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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 JUNE 30, 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 August 8, 2003, there were 38,239,121 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
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SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................... 3
Consolidated Balance Sheets, June 30, 2003 and September 30, 2002......................... 3
Consolidated Statements of Income for the three months and nine months ended
June 30, 2003 and 2002................................................................ 4
Consolidated Statement of Stockholders' Equity and Comprehensive Income
for the nine months ended June 30, 2003............................................... 5
Consolidated Statements of Cash Flows for the nine months ended
June 30, 2003 and 2002................................................................ 6
Notes to Unaudited Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 33
Item 4. Controls and Procedures................................................................... 35
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................... 36
Signature........................................................................................... 37
Exhibit Index....................................................................................... 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2003 2002
---------- ----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 19,883 $ 12,652
Accounts receivable (less allowance for doubtful receivables of
$1,484 and $1,400 at June 30, 2003 and September 30, 2002, respectively)........ 91,325 80,479
Inventories (note 2)............................................................... 85,530 89,685
Deferred income taxes.............................................................. 8,527 8,537
Deposit............................................................................ 16,083 --
Prepaid expenses and other current assets.......................................... 12,944 14,163
---------- ----------
Total current assets............................................................ 234,292 205,516
---------- ----------
Property, plant and equipment, net of accumulated depreciation of $92,929
and $85,906 at June 30, 2003 and September 30, 2002, respectively.................. 76,360 75,502
Goodwill.............................................................................. 248,004 241,405
Intangible assets, net................................................................ 17,406 17,711
Deferred income taxes................................................................. 10,869 6,890
Other assets.......................................................................... 23,892 22,433
---------- ----------
Total assets....................................................................... $ 610,823 $ 569,457
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 15,609 $ 14,927
Current portion of long-term debt.................................................. 3,918 3,193
Income taxes payable............................................................... 14,833 3,389
Accrued payroll and employee benefits.............................................. 24,399 24,367
Restructuring reserve (note 3)..................................................... 2,036 4,130
Deferred income taxes.............................................................. 1,735 1,110
Accrued rebates.................................................................... 6,372 5,626
Accrued interest................................................................... 1,239 4,605
Other current liabilities.......................................................... 12,102 9,018
---------- ----------
Total current liabilities....................................................... 82,243 70,365
---------- ----------
Long-term debt........................................................................ 150,648 187,644
Senior subordinated notes............................................................. 150,000 150,000
Deferred income taxes................................................................. 19,531 18,334
Other liabilities..................................................................... 20,522 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,
38,223,515 and 37,989,202 issued and outstanding at June 30, 2003
and September 30, 2002, respectively............................................ 382 380
Additional paid-in capital......................................................... 73,882 70,329
Retained earnings.................................................................. 108,743 68,592
Accumulated other comprehensive income (loss)...................................... 4,872 (8,158)
---------- ----------
Total stockholders' equity...................................................... 187,879 131,143
---------- ----------
Total liabilities and stockholders' equity...................................... $ 610,823 $ 569,457
========== ==========
See accompanying notes to unaudited consolidated financial statements.
3
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Net sales............................................... $ 134,232 $ 119,303 $ 388,648 $ 341,762
Cost of sales........................................... 59,850 51,977 175,341 149,181
----------- ----------- ----------- -----------
Gross profit............................................ 74,382 67,326 213,307 192,581
Selling, general and administrative expenses............ 44,799 38,677 131,573 110,955
Amortization of goodwill and other intangible assets.... 329 2,541 939 7,570
----------- ----------- ----------- -----------
Total selling, general and
administrative expenses........................ 45,128 41,218 132,512 118,525
----------- ----------- ----------- -----------
Operating income........................................ 29,254 26,108 80,795 74,056
Other income (expense):
Interest expense..................................... (5,418) (6,571) (16,397) (20,174)
Amortization of deferred financing fees.............. (416) (259) (1,237) (702)
Refinancing expenses................................. -- (12,998) -- (12,998)
Other, net........................................... (35) 165 825 247
----------- ----------- ----------- -----------
Income before income taxes.............................. 23,385 6,445 63,986 40,429
Income taxes............................................ 8,406 2,514 23,835 15,768
----------- ----------- ----------- -----------
Net income........................................ $ 14,979 $ 3,931 $ 40,151 $ 24,661
=========== =========== =========== ===========
Basic earnings per share (note 5)....................... $ 0.39 $ 0.10 $ 1.05 $ 0.65
=========== =========== =========== ===========
Diluted earnings per share (note 5)..................... $ 0.38 $ 0.10 $ 1.03 $ 0.63
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
4
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 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 ................. -- -- -- 40,151 -- 40,151 $40,151
Translation adjustment ..... -- -- -- -- 15,959 15,959 15,959
Unrealized loss on
derivative instruments ... -- -- -- -- (2,929) (2,929) (2,929)
---------- ---- ------- -------- ------ -------- -------
Total comprehensive income .... -- -- -- 40,151 13,030 $53,181
=======
Issuance of common stock
from options exercised,
including tax benefit ...... 234,313 2 3,553 -- -- 3,555
---------- ---- ------- -------- ------ --------
Balance at June 30, 2003 ...... 38,223,515 $382 $73,882 $108,743 $4,872 $187,879
========== ==== ======= ======== ====== ========
See accompanying notes to unaudited consolidated financial statements.
5
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 40,151 $ 24,661
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................................... 8,637 7,997
Amortization of goodwill and other intangible assets................... 939 7,570
Amortization of deferred financing fees................................ 1,237 702
Non-cash charges related to termination of previous credit facility.... -- 7,694
Gain on sales of property, plant and equipment......................... (659) (360)
Provision for losses on doubtful receivables........................... 223 487
Inventory provisions................................................... 2,180 1,362
Deferred income taxes.................................................. (2,147) 7,713
Tax benefit from issuance of stock under employee stock plan........... 450 283
Changes in assets and liabilities, net of effects of businesses
acquired:
(Increase)/decrease in accounts receivable............................. (10,930) 11,728
(Increase)/decrease in inventories..................................... 3,640 (13,254)
(Increase)/decrease in prepaid expenses and other current assets....... 1,219 (10,485)
Increase/(decrease) in accounts payable................................ 682 (715)
Increase/(decrease) in income taxes payable............................ 11,444 (7,344)
Increase/(decrease) in accrued payroll and employee benefits........... 32 (3,664)
Decrease in restructuring reserve...................................... (2,094) (944)
Decrease in accrued interest........................................... (3,366) (532)
Increase/(decrease) in other current liabilities....................... 3,830 (1,473)
Net change in other assets and liabilities............................. (2,898) 2,175
------------ ------------
Net cash provided by operating activities........................... 52,570 33,601
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (5,352) (12,153)
Proceeds from sales of property, plant, and equipment..................... 5,304 515
Net payments for business acquired........................................ -- (8,235)
Deposit................................................................... (16,083) --
Payments for intangibles.................................................. (911) (2,497)
------------ ------------
Net cash used in investing activities................................ (17,042) (22,370)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility............................................. 104,500 403,000
Principal payments on credit facility..................................... (141,074) (537,911)
Proceeds from long-term debt.............................................. 3,259 957
Principal payments on long-term debt...................................... (3,651) (486)
Payment of deferred financing fees........................................ (473) (11,062)
Proceeds from sale of senior subordinated notes........................... -- 150,000
Payments of prepayment penalty and terminated interest rate swap
related to refinancing............................................... -- (5,305)
Cash received from exercise of stock options.............................. 3,105 1,203
------------ ------------
Net cash provided by (used in) financing activities.................. (34,334) 396
------------ ------------
Effect of exchange rate changes on cash and cash equivalents................. 6,037 1,414
Net increase in cash and cash equivalents.................................... 7,231 13,041
Cash and cash equivalents at beginning of period............................. 12,652 8,319
------------ ------------
Cash and cash equivalents at end of period................................... $ 19,883 $ 21,360
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................. $ 20,625 $ 21,026
============ ============
Cash paid during the period for income taxes.............................. $ 11,603 $ 22,544
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Non-cash charge for the de-designation of interest rate swaps............. $ -- $ 3,223
============ ============
Non-cash charge for the write-off of deferred financing fees.............. $ -- $ 4,471
============ ============
See accompanying notes to unaudited consolidated financial statements.
