SYBRON DENTAL SPECIALTIES INC - 10-Q Quarterly Report

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 DECEMBER 31, 2003


o		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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

At February 4, 2004, there were 38,412,775 shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
	ITEM 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
PART II - OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES


				PAGE

PART I -		FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)			3
			Condensed Consolidated Balance Sheets, December 31, 2003 and September 30, 2003		3
			Condensed Consolidated Statements of Income for the three months ended December 31, 2003 and 2002		4
			Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the three months ended December 31, 2003		5
			Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2003 and 2002		6
			Notes to Unaudited Condensed 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			27
	Item 4.	Controls and Procedures			29
PART II -		OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K			29
Signature					30
Exhibit Index					31

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


			December 31,		September 30,
			2003		2003

			(in thousands except share and
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	23,047	$	22,868
	Accounts receivable, net			86,638		103,565
	Inventories			85,407		84,239
	Deferred income taxes			4,530		4,896
	Prepaid expenses and other current assets			12,390		11,624

		Total current assets		212,012		227,192
Property, plant and equipment, net				81,292		80,750
Goodwill				260,974		258,590
Intangible assets, net				16,388		16,455
Other assets				28,412		28,672

	Total assets		$	599,078	$	611,659

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	15,455	$	19,620
	Current portion of long-term debt			4,508		3,714
	Income taxes payable			15,904		16,274
	Accrued payroll and employee benefits			22,660		28,712
	Restructuring reserve			1,463		1,486
	Accrued rebates			11,712		9,872
	Accrued interest			731		3,901
	Other current liabilities			8,406		10,917

		Total current liabilities		80,839		94,496
Long-term debt				104,438		124,008
Senior subordinated notes				150,000		150,000
Deferred income taxes				11,709		13,748
Other liabilities				28,058		21,422

		Total liabilities		375,044		403,674
Commitments and contingent liabilities
Subsequent event
Stockholders’ equity:
	Preferred stock, $.01 par value; authorized 20,000,000 shares, no shares outstanding			—		—
	Common stock, $.01 par value; authorized 250,000,000 shares, 38,387,634 and 38,285,224 shares issued and outstanding at December 31, 2003 and September 30, 2003, respectively			384		383
	Additional paid-in capital			76,875		74,934
	Retained earnings			137,993		126,044
	Accumulated other comprehensive income			8,782		6,624

		Total stockholders’ equity		224,034		207,985

		Total liabilities and stockholders’ equity	$	599,078	$	611,659

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


			Three Months Ended
			December 31,

			2003			2002

			(in thousands except per share amounts)
Net sales			$	131,857		$	120,149
Cost of sales				59,899			55,574

Gross profit				71,958			64,575
Selling, general and administrative expenses				48,193			42,714
Amortization of intangible assets				309			404

	Total selling, general and administrative expenses			48,502			43,118

Operating income				23,456			21,457
Other expense:
	Interest expense			(5,160	)		(5,576	)
	Amortization of deferred financing fees			(407	)		(421	)
	Other, net			(54	)		(33	)

Income before income taxes				17,835			15,427
Income taxes				5,886			5,862

		Net income	$	11,949		$	9,565

Basic earnings per share			$	0.31		$	0.25

Diluted earnings per share			$	0.30		$	0.25

Weighted average shares outstanding:
		Basic		38,310			37,990

		Diluted		39,897			38,259

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)


		Common Stock
										Accumulated
						Additional				Other			Total			Total
		Number of				Paid-in		Retained		Comprehensive			Stockholders’			Comprehensive
		Shares		Par Value		Capital		Earnings		Income			Equity			Income

		(in thousands except share amounts)
Balance at September 30, 2003			38,285,224	$	383	$	74,934	$	126,044	$	6,624		$	207,985
Comprehensive income:
	Net income		—		—		—		11,949		—			11,949		$	11,949
	Translation adjustment		—		—		—		—		3,504			3,504			3,504
	Unrealized loss on derivative instruments		—		—		—		—		(1,346	)		(1,346	)		(1,346	)

Total comprehensive income																$	14,107

Issuance of common stock from stock options exercised			76,019		1		1,141		—		—			1,142
Income tax benefit from stock options exercised							278		—		—			278
Issuance of common stock from ESP plan			26,391		—		522		—		—			522

Balance at December 31, 2003			38,387,634	$	384	$	76,875	$	137,993	$	8,782		$	224,034

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


					Three Months Ended December 31,

					2003			2002

					(in thousands)
Cash flows from operating activities:
	Net income				$	11,949		$	9,565
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation				3,355			2,851
		Amortization of intangible assets				309			404
		Amortization of deferred financing fees				407			421
		Loss (gain) on sales of property, plant and equipment				(5	)		206
		Provision for losses on doubtful receivables				197			209
		Inventory provisions				1,069			1,082
		Deferred income taxes				(1,673	)		(2,612	)
		Tax benefit from issuance of stock under employee stock plan				278			—
	Changes in assets and liabilities, net of effects of businesses acquired:
		(Increase)/decrease in accounts receivable				16,757			(254	)
		(Increase)/decrease in inventories				(1,910	)		1,888
		(Increase)/decrease in prepaid expenses and other current assets				(766	)		671
		Decrease in accounts payable				(4,165	)		(2,082	)
		Increase/(decrease) in income taxes payable				(370	)		3,111
		Increase/(decrease) in accrued payroll and employee benefits				(6,052	)		1,875
		Increase in accrued rebates				1,840			2,802
		Decrease in restructuring reserve				(23	)		(581	)
		Decrease in accrued interest				(3,170	)		(3,245	)
		Increase/(decrease) in other current liabilities				(2,511	)		842
		Net change in other assets and liabilities				4,790			4,942

				Net cash provided by operating activities		20,306			22,095
Cash flows from investing activities:
	Capital expenditures					(2,679	)		(730	)
	Proceeds from sales of property, plant, and equipment					118			6
	Payments for intangibles					(232	)		(364	)

			Net cash used in investing activities			(2,793	)		(1,088	)
Cash flows from financing activities:
	Proceeds from credit facility					33,500			36,500
	Principal payments on credit facility					(51,210	)		(45,387	)
	Proceeds from long-term debt					818			846
	Principal payments on long-term debt					(2,030	)		(1,866	)
	Payment of deferred financing fees					—			(473	)
	Cash received from exercise of stock options					1,142			44
	Cash received from ESP plan					522			—

