental. Increased net sales in the Professional Dental
segment resulted primarily from: (a) net sales of new products (approximately
$7.9 million), (b) favorable foreign currency fluctuations (approximately $5.7
million), (c) net sales of products from an acquired company (approximately $4.8
million) and (d) reduced rebate expense (approximately $0.5 million). The
increase in net sales was partially offset by: (a) the transfer of the
endodontic product sales to the Orthodontics segment (approximately $6.4
million) and (b) decreased net sales of existing products (approximately $0.7
million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately
$11.3 million), (b) the transfer of the endodontic product sales from the
Professional Dental segment (approximately $5.3 million), (c) favorable foreign
currency fluctuations (approximately $3.9 million) and (d) net sales of new
products (approximately $1.9 million). The increase in net sales was partially
offset by increased rebate expense (approximately $2.2 million).
GROSS PROFIT
FISCAL PERCENT OF FISCAL PERCENT OF
GROSS PROFIT: 2003 SALES 2002 SALES
------------ ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental $ 80,873 54.7% $ 78,159 57.5%
Orthodontics........ 58,052 54.4 47,096 54.5
---------- ----- --------- -----
Total Gross Profit.. $ 138,925 54.6% $ 125,255 56.3%
========== ===== ========= =====
Overall Company. Gross profit for the first six months ended March 31,
2003 increased by $13.7 million or 10.9% from the corresponding fiscal 2002
period.
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) unit volume relating to new products
(approximately $4.4 million), (b) favorable foreign currency fluctuations
(approximately $3.2 million), (c) margins relating to net sales of products from
an acquired company (approximately $2.9 million) and (d) reduced rebate expense
(approximately $0.5 million). The increase in gross profit was partially offset
by: (a) the transfer of the endodontic product line from the Professional Dental
segment to the Orthodontics segment (approximately $4.1 million), (b) an
unfavorable product mix (approximately $2.4 million), (c) unfavorable
manufacturing variances (approximately $1.3 million), (d) decreased net sales of
existing products (approximately $0.3 million) and (e) inventory reserve
adjustments (approximately $0.2 million, of which approximately $0.1 million is
due to an increase in obsolescence and approximately $0.1 million is due to
physical inventory adjustments).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $5.8
million), (b) favorable foreign currency fluctuations (approximately $3.9
million), (c) the transfer of the endodontic product line from the Professional
Dental segment to the Orthodontics segment (approximately $3.0 million), (d)
unit volume relating to new products (approximately $1.2 million), (e) inventory
reserve adjustments (approximately $0.7 million, of which approximately $0.9
million is due to an decrease in obsolescence, partially offset by standard cost
revisions of approximately $0.2 million) and (f) a favorable product mix of
approximately $0.3 million. The increase in gross profit was partially offset
by: (a) increased rebate expense (approximately $2.2 million), (b) unfavorable
manufacturing variances (approximately $1.1 million) and (c) increased royalty
expense (approximately $0.6 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SELLING, GENERAL AND FISCAL PERCENT OF FISCAL PERCENT OF
ADMINISTRATIVE EXPENSES: 2003 SALES 2002 SALES
----------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental.......... $ 49,422 33.5% $ 43,997 32.3%
Orthodontics................. 37,962 35.6 33,310 38.5
---------- ---- ---------- ----
Total Selling, General and
Administrative Expenses.. $ 87,384 34.3% $ 77,307 34.8%
========== ==== ========== ====
Overall Company. Selling, general and administrative expenses for the
first six months of fiscal 2003 increased by $10.1 million or 13.0% from the
corresponding fiscal 2002 period. As of October 1, 2002, we adopted SFAS No. 142
"Goodwill and Other Intangible
21
Assets" and have ceased the amortization of goodwill and other intangible assets
resulting in decreased amortization expense from the corresponding prior year
period of approximately $4.4 million.
Professional Dental. Increased selling, general and administrative
expenses in the Professional Dental segment resulted primarily from: (a)
increased general and administrative expenses (approximately $2.5 million), (b)
expenses of an acquired company (approximately $2.3 million), (c) an increase in
expenses relating to foreign currency fluctuations (approximately $2.0 million)
and (d) increased selling and marketing expenses (approximately $1.9 million).