6
SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR 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 fiscal 2003 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 reported 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 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 June 30, 2003 and 2002 refer to the third 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 June 30, 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 of
America. 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 June 30, 2003 and September 30, 2002 are presented below.
JUNE 30, SEPTEMBER 30,
2003 2002
---------- ---------
Raw materials and supplies..... $ 21,795 $ 23,169
Work in process................ 17,283 23,888
Finished goods................. 51,441 47,102
Inventory reserves............. (4,989) (4,474)
---------- ---------
$ 85,530 $ 89,685
========== =========
3. RESTRUCTURING CHARGES
In September 2002, the Company recorded a restructuring charge of
approximately $3,666 ($2,353 after tax). The charge is primarily composed of
severance and termination costs associated with the 71 employees whose
employment is being terminated as a
7
result of the consolidation of several of the Company's European facilities into
its 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 and the balance of approximately $302 relates to non-cash charges. As of
June 30, 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. Their employment was terminated 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....... 1,323 259 -- -- -- -- 192 26 1,800
Fiscal 2003 Non-Cash Payments... -- -- -- 106 196 -- -- -- 302
------ ----- ---- ------ ----- ----- ----- ----- -------
June 30, 2003 Balance........... $ 954 $ 73 $ -- $ -- $ -- $ 300 $ 37 $ 87 $ 1,451
====== ===== ==== ====== ===== ===== ===== ===== =======
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
June 30, 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.... -- -- -- -- -- -- -- (8) (8)
------ ----- ------ ------ ------- ----- ----- ------- --------
June 30, 2003 Balance........... $ -- $ -- $ -- $ -- $ -- $ 700 $ -- $ 185 $ 885
====== ===== ====== ====== ======= ===== ===== ======= ========
8
(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 June 30, 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. It
has not been adjusted to reflect the transfer of the sales of the endodontic
product line.
Information on these business segments is summarized as follows:
9
PROFESSIONAL
DENTAL ORTHODONTICS ELIMINATIONS TOTAL SDS
------------ ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2003
Revenues:
External customer............................. $ 77,785 $ 56,447 $ -- $ 134,232
Intersegment.................................. 879 1,992 (2,871) --
----------- ---------- --------- -----------
Total revenues.............................. $ 78,664 $ 58,439 $ (2,871) $ 134,232
=========== ========== ========= ===========
Gross profit..................................... 41,816 32,566 -- 74,382
Selling, general and administrative expenses..... 24,824 20,304 -- 45,128
Operating income................................. 16,992 12,262 -- 29,254
THREE MONTHS ENDED JUNE 30, 2002
Revenues:
External customer............................. $ 73,721 $ 45,582 $ -- $ 119,303
Intersegment.................................. 409 2,574 (2,983) --
----------- ---------- --------- -----------
Total revenues.............................. $ 74,130 $ 48,156 $ (2,983) $ 119,303
=========== ========== ========= ===========
Gross profit..................................... 40,255 27,071 -- 67,326
Selling, general and administrative expenses..... 24,291 16,927 -- 41,218
Operating income................................. 15,964 10,144 -- 26,108
NINE MONTHS ENDED JUNE 30, 2003
Revenues:
External customer............................. $ 225,528 $ 163,120 $ -- $ 388,648
Intersegment.................................. 4,139 6,707 (10,846) --
----------- ---------- --------- -----------
Total revenues.............................. $ 229,667 $ 169,827 $ (10,846) $ 388,648
=========== ========== ========= ===========
Gross profit..................................... 122,689 90,618 -- 213,307
Selling, general and administrative expenses..... 74,246 58,266 -- 132,512
Operating income................................. 48,443 32,352 -- 80,795
Segment assets................................... 432,394 178,429 -- 610,823
NINE MONTHS ENDED JUNE 30, 2002
Revenues:
External customer............................. $ 209,732 $ 132,030 $ -- $ 341,762
Intersegment.................................. 937 6,462 (7,399) --
----------- ---------- --------- -----------
Total revenues.............................. $ 210,669 $ 138,492 $ (7,399) $ 341,762
=========== ========== ========= ===========
Gross profit..................................... 118,406 74,175 -- 192,581
Selling, general and administrative expenses..... 68,288 50,237 -- 118,525
Operating income................................. 50,118 23,938 -- 74,056
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 38,165,542 and 37,962,934 for the
quarters ended June 30, 2003 and 2002, respectively. For the nine-month periods
ended June 30, 2003 and 2002, the basic weighted average number of shares
outstanding was 38,057,749 and 37,925,138, respectively. The number of
incremental diluted shares was 1,569,048 and 1,566,089 for the quarters ended
June 30, 2003 and 2002, respectively, which represent the dilutive effect of
options outstanding. For the nine-month periods ended June 30, 2003 and 2002,
the number of incremental diluted shares was 816,295 and 1,457,542,
respectively. For the nine-month period ended June 30, 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 392,510 at a weighted
average exercise price of $18.96 per share. There were no anti-dilutive shares
in the quarters ended June 30, 2003 and 2002, or in the year to date period
ended June 30, 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.
10
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 nine months ended June 30, 2003 were
521,162 at a weighted average exercise price of $14.97. There were no options
granted in the quarters ended June 30, 2003 and 2002. The weighted average
Black-Scholes value of these grants under the assumptions indicated below was
$4.43 per option.
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 NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------- ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported........................ $ 14,979 $ 3,931 $ 40,151 $ 24,661
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects............................ 659 699 2,019 1,997
--------- --------- --------- ---------
Pro forma net income:.......................... $ 14,320 $ 3,232 $ 38,132 $ 22,664
========= ========= ========= =========
Earnings per share:
Basic - as reported....................... $ 0.39 $ 0.10 $ 1.05 $ 0.65
========= ========= ========= =========
Basic - pro forma......................... $ 0.38 $ 0.09 $ 1.00 $ 0.60
========= ========= ========= =========
Diluted - as reported..................... $ 0.38 $ 0.10 $ 1.03 $ 0.63
========= ========= ========= =========
Diluted - pro forma....................... $ 0.36 $ 0.08 $ 0.98 $ 0.58
========= ========= ========= =========
The fair value of options granted during the nine-month periods ended June
30, 2003 and 2002 was determined using the Black-Scholes pricing model with the
following weighted average assumptions:
NINE MONTHS
JUNE 30
-----------------------
2003 2002
--------- ----------
Expected lives................ 4 years 4 years
Expected volatility........... 32.605% 31.552%
Risk-free interest rate....... 2.653% 3.990%
Dividend yield................ -- --
The Black-Scholes model is a trading option-pricing model that neither
considers the non-traded nature of employee stock options, nor considers the
restrictions on trading, the lack of transferability or the ability of employees
to forfeit the options prior to their expiration. For these reasons and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single value of the Company's options and may not be
representative of the future effects on reported net income or the future stock
price of the Company.