			Net cash used in financing activities			(17,258	)		(10,336	)
Effect of exchange rate changes on cash and cash equivalents						(76	)		(1,570	)

Net increase in cash and cash equivalents						179			9,101
Cash and cash equivalents at beginning of period						22,868			12,652

Cash and cash equivalents at end of period					$	23,047		$	21,753

Supplemental cash flow information:
	Cash paid during the period for interest				$	8,434		$	9,257

	Cash paid during the period for income taxes				$	4,906		$	2,774

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. OVERVIEW AND BASIS OF PRESENTATION

Sybron Dental Specialties, Inc. (“SDS” or the “Company”) was incorporated in Delaware on July 17, 2000. At the time of its incorporation the Company was a wholly-owned subsidiary of Sybron International Corporation, which is now known as Apogent Technologies Inc. (“Apogent”). The Company was created to effect the spin-off by Apogent of its dental business. As a part of the spin-off, which occurred on December 11, 2000, Apogent transferred to SDS, along with certain other assets, all of the capital stock of Sybron Dental Management, Inc. (“SDM”), which owned, directly or indirectly, the stock or other equity interest in the subsidiaries that held substantially all of the assets and liabilities of Apogent’s then dental business. Apogent then distributed to its shareholders, by means of pro rata distribution, all of the Company’s outstanding common stock together with related preferred stock purchase rights (the “spin-off”). As a result, SDS became an independent, publicly traded company.

The unaudited condensed 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 quarters ended December 31, 2003 and 2002 refer to the first quarters of fiscal years 2004 and 2003, respectively. The Company has reclassified certain prior year data to conform to the 2004 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. All such adjustments were of a normal recurring nature. The results for the period ended December 31, 2003 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated 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, 2003.

2. INVENTORIES

Inventories at December 31, 2003 and September 30, 2003 are presented below.


	December 31,			September 30,
	2003			2003

Raw materials and supplies	$	21,362		$	21,851
Work in process		17,546			19,211
Finished goods		51,608			47,544
Inventory reserves		(5,109	)		(4,367	)

	$	85,407		$	84,239

3. GOODWILL AND INTANGIBLE ASSETS, NET

Intangible assets are recorded at cost and are amortized using the straight-line method, over their estimated useful lives. The following table details the balances of the intangible assets as of December 31, 2003:


		Gross Carrying		Accumulated		Net Carrying
		Amount		Amortization		Amount

Intangibles Assets Subject To Amortization
Proprietary technology		$	15,669	$	9,370	$	6,299
Other			15,274		14,896		378

	Total	$	30,943	$	24,266		6,677

Intangibles Assets Not Subject To Amortization
Trademarks							9,711

	Total Intangible Assets					$	16,388

The following table represents the estimated amortization (calculated as of December 31, 2003) for each of the five twelve-month periods indicated:


	2004		2005		2006		2007		2008

Amortization of intangible assets	$	939	$	758	$	635	$	600	$	574

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires the Company to perform an assessment at least annually (or whenever events or changes in circumstances indicate that the carrying value may not be recoverable), of whether there is an indication that goodwill or non-amortizing intangible assets were impaired as of the date of the last assessment. 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, 2003. 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 there was no goodwill or non-amortizing intangible asset impairment as of October 1, 2003.

4. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefits: The Company participates in various defined benefit pension plans covering substantially all of its U.S. and Canadian employees. The benefits are generally based on various formulas, the principal factors of which are years of service and compensation. Plan assets are invested primarily in U.S. stocks, bonds and international stocks. In addition to the defined benefit plans, the Company provides certain health care benefits for certain U.S. employees, which are funded as costs are incurred. Eligible salaried employees who reached age 55 prior to January 1, 1996 became eligible for postretirement health care benefits only if they reach retirement age while working for SDS. However, under the current collective bargaining agreement between Kerr Corporation and the United Auto Workers, the bargaining unit employees qualify for postretirement health care benefits. The Company accrues, as current costs, the future lifetime retirement benefits for qualifying active employees. The postretirement health care plans currently follow a policy instituted by the predecessor of Apogent in 1986 where the Company’s contributions were frozen at the levels equal to the Corporation’s contributions on December 31, 1988, except where collective bargaining agreements prohibited such a freeze.

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


							Other Postretirement
	Pension Benefits						Benefits

	Three Months Ended						Three Months Ended
	December 31,						December 31,

	2003			2002			2003		2002

Service cost	$	985		$	786		$	119	$	73
Interest cost		820			726			205		171
Expected return on plan assets		(948	)		(768	)		—		—
Amortization of prior service cost		24			25			—		—
Amortization of actuarial loss		302			173			121		65

Net periodic benefit cost	$	1,183		$	942		$	445	$	309

The Company is currently assessing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The accumulated benefit obligation and the net periodic benefit cost do not reflect the effects of the Act. Specific authoritative guidance on accounting for the federal subsidy is pending. The issued guidance could require the Company to change previously reported information.

The Company’s funding policy is to generally make annual contributions in excess of both the minimum required contributions required by applicable regulations and the amount needed in order to avoid any Pension Benefit Guarantee Corporation (“PBGC”) variable premium payments, and to not have any additional minimum liability under SFAS No. 87, “Employers’ Accounting for Pensions.” The calculations required to determine the amount of the annual contributions are typically performed in the third quarter of each fiscal year. The current fiscal year’s contributions have not yet been calculated.

5. 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 the Company has either terminated or plans to terminate as a 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 requires settlement in cash related to severance and contractual obligations, $300 requires settlement in cash for tax liabilities included in income taxes payable and the balance of approximately $302 relates to non-cash charges. The Company expects to complete the balance of the 2002 restructuring plan by the end of fiscal 2004.

The 2002 restructuring charge activity since September 30, 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		1,761		278		—		—		—		—		229		80		2,348
Fiscal 2003 Non-Cash Charges		—		—		—		106		196		—		—		—		302

September 30, 2003 Balance		516		54		—		—		—		300		—		33		903
Fiscal 2004 Cash Payments		24		—		—		—		—		—		—		—		24

December 31, 2003 Balance	$	492	$	54	$	—	$	—	$	—	$	300	$	—	$	33	$	879

(a)		The amount primarily represents 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.

(b)		Amount represents lease payments and shutdown costs on exited facilities.