The increase in selling, general and administrative expenses was partially
offset by: (a) decreased amortization expense of goodwill and other intangible
assets (approximately $3.2 million) and (b) decreased research and development
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 $2.9 million), (b) increased general and
administrative expenses (approximately $1.6 million), (c) increased expenses
related to foreign currency fluctuations (approximately $1.2 million) and (d)
increased research and development expenses (approximately $0.3 million). The
increase in selling, general and administrative expenses was partially offset by
a decrease in amortization expense of goodwill and other intangible assets
(approximately $1.3 million).
OPERATING INCOME
FISCAL PERCENT OF FISCAL PERCENT OF
OPERATING INCOME: 2003 SALES 2002 SALES
---------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental...... $ 31,451 21.3% $ 34,162 25.1%
Orthodontics............. 20,090 18.8 13,786 15.9
---------- ---- ---------- ----
Total Operating Income... $ 51,541 20.3% $ 47,948 21.6%
========== ==== ========== ====
As a result of the foregoing, operating income in the first six months of
fiscal 2003 increased by 7.5% or $3.6 million from operating income in the
corresponding fiscal 2002 period.
INTEREST EXPENSE
Interest expense was $11.0 million in the first six months of fiscal 2003,
a decrease of $2.6 million from the corresponding fiscal 2002 period. The
decrease resulted from reduced average debt balances in the first half of fiscal
2003 and reduced average interest rates on our credit facility.
INCOME TAXES
Taxes on income in the first six months of fiscal 2003 were approximately
$15.4 million, an increase of $2.2 million from the corresponding fiscal 2002
period. The increase was primarily due to higher taxable earnings, partially
offset by a decrease in the effective tax rate for the first six months from
39.0% in fiscal 2002 to 38.0% in the corresponding fiscal 2003 period.
NET INCOME
As a result of the foregoing, we had net income of $25.2 million in the
first six months of fiscal 2003, as compared to net income of $20.7 million in
the corresponding fiscal 2002 period.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of goodwill (prior to October 1, 2002) and
other intangible assets is allocated among the cost of sales, selling, general
and administrative expenses and other expense in the first quarter of fiscal
2003. Amortization of goodwill and other intangible assets decreased $4.4
million in the first six months of fiscal 2003 compared to the same period in
the prior year primarily due to our discontinuing the amortization of goodwill
and certain other intangible assets in accordance SFAS No. 142. Depreciation
increased by $0.5 million compared to the same period in the prior year.
CRITICAL ACCOUNTING POLICIES
22
Pension and Other Postretirement Benefits - We are examining our current
estimates and judgments on historical experience currently used in determining,
among others, our discount rates, average medical and compensation percentage
increases and the expected long-term rate of return on assets currently used in
the determination of pension liabilities and assets. We anticipate that upon
completion of this examination, we will see an increase in pension expense and
additional payments to be made to our pension plan by the end of our third
fiscal quarter of 2003.
Please refer to our Annual Report on Form 10-K for the fiscal year ended
September 30, 2002 and subsequent First Quarter Report on Form 10-Q for a more
complete discussion of our critical accounting policies.
NEW ACCOUNTING PRONOUNCEMENTS
On December 31, 2002 the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 amends the
disclosure requirements in SFAS No. 123 for stock-based compensation for annual
periods ending after December 15, 2002 and for interim periods beginning after
December 15, 2002, including those companies that continue to recognize
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In addition, SFAS No. 148 provides three alternative transition
methods for companies that choose to adopt the fair value measurement provisions
of SFAS No. 123. For a complete explanation on the valuation of our stock-based
compensation consistent with the method prescribed by SFAS No. 123, please refer
to the notes to the consolidated financial statements included in our annual
report for the fiscal year ended September 30, 2002. We are currently reviewing
whether or not we will adopt the fair value method of accounting for stock
options.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The new guidance amends SFAS No. 133 for decisions made: as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS No. 133, in connection with other FASB projects dealing with financial
instruments, and regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components.
SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. The guidance should be applied prospectively.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective
effective dates. In addition, certain provisions relating to forward purchases
or sales of "when-issued" securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003.
We are currently assessing, but have not yet determined the impact of SFAS
No. 149 on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We intend to fund our capital expenditure requirements (primarily related
to the purchase of machinery and equipment), working capital requirements
(primarily related to inventory and accounts receivable), acquisitions of
various businesses and product lines, principal and interest payments on our
Credit Facility (defined below), obligations under the Sale/Leaseback (defined
below), restructuring expenditures, other liabilities and periodic expansion of
facilities, to the extent available, with funds provided by operations and
short-term borrowings under the Revolver (defined below). While cash provided
from operating activities may be impacted by a variety of factors such as lower
revenues, an increase in expenses 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 Revolver (defined below), 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 this will be the
case. To the extent that funds are not available from these sources,
particularly with respect to our acquisition strategy, we would have to raise
additional capital in another manner or curtail our acquisition strategy.