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 is 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.
11
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 June
30, 2003 and September 30, 2002, statements of operations for the three and nine
months ended June 30, 2003 and 2002, and statements of cash flows for the nine
months ended June 30, 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.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2003
----------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents ................................ $ 228 $ (2,154) $ 21,809 $ -- $ 19,883
Account receivable, net ............................. 19 50,892 40,414 -- 91,325
Inventories, net .................................... -- 56,704 28,826 -- 85,530
Other current assets ................................ 11,928 3,478 22,148 -- 37,554
--------- --------- --------- --------- ---------
Total current assets ........................... 12,175 108,920 113,197 -- 234,292
Property, plant and equipment, net ..................... 8,867 24,389 43,104 -- 76,360
Goodwill ............................................... -- 192,976 55,028 -- 248,004
Intangible assets, net ................................. 1,004 16,194 208 -- 17,406
Deferred income taxes .................................. 10,869 -- -- -- 10,869
Investment in subsidiaries
and intercompany balances ........................... (228,363) 216,244 89,408 (77,289) --
Other assets ........................................... 9,925 11,299 2,668 -- 23,892
--------- --------- --------- --------- ---------
Total assets ................................... $(185,523) $ 570,022 $ 303,613 $ (77,289) $ 610,823
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Account payable ..................................... $ 254 $ 10,610 $ 4,745 $ -- $ 15,609
Current portion of long-term debt ................... -- 1,481 2,437 -- 3,918
Income taxes payable ................................ (6,491) 13,565 7,824 (65) 14,833
Accrued expenses and other
current liabilities .............................. 7,224 20,787 19,872 -- 47,883
--------- --------- --------- --------- ---------
Total current liabilities ...................... 987 46,443 34,878 (65) 82,243
Long-term debt ......................................... 16,500 129,993 4,155 -- 150,648
Senior subordinated notes .............................. 150,000 -- -- -- 150,000
Deferred income taxes .................................. 18,802 -- 729 -- 19,531
Other liabilities ...................................... 19,672 95 755 -- 20,522
Commitments and contingent
liabilities ......................................... -- -- -- -- --
Stockholders' equity (deficit):
Preferred stock ..................................... -- -- -- -- --
Common stock ........................................ 4,273 53 7,081 (11,025) 382
Additional paid-in capital ............................. (276,867) 275,816 138,400 (63,467) 73,882
Retained earnings (accumulated deficit) ................ (99,881) 111,604 99,752 (2,732) 108,743
Accumulated other
comprehensive income (loss) ......................... (19,009) 6,018 17,863 -- 4,872
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ........... (391,484) 393,491 263,096 (77,224) 187,879
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity (deficit) .............. $(185,523) $ 570,022 $ 303,613 $ (77,289) $ 610,823
========= ========= ========= ========= =========
12
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
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Net sales...................... $ -- $ 80,171 $ 56,932 $ (2,871) $ 134,232
Cost of sales.................. 238 29,690 32,793 (2,871) 59,850
------- -------- -------- -------- ---------
Gross profit................... (238) 50,481 24,139 -- 74,382
Selling, general and
administrative expenses..... 4,390 26,757 13,981 -- 45,128
------- -------- -------- -------- ---------
Operating income (loss)........ (4,628) 23,724 10,158 -- 29,254
Other income (expense):
Interest expense............ (3,371) (1,866) (181) -- (5,418)
Other, net.................. 8,255 (7,665) (1,041) -- (451)
------- -------- -------- -------- ---------
Income before income
taxes...................... 256 14,193 8,936 -- 23,385
Income taxes................... (383) 5,235 3,519 35 8,406
------- -------- -------- -------- ---------
Net income (loss).............. $ 639 $ 8,958 $ 5,417 $ (35) $ 14,979
======= ======== ======== ======== =========
13
FOR THE THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Net sales ........................... $ -- $ 74,523 $ 47,762 $ (2,982) $ 119,303
Cost of sales ....................... 229 26,718 27,985 (2,955) 51,977
--------- --------- --------- --------- ---------
Gross profit ........................ (229) 47,805 19,777 (27) 67,326
Selling, general and
administrative expenses .......... 3,732 25,528 12,094 (136) 41,218
--------- --------- --------- --------- ---------
Operating income (loss) ............ (3,961) 22,277 7,683 109 26,108
Other income (expense):
Interest expense ................. (2,295) (4,159) (117) -- (6,571)
Other, net ....................... (3,594) (8,753) (745) -- (13,092)
--------- --------- --------- --------- ---------
Income (loss) before
income .............................. (9,850) 9,365 6,821 109 6,445
taxes
Income taxes ........................ (3,465) 3,389 2,590 -- 2,514
--------- --------- --------- --------- ---------
Net income (loss) ................... $ (6,385) $ 5,976 $ 4,231 $ 109 $ 3,931
========= ========= ========= ========= =========
FOR THE NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Net sales ........................... $ -- $ 229,164 $ 170,330 $ (10,846) $ 388,648
Cost of sales ....................... 760 91,691 93,736 (10,846) 175,341
--------- --------- --------- --------- ---------
Gross profit ........................ (760) 137,473 76,594 -- 213,307
Selling, general and
administrative expenses .......... 16,689 75,412 40,411 -- 132,512
--------- --------- --------- --------- ---------
Operating income (loss) ............. (17,449) 62,061 36,183 -- 80,795
Other income (expense):
Interest expense ................. (10,583) (5,469) (345) -- (16,397)
Other, net ....................... 28,038 (25,495) (2,955) -- (412)
--------- --------- --------- --------- ---------
Income before income
taxes ........................... 6 31,097 32,883 -- 63,986
Income taxes ........................ (478) 13,736 10,642 (65) 23,835
--------- --------- --------- --------- ---------
Net income .......................... $ 484 $ 17,361 $ 22,241 $ 65 $ 40,151
========= ========= ========= ========= =========
FOR THE NINE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Net sales ........................... $ -- $ 210,640 $ 138,520 $ (7,398) $ 341,762
Cost of sales ....................... 682 73,822 81,994 (7,317) 149,181
--------- --------- --------- --------- ---------
Gross profit ........................ (682) 136,818 56,526 (81) 192,581
Selling, general and
administrative expenses .......... 14,062 70,422 34,207 (166) 118,525
--------- --------- --------- --------- ---------
Operating income (loss) ............ (14,744) 66,396 22,319 85 74,056
Other income (expense):
Interest expense ................. (4,716) (15,231) (227) -- (20,174)
Other, net ....................... 10,349 (21,150) (2,652) -- (13,453)
--------- --------- --------- --------- ---------
Income (loss) before
income taxes ........................ (9,111) 30,015 19,440 85 40,429
Income taxes ........................ (2,368) 10,895 7,241 -- 15,768
--------- --------- --------- --------- ---------
Net income (loss) ................... $ (6,743) $ 19,120 $ 12,199 $ 85 $ 24,661
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Cash flows provided by (used in)
operating activities................. $ (14,558) $ 45,112 $ 21,903 $ 113 $ 52,570
Cash flows from investing activities:
Capital expenditures................. (648) (2,359) (2,345) -- (5,352)
Proceeds from sales of property,