(c)		Amount represents write-offs of inventory and fixed assets associated with discontinued product lines.

(d)		Amount represents $300 for tax liabilities included in income taxes payable.

(e)		Amount represents certain contractual obligations.

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 1998 restructuring charge activity since June 30, 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 Payments		—		—		—		—		—		—		—		(6	)		(6	)

September 30, 2003 Balance		—		—		—		—		—		700		—		183			883
Fiscal 2004 Non-Cash Payments		—		—		—		—		—		—		—		(1	)		(1	)

December 31, 2003 Balance	$	—	$	—	$	—	$	—	$	—	$	700	$	—	$	184		$	884

(a)

The amount primarily 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 charge of $700 represents a statutory tax relating to assets transferred from an exited sales facility in Switzerland.

(e) Amount represents certain contractual obligations.

6. SEGMENT INFORMATION

The Company is a global manufacturer and marketer of a broad range of consumable dental products and related small equipment, and a manufacturer and distributor of products for use in infection prevention in both the medical and dental markets. The Company’s subsidiaries operate in two business segments: Professional Dental and Orthodontics.

The following table presents the results of operations for these business segments for the quarters ended December 31:


				Professional
				Dental		Orthodontics		Eliminations			Total SDS

2003
	Revenues:
		External customer		$	71,444	$	60,413	$	—		$	131,857
		Intersegment			1,117		957		(2,074	)		—

			Total revenues	$	72,561	$	61,370	$	(2,074	)	$	131,857

	Gross profit			$	38,123	$	33,835	$	—		$	71,958
	Selling, general and administrative expenses				26,527		21,975		—			48,502
	Operating income				11,596		11,860		—			23,456
2002
	Revenues:
		External customer		$	70,928	$	49,221	$	—		$	120,149
		Intersegment			1,927		2,624		(4,551	)		—

			Total revenues	$	72,855	$	51,845	$	(4,551	)	$	120,149

	Gross profit			$	38,403	$	26,172	$	—		$	64,575
	Selling, general and administrative expenses				24,629		18,489		—			43,118
	Operating income				13,774		7,683		—			21,457

The following table presents the segment assets as of December 31, 2003 compared to the prior fiscal year end:


	Professional
	Dental		Orthodontics		Eliminations		Total SDS

December 31, 2003		436,209		162,869		—		599,078
September 30, 2003		431,212		180,447		—		611,659

7. 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 reflect the potential dilutive effect, calculated using the treasury stock method, of additional common shares that are issuable upon exercise of outstanding stock options as follows:


	Three Months Ended
	December 31,

	2003		2002

Basic shares outstanding (weighted average)		38,310		37,990
Effect of dilutive securities		1,587		269

Diluted shares outstanding		39,897		38,259

Options outstanding during the three months ended December 31, 2002 to purchase approximately 3,908 shares of common stock were not included in the computation of dilutive securities because inclusion would be anti-dilutive. No options to purchase shares of common stock were excluded from the computation of dilutive securities during the three months ended December 31, 2003.

8. 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.

As required under Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock-Based Compensation,” as amended, the pro forma effects of stock-based compensation on net income and net earnings per common share have been estimated as of the date of grant using the Black-Scholes option-pricing model.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable and negotiable in a free trading market. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options, 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 measure of the fair value of its options. The Black-Scholes weighted average fair value of stock options granted during the three months ended December 31, 2002 was $4.41. No stock options were granted during the three months ended December 31, 2003. The weighted average estimated fair value of purchase rights pursuant to the Employee Stock Purchase Plan (the “ESPP”) during the three months ended December 31, 2003, the initial purchase pursuant to the ESPP, was $4.91.

For purposes of pro forma disclosures, the estimated fair value of each option is assumed to be amortized to expense over its vesting period. The pro forma effects of recognizing compensation expense under the fair value method on net income and net earnings per common share were as follows:


		Three Months
		Ended December 31,

		2003		2002

Net income, as reported		$	11,949	$	9,565
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			947		642

Pro forma net income:		$	11,002	$	8,923

Earnings per share:
	Basic - as reported	$	0.31	$	0.25

	Basic - pro forma	$	0.29	$	0.23

	Diluted - as reported	$	0.30	$	0.25

	Diluted - pro forma	$	0.28	$	0.23

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.

9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

Prior to January 1, 2003, SDM was a guarantor subsidiary of the Company’s 8 1/8% 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 December 31, 2003 and September 30, 2003, statements of income for the three months ended December 31, 2003 and 2002, and statements of cash flows for the three months ended December 31, 2003 and 2002, of Sybron Dental Specialties, Inc. and its subsidiaries, reflecting the subsidiary guarantors of the Senior Subordinated Notes.

Certain general corporate expenses have been allocated to the subsidiaries. As a matter of course, the Company retains certain assets and liabilities at the corporate level that are not allocated to the subsidiaries including, but not limited to, certain employee benefit, insurance and tax liabilities. Intercompany balances include receivables/payables incurred in the normal course of business in addition to investments and loans transacted by subsidiaries of the Company with other subsidiaries or with the Company.

Condensed Consolidating Balance Sheets


			As of December 31, 2003

									Non
			Sybron Dental			Guarantor			Guarantor
			Specialties			Subsidiaries			Subsidiaries		Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalents		$	(1,782	)	$	(894	)	$	25,723	$	—		$	23,047
	Account receivable, net			25			46,710			39,903		—			86,638
	Inventories			—			54,953			30,454		—			85,407
	Other current assets			8,495			2,827			5,598		—			16,920

		Total current assets		6,738			103,596			101,678		—			212,012
Property, plant and equipment, net				8,509			25,908			46,875		—			81,292
Goodwill				—			192,976			67,998		—			260,974
Intangible assets, net				—			16,223			165		—			16,388
Intercompany balances				—			181,984			80,404		(262,388	)		—
Other assets				15,393			10,463			2,556		—			28,412

		Total assets	$	30,640		$	531,150		$	299,676	$	(262,388	)	$	599,078

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Account payable		$	412		$	10,025		$	5,018	$	—		$	15,455
	Current portion of long-term debt			—			986			3,522		—			4,508
	Income taxes payable			7,048			2,203			6,949		(296	)		15,904
	Accrued expenses and other current liabilities			5,370			22,526			17,076		—			44,972