23
It is currently our intent to reduce total debt and to continue to pursue
our acquisition strategy when those acquisitions appear to be in the best
interest of the stockholders, taking into account our level of debt and interest
expense. If significant acquisition opportunities become available, of which
there can be no assurance, we may require financing beyond the capacity of our
Credit Facility (defined below). In addition, certain acquisitions previously
completed contain "earnout provisions" requiring further payments in the future
if certain financial results are achieved by the acquired companies.
The statements contained in the immediately preceding paragraph concerning
our intent to continue to pursue our acquisition strategy are forward-looking
statements. Our ability to continue our acquisition strategy is subject to a
number of uncertainties, including, but not limited to, our ability to raise
capital beyond the capacity of our credit facilities and the availability of
suitable acquisition candidates at reasonable prices.
Approximately $39.5 million of cash was generated from operating
activities in the first six months of fiscal 2003, as compared to approximately
$16.7 million from the same period of the prior year. The approximate $22.8
million increase in cash flows from operations was primarily due to: (a) a
decrease in the net change in inventories from the prior year period of
approximately $14.0 million, (b) an increase in the net change of income taxes
payable from the prior year period of approximately $10.9 million, (c) an
increase in the net change in accrued payroll and employee benefits from the
prior year period of approximately $6.9 million, (d) a decrease in the net
change in prepaid expenses and other current assets from the prior year period
of approximately $5.9 million, (e) an increase in the net change in accounts
payable from the prior year period of approximately $4.7 million, (f) increased
earnings from the prior year period of approximately $4.4 million, (g) an
increase in the net change in other current liabilities from the prior year
period of approximately $4.4 million, (h) an increase in the net change in other
assets and liabilities of approximately $1.2 million from the prior year period,
(i) an increase in depreciation expense from the prior year period of
approximately $0.5 million and (j) an increase in the amortization of deferred
financing fees of approximately $0.4 million from the prior year period. The
increase in cash flows from operations were partially offset by the following:
(a) an increase in the net change in accounts receivable from the prior year
period of approximately $17.0 million, (b) a decrease in the net change in
deferred income taxes from the prior year period of approximately $6.3 million,
(c) a decrease in amortization expense of goodwill and other intangible assets
from the prior year period of approximately $4.4 million, (d) a decrease in the
net change in the restructuring reserve of approximately $1.5 million, (e) a
decrease in the net change in accrued interest of approximately $0.7 million,
(f) a decrease in the net change in the loss (gain) on sales of property, plant
and equipment from the prior year period of approximately $0.2 million, (g) a
decrease in the provision for losses on doubtful receivables from prior year
period of approximately $0.2 million, (h) a decrease in inventory provisions
from the prior year period of approximately $0.1 million, and (i) a decrease in
the tax benefit from issuance of our common stock under our employee stock
option plan of approximately $0.1 million from the prior period.
Approximately $1.8 million of cash was provided by investing activities in
the first six months of fiscal year 2003, an increase of approximately $17.7
million from the same period of the prior year. The increase was primarily due
to: (a) a decrease in payments for acquisitions from the prior year period of
approximately $8.2 million, (b) an increase in proceeds from the sales of
property, plant and equipment from the prior year period of approximately $4.8
million, (c) a decrease in capital expenditures of approximately $4.2 million
from the prior year period and (d) a decrease in the net payments for
intangibles from the prior year period of approximately $0.5 million.
Approximately $27.6 million of cash was used in financing activities in
the first six months of fiscal 2003, a decrease of approximately $32.8 million
from the prior year period. The decrease was primarily due to: (a) a decrease in
the net loan proceeds of approximately $32.3 million from the prior year period,
and (b) an increase in deferred financing fees from the prior year period of
approximately $0.5 million.
CREDIT FACILITIES AND SENIOR SUBORDINATED NOTES
On June 6, 2002, we terminated our then existing $450.0 million credit
facility and entered into a $350.0 million syndicated credit facility for which
Credit Suisse First Boston is the administrative agent. The credit facility (the
"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 Specialties, Inc., Kerr Corporation, Ormco Corporation
and Pinnacle Products, Inc. (the "Domestic Borrowers") are joint and several
borrowers under the Revolver and the Term Loan B, and Hawe Neos Holdings S.A.