plant, and equipment.............. -- 5,234 70 -- 5,304
Deposit.............................. -- -- (16,083) -- (16,083)
Payments for intangibles............. -- (831) (80) -- (911)
--------- --------- -------- ------ ----------
Net cash provided by (used in)
investing activities............ (648) 2,044 (18,438) -- (17,042)
Cash flows from financing activities:
Proceeds from credit facility........ 99,500 5,000 -- -- 104,500
Principal payments on credit
facility.......................... (125,000) (16,074) -- -- (141,074)
Proceeds from long-term debt......... -- -- 3,259 -- 3,259
Principal payments on long-term
debt.............................. -- (142) (3,509) -- (3,651)
Payment of deferred financing fees... -- (473) -- -- (473)
Cash received from exercise of
stock options..................... 3,105 -- -- -- 3,105
--------- --------- -------- ------ ----------
Net cash used in
financing activities............ (22,395) (11,689) (250) -- (34,334)
Effect of exchange rate changes on
cash and cash equivalents............ (3,598) 7,282 2,466 (113) 6,037
Net change in intercompany
balances............................. 41,431 (40,975) (456) -- --
--------- --------- -------- ------ ----------
Net increase in cash and
cash equivalents..................... 232 1,774 5,225 -- 7,231
Cash and cash equivalents at
beginning of period.................. (4) (3,928) 16,584 -- 12,652
--------- --------- -------- ------ ----------
Cash and cash equivalents at
end of period........................ $ 228 $ (2,154) $ 21,809 $ -- $ 19,883
========= ========= ======== ====== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest.......................... $ 14,200 $ 6,147 $ 278 $ -- $ 20,625
========= ========= ======== ====== ==========
Cash paid during the period for
income taxes...................... $ 2,836 $ -- $ 8,767 $ -- $ 11,603
========= ========= ======== ====== ==========
15
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------------
NON
SYBRON DENTAL GUARANTOR GUARANTOR
SPECIALTIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Cash flows provided by (used in)
operating activities................. $ (32,154) $ 49,430 $ 16,410 $ (85) $ 33,601
Cash flows from investing activities:
Capital expenditures................. (1,415) (4,639) (6,099) -- (12,153)
Proceeds from sales of property,
plant, and equipment.............. -- 502 13 -- 515
Net payments for businesses
acquired.......................... -- (8,235) -- -- (8,235)
Payments for intangibles............. -- (1,612) (885) -- (2,497)
---------- --------- -------- ----- ----------
Net cash used in
investing activities............ (1,415) (13,984) (6,971) -- (22,370)
Cash flows from financing activities:
Proceeds from credit facility........ 188,000 215,000 -- -- 403,000
Principal payments on credit
facility.......................... (171,500) (366,411) -- -- (537,911)
Proceeds from long-term debt......... -- 81 876 -- 957
Principal payments on long-term
debt.............................. -- (486) -- -- (486)
Payment of deferred financing fees... -- (11,062) -- -- (11,062)
Proceeds from sale of senior
subordinated notes................ 150,000 -- -- -- 150,000
Payments of prepayment penalty and
terminated interest rate swap
related to refinancing............ -- (5,305) -- -- (5,305)
Proceeds from the exercise of
stock option...................... 1,203 -- -- -- 1,203
---------- --------- -------- ----- ----------
Net cash provided by (used in)
financing activities............ 167,703 (168,183) 876 -- 396
Effect of exchange rate changes on
cash and cash equivalents............ (1,934) 2,606 657 85 1,414
Net change in intercompany
balances............................. (128,163) 126,973 1,190 -- --
---------- --------- -------- ----- ----------
Net increase (decrease) in cash and
cash equivalents..................... 4,037 (3,158) 12,162 -- 13,041
Cash and cash equivalents at
beginning of period.................. 490 1,726 6,103 -- 8,319
---------- --------- -------- ----- ----------
Cash and cash equivalents at
end of period........................ $ 4,527 $ (1,432) $ 18,265 $ -- $ 21,360
========== ========= ======== ===== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest.......................... $ 3,724 $ 17,123 $ 179 $ -- $ 21,026
========== ========= ======== ===== ==========
Cash paid during the period for
income taxes...................... $ 15,775 $ -- $ 6,769 $ -- $ 22,544
========== ========= ======== ===== ==========
SUPPLEMENTAL DISCLOSURES OF NON-
CASH FINANCING ACTIVITIES:
Non-cash charge for the
de-designation of interest rate
swaps............................. $ -- $ 3,223 $ -- $ -- $ 3,223
========== ========= ======== ===== ==========
Non-cash charge for the write-off of
deferred financing fees........... $ -- $ 4,471 $ -- $ -- $ 4,471
========== ========= ======== ===== ==========
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.
16
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 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 $2,179 and $6,620 for the three and nine
months ended June 30, 2002. No amortization expense was recorded for goodwill or
those certain other intangible assets deemed to have indefinite lives for the
three month or nine-month periods ended June 30, 2003 because those items are no
longer being amortized under the provisions of SFAS No. 142.
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 NINE MONTHS
ENDED JUNE 30, 2002 ENDED JUNE 30, 2002
------------------- -------------------
Reported net income............................. $ 3,931 $ 24,661
Add back: goodwill and certain other intangibles
amortization, net of taxes................... 1,329 4,038
---------- ---------
Adjusted net income........................... $ 5,260 $ 28,699
Reported basic earnings per share............... $ 0.10 $ 0.65
Add back: goodwill and certain other intangibles
amortization, net of taxes................... 0.04 0.11
---------- ---------
Adjusted basic earnings per share............. $ 0.14 $ 0.76
Reported diluted earnings per share............. $ 0.10 $ 0.63
Add back: goodwill and certain other intangibles
amortization, net of taxes................... 0.03 0.10
---------- ---------
Adjusted diluted earnings per share........... $ 0.13 $ 0.73
SFAS No. 141 and SFAS No. 142 also require the Company to 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 June 30, 2003:
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Proprietary technology.. $ 15,069 $ 8,923 $ 6,146
Other................... $ 16,246 $ 14,697 $ 1,549
Additionally, SFAS No. 142 requires the Company to disclose the estimated
intangible asset amortization for each of the five twelve-month periods
subsequent to June 30, 2003. The following table represents the estimated
amortization (calculated as of June 30, 2003) for each of the five twelve-month
periods indicated:
TWELVE-MONTH PERIODS ENDING JUNE 30,
-----------------------------------------------------------
2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- -------
Amortization of intangible assets .... $1,180 $ 965 $ 775 $ 739 $ 705
17
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 has reclassified the extraordinary item as
the result of a loss from the extinguishment of indebtedness reported in the
third quarter of fiscal year 2002 to refinancing expenses in accordance with
SFAS No. 145.
9. SUBSEQUENT EVENT
During the third quarter of fiscal 2003, the Company entered into an
agreement to acquire Spofa Dental a.s., a leading manufacturer of consumable
dental supplies in Central and Eastern Europe, and deposited approximately $16.1
million dollars into an escrow account pending completion of the acquisition.
The amount is reflected as a deposit in the accompanying June 30, 2003
consolidated balance sheet. The acquisition was subject to approval by the Czech
Republic's Office for the Protection of Competition, which was received during
the fourth quarter of fiscal 2003. The Company completed the acquisition of
Spofa Dental a.s. on August 4, 2003.