		Total current liabilities		12,830			35,740			32,565		(296	)		80,839
Long-term debt				12,500			89,929			2,009		—			104,438
Senior subordinated notes				150,000			—			—		—			150,000
Deferred income taxes				10,973			—			736		—			11,709
Other liabilities				27,189			17			852		—			28,058
Intercompany balances				178,485			—			—		(178,485	)		—

		Total liabilities		391,977			125,686			36,162		(178,781	)		375,044
Commitments and contingent liabilities
Subsequent event
Stockholders’ equity (deficit):
		Preferred stock		—			—			—		—			—
		Common stock		4,275			53			7,081		(11,025	)		384
Additional paid-in capital				(273,882	)		279,675			141,163		(70,081	)		76,875
Retained earnings (accumulated deficit)				(70,045	)		118,583			91,956		(2,501	)		137,993
Accumulated other comprehensive income (loss)				(21,685	)		7,153			23,314		—			8,782

		Total stockholders’ equity (deficit)		(361,337	)		405,464			263,514		(83,607	)		224,034

		Total liabilities and stockholders’ equity (deficit)	$	30,640		$	531,150		$	299,676	$	(262,388	)	$	599,078

Condensed Consolidating Balance Sheets


			As of September 30, 2003

									Non
			Sybron Dental			Guarantor			Guarantor
			Specialties			Subsidiaries			Subsidiaries		Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalents		$	3,817		$	1,164		$	17,887	$	—		$	22,868
	Account receivable, net			108			55,242			48,215		—			103,565
	Inventories			—			56,561			27,678		—			84,239
	Other current assets			7,845			2,695			5,980		—			16,520

		Total current assets		11,770			115,662			99,760		—			227,192
Property, plant and equipment, net				8,684			25,544			46,522		—			80,750
Goodwill				—			192,976			65,614		—			258,590
Intangible assets, net				—			16,277			178		—			16,455
Intercompany balances				—			186,371			75,946		(262,317	)		—
Other assets				15,395			10,897			2,380		—			28,672

		Total assets	$	35,849		$	547,727		$	290,400	$	(262,317	)	$	611,659

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Account payable		$	768		$	13,665		$	5,187	$	—		$	19,620
	Current portion of long-term debt			—			1,285			2,429		—			3,714
	Income taxes payable			10,929			(1,183	)		6,735		(207	)		16,274
	Accrued expenses and other current liabilities			11,496			23,502			19,890		—			54,888

		Total current liabilities		23,193			37,269			34,241		(207	)		94,496
Long-term debt				10,000			109,871			4,137		—			124,008
Senior subordinated notes				150,000			—			—		—			150,000
Deferred income taxes				13,036			—			712		—			13,748
Other liabilities				20,528			94			800		—			21,422
Intercompany balances				178,414			—			—		(178,414	)		—

		Total liabilities		395,171			147,234			39,890		(178,621	)		403,674
Commitments and contingent liabilities
Subsequent event
Stockholders’ equity (deficit):
		Preferred stock		—			—			—		—			—
		Common stock		4,274			53			7,081		(11,025	)		383
Additional paid-in capital				(275,815	)		281,295			139,535		(70,081	)		74,934
Retained earnings (accumulated deficit)				(70,045	)		113,330			85,349		(2,590	)		126,044
Accumulated other comprehensive income (loss)				(17,736	)		5,815			18,545		—			6,624

		Total stockholders’ equity (deficit)		(359,322	)		400,493			250,510		(83,696	)		207,985

		Total liabilities and stockholders’ equity (deficit)	$	35,849		$	547,727		$	290,400	$	(262,317	)	$	611,659

Condensed Consolidating Statements of Income


		For The Three Months Ended December 31, 2003

								Non
		Sybron Dental			Guarantor			Guarantor
		Specialties			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	—		$	73,515		$	60,416		$	(2,074	)	$	131,857
Cost of sales			263			26,970			34,740			(2,074	)		59,899

Gross profit			(263	)		46,545			25,676			—			71,958
Selling, general and administrative expenses			5,464			27,780			15,258			—			48,502

Operating income (loss)			(5,727	)		18,765			10,418			—			23,456
Other income (expense):
	Interest expense		(3,353	)		(1,721	)		(86	)		—			(5,160	)
	Amortization of deferred financing fees		—			(407	)		—			—			(407	)
	Other, net		9,080			(8,007	)		(1,127	)		—			(54	)

Income before income taxes			—			8,630			9,205			—			17,835
Income taxes			—			3,377			2,598			(89	)		5,886

Net income		$	—		$	5,253		$	6,607		$	89		$	11,949


		For The Three Months Ended December 31, 2002

								Non
		Sybron Dental			Guarantor			Guarantor
		Specialties			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales		$	—		$	70,411		$	54,289		$	(4,551	)	$	120,149
Cost of sales			256			30,604			29,265			(4,551	)		55,574

Gross profit			(256	)		39,807			25,024			—			64,575
Selling, general and administrative expenses			6,604			24,085			12,452			(23	)		43,118

Operating income (loss)			(6,860	)		15,722			12,572			23			21,457
Other income (expense):
	Interest expense		(3,755	)		(1,739	)		(82	)		—			(5,576	)
	Amortization of deferred financing fees		—			(421	)		—			—			(421	)
	Other, net		10,615			(9,673	)		(975	)		—			(33	)

Income before income taxes			—			3,889			11,515			23			15,427
Income taxes			—			2,807			3,097			(42	)		5,862

Net income		$	—		$	1,082		$	8,418		$	65		$	9,565

Condensed Consolidating Statements of Cash Flows


			For The Three Months Ended December 31, 2003

									Non
			Sybron Dental			Guarantor			Guarantor
			Specialties			Subsidiaries			Subsidiaries			Eliminations		Consolidated

Cash flows provided by (used in) operating activities			$	(6,920	)	$	14,350		$	12,876		$	—	$	20,306
Cash flows from investing activities:
	Capital expenditures			(311	)		(1,668	)		(700	)		—		(2,679	)
	Proceeds from sales of property, plant, and equipment			—			—			118			—		118
	Payments for intangibles			—			(232	)		—			—		(232	)