("Hawe Neos") is the borrower under the Euro Tranche. Sybron Dental Specialties
became a borrower under the Revolver and Term Loan B as a result of the merger
of Sybron Dental Management into Sybron Dental Specialties effective January 1,
2003; prior to that time Sybron Dental Management was one of the borrowers and
Sybron Dental Specialties was not. In addition to the 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
24
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 Credit Facility is jointly and severally guaranteed by Sybron Dental
Specialties, Inc., the other 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 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, certain direct subsidiaries of Hawe Neos and certain of our other indirect
foreign subsidiaries.
The Credit Facility may be prepaid at any time without penalty except for
LIBOR and Euro-LIBOR breakage costs. Under the 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 (a) the
LIBOR rate, plus between 225 and 275 basis points, or (b) between 125 and 175
basis points plus the higher of (i) the rate from time to time publicly
announced by Credit Suisse First Boston as its prime rate, or (ii) the rate
which is 1/2 of 1% in excess of the federal funds rate, in each case as
determined on a quarterly basis according to the rating of the Credit Facility
by Standard and Poor's and Moody's. The per annum initial interest rate for the
first six months was LIBOR, plus 250 basis points. The per annum interest rate
for the second quarter of fiscal year 2003 was LIBOR, plus 250 basis points. As
of March 31, 2003, the amount outstanding on the Term B Loan was $133.8 million.
The average interest rate at March 31, 2003 on the Term B Loan was 4.79% 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
either (a) the LIBOR rate, plus between 175 and 250 basis points, or (b) between
75 and 150 basis points plus the higher of (i) the rate from time to time
publicly announced by Credit Suisse First Boston as its prime rate, or (ii) the
rate which is 1/2 of 1% in excess of the federal funds rate, 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 was LIBOR plus 225 basis points. The per annum
interest rate for the second quarter of fiscal year 2003 was LIBOR, plus 225
basis points. The annual commitment fee on the unused portion of the Revolver
will vary between 0.375% to 0.5% based on the quarterly leverage ratio. As of
March 31, 2003, the amount outstanding on the Revolver was $14.0 million. The
average interest rate at March 31, 2003 on the Revolver was 5.03%. The Revolver
also provides for the issuance of standby letters of credit and commercial
letters of credit as required in the ordinary course of business. As of March
31, 2003, a total of $2.9 million in letters of credit was issued. As of March
31, 2003, the amount available under the Revolver was $103.1 million.
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 Euro Tranche will vary between
0.375% to 0.5% based on the quarterly leverage ratio. As of March 31, 2003,
there was no outstanding balance under the Euro Tranche and the amount available
was $30.0 million.
The 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, (vii) the repurchase or redemption of
more than $25.0 million of our stock from stockholders and (viii) loans and
investments, as well as prohibitions on the payment of cash dividends. The
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 March
31, 2003.
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
25
Ormco were borrowers, and a five year revolving credit facility up to $150.0
million, under which Sybron Dental Management, Inc., was the borrower.
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 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.
Prior to January 1, 2003, Sybron Dental Management, Inc. ("SDM") was a
guarantor subsidiary of Sybron Dental Specialties, Inc. ("SDS") for our Senior
Subordinated Notes. Effective January 1, 2003, SDM was merged into SDS.
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.
TWELVE-MONTH PERIOD COMMENCING JUNE 15: PERCENTAGE
----------------------------------------- ----------
2007........................................ 104.063%
2008........................................ 102.708%
2009........................................ 101.354%
2010 and thereafter......................... 100.000%
As a result of the terms of our 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 with variable interest rates. In order
to reduce our sensitivity to interest rate increases, from time to time we enter
into interest rate swap agreements. As of March 31, 2003, we had two interest
rate swap agreements outstanding aggregating a notional amount of approximately
$48.9 million. On February 11, 2003, we assigned an interest rate swap agreement
with a notional amount of $10.0 million and incorporated the fair value to an
existing amended interest rate swap agreement. 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 swap agreement's expiration dates. The net interest
rate paid by us on the indicated notional amount is approximately equal to the
sum of the relevant swap agreement rate plus the applicable Eurodollar rate
margin. The swap agreement rates and durations as of March 31, 2003 are as
follows:
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE SWAP EFFECTIVE DATE
--------------- --------------- ------------------- ------------------- -------------------
March 31, 2005 $23.5 million January 2, 2001 5.65% March 30, 2001
June 30, 2006 $25.4 million January 2, 2001 5.58% March 30, 2001
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 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
26
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 lists our contractual obligations and other commercial
commitments for the indicated periods (calculated as of March 31, 2003):
PAYMENTS DUE FOR THE TWELVE MONTH PERIODS ENDED MARCH 31,
--------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
(IN THOUSANDS)
Long-term debt .......... $ 5,291 $ 2,125 $ 2,137 $ 2,148 $ 11,163 $140,779 $163,643
Senior subordinated notes -- -- -- -- -- 150,000 150,000
Standby letters of credit 2,928 -- -- -- -- -- 2,928
Operating leases ........ 4,957 4,430 2,854 2,020 1,632 6,527 22,420
-------- -------- -------- -------- -------- -------- --------
Total contractual cash
obligations ......... $ 13,176 $ 6,555 $ 4,991 $ 4,168 $ 12,795 $297,306 $338,991
======== ======== ======== ======== ======== ======== ========
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 and affect
our future results of operations and financial condition:
OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
We presently have, and will continue to have, a substantial amount of
indebtedness which required significant interest payments. As of March 31, 2003,
we had $313.6 million in total long-term borrowings (including current portion),
and $162.4 million in stockholders' equity. In addition, subject to restrictions
in the indenture for our Senior Subordinated Notes and our Credit Facility, we
may incur additional indebtedness.