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 June 30, 2003 and 2002 refer to the third 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.
In addition to realigning our business segments, at the commencement of the
2003 fiscal year we transferred the net sales of our stainless steel endodontic
product line from the Professional Dental segment to the Orthodontics segment.
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 reported consolidated results of
operations for the quarter or year to date periods.
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. 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.
18
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
RESULTS OF OPERATIONS
OVERVIEW
Our net sales for the quarter and nine-month periods ended June 30, 2003
increased by 12.5% and 13.7%, respectively, from the corresponding fiscal 2002
periods. Included in the 12.5% increase in net sales for the quarter ended June
30, 2003 from the prior year period is internal growth of 5.7%, with the
remaining sales increase predominately attributed to favorable currency
translation. The 13.7% increase in net sales for the nine-month period ended
June 30, 2003 is composed of internal growth of 6.7%, favorable foreign currency
fluctuations of 5.0%, and net sales of our Orascoptic product line prior to
February 1, 2003.
Our domestic sales for the quarter ended June 30, 2003 were $74.9 million,
representing an increase of $3.7 million or 5.2% over the comparable prior year
period. For the nine-month period ended June 20, 3003, our domestic sales were
$220.2 million, representing an increase of $18.4 million or 9.1% over the
comparable prior year period. International sales increased by $11.2 million, or
23.3%, to $59.4 million for the quarter ended June 30, 2003 compared to the same
period in the prior year, while the international sales for the nine-month
period ended June 30, 2003 increased $28.5 million, or 20.4%, to $168.5 million,
compared to the same period in the prior year. Foreign currency fluctuations in
the quarter and nine-month period ended June 30, 2002 represented $7.4 million
and $17.2 million, respectively, of the increases in international sales over
the comparable prior year 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, the increase in our endodontic
sales force 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 over the prior year period; although we anticipate the revenue related
to sales of the LED curing light to start trending downwards and we anticipate
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. Additionally, we
expect to see continued pricing pressures in a competitive environment.
Operating income for the third quarter and first nine months of fiscal 2003
was $29.3 million and $80.8 million, representing increases of 12.0% and 9.1%,
respectively, from the corresponding fiscal 2002 periods. The increase in
operating income is largely due to the effects of our adoption, as of October 1,
2002, of SFAS No. 142. Our fiscal 2002 third quarter operating income, and the
operating income for the first nine months of fiscal 2002, included,
respectively, a $2.2 million charge and $6.6 million charge of amortization of
goodwill and certain other intangible assets, which are not being amortized this
year due to our adoption of SFAS No. 142.
During the third quarter of fiscal 2003, we transitioned the handling of
orders and shipping of product from the Professional Dental United Kingdom
location to our Hawe Neos facility in Switzerland and closed that location. We
anticipate closing the Professional Dental distribution office located in
Northern Italy during the fourth 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 Neos is complete.
19
QUARTER ENDED JUNE 30, 2003 COMPARED TO THE QUARTER ENDED JUNE 30, 2002
NET SALES
FISCAL FISCAL
NET SALES 2003 2002
----------------------------- ----------- -----------
(IN THOUSANDS)
Professional Dental...... $ 77,785 $ 73,721
Orthodontics............. 56,447 45,582
----------- -----------
Total Net Sales.......... $ 134,232 $ 119,303
=========== ===========
Overall Company. Net sales for the third quarter of fiscal 2003 increased by
$14.9 million or 12.5% from the corresponding fiscal 2002 quarter.
Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from: (a) net sales of new products (approximately $4.7
million), (b) favorable foreign currency fluctuations (approximately $4.3
million) and (c) reduced rebate expense (approximately $0.4 million). The
increase in net sales was partially offset by: (a) a decrease in net sales due
to the transfer of the endodontic product sales to the Orthodontics segment,
which contributed approximately $4.0 million in net sales to the Professional
Dental segment in the comparable prior year period and (b) decreased net sales
of existing products (approximately $1.4 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $5.7
million), (b) an increase in net sales due to the transfer of the endodontic
product sales from the Professional Dental segment, which contributed
approximately $3.5 million in net sales to the Orthodontic segment in the third
quarter of fiscal 2003, (c) favorable foreign currency fluctuations
(approximately $3.0 million) and (d) net sales of new products (approximately
$1.4 million). The increase in net sales was partially offset by increased
rebate expense (approximately $2.7 million).
GROSS PROFIT
FISCAL PERCENT OF FISCAL PERCENT OF
GROSS PROFIT 2003 SALES 2002 SALES
- ---------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental... $ 41,816 53.8% $ 40,255 54.6%
Orthodontics.......... 32,566 57.7 27,071 59.4
---------- ---- ---------- ----
Total Gross Profit.... $ 74,382 55.4% $ 67,326 56.4%
========== ==== ========== ====
Overall Company. Gross profit for the quarter ended June 30, 2003 increased
by $7.1 million or 10.5% from the corresponding fiscal 2002 quarter.
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) unit volume relating to new products
(approximately $2.6 million), (b) favorable foreign currency fluctuations
(approximately $2.3 million), (c) reduced rebate expense (approximately $0.4
million), (d) decreased royalty expense (approximately $0.2 million) and (e)
inventory reserve adjustments (approximately $0.1 million, of which
approximately $0.2 million is due to physical inventory adjustments partially
offset by standard cost revisions of approximately $0.1 million). The increase
in gross profit was partially offset by: (a) decreased gross profit due to the
transfer of the endodontic product line to the Orthodontics segment, which
contributed approximately $2.6 million in gross profit to the Professional
Dental segment in the comparable prior year period, (b) decreased net sales of
existing products (approximately $0.8 million), (c) unfavorable manufacturing
variances (approximately $0.3 million) and (d) a change in product mix
(approximately $0.3 million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) favorable manufacturing variances (approximately $3.2
million), (b) increased net sales of existing products (approximately $3.1
million), (c) favorable foreign currency fluctuations (approximately $3.1
million), (d) increased gross profit due to the transfer of the endodontic
product line from the Professional Dental segment, which contributed
approximately $2.1 million in gross profit to the Orthodontic segment in the
third quarter of fiscal 2003 and (e) unit volume relating to new products
(approximately $0.8 million). The increase in gross profit was partially offset
by: (a) increased rebate expense (approximately $3.0 million), (b) a change in
product mix (approximately $1.8 million), (c) inventory reserve adjustments
(approximately $1.4 million, of which approximately $1.2 million is due to an
increase in obsolescence and physical inventory adjustments of approximately
$0.2 million) and (d) increased royalty expense (approximately $0.6 million).
20
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......... $ 24,824 31.9% $ 24,291 32.9%
Orthodontics................ 20,304 36.0 16,927 37.1
--------- ---- ---------- ----
Total Selling, General and
Administrative
Expenses................ $ 45,128 33.6% $ 41,218 34.5%
========= ==== ========== ====
Overall Company. Selling, general and administrative expenses for the
quarter ended June 30, 2003 increased by $3.9 million or 9.5% 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 certain other intangible assets resulting in decreased amortization
expense from the corresponding prior year period of approximately $2.2 million.
General and administrative expenses may increase in future quarters as we incur
additional professional fees related to the review of our documentation related
to our internal control over financial reporting, as required under Section 404
of the Sarbanes-Oxley Act of 2002.