		Net cash used in investing activities		(311	)		(1,900	)		(582	)		—		(2,793	)
Cash flows from financing activities:
	Proceeds from credit facility			18,500			15,000			—			—		33,500
	Principal payments on credit facility			(16,000	)		(35,210	)		—			—		(51,210	)
	Proceed from long-term debt			—			—			818			—		818
	Principal payments on long-term debt			—			(23	)		(2,007	)		—		(2,030	)
	Cash received from exercise of stock options			1,142			—			—			—		1,142
	Cash received from ESP plan			522			—			—			—		522

		Net cash provided by (used in) financing activities		4,164			(20,233	)		(1,189	)		—		(17,258	)
Effect of exchange rate changes on cash and cash equivalents				(2,603	)		1,338			1,189			—		(76	)
Net change in intercompany balances				71			4,387			(4,458	)		—		—

Net increase (decrease) in cash and cash equivalents				(5,599	)		(2,058	)		7,836			—		179
Cash and cash equivalents at beginning of period				3,817			1,164			17,887			—		22,868

Cash and cash equivalents at end of period			$	(1,782	)	$	(894	)	$	25,723		$	—	$	23,047

Supplemental cash flow information:
	Cash paid during the period for interest		$	6,398		$	1,940		$	96		$	—	$	8,434

	Cash paid during the period for income taxes		$	2,429		$	—		$	2,477		$	—	$	4,906

Condensed Consolidating Statements of Cash Flows


			For The Three Months Ended December 31, 2002

									Non
			Sybron Dental			Guarantor			Guarantor
			Specialties			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Cash flows provided by operating activities			$	3,083		$	11,463		$	7,526		$	23		$	22,095
Cash flows from investing activities:
	Capital expenditures			(105	)		(400	)		(225	)		—			(730	)
	Proceeds from sales of property, plant, and equipment			—			—			6			—			6
	Payments for intangibles			—			(347	)		(17	)		—			(364	)

		Net cash used in investing activities		(105	)		(747	)		(236	)		—			(1,088	)
Cash flows from financing activities:
	Proceeds from credit facility			36,500			—			—			—			36,500
	Principal payments on credit facility			(45,000	)		(387	)		—			—			(45,387	)
	Proceed from long-term debt			—			34			812			—			846
	Principal payments on long-term debt			—			(19	)		(1,847	)		—			(1,866	)
	Payment of deferred financing fees			—			(473	)		—			—			(473	)
	Cash received from exercise of stock options			44			—			—			—			44

		Net cash used in financing activities		(8,456	)		(845	)		(1,035	)		—			(10,336	)
Effect of exchange rate changes on cash and cash equivalents				(2,796	)		907			342			(23	)		(1,570	)
Net change in intercompany balances				9,559			(7,669	)		(1,890	)		—			—

Net increase in cash and cash equivalents				1,285			3,109			4,707			—			9,101
Cash and cash equivalents at beginning of period				(4	)		(3,928	)		16,584			—			12,652

Cash and cash equivalents at end of period			$	1,281		$	(819	)	$	21,291		$	—		$	21,753

Supplemental cash flow information:
	Cash paid during the period for interest		$	7,224		$	1,984		$	49		$	—		$	9,257

	Cash paid during the period for income taxes		$	186		$	—		$	2,588		$	—		$	2,774

10. SUBSEQUENT EVENT

Subsequent to December 31, 2003, the Company announced the implementation of a plan to close its manufacturing facility in Tijuana, Mexico over the next four fiscal quarters and transfer the production currently taking place there to its other facilities in Mexico.

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 December 31, 2003 and 2002 refer to the first quarters of fiscal 2004 and 2003, respectively.

General

We are a leading global manufacturer and marketer of a broad range of consumable dental products and related small equipment, and as a manufacturer and distributor of products for use in infection prevention in both the medical and dental markets. Our subsidiaries 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.

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.
KerrHawe S.A.
Metrex Research Corporation
SpofaDental a.s

Results of Operations

Overview

Our net sales in the first quarter of fiscal 2004 were $131.9 million, an increase of 9.7% over the corresponding prior year period, of which 5.2% is due to favorable currency translation, 3.0% is due to the acquisition of SpofaDental a.s. in the fourth quarter of fiscal 2003, and 1.5% is due to net internal growth, which excludes the net sales of SpofaDental and currency fluctuations.

Our domestic sales for the first quarter ended December 31, 2003 were $69.7 million, representing an increase of $0.7 million or 1.0% over the comparable prior year period. International sales increased by $11.0 million, or 21.5%, to $62.2 million for the quarter ended December 31, 2003 compared to the same period in the prior year. Foreign currency fluctuations in the quarter ended December 31, 2003 represented $6.3 million of the increase in international sales over the comparable prior year period.

Our revenues were impacted by increased sales in our Orthodontics segment for existing products, such as our Damon 2 self-ligating bracket, as well as the introduction of new products, such as our Titanium Orthos2 buccal tubes and our Inspire Ice clear-ceramic brackets. We expect to see continued revenue growth in fiscal 2004 as we promote the Damon 2 system through educational seminars and introduce extensions to our line of high-end brackets. Another contributor to our growth in the Orthodontic segment in the first quarter of fiscal 2004 was our endodontic product line. We anticipate our planned expanded sales presence in Europe this year will continue to offer long-term growth opportunities in this market. In fiscal 2003 we transferred the net sales of a portion of our endodontic product line from the Professional Dental segment to the Orthodontic segment. At the commencement of the 2004 fiscal

year we transferred the remaining net sales of our European endodontic product line from the Professional Dental segment to the Orthodontics segment. The operating results of the Professional Dental segment for fiscal year 2004 do not include the net sales of the recently transferred European endodontic product line. They are, however, included in the fiscal 2003 results. The operating results of the Orthodontics segment include the net sales of the recently transferred European endodontic product line in fiscal year 2004, but do not reflect the net sales of those products in 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 2004, there was no impact on our reported consolidated results of operations for the fiscal quarter.

Our Professional Dental segment experienced lower than historical internal revenue growth, largely the result of a decrease in the net sales of our LED curing light, when compared to sales in the first quarter of fiscal 2003. The LED curing light was introduced in the first quarter of fiscal 2003 and generated significant net sales during that quarter. While our LED curing light sales comparison to prior periods will continue to reflect lower revenues, we anticipate our consumable products to reflect positive internal growth for the remainder of fiscal 2004. We have scheduled the introduction of 18 new products in fiscal 2004 for our Professional Dental segment. Two of these products introduced in the first quarter, Stand-Out and Fill-In, had a delayed introduction into the market, which also contributed to lower than expected sales in this business segment. Other factors expected to impact revenues are the weakening economy in Asia, as well as reductions to regulatory health reimbursement programs in Germany, which will have a somewhat negative impact on the Orthodontic segment sales for rest fiscal 2004. Additionally, we expect to see continued pricing pressures in a competitive environment in both business segments this fiscal year.