Our substantial level of indebtedness could have important consequences,
which include the following:
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, or general corporate purposes
may be impaired;
- we must use a substantial portion of our cash flow from operations
to pay interest and principal on our Senior Subordinated Notes and
other indebtedness, which will reduce the funds available to us for
other purposes such as potential acquisitions and capital
expenditures;
- we are exposed to fluctuations in interest rates, to the extent our
borrowings bear variable rates of interest, including through
interest rate swap agreements;
27
- we have a higher level of indebtedness than some of our competitors,
which may put us at a competitive disadvantage and reduce our
flexibility in planning for, or responding to, changing conditions
in our industry, including increased competition; and
- we are more vulnerable to general economic downturns and adverse
developments in our business.
From time to time we have engaged in interest rate hedges to mitigate the
impact of interest rate fluctuations. If we are unable to, or elect not to
employ interest rate hedges, it could have a material adverse effect on our
profitability.
In addition, our Credit Facility contains 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.
WE ARE A HOLDING COMPANY AND ARE DEPENDENT UPON DIVIDENDS, INTEREST INCOME
AND LOANS FROM OUR SUBSIDIARIES TO MEET OUR DEBT SERVICE OBLIGATIONS.
We are a United States holding company and conduct substantially all of
our operations through our subsidiaries, some of which are located in other
countries. Our ability to meet our debt service obligations will therefore be
dependent on receipt of dividends, interest income and loans from our direct and
indirect subsidiaries. Our subsidiaries may be limited in the amounts they are
permitted to pay as dividends to us on their capital stock as a result of
statutory and other contractual restrictions. In particular, there are
significant tax and other legal restrictions on the ability of non-U.S.
subsidiaries to remit money to us. As a result, some or all of our subsidiaries
may not be able to pay dividends to us. If they do not, we may not be able to
make debt service payments on our debt instruments.
FUTURE EXCHANGE RATE FLUCTUATIONS OR INFLATION MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We manufacture many of our products, including those in our professional
dental business segment, in our facilities in Mexico, Canada, Switzerland and
Italy. These products are supported by our sales offices in Europe, Japan,
Australia and Mexico. In fiscal 2002, our foreign facilities' selling, general
and administrative expenses represented approximately 27.7% of our consolidated
selling, general and administrative expenses while our foreign sales represented
approximately 41.5% of our total net sales.
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.
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.
ACQUISITIONS HAVE BEEN AND CONTINUE TO BE AN IMPORTANT PART OF OUR GROWTH
STRATEGY; FAILURE TO CONSUMMATE STRATEGIC ACQUISITIONS COULD LIMIT OUR GROWTH
AND FAILURE TO SUCCESSFULLY INTEGRATE ACQUISITIONS COULD ADVERSELY IMPACT OUR
RESULTS.
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
28
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 loss of sales momentum. We cannot
be certain that we will successfully manage them in the future. Also, our Credit
Facility and the indenture for the Senior Subordinated Notes limit our ability
to consummate acquisitions by imposing various conditions which must be
satisfied.
OUR PROFITABILITY MAY BE AFFECTED BY FACTORS OUTSIDE OUR CONTROL.
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.
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.
IF WE ARE UNABLE TO SUCCESSFULLY MANAGE GROWTH AND RETAIN QUALIFIED
PERSONNEL, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR REVENUES MAY DROP
SIGNIFICANTLY.