Professional Dental. Increased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) increased
general and administrative expenses (approximately $1.8 million) and (b) an
increase in expenses relating to foreign currency fluctuations (approximately
$1.1 million). The increase in selling, general and administrative expenses was
partially offset by: (a) decreased amortization expense of goodwill and other
intangible assets (approximately $1.5 million), (b) decreased selling and
marketing expenses (approximately $0.8 million) and (c) 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 $2.6 million), (b) increased general and
administrative expenses (approximately $1.1 million) and (c) increased expenses
related to foreign currency fluctuations (approximately $1.0 million). The
increase in selling, general and administrative expenses was partially offset
by: (a) a decrease in amortization expense of goodwill and other intangible
assets (approximately $0.7 million) and (b) decreased research and development
expenses (approximately $0.6 million) due to the diversion of research and
development expenses to produce new products that were subsequently capitalized
into inventory.
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
certain other intangible assets decreased $2.2 million in the third 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 $0.1 million compared to
the same period in the prior year.
OPERATING INCOME
FISCAL PERCENT OF FISCAL PERCENT OF
OPERATING INCOME 2003 SALES 2002 SALES
---------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental..... $ 16,992 21.8% $ 15,964 21.7%
Orthodontics............ 12,262 21.7 10,144 22.3
---------- ---- ---------- ----
Total Operating Income.. $ 29,254 21.8% $ 26,108 21.9%
========== ==== ========== ====
As a result of the foregoing, operating income in the third quarter of
fiscal 2003 increased by 12.0% or $3.1 million from operating income in the
corresponding quarter of fiscal 2002.
INTEREST EXPENSE
Interest expense was $5.4 million in the third quarter of fiscal 2003, a
decrease of $1.2 million from the corresponding fiscal 2002 quarter. The
decrease resulted from reduced average debt balances in the third quarter of
fiscal 2003 and reduced average interest rates on our credit facility.
21
INCOME TAXES
Taxes on income in the third quarter of fiscal 2003 were approximately $8.4
million, an increase of $5.9 million from the corresponding fiscal 2002 quarter.
The increase was primarily due to higher taxable earnings, partially offset by a
decrease in our 2003 effective tax rate from 39.0% in fiscal 2002 to 36.0% in
fiscal 2003.
NET INCOME
As a result of the foregoing, we had net income of $15.0 million in the
quarter ended June 30, 2003, as compared to net income of $3.9 million in the
corresponding fiscal 2002 period.
NINE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
2002
NET SALES
FISCAL FISCAL
NET SALES 2003 2002
----------------------- ---------- ----------
(IN THOUSANDS)
Professional Dental.... $ 225,528 $ 209,732
Orthodontics........... 163,120 132,030
----------- -----------
Total Net Sales........ $ 388,648 $ 341,762
=========== ===========
Overall Company. Net sales for the first nine months of fiscal 2003
increased by $46.9 million or 13.7% 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 $12.6
million), (b) favorable foreign currency fluctuations (approximately $10.0
million), (c) net sales of products from an acquired company (approximately $4.8
million) and (d) reduced rebate expense (approximately $0.9 million). The
increase in net sales was partially offset by: (a) a decrease in net sales due
to the transfer of the endodontic product sales to the Orthodontics segment,
which contributed approximately $10.4 million in net sales to the Professional
Dental segment in the comparable prior year period and (b) decreased net sales
of existing products (approximately $2.1 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately
$16.7 million), (b) an increase in net sales due to the transfer of the
endodontic product sales from the Professional Dental segment, which contributed
approximately $8.8 million in net sales to the Orthodontic segment in the first
nine months of fiscal 2003, (c) favorable foreign currency fluctuations
(approximately $7.2 million) and (d) net sales of new products (approximately
$3.3 million). The increase in net sales was offset by increased rebate expense
(approximately $4.9 million).
GROSS PROFIT
FISCAL PERCENT OF FISCAL PERCENT OF
GROSS PROFIT 2003 SALES 2002 SALES
------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental... $ 122,689 54.4% $ 118,406 56.5%
Orthodontics.......... 90,618 55.6 74,175 56.2
---------- ---- ----------- ----
Total Gross Profit.... $ 213,307 54.9% $ 192,581 56.3%
========== ==== =========== ====
Overall Company. Gross profit for the first nine months ended June 30, 2003
increased by $20.7 million or 10.8% 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 $7.0 million), (b) favorable foreign currency fluctuations
(approximately $5.5 million), (c) margins relating to net sales of products from
an acquired company (approximately $2.9 million), (d) reduced rebate expense
(approximately $0.9 million) and (e) decreased royalty expense (approximately
$0.2 million). The increase in gross profit was partially offset by: (a)
decreased gross profit due to the transfer of the endodontic product line to the
Orthodontics segment, which contributed approximately $6.7 million in gross
profit to the Professional Dental segment in the comparable prior year period,
(b) a change in product mix (approximately $2.7 million), (c) unfavorable
manufacturing variances (approximately $1.6 million), (d) decreased net sales of
existing products (approximately $1.1 million) and (e) inventory reserve
adjustments (approximately $0.1 million, of which
22
approximately $0.1 million is due to standard cost revisions, an increase in
obsolescence of approximately $0.1 million partially offset by physical
inventory adjustments of approximately $0.1 million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $8.9
million), (b) favorable foreign currency fluctuations (approximately $6.9
million), (c) increased gross profit due to the transfer of the endodontic
product line from the Professional Dental segment, which contributed
approximately $5.1 million in gross profit to the Orthodontics segment in the
first nine months of fiscal 2003, (d) favorable manufacturing variances
(approximately $2.1 million) and (e) unit volume relating to new products
(approximately $2.0 million). The increase in gross profit was partially offset
by: (a) increased rebate expense (approximately $5.2 million), (b) a change in
product mix (approximately $1.5 million), (c) increased royalty expense
(approximately $1.2 million) and (d) inventory reserve adjustments
(approximately $0.7 million, of which approximately $0.3 million is due to an
increase in obsolescence, standard cost revisions of approximately $0.2 million
and physical inventory adjustments of 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.......... $ 74,246 32.9% $ 68,288 32.6%
Orthodontics................. 58,266 35.7 50,237 38.0
--------- ---- ---------- ----
Total Selling, General and
Administrative Expenses.. $ 132,512 34.1% $ 118,525 34.7%
========= ==== ========== ====
Overall Company. Selling, general and administrative expenses for the first
nine months of fiscal 2003 increased by $14.0 million or 11.8% from the
corresponding fiscal 2002 period. As of October 1, 2002, we adopted SFAS No. 142
"Goodwill and Other Intangible Assets" and have ceased the amortization of
goodwill and certain other intangible assets resulting in decreased amortization
expense from the corresponding prior year period of approximately $6.6 million.
General and administrative expenses may increase in future quarters as we incur
additional professional fees related to the review of our documentation related
to our internal control over financial reporting, as required under Section 404
of the Sarbanes-Oxley Act of 2002.
Professional Dental. Increased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) increased
general and administrative expenses (approximately $4.3 million), (b) an
increase in expenses relating to foreign currency fluctuations (approximately
$3.2 million), (c) expenses of an acquired company (approximately $2.3 million)
and (d) increased selling and marketing expenses (approximately $1.1 million).
The increase in selling, general and administrative expenses was partially
offset by: (a) decreased amortization expense of goodwill and other intangible
assets (approximately $4.7 million) and (b) decreased research and development
expenses (approximately $0.2 million).
Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) increased selling and
marketing expenses (approximately $5.5 million), (b) increased general and
administrative expenses (approximately $2.7 million) and (c) increased expenses
related to foreign currency fluctuations (approximately $2.1 million). The
increase in selling, general and administrative expenses was partially offset
by: (a) a decrease in amortization expense of goodwill and other intangible
assets (approximately $2.0 million) and (b) decreased research and development
expenses (approximately $0.3 million) due to the diversion of research and
development expenses to produce new products that were subsequently capitalized
into inventory.
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 certain other intangible assets decreased
$6.6 million in the first nine 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 $0.6 million compared to the same period in the prior
year.
23
OPERATING INCOME
FISCAL PERCENT OF FISCAL PERCENT OF
OPERATING INCOME 2003 SALES 2002 SALES
------------------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Professional Dental...... $ 48,443 21.5% $ 50,118 23.9%
Orthodontics............. 32,352 19.8 23,938 18.1
---------- ---- ---------- ----
Total Operating Income... $ 80,795 20.8% $ 74,056 21.7%
========== ==== ========== ====
As a result of the foregoing, operating income in the first nine months of
fiscal 2003 increased by 9.1% or $6.7 million from operating income in the
corresponding fiscal 2002 period.
INTEREST EXPENSE
Interest expense was $16.4 million in the first nine months of fiscal 2003,
a decrease of $3.8 million from the corresponding fiscal 2002 period. The
decrease resulted from reduced average debt balances in the first nine months of
fiscal 2003 and reduced average interest rates on our credit facility.
INCOME TAXES
Taxes on income in the first nine months of fiscal 2003 were approximately
$23.8 million, an increase of $8.1 million from the corresponding fiscal 2002
period. The increase was primarily due to higher taxable earnings, partially
offset by a decrease in our effective tax rate.
NET INCOME
As a result of the foregoing, we had net income of $40.2 million in the
first nine months of fiscal 2003, as compared to net income of $24.7 million in
the corresponding fiscal 2002 period.
CRITICAL ACCOUNTING POLICIES
Pension and Other Postretirement Benefits -- We have two non-contributory
defined benefit pension plans that cover all regular United States based
employees with more than five years of service. Our accumulated benefit
obligation, the fair value of plan assets and the amount of annual pension cost
are calculated based on a number of actuarial assumptions including an expected
long-term return on plan assets, assumed rates of compensation increase and a
discount rate. In developing these assumptions, we evaluate input from our
actuaries as well as information available from the securities markets. The
assumptions and factors used by the Company may differ materially from actual
results due to changing market conditions, earlier or later retirement ages or
longer or shorter life spans of participants. These differences may result in a
significant impact to the amount of pension obligation or expense recorded by
the Company. The actuarial assumptions are evaluated annually and adjusted as
necessary.
Based on information from our actuaries and investment advisors, we reduced,
during the quarter ended June 30, 2003, our discount rate from 7.25% to 6.0% and
the expected return on plan assets from 10.00% to 8.75%. We maintained our
expected rate of compensation increase at 4.00%. The reductions were made due to
current market conditions. To compensate for the lowered assumptions, we made a
$10.3 million contribution to the Company's pension fund during the quarter. The
change in assumptions is expected to result in an increase in our pension
expense.
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.
24
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 SFAS No.
149 will have 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, 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.
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 $52.6 million of cash was generated from operating activities
in the first nine months of fiscal 2003, as compared to approximately $33.6
million from the same period of the prior year. The approximate $19.0 million
increase in cash flows from operations was primarily due to: (a) an increase in
the net change of income taxes payable from the prior year period of
approximately $18.8 million, (b) a decrease in the net change in inventories
from the prior year period of approximately $16.9 million, (c) increased
earnings from the prior year period of approximately $15.5 million, (d) a
decrease in the net change in prepaid expenses and other current assets from the
prior year period of approximately $11.7 million, (e) an increase in the net
change in other current liabilities from the prior year period of approximately
$5.3 million, (f) an increase in the net change in accrued payroll and employee
benefits from the prior year period of approximately $3.7 million, (g) an
increase in the net change in accounts payable from the prior year period of
approximately $1.4 million, (h) an increase in inventory provisions from the
prior year period of approximately $0.8 million, (i) an increase in depreciation
expense from the prior year period of approximately $0.6 million, (j) an
increase in the amortization of
25
deferred financing fees of approximately $0.5 million from the prior year period
and (k) an increase in the tax benefit from issuance of our common stock under
our employee stock option plan of approximately $0.2 million from the prior
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 $22.7 million, (b) a decrease in the net
change in deferred income taxes from the prior year period of approximately $9.9
million, (c) a decrease in non-cash charges of approximately $7.7 million,
related to the termination of the previous credit facility, (d) a decrease in
amortization expense of goodwill and other intangible assets from the prior year
period of approximately $6.6 million, (e) a decrease in the net change in other
assets and liabilities of approximately $5.1 million from the prior year period,
(f) a decrease in the net change in accrued interest of approximately $2.8
million, (g) a decrease in the net change in the restructuring reserve of
approximately $1.1 million, (h) a decrease in the net change in the loss (gain)
on sales of property, plant and equipment from the prior year period of
approximately $0.3 million and (i) a decrease in the provision for losses on
doubtful receivables from prior year period of approximately $0.3 million.
Approximately $17.0 million of cash was used in investing activities in the
first nine months of fiscal year 2003, a decrease of approximately $5.3 million
from the same period of the prior year. The decrease was primarily due to: (a) a
decrease in payments for acquisitions from the prior year period of
approximately $8.2 million, (b) a decrease in capital expenditures of
approximately $6.8 million from the prior year period, (c) an increase in
proceeds from the sales of property, plant and equipment from the prior year
period of approximately $4.8 million and (d) a decrease in the net payments for
intangibles from the prior year period of approximately $1.6 million. The
decrease in cash used in investing activities was offset by a deposit of
approximately $16.1 million in fiscal year 2003.
Approximately $34.3 million of cash was used in financing activities in the
first nine months of fiscal 2003, a decrease of approximately $34.7 million from
the approximate $0.4 million cash provided by financing activities in the prior
year period. The decrease was primarily due to decreased net loan and senior
note proceeds of approximately $52.5 million from the prior year period. The
decrease in cash provided by financing activities was partially offset by: (a) a
decrease in the payment of deferred financing fees from the prior year period of
approximately $10.6 million, (c) a decrease from the prior year period for the
payments of the prepayment penalty and terminated interest rate swap related to
the refinancing of approximately $5.3 million and (d) an increase in cash
received from the exercise of stock options of approximately $1.9 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 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.
26
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 interest rate for the third
quarter of fiscal year 2003 was LIBOR, plus 250 basis points. As of June 30,
2003, the amount outstanding on the Term B Loan was $133.5 million. The average
interest rate at June 30, 2003 on the Term B Loan was 4.74% 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 interest rate for the third
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 June 30, 2003, the amount
outstanding on the Revolver was $6.5 million. The average interest rate at June
30, 2003 on the Revolver was 5.32%. 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 June 30, 2003, a total of $2.9 million in
letters of credit was issued. As of June 30, 2003, the amount available under
the Revolver was $110.6 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 June 30, 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 June
30, 2003.