Operating income for the first quarter of fiscal 2004 was $23.5 million, representing an increase of 9.3% from the corresponding fiscal 2003 period. Operating income was negatively impacted by increased selling, general and administrative expenses for the quarter ended December 31, 2003 of $5.4 million, or 12.5%, from the corresponding prior year period. The increase in selling, general and administrative expense is primarily the result of increased expenses due to; foreign currency translation rates, the timing in recognition of advertising and promotional expenses, sales commissions, research and development, and expenses incurred by our newly acquired company, SpofaDental a.s. Lastly, we are continuing to incur expenses in association with Sarbanes-Oxley compliance efforts, both in terms of one-time costs as well as ongoing expenses. We expect these expenses to be approximately $0.75 million per quarter for the remainder of fiscal 2004.

Interest expense in the first quarter of fiscal 2004 was $5.2 million, or $0.4 million less than the prior year period. The decrease was a result of lower average debt in the quarter of $269.8 million, or $66.9 million less than in the prior year period, partially offset by an increase in the average interest rate to 7.48%, from 6.48% in the prior year period. The average interest rate is expected to continue to increase as we pay down our lower interest-bearing debt in fiscal 2004. Due to payment terms and hedging contracts, our higher interest-bearing debt is unavailable for non-scheduled principal payments in the current fiscal year.

Income taxes in the first quarter of fiscal 2004 were $5.9 million, or 33.0% of income before taxes as compared to income taxes of $5.9 million, or 38.0% of income before taxes in the corresponding fiscal 2003 period. The 5.0% reduction in our tax rate is primarily attributable to the benefits resulting from the consolidation of several of our European facilities into Switzerland, which has a lower tax rate. We believe that our effective tax rate for the full year will remain at 33.0%. However, this is based on current assumptions regarding the income contributions from our various operations around the world. Should the income contributions from territories with higher tax rates exceed our expectations, then our effective tax rate could be higher than 33.0%.

Subsequent to December 31, 2003, we announced the implementation of a plan to close our manufacturing facility in Tijuana, Mexico over the next four fiscal quarters and transfer the production currently taking place there to our other facilities in Mexico. This facility rationalization is expected to result in an annual savings of $1.7 million, with an expected cost of $2.1 million over the next four quarters. We expect a modest increase in our inventory levels for the next several quarters as we build inventory of certain products to cover demand during the transition of production to the new facilities. We do not anticipate any impairment loss due to the closure of this facility.

Quarter Ended December 31, 2003 Compared to the Quarter Ended December 31, 2002

Net Sales


		Fiscal		Fiscal
Net Sales		2004		2003

		(in thousands)
Professional Dental		$	71,444	$	70,928
Orthodontics			60,413		49,221

	Total Net Sales	$	131,857	$	120,149

Overall Company. Net sales for the quarter ended December 31, 2003 increased by $11.7 million, or 9.7%, from the corresponding fiscal 2003 quarter.

Professional Dental. Increased net sales in the Professional Dental segment resulted primarily from: (a) the net sales of products from an acquired company (approximately $3.7 million) and (b) favorable foreign currency fluctuations (approximately $2.7 million). The increase in net sales was partially offset by: (a) decreased net sales of existing products (approximately $4.3 million), (b) a decrease in net sales due to the transfer of the European endodontic product sales to the Orthodontics segment, which contributed approximately $1.3 million in net sales to the Professional Dental segment in the comparable prior year period, and (c) increased rebate (approximately $0.3 million).

Orthodontics. Increased net sales in the Orthodontics segment resulted primarily from: (a) increased net sales of existing products (approximately $3.6 million), (b) favorable foreign currency fluctuations (approximately $3.6 million), (c) net sales of new products (approximately $2.1 million), (d) an increase in net sales due to the transfer of the European endodontic product sales from the Professional Dental segment, which contributed approximately $1.3 million in net sales to the Orthodontics segment in the first quarter of fiscal 2004, and (e) reduced rebate (approximately $0.6 million).

Gross Profit


		Fiscal		Percent of			Fiscal		Percent of
Gross Profit		2004		Net Sales			2003		Net Sales

		(in thousands, except percentages)
Professional Dental		$	38,123		53.4	%	$	38,403		54.1	%
Orthodontics			33,835		56.0			26,172		53.2

	Total Gross Profit	$	71,958		54.6	%	$	64,575		53.7	%

Overall Company. Gross profit for the quarter ended December 31, 2003 increased by $7.4 million or 11.4% from the corresponding fiscal 2003 quarter.

Professional Dental. Decreased gross profit in the Professional Dental segment resulted primarily from: (a) decreased net sales of existing products (approximately $2.4 million), (b) decreased gross profit due to the transfer of the European endodontic product line to the Orthodontics segment, which contributed approximately $0.3 million in gross profit for the Professional Dental segment in the comparable prior year period, (c) inventory adjustments (approximately $0.3 million, of which approximately $0.2 million is due to standard cost revisions and physical inventory adjustments of approximately $0.1 million) and (d) increased rebate (approximately $0.3 million). The decrease in gross profit was partially offset by: (a) gross profit derived from the net sales of products from an acquired company (approximately $1.8 million) and (b) favorable foreign currency fluctuations (approximately $1.2 million). Gross margin percent was negatively impacted in the quarter ended December 31, 2003 by reduced manufacturing volume, resulting in factory overhead being absorbed by fewer units, which offset the positive impact of favorable foreign currency fluctuations.

Orthodontics. Increased gross profit in the Orthodontics segment resulted primarily from: (a) favorable foreign currency fluctuations (approximately $3.6 million), (b) increased net sales of existing products (approximately $2.0 million), (c) gross profit relating to new products (approximately $1.1 million), (d) decreased rebate (approximately $0.5 million), (e) inventory adjustments (approximately $0.3 million, of which approximately $0.1 million is due to a decrease in obsolescence, standard cost revisions of approximately $0.1 million and physical inventory adjustments of approximately $0.1 million), and (f) increased gross profit due to the transfer of the European endodontic product line from the Professional Dental segment, which contributed approximately $0.3 million in gross profit to the Orthodontics segment in the first quarter of fiscal 2004. Gross margin percent was positively impacted in the quarter ended December 31, 2003 by increased manufacturing volume, resulting in factory overhead being absorbed by more units, and by the positive impact of favorable foreign currency fluctuations.

