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 MARCH 31, 2004

¨	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

incorporation or organization)

(I.R.S. Employer

Identification No.)

1717 WEST COLLINS AVENUE, ORANGE, CALIFORNIA 92867

(Address of principal executive offices) (Zip Code)

(714) 516-7400

(Registrant’s Telephone Number, Including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

At April 28, 2004, there were 38,543,849 shares of the Registrant’s Common Stock outstanding.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES


		PAGE
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	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	30
Item 4.	Controls and Procedures	32

PART II - OTHER INFORMATION

Item 4.	Submissions of Matters to a Vote of Security Holders	32
Item 6.	Exhibits and Reports on Form 8-K	32
Signature		33
Exhibit Index		34

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	March 31, 2004		September 30, 2003
	(in thousands except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	21,299	$	22,868
Accounts receivable, net		105,737		103,565
Inventories		85,839		84,239
Deferred income taxes		4,987		4,896
Prepaid expenses and other current assets		14,387		11,624

Total current assets		232,249		227,192
Property, plant and equipment, net		80,033		80,750
Goodwill		261,168		258,590
Intangible assets, net		16,276		16,455
Other assets		28,111		28,672

Total assets	$	617,837	$	611,659

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,586	$	19,620
Current portion of long-term debt		1,460		3,714
Income taxes payable		16,628		16,274
Accrued payroll and employee benefits		27,182		28,712
Restructuring reserve		1,080		1,486
Accrued rebates		7,626		9,872
Accrued interest		3,698		3,901
Other current liabilities		12,628		10,917

Total current liabilities		85,888		94,496
Long-term debt		97,322		124,008
Senior subordinated notes		150,000		150,000
Deferred income taxes		12,714		13,748
Other liabilities		24,456		21,422

Total liabilities		370,380		403,674
Commitments and contingent liabilities
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, 38,536,348 and 38,285,224 shares issued and outstanding at March 31, 2004 and September 30, 2003, respectively		385		383
Additional paid-in capital		79,621		74,934
Retained earnings		155,501		126,044
Accumulated other comprehensive income		11,950		6,624

Total stockholders’ equity		247,457		207,985

Total liabilities and stockholders’ equity	$	617,837	$	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 March 31,						Six Months Ended March 31,
	2004			2003			2004			2003
	(in thousands except for per share amounts)
Net sales	$	150,921		$	134,267		$	282,778		$	254,416
Cost of sales:
Cost of products sold		66,854			59,917			126,753			115,491
Restructuring charge		1,482			—			1,482			—

Total cost of sales		68,336			59,917			128,235			115,491

Gross profit		82,585			74,350			154,543			138,925
Selling, general and administrative expenses		50,800			44,060			98,993			86,774
Amortization of intangible assets		322			206			631			610

Total selling, general and administrative expenses		51,122			44,266			99,624			87,384

Operating income		31,463			30,084			54,919			51,541
Other income (expense):
Interest expense		(4,941	)		(5,403	)		(10,101	)		(10,979	)
Amortization of deferred financing fees		(402	)		(400	)		(809	)		(821	)
Other, net		11			893			(43	)		860

Income before income taxes		26,131			25,174			43,966			40,601
Income taxes		8,623			9,567			14,509			15,429

Net income	$	17,508		$	15,607		$	29,457		$	25,172

Basic earnings per share	$	0.46		$	0.41		$	0.77		$	0.66

Diluted earnings per share	$	0.44		$	0.40		$	0.74		$	0.66

Weighted average shares outstanding:
Basic		38,471			38,018			38,391			38,004

Diluted		40,166			38,658			40,032			38,379

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 SIX MONTHS ENDED MARCH 31, 2004

(UNAUDITED)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Number of Shares	Par Value		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	(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	—		—		—		29,457		—		29,457
Translation adjustment	—		—		—		—		5,153		5,153
Unrealized gain on derivative instruments	—		—		—		—		173		173

Total comprehensive income											34,783
Issuance of common stock from stock options exercised	224,733		2		3,351		—		—		3,353
Income tax benefit from stock options exercised	—		—		814		—		—		814
Issuance of common stock from ESP plan	26,391		—		522		—		—		522