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 June 30, 2003, we had two interest rate
swap agreements outstanding aggregating a notional amount of approximately $47.1
million. On February 11, 2003, we assigned an interest
27
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 June 30, 2003 are as
follows:
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE SWAP EFFECTIVE DATE
--------------- --------------- ------------------- ------------------- -------------------
March 31, 2005 $21.7 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 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 June 30, 2003):
PAYMENTS DUE FOR THE TWELVE MONTH PERIODS ENDING JUNE 30,
------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
--------- ------- ------- ------- -------- ---------- ---------
(IN THOUSANDS)
Long-term debt.............. $ 3,918 $ 1,998 $ 2,008 $ 8,521 $ 2,053 $ 136,068 $ 154,566
Senior subordinated notes... -- -- -- -- -- 150,000 150,000
Standby letters of credit... 2,928 -- -- -- -- -- 2,928
Operating leases............ 5,257 4,856 3,257 2,138 1,770 6,502 23,780
--------- ------- ------- ------- -------- --------- ---------
Total contractual cash
obligations............ $ 12,103 $ 6,854 $ 5,265 $10,659 $ 3,823 $ 292,570 $ 331,274
========= ======= ======= ======= ======== ========= =========
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
28
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 June 30, 2003,
we had $304.6 million in total long-term borrowings (including current portion),
and $187.9 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;
- 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.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND WE CANNOT BE CERTAIN THAT WE
WILL BE ABLE TO COMPETE EFFECTIVELY.
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.;
29
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. Some of these companies have a larger sales
force and invest more heavily in research, product development and product
marketing than we do. As a result, we may not be able to achieve or maintain
adequate market share or margins, or compete effectively, against these
companies.
WE RELY HEAVILY ON MANUFACTURING OPERATIONS TO PRODUCE THE PRODUCTS WE SELL,
AND WE COULD BE INJURED BY DISRUPTIONS OF OUR MANUFACTURING OPERATIONS.
We rely upon our manufacturing operations to produce most of the products we
sell. While we do not presently anticipate any significant disruption of those
operations, should a disruption occur, for any reason, such as strikes, labor
disputes, or other labor unrest, power interruptions, fire, war, or other force
majuere, could adversely affect our sales and customer relationships and
therefore adversely affect our business. In particular, we rely upon our
facilities in Mexico to manufacture a substantial portion of our orthodontic
products. Any disruption in our ability to import those products into the United
States could severely impact our Orthodontics sales. Although most of our raw
materials are available from a number of potential suppliers, our operations
also depend upon our ability to obtain raw materials at reasonable prices.
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 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,
30
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 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.
31
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.
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
32
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 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 June 30, 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. In April 2003 and May 2003, we entered
into two additional 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. In April
2003 and May 2003, we entered into two additional zero cost collar contracts to
hedge intercompany transactions with a total notional amount of 360.0 million
Japanese yen for fiscal year 2004.
At June 30, 2003, approximately $2.2 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 June 30, 2003 are as follows (in
thousands, except rates):
33
LOCAL
TRADE EFFECTIVE MATURITY CURRENCY
CURRENCY DATE DATE DATE AMOUNT FLOOR RATE CEILING RATE
------------ ------------ ------------ ------------ ------------ ------------ ------------
Euro 07/16/2002 10/15/2002 09/16/2003 6,000 0.97 1.03
Euro 11/01/2002 11/15/2002 09/15/2003 4,500 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
Euro 04/14/2003 04/15/2004 06/15/2004 10,500 1.04 1.08
Euro 05/02/2003 07/15/2004 09/15/2004 10,500 1.09 1.13
Yen 06/25/2002 10/15/2002 09/15/2003 180,000 122.00 117.99
Yen 03/06/2003 10/15/2003 03/15/2004 360,000 117.00 115.37
Yen 04/14/2003 04/15/2004 06/15/2004 180,000 121.00 116.75
Yen 05/01/2003 07/15/2004 09/15/2004 180,000 119.50 116.75
As of June 30, 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 fifteen months for the Japanese yen and
fifteen 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 June 30, 2003, the fair value of the cross currency debt swap transaction
loss included in translation adjustments was approximately $2.8 million (net of
income tax).
As a result of terminating the cross currency debt swap transaction in
fiscal 2002 to hedge our net investment in Hawe Neos, we recognized a loss to
the translation adjustment, a component of other comprehensive income (loss) in
the amount of approximately $0.9 million (net of income tax). This amount will
remain in translation adjustment, a component of other comprehensive income
(loss) until sale or upon complete or substantially complete liquidation of our
net investment in Hawe Neos.
INTEREST RATE EXPOSURE--INTEREST RATE RISK MANAGEMENT
We use 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.
34
The table below provides information about our debt obligations that are
sensitive to changes in interest rates as of June 30, 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 $157,500
Average Interest Rate ... 8.125% 8.125% 8.125% 8.125% 8.125% 8.125%
Variable Rate Debt ...... $ 3,918 $ 1,998 $ 2,008 $ 8,521 $ 2,053 $ 136,068 $154,566
Average Interest Rate ... 4.165% 5.245% 6.125% 6.805% 7.330% 7.725%
For the quarter ended June 30, 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 $0.3 million. At
June 30, 2003, approximately $2.5 million loss (net of income tax) is included
in accumulated other comprehensive income (loss). Below is a table listing the
interest expense exposure detail and the fair value of the interest rate swap
agreements as of June 30, 2003 (dollars in thousands):
THREE MONTHS
NOTIONAL ENDED FAIR VALUE
LOAN AMOUNT TERM TRADE EFFECTIVE MATURITY JUNE 30, 2003 (PRE-TAX)
------------- ---------- ---------- -------- ------------- ---------- ------------- -------------
Kerr B .............. $ 21,724 4 years 1/2/2001 3/30/2001 3/31/2005 $ 112.0 $ 1,211.2
Ormco B ............. 25,344 4 years 1/2/2001 3/30/2001 6/30/2006 155.4 2,738.5
-------- -------- ---------
Total .............. $ 47,068 $ 267.4 $ 3,949.7
======== ======== =========
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 $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 June 30, 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
June 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company's management, with the
participation of the Company's Chief Executive Office and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording,
35
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting: The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, also conducted an evaluation of the Company's internal control over
financial reporting to determine whether any changes occurred during the quarter
covered by this report that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
Based on that evaluation, we have concluded that there have been no such changes
during the period covered by this report.
PART II - OTHER INFORMATION
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:
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.
A Form 8-K was filed on July 29, 2003 to furnish the Company's press
release announcing the Company's financial results for the quarter and
nine-month period ended June 30, 2003.
A Form 8-K was filed on August 5, 2003 to furnish the transcript of the
Company's July 29, 2003 conference call, in which the Company reported on
the results of its operations for the third quarter and first nine months of
the 2003 fiscal year.
36
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: August 13, 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.
37
SYBRON DENTAL SPECIALTIES, INC.
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-16057)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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 A for the fiscal year ended September 30, 2000
Preferred Stock
3.2 Bylaws of the Registrant Exhibit 3.2 to the Form 10/A No. 2
31.1 Certification pursuant to Rule X
13a-14(a) or Rule 15d-14(a), as adopted
pursuant to section 302 of the Sarbanes
- Oxley Act of 2002
31.2 Certification pursuant to Rule X
13a-14(a) or Rule 15d-14(a), as adopted
pursuant to section 302 of the Sarbanes
- Oxley Act of 2002
32 Chief Executive and Chief Financial X
Officers' certification pursuant to 18
U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes
- Oxley Act of 2002
38