Selling, General and Administrative Expenses


		Fiscal		Percent of			Fiscal		Percent of
Selling, General and Administrative Expenses		2004		Net Sales			2003		Net Sales

		(in thousands, except percentages)
Professional Dental		$	26,527		37.1	%	$	24,629		34.7	%
Orthodontics			21,975		36.4			18,489		37.6

	Total Selling, General and Administrative Expenses	$	48,502		36.8	%	$	43,118		35.9	%

Overall Company. Selling, general and administrative expenses for the quarter ended December 31, 2003 increased by $5.4 million or 12.5% from the corresponding fiscal 2003 quarter.

Professional Dental. Increased selling, general and administrative expenses in the Professional Dental segment resulted primarily from: (a) expenses of an acquired company (approximately $1.5 million), (b) increased selling and marketing expenses (approximately $0.7 million), (c) an increase in expenses relating to foreign currency fluctuations (approximately $0.3 million) and (d) increased research and development expenses (approximately $0.1 million). The increase in selling, general and administrative expenses was partially offset by: (a) decreased general and administrative expenses (approximately $0.6 million) and (b) decreased amortization expense of other intangible assets (approximately $0.1 million).

Orthodontics. Increased selling, general and administrative expenses in the Orthodontics segment resulted primarily from: (a) increased selling and marketing expenses due to timing in recognition of the expenses (approximately $2.6 million), (b) increased expenses related to foreign currency fluctuations (approximately $0.7 million) and (c) increased research and development expenses (approximately $0.2 million).

Operating Income


		Fiscal		Percent of			Fiscal		Percent of
Operating Income		2004		Net Sales			2003		Net Sales

				(in thousands, except percentages)
Professional Dental		$	11,596		16.2	%	$	13,774		19.4	%
Orthodontics			11,860		19.6			7,683		15.6

	Total Operating Income	$	23,456		17.8	%	$	21,457		17.9	%

As a result of the foregoing, operating income for the quarter ended December 31, 2003 increased by 9.3% or $2.0 million from operating income in the corresponding quarter of fiscal 2003.

Interest Expense

Interest expense was $5.2 million in the first quarter of fiscal 2004, a decrease of $0.4 million from the corresponding fiscal 2003 quarter. The decrease resulted from reduced average debt balances from $336.7 million in fiscal 2003 to $269.8 million in fiscal 2004, partially offset by an increase in the average interest rate on debt from 6.48% in fiscal 2003 to 7.48% in fiscal 2004. Debt that was paid down in the first quarter of fiscal 2004 was adjustable rate debt with a lower average interest rate. This increase in interest rates is expected to continue for the balance of the year.

Income Taxes

Taxes on income in the first quarter of fiscal 2004 were $5.9 million, or 33.0% of income before taxes as compared to taxes on income of $5.9 million, or 38.0% of income before taxes in the corresponding 2003 period.

Liquidity and Capital Resources

Our main source of liquidity is cash generated by operating activities and, to a lesser extent, borrowings under our credit facility. The borrowings under our credit facility are made from our $120.0 million revolving credit facility, which is part of our $350 million syndicated credit facility. As of December 31, 2003, $103.3 million of the $120.0 million revolving credit was available for borrowing.

Cash provided by operations for the three months ended December 31, 2003 was $20.3 million, as compared to $22.1 million for the three months ended December 31, 2002 a decrease of $1.8 million. The decrease resulted primarily from decreases in accrued payroll, accounts payable and other current liabilities, as well as an increase in inventories. These factors were partially offset by a decrease in accounts receivable due to the timing of cash receipts in the beginning of the first quarter of fiscal 2004. Working capital decreased to $131.2 million at December 31, 2003 from $132.7 million at September 30, 2003. The current ratio increased to 2.6 at December 31, 2003 from 2.4 at September 30, 2003, primarily due to the decreases in accrued payroll, accounts payable and other current liabilities previously discussed. Days sales outstanding (“DSO”) was 61.1 for the three months ended December 31, 2003, as

compared to 60.9 days for the three months ended December 31, 2002 and 60.1 for the three months ended September 30, 2003. We usually see a slowdown in collections during the holiday season, as a result our fiscal first quarter DSO calculation is typically the highest of the year. Inventory days were 130 as of December 31, 2003, as compared to 153 days at December 31, 2002 due to our increased focus on supply chain and inventory management. We expect inventory levels to increase modestly over the next several quarters, as inventory of certain products is built to cover demand during the transition of manufacturing from our Tijuana facility to other facilities in Mexico.

Capital expenditures for property, plant and equipment were $2.7 million and $0.7 million for the first three months of 2004 and 2003, respectively. We expect capital expenditures for all of fiscal 2004 to be approximately $15.0 million.

Net cash used by financing activities for the three months ended December 31, 2003 was $17.3 million. Net debt repayments were $18.9 million, offset by cash received from the exercise of stock options and the employee stock purchase plan of $1.6 million.

We expect on an ongoing basis, to be able to finance cash requirements, including capital expenditures, debt service, operating leases and potential future acquisitions, from the funds generated from operations and amounts available under our existing credit facilities.

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 December 31, 2003.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

There have been no material changes to our contractual obligations outside the ordinary course of our business from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

Cautionary Factors

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

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact our business and financial prospects and affect our future results of operations and financial condition:

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.; 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 the 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 our results could be affected 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, it 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.

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 require significant interest payments. As of December 31, 2003, we had $258.9 million in total long-term borrowings (including current portion), and $224.0 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 service 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 may incur impairment charges on our intangible assets with indefinite lives that would reduce our earnings.

On October 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets that have an indefinite useful life be tested at least annually for impairment. Goodwill and other intangible assets with indefinite lives must also be tested for impairment between the annual test if an event occurs that would more likely than not reduce the fair value of the asset below its carrying amount. As of December 31, 2003, goodwill and other intangible assets with indefinite lives represented approximately 44% of our total assets. If during the testing an impairment loss is required, our financial results for the relevant period will be reduced by the amount of the impairment loss, net of income tax effects, if any.