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 retain and
attract 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 manage the future expansion of
our business could have a material adverse effect on our revenues and
profitability.
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 the employees' council. There is a risk of strikes or
other labor disputes at our locations which are unionized or are subject to
national contracts which could affect our operations.
WE RELY HEAVILY UPON KEY DISTRIBUTORS, AND WE COULD LOSE SALES IF ANY OF
THEM STOP DOING BUSINESS WITH US.
In fiscal 2002, approximately 22% 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 material adverse effect on our results of operations or financial
condition until we find alternative means to distribute our products.
WE ARE SUBJECT TO PRODUCT LIABILITY LITIGATION AND RELATED RISKS WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
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 or a product recall
could divert significant
29
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 such concerns are justified.
OUR BUSINESS IS SUBJECT TO QUARTERLY VARIATIONS IN OPERATING RESULTS DUE
TO FACTORS OUTSIDE OF OUR CONTROL.
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. 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.
CHANGES IN INTERNATIONAL TRADE LAWS AND IN THE BUSINESS, POLITICAL AND
REGULATORY ENVIRONMENT ABROAD COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Our foreign operations include manufacturing facilities in Canada,
Switzerland, Italy and Mexico. Accordingly, 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 and retain local employees;
- currency exchange restrictions and fluctuations in the value of
foreign currency;
- potentially adverse tax consequences;
- longer payment cycles;
- greater difficulties in collecting accounts receivable;
- political conditions in countries where we have operations;
- 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 the events described were to occur, it could have a material
adverse effect on our business, financial condition and results of operations.
IF WE INCUR MORE INDEBTEDNESS AND GREATER INTEREST EXPENSE, WE MAY NOT BE
ABLE TO MAINTAIN OUR LEVEL OF INVESTMENT IN RESEARCH AND DEVELOPMENT.
The indenture relating to our Senior Subordinated Notes and our Credit
Facility permit us to incur significant amounts of additional debt. If we incur
additional debt, our interest expense 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. We may not be able to maintain our level of investment in research and
development as we incur more indebtedness and greater interest expense.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND WE CANNOT BE CERTAIN THAT
WE WILL BE ABLE TO COMPETE EFFECTIVELY.
30
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.,
Ivoclar Vivadent Group, Johnson & Johnson, Steris Corporation, and Ecolab, Inc.;
and in the Orthodontics business segment, our principal competitors include
Unitek, a subsidiary of 3M Corporation, GAC Orthodontics, a subsidiary of
Dentsply, and American Orthodontics. 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.
CERTAIN OF OUR PRODUCTS AND MANUFACTURING FACILITIES ARE SUBJECT TO
REGULATION, AND OUR FAILURE TO OBTAIN OR MAINTAIN THE REQUIRED REGULATORY
APPROVALS FOR THESE PRODUCTS COULD HINDER OR PREVENT THEIR SALE AND INCREASE OUR
COSTS OF REGULATORY COMPLIANCE.
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.
WE MAY BE REQUIRED TO SATISFY CERTAIN INDEMNIFICATION OBLIGATIONS TO
APOGENT, OR MAY NOT BE ABLE TO COLLECT ON INDEMNIFICATION RIGHTS FROM APOGENT.
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 operations and assets 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 assure
you that, if Apogent has substantial indemnification obligations to us and our
affiliates, Apogent will have the ability to satisfy those obligations.
Except as may be required by applicable securities laws or regulations, we
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 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, Mexican peso, 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, Swiss franc, Mexican peso and Australian dollar versus the U.S. dollar.
For fiscal year 2003, our projected total foreign currency exposure is
approximately 52.7 million euros, 897.1 million Japanese yen, 13.5 million
Canadian dollars, 15.4 million Australian dollars, and 3.1 million Swiss francs.
We have put in place a strategy to
31
manage our euro and Japanese 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 March 31, 2003.
In July 2002, we entered into a zero cost collar contract to hedge
intercompany transactions with a notional amount of 24.0 million euros for
fiscal year 2003. In November 2002, we entered into an additional zero cost
collar contract to hedge intercompany transactions with a notional amount of
16.5 million euros for fiscal year 2003. Also, in June 2002, we entered into a
zero cost collar contract to hedge a notional amount of 720.0 million Japanese
yen for fiscal year 2003.