Balance at March 31, 2004	38,536,348	$	385	$	79,621	$	155,501	$	11,950	$	247,457

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended March 31,
	2004			2003
	(in thousands)
Cash flows from operating activities:
Net income	$	29,457		$	25,172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		6,709			5,772
Amortization of intangible assets		631			610
Amortization of deferred financing fees		809			821
Loss (gain) on sales of property, plant and equipment		26			(616	)
Provision for losses on doubtful receivables		415			117
Inventory provisions		2,124			1,736
Deferred income taxes		(998	)		(2,482	)
Tax benefit from issuance of stock under employee stock option plans		814			59
Changes in assets and liabilities, net of effects of businesses acquired:
Increase in accounts receivable		(1,903	)		(11,420	)
(Increase)/decrease in inventories		(2,772	)		4,212
(Increase)/decrease in prepaid expenses and other current assets		(2,763	)		2,084
Decrease in accounts payable		(4,034	)		(85	)
Increase in income taxes payable		354			9,889
Increase/(decrease) in accrued payroll and employee benefits		(1,530	)		4,329
Increase/(decrease) in accrued rebates		(2,246	)		103
Decrease in restructuring reserve		(406	)		(1,574	)
Decrease in accrued interest		(203	)		(512	)
Increase in other current liabilities		1,711			1,406
Net change in other assets and liabilities		1,708			(71	)

Net cash provided by operating activities		27,903			39,550
Cash flows from investing activities:
Capital expenditures		(5,334	)		(2,856	)
Proceeds from sales of property, plant, and equipment		194			5,281
Payments for intangibles		(559	)		(669	)

Net cash (used in)/provided by investing activities		(5,699	)		1,756
Cash flows from financing activities:
Proceeds from credit facility		84,000			75,500
Principal payments on credit facility		(106,895	)		(104,237	)
Proceeds from long-term debt		2,469			3,259
Principal payments on long-term debt		(8,730	)		(2,126	)
Payment of deferred financing fees		—			(473	)
Cash received from exercise of stock options		3,353			451
Cash received from ESP plan		522			—

Net cash used in financing activities		(25,281	)		(27,626	)
Effect of exchange rate changes on cash and cash equivalents		1,508			978

Net (decrease)/increase in cash and cash equivalents		(1,569	)		14,658
Cash and cash equivalents at beginning of period		22,868			12,652

Cash and cash equivalents at end of period	$	21,299		$	27,310

Supplemental cash flow information:
Cash paid during the period for interest	$	10,442		$	12,098

Cash paid during the period for income taxes	$	12,958		$	5,376

See accompanying notes to unaudited condensed consolidated financial statements.

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS 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 March 31, 2004 and 2003 refer to the second 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 March 31, 2004 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 March 31, 2004 and September 30, 2003 are presented below.


	March 31, 2004			September 30, 2003
Raw materials and supplies	$	24,393		$	21,851
Work in process		17,715			19,211
Finished goods		49,270			47,544
Inventory reserves		(5,539	)		(4,367	)

	$	85,839		$	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 March 31, 2004:


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangibles Assets Subject To Amortization:
Proprietary technology	$	15,879	$	9,604	$	6,275
Other		14,792		14,502		290

Total	$	30,671	$	24,106		6,565

Intangibles Assets Not Subject To Amortization:
Trademarks						9,711

Total Intangible Assets					$	16,276

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 of goodwill or other intangible assets may not be recoverable), to determine 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. In addition, 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 Company’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:


	Pension Benefits												Other Postretirement Benefits
	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended March 31,				Six Months Ended March 31,
	2004			2003			2004			2003			2004		2003		2004		2003
Service cost	$	985		$	786		$	1,970		$	1,572		$	119	$	73	$	238	$	146
Interest cost		820			726			1,640			1,452			205		171		410		342
Expected return on plan assets		(948	)		(768	)		(1,896	)		(1,536	)		—		—		—		—
Amortization of prior service cost		24			25			48			50			—		—		—		—
Amortization of actuarial loss		302			173			604			346			121		65		242		130

Net periodic benefit cost	$	1,183		$	942		$	2,366		$	1,884		$	445	$	309	$	890	$	618

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 the January 2004, the Company implemented a plan to close the Tijuana facility by the end of the first quarter of fiscal 2005, and as a result of this plan, recorded a restructuring charge of $1,482 ($993 after tax) in the quarter ended March 31, 2004. The charge is composed of severance and termination costs associated with the 249 employees whose employment the Company plans to terminate as a result of the closure, and the charge is recorded in other current liabilities.

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 terminated 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:


	Severance		Lease Payments		Inventory Write-Off		Fixed Assets		Tax		Contractual Obligations		Other		Total
	(a)		(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		398		—		—		—		—		—		—		398

March 31, 2004 Balance	$	118	$	54	$	—	$	—	$	300	$	—	$	33	$	505

(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 terminated as a result of the 2002 European restructuring plan.