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, Czech Republic and Italy. These products are supported by our sales offices in Europe, Japan, Australia, South America and Mexico. In fiscal 2003, our foreign facilities’ selling, general and administrative expenses represented approximately 31.7% of our consolidated selling, general and administrative expenses while our foreign sales represented approximately 43.1% 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 depreciate 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, 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 2003, approximately 25% 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 one of our top two distributors, the only distributors who account for more than 5% of our consolidated net sales and who sell primarily into the dental segment, 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.

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 the Czech Republic, 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 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 is 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. With the acquisition of SpofaDental a.s. on August 4, 2003, we now consider the Czech koruna a currency exposure.

For fiscal year 2004, our projected total foreign currency exposure is estimated to be approximately 88.3 million euros, 938.0 million Japanese yen, 11.5 million Canadian dollars, 17.8 million Australian dollars, 14.8 million Mexican peso, 28.3 million Czech koruna and 29.8 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, Mexican peso, Czech koruna and Swiss franc at December 31, 2003.

In January, March, April, and May 2003, we entered into a series of zero cost collar contracts to hedge intercompany transactions with a total notional amount of 42.0 million euros and 720.0 million Japanese yen for fiscal year 2004. In addition, in December 2003, we entered into a series of zero cost collar contracts to hedge intercompany transactions with a total notional amount of 9.0 million euros and 180.0 million Japanese yen for the first quarter of our fiscal year 2005.

At December 31, 2003, an unrealized loss of $3.5 million (net of income tax), representing the fair value of the zero cost collars, is included in accumulated other comprehensive income. In addition, none of the foreign currency cash flow hedges has been discontinued.

Zero cost collar contracts in place as of December 31, 2003 are as follows (in thousands, except rates):

Local

Maturity

Currency

Trade Date

Effective Date

Date

Amount

Floor Rate

Ceiling Rate

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

Euro

12/15/2003

10/15/2004

12/15/2004

9,000

1.20

1.24

Yen

03/06/2003

10/15/2003

03/15/2004

180,000

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

Yen

12/15/2003

10/15/2004

12/15/2004

180,000

108.00

104.40

As of December 31, 2003, the maximum length of time over which we are hedging our exposure to the variability in future cash flows associated with foreign currency forecasted transactions is twelve months for the Japanese yen and twelve months for the euro.

In June 2002, we entered into four cross currency debt swap transactions to hedge our net investment in Hawe Neos and one cross currency debt swap transaction to hedge our net investment in SDS Japan. The agreements are contracts to exchange U.S. dollar

principal aggregating a total amount of $45.0 million in exchange for a Swiss franc principal aggregating a total amount of 67.5 million and U.S. dollar principal amount of $4.0 million in exchange for a Japanese yen amount of 486.0 million. Both the Swiss franc contracts and the Japanese yen contract mature on June 15, 2007. The fixed interest rate to be paid to us on the U.S. dollar leg of the agreements is a 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.

The following are the details of the 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 December 31, 2003, an unrealized loss of $6.8 million (net of income tax), representing the fair value of the cross currency debt swap, was included in accumulated other comprehensive income.

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, our interest expense increases. Conversely, if interest rates decrease, our interest expense also decreases. We entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These interest rate swaps change a portion of our variable-rate cash flow exposure to fixed-rate cash flows.

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

The table below provides information about our debt obligations that are sensitive to changes in interest rates as of December 31, 2003. For these debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward 3-month LIBOR rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents.


		Twelve Months Ending December 31

Liabilities		2004			2005			2006			2007			2008			Thereafter			Fair Value

								(in thousands, except percentages)
Long-Term Debt:
	Fixed Rate Debt		—			—			—			—			—		$	150,000		$	163,125
	Average Interest Rate		8.125	%		8.125	%		8.125	%		8.125	%		8.125	%		8.125	%
	Variable Rate Debt	$	4,508		$	1,119		$	1,136		$	1,141		$	1,173		$	99,869		$	108,946
	Average Interest Rate		4.255	%		5.855	%		6.845	%		7.560	%		8.055	%		8.340	%

For the quarter ended December 31, 2003, the total net cost of converting from floating rate (3-month LIBOR) to fixed rate from a portion of the interest payments under our long-term debt obligations was approximately $0.5 million. At December 31, 2003, an unrealized loss of $1.8 million (net of income tax) is included in accumulated other comprehensive income. Below is a table listing the interest expense exposure detail and the fair value of the interest rate swap agreements as of December 31, 2003 (in thousands):

Three Months

Ended

Notional

December 31,

Fair Value

Loan

Amount

Term

Trade

Effective

Maturity

2003

(Pre-tax)

Kerr B

18,108

4 years

1/2/2001

3/30/2001

3/31/2005

170.6

950.7

Ormco B

25,345

5 years

1/2/2001

3/30/2001

6/30/2006

291.9

1,970.1

Total

43,453

462.5

2,920.8

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. 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.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures: The Company’s management, with the participation of the Company’s Chief Executive Officer 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, 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:

On November 18, 2003, the Company furnished a Current Report on Form 8-K furnishing the Company’s press release announcing the Company’s financial results for the quarter and twelve-month period ended September 30, 2003.

On January 27, 2004, subsequent to the end of the quarter for which this report is filed, the Company furnished a Current Report on Form 8-K furnishing the Company’s press release announcing the Company’s financial results for the quarter ended December 31, 2003.

SIGNATURE

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


		SYBRON DENTAL SPECIALTIES, INC. (Registrant)

Date: February 11, 2004		/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.

SYBRON DENTAL SPECIALTIES, INC.
(THE “REGISTRANT”)
(COMMISSION FILE NO. 1-16057)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2003


Exhibit Number	Description	Incorporated Herein By Reference To	Filed Herewith

3.1	(a) Restated Certificate of Incorporation of the Registrant	Exhibit 3.1 to Amendment No. 2 to the 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, Preferences and Rights of Series A Preferred Stock	Exhibit 3.1(b) to the Registrant’s Form 10-K for the fiscal year ended September 30, 2000
3.2	Bylaws of the Registrant	Exhibit 3.2 to the Form 10/A No. 2
31.1	Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002		X
31.2	Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes- Oxley Act of 2002		X
32	Chief Executive and Chief Financial Officers’ certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002		X

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	•		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.

	•		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 service 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.

	•		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.