In January 2003 and March 2003, we entered into two new zero cost collar
contracts to hedge intercompany transactions with a total notional amount of
21.0 million euros for fiscal year 2004. Also, in March 2003, we entered into a
zero cost collar contract to hedge a notional amount of 360.0 million Japanese
yen for fiscal year 2004.
At March 31, 2003, approximately $1.0 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.
Zero cost collar contracts in place as of March 31, 2003 are as follows
(in thousands, except rates):
LOCAL
TRADE EFFECTIVE MATURITY CURRENCY
CURRENCY DATE DATE DATE AMOUNT FLOOR RATE CEILING RATE
-------- ---------- ---------- ---------- -------- ---------- ------------
Euro 07/16/2002 10/15/2002 09/16/2003 12,000 0.97 1.03
Euro 11/01/2002 11/15/2002 09/15/2003 9,000 0.97 1.00
Euro 01/13/2003 10/15/2003 12/15/2003 10,500 1.01 1.08
Euro 03/06/2003 01/15/2004 03/15/2004 10,500 1.06 1.11
Yen 06/25/2002 10/15/2002 09/15/2003 360,000 122.00 117.99
Yen 03/06/2003 10/15/2003 03/15/2004 360,000 117.00 115.37
As of March 31, 2003, the maximum length of time over which we are hedging
our exposure to the variability in future cash flows associated with foreign
currency forecasted transactions is twelve months for the Japanese yen and
twelve months for the euro.
In September 2001, we entered into a cross currency debt swap transaction
to hedge our net investment in Hawe Neos. The agreement had an effective date of
October 16, 2001, and was a contract to exchange a U.S. dollar principal amount
of $45.0 million in exchange for a Swiss franc principal amount of 71.73 million
at the termination date of October 16, 2006. On June 6, 2002, we terminated this
cross currency debt swap transaction to satisfy requirements under our 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 have a total aggregate notional amount of $45.0
million and the agreement relating to SDS Japan has a notional amount of $4.0
million. The mechanics of the agreements are similar to the original cross
currency debt swap terminated on June 6, 2002. However, the fixed interest rate
to be paid to us on the U.S. dollar leg of the agreements is the rate equal to
the Senior Subordinated Notes rate of 8 1/8% while the fixed interest rate to be
paid by us on the Swiss franc leg of the agreements ranges from 6.39% to 6.45%
and the Japanese yen leg of the agreements is 3.65%, with the interest payments
due semi-annually.
Following are the details of the new cross currency debt swaps (amounts in
millions, except rates):
TRADE DATE EFFECTIVE DATE MATURITY US$ INTEREST FX AMT INTEREST
---------- -------------- -------- --- -------- ------- --------
06/25/02 06/27/02 06/15/07 $ 15.0 8 1/8% CHF 22.50 6.450%
06/26/02 06/28/02 06/15/07 $ 15.0 8 1/8% CHF 22.50 6.390%
06/27/02 07/01/02 06/15/07 $ 7.5 8 1/8% CHF 11.25 6.390%
06/27/02 07/01/02 06/15/07 $ 7.5 8 1/8% CHF 11.25 6.390%
06/25/02 06/27/02 06/15/07 $ 4.0 8 1/8% JPY 486.00 3.650%
At March 31, 2003, the fair value of the cross currency debt swap
transaction loss included in translation adjustments was approximately $3.1
million (net of income tax).
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
32
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 our Credit Facility and Senior Subordinated Notes to finance our
operations. The Credit Facility exposes 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 prior 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.
We continue to assess our exposure to interest rate risk on an ongoing
basis.
The table below provides information about our debt obligations that are
sensitive to changes in interest rates as of March 31, 2003. For these debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on implied forward 3-month LIBOR rates in the yield curve at the
reporting date. The information is presented in U.S. dollar equivalents, which
is our reporting currency.
LIABILITIES 2004 2005 2006 2007 2008 THEREAFTER FAIR VALUE
----------------------- --------- --------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Long-term Debt:
Fixed Rate Debt ..... -- -- -- -- -- $ 150,000 $ 153,750
Average Interest Rate 8.125% 8.125% 8.125% 8.125% 8.125% 8.125%
Variable Rate Debt .. $ 5,291 $ 2,125 $ 2,137 $ 2,148 $ 11,163 $ 140,779 $ 163,643
Average Interest Rate 4.870% 6.065% 6.905% 7.520% 7.910% 8.230%
For the quarter ended March 31, 2003, 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 obligations was approximately $0.4 million. At
March 31, 2003, approximately $2.4 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 March 31, 2003 (dollars in thousands):
THREE MONTHS
NOTIONAL ENDED FAIR VALUE
LOAN AMOUNT TERM TRADE EFFECTIVE MATURITY MARCH 31, 2003 (PRE-TAX)
-------- -------- ------- ----- --------- --------- -------------- ----------
Kerr B.... $ 23,534 4 years 1/2/2001 3/30/2001 3/31/2005 $ 162.6 $ 1,366.0
Ormco B... 25,344 4 years 1/2/2001 3/30/2001 6/30/2006 218.0 2,458.4
-------- -------- ---------
Totals.... $ 48,878 $ 380.6 $ 3,824.4
======== ======== =========
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 $350.0 million syndicated credit
facility for which Credit Suisse First Boston is the administrative agent. This
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 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.