(b)	Amount represents lease payments 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:


	Severance		Lease Payments		Shut-Down Costs		Inventory Write-Off		Fixed Assets		Tax		Contractual 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 Charges		—		—		—		—		—		—		—		7			7

September 30, 2002 Balance		—		—		—		—		—		700		—		177			877
Fiscal 2003 Non-Cash Charges		—		—		—		—		—		—		—		(6	)		(6	)

September 30, 2003 Balance		—		—		—		—		—		700		—		183			883
Fiscal 2004 Non-Cash Charges		—		—		—		—		—		—		—		8			8

March 31, 2004 Balance	$	—	$	—	$	—	$	—	$	—	$	700	$	—	$	175		$	875

(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 quarter and six month periods ended March 31:


THREE MONTHS ENDED MARCH 31,	Professional Dental		Orthodontics		Eliminations			Total SDS
2004
Revenues:
External customer	$	83,849	$	67,072	$	—		$	150,921
Intersegment		796		961		(1,757	)		—

Total revenues	$	84,645	$	68,033	$	(1,757	)	$	150,921

Gross profit	$	46,426	$	36,159	$	—		$	82,585
Selling, general and administrative expenses		27,786		23,336		—			51,122
Operating income		18,640		12,823		—			31,463
2003
Revenues:
External customer	$	76,815	$	57,452	$	—		$	134,267
Intersegment		1,332		2,092		(3,424	)		—

Total revenues	$	78,147	$	59,544	$	(3,424	)	$	134,267

Gross profit	$	42,470	$	31,880	$	—		$	74,350
Selling, general and administrative expenses		24,793		19,473		—			44,266
Operating income		17,677		12,407		—			30,084


SIX MONTHS ENDED MARCH 31,	Professional Dental		Orthodontics		Eliminations			Total SDS
2004
Revenues:
External customer	$	155,293	$	127,485	$	—		$	282,778
Intersegment		1,913		1,918		(3,831	)		—

Total revenues	$	157,206	$	129,403	$	(3,831	)	$	282,778

Gross profit	$	84,549	$	69,994	$	—		$	154,543
Selling, general and administrative expenses		54,313		45,311		—			99,624
Operating income		30,236		24,683		—			54,919
2003
Revenues:
External customer	$	147,743	$	106,673	$	—		$	254,416
Intersegment		3,259		4,716		(7,975	)		—

Total revenues	$	151,002	$	111,389	$	(7,975	)	$	254,416

Gross profit	$	80,873	$	58,052	$	—		$	138,925
Selling, general and administrative expenses		49,422		37,962		—			87,384
Operating income		31,451		20,090		—			51,541

The following table presents the segment assets as of March 31, 2004 compared to the prior fiscal year end:


	Professional Dental	Orthodontics	Eliminations	Total SDS
March 31, 2004	448,085	169,752	—	617,837
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 March 31,		Six Months Ended March 31,
	2004	2003	2004	2003
Basic shares outstanding (weighted average)	38,471	38,018	38,391	38,004
Effect of dilutive securities	1,695	640	1,641	375

Diluted shares outstanding	40,166	38,658	40,032	38,379

Options outstanding during the three month and six month periods ended March 31, 2004 to purchase approximately 60,000 shares of common stock were not included in the computation of dilutive shares because inclusion would be anti-dilutive. Options outstanding during the three month and six month periods ended March 31, 2003 to purchase approximately 401,609 and 3,132,374, respectively, were also excluded in the computation of dilutive shares because inclusion would be anti-dilutive.

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 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 and six months ended March 31, 2004 was $8.11. The Black-Scholes weighted average fair values of stock options granted during the three months and six months ended March 31, 2003 were $4.57 and $4.43, respectively. The Black-Scholes weighted average estimated fair value of purchase rights pursuant to the Employee Stock Purchase Plan during the three months and six months ended March 31, 2004 was $4.91.

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


	Three Months Ended March 31,				Six Months Ended March 31,
	2004		2003		2004		2003
Net income, as reported	$	17,508	$	15,607	$	29,457	$	25,172
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		1,093		719		2,040		1,361

Pro forma net income:	$	16,415	$	14,888	$	27,417	$	23,811

Earnings per share:
Basic - as reported	$	0.46	$	0.41	$	0.77	$	0.66

Basic - pro forma	$	0.43	$	0.39	$	0.71	$	0.63

Diluted - as reported	$	0.44	$	0.40	$	0.74	$	0.66

Diluted - pro forma	$	0.41	$	0.38	$	0.68	$	0.62

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 8¹/8% 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 8¹/8% 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 March 31, 2004 and September 30, 2003, statements of income for the three months and six months ended March 31, 2004 and 2003, and statements of cash flows for the six months ended March 31, 2004 and 2003, 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 March 31, 2004
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	(496	)	$	(2,914	)	$	24,709	$	—		$	21,299
Account receivable, net		61			56,392			49,284		—			105,737
Inventories		—			53,678			32,161		—			85,839
Other current assets		8,804			2,601			7,969		—			19,374