Approximately $70.0 million of our then-existing interest rate swaps could
not be re-assigned to our Credit Facility entered into on June 6, 2002 and thus
were terminated. Accordingly, we recorded a loss on derivative instruments of
approximately $3.8 million (or approximately $2.3 million, net of tax) in other
income (expense), which represented the fair value of the swaps at the
termination date. Additionally, we had to de-designate the remaining interest
rate swaps as a result of the specificity of our hedge documentation relating to
the hedged item. Accordingly, a non-cash loss on derivative instruments of
approximately $3.2 million (or approximately
33
$2.0 million, net of tax), representing the fair value of the remaining swaps at
the date of the refinancing, was reclassified from accumulated 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 Credit Facility. The change in the fair value of these
re-assigned swaps from the refinancing date to March 31, 2003 has been recorded
in accumulated 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, as amended. The re-assigned interest rate
swap agreements showed no recognizable ineffectiveness during the quarter ended
March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have disclosure controls and procedures in place which are designed to
ensure that material information related to SDS, including our consolidated
subsidiaries, is made known to our management, including our Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"). We review our disclosure
controls and procedures regularly and when necessary and make changes to ensure
they are effective.
Within the 90 day period prior the date of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including the CEO and the CFO, of the effectiveness of our disclosure controls
and procedures. Based upon that evaluation, the CEO and CFO have concluded that
SDS's disclosure controls and procedures are effective in causing material
information to be collected and evaluated by the management of the Company on a
timely basis and to ensure that the quality and timeliness of our public
disclosures complies with our SEC disclosure obligations.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other
factors that could significantly affect those controls after the date of our
most recent evaluation.
34
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company, a Delaware corporation, held its Annual Meeting of
Stockholders on February 7, 2003. A quorum was present at the Annual Meeting,
with 33,499,096 shares out of a total of 37,989,650 shares entitled to cast
votes represented in person or by proxy at the meeting. Further information
regarding our Annual Meeting of Shareholders was previously reported in our Form
10-Q for the quarter ended December 31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
See the Exhibit Index included on the last page in this report,
which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
A Form 8-K was filed on April 29, 2003 to furnish the Company's
press release, announcing the Company's financial results for the quarter
and six-month period ended March 31, 2003.
35
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: May 14, 2003 /s/ GREGORY D. WALLER
-----------------------------------------
Gregory D. Waller
Vice President - Finance,
Chief Financial Officer & Treasurer*
* executing as both the principal
financial officer and a duly
authorized officer of the Company.
36
CERTIFICATIONS
I, Floyd W. Pickrell, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sybron Dental
Specialties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
of other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ FLOYD W. PICKRELL, JR.
------------------------------
Chief Executive Officer
Dated: May 14, 2003
37
I, Gregory D. Waller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sybron Dental
Specialties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
of other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ GREGORY D. WALLER
---------------------------
Chief Financial Officer
Dated: May 14, 2003
38
SYBRON DENTAL SPECIALTIES, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-16057)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003
FILED
EXHIBIT NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
3.1 (a) Restated Certificate of Exhibit 3.1 to Amendment No. 2 to the
Incorporation of the Registrant Registrant's Registration Statement on Form
10/A filed on November 9, 2000
(File No. 1-16057)
(the "Form 10/A No.2")
(b) Certificate of Designation, Exhibit 3.1(b) to the Registrant's Form 10-K
Preferences and Rights of Series for the fiscal year ended September 30, 2000
A Preferred Stock
3.2 Bylaws of the Registrant Exhibit 3.2 to the Form 10/A No. 2
99.1 Chief Executive Officer's certification X
pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the
Sarbanes - Oxley Act of 2002
99.2 Chief Financial Officer's certification X
pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the
Sarbanes - Oxley Act of 2002
39