Total current assets		8,369			109,757			114,123		—			232,249
Property, plant and equipment, net		8,214			25,770			46,049		—			80,033
Goodwill		—			192,976			68,192		—			261,168
Intangible assets, net		—			16,133			143		—			16,276
Intercompany balances		—			169,718			82,975		(252,693	)		—
Other assets		15,521			10,035			2,555		—			28,111

Total assets	$	32,104		$	524,389		$	314,037	$	(252,693	)	$	617,837

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Account payable	$	34		$	8,641		$	6,911	$	—		$	15,586
Current portion of long-term debt		—			868			592		—			1,460
Income taxes payable		1,552			6,451			9,010		(385	)		16,628
Accrued expenses and other current liabilities		10,616			22,575			19,023		—			52,214

Total current liabilities		12,202			38,535			35,536		(385	)		85,888
Long-term debt		22,500			74,821			1		—			97,322
Senior subordinated notes		150,000			—			—		—			150,000
Deferred income taxes		11,980			—			734		—			12,714
Other liabilities		23,543			15			898		—			24,456
Intercompany balances		168,791			—			—		(168,791	)		—

Total liabilities		389,016			113,371			37,169		(169,176	)		370,380
Stockholders’ equity (deficit):
Preferred stock		—			—			—		—			—
Common stock		385			3,944			7,081		(11,025	)		385
Additional paid-in capital		(271,128	)		278,618			142,212		(70,081	)		79,621
Retained earnings (accumulated deficit)		(66,841	)		121,331			103,422		(2,411	)		155,501
Accumulated other comprehensive income (loss)		(19,328	)		7,125			24,153		—			11,950

Total stockholders’ equity (deficit)		(356,912	)		411,018			276,868		(83,517	)		247,457

Total liabilities and stockholders’ equity	$	32,104		$	524,389		$	314,037	$	(252,693	)	$	617,837

Condensed Consolidating Balance Sheets


	As of September 30, 2003
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor 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
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	$	35,849		$	547,727		$	290,400	$	(262,317	)	$	611,659

Condensed Consolidating Statements of Income


	For The Three Months Ended March 31, 2004
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	80,733		$	71,945		$	(1,757	)	$	150,921
Cost of sales		284			30,468			39,341			(1,757	)		68,336

Gross profit		(284	)		50,265			32,604			—			82,585
Selling, general and administrative expenses		6,985			28,514			15,623			—			51,122

Operating income (loss)		(7,269	)		21,751			16,981			—			31,463
Other income (expense):
Interest expense		(3,421	)		(1,495	)		(25	)		—			(4,941	)
Amortization of deferred financing fees		—			(402	)		—			—			(402	)
Other, net		10,690			(9,553	)		(1,126	)		—			11

Income before income taxes		—			10,301			15,830			—			26,131
Income taxes		—			4,350			4,362			(89	)		8,623

Net income	$	—		$	5,951		$	11,468		$	89		$	17,508


	For The Three Months Ended March 31, 2003
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	78,582		$	59,109		$	(3,424	)	$	134,267
Cost of sales		266			31,397			31,678			(3,424	)		59,917

Gross profit		(266	)		47,185			27,431			—			74,350
Selling, general and administrative expenses		5,695			24,570			13,978			23			44,266

Operating income (loss)		(5,961	)		22,615			13,453			(23	)		30,084
Other income (expense):
Interest expense		(3,456	)		(1,865	)		(82	)		—			(5,403	)
Amortization of deferred financing fees		—			(400	)		—			—			(400	)
Other, net		9,167			(7,335	)		(939	)		—			893

Income (loss) before income taxes		(250	)		13,015			12,432			(23	)		25,174
Income taxes		(95	)		5,695			4,025			(58	)		9,567

Net income (loss)	$	(155	)	$	7,320		$	8,407		$	35		$	15,607


	For The Six Months Ended March 31, 2004
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	154,248		$	132,361		$	(3,831	)	$	282,778
Cost of sales		547			57,437			74,082			(3,831	)		128,235

Gross profit		(547	)		96,811			58,279			—			154,543
Selling, general and administrative expenses		12,450			56,293			30,881			—			99,624

Operating income (loss)		(12,997	)		40,518			27,398			—			54,919
Other income (expense):
Interest expense		(6,774	)		(3,215	)		(112	)		—			(10,101	)
Amortization of deferred financing fees		—			(809	)		—			—			(809	)
Other, net		19,771			(17,561	)		(2,253	)		—			(43	)

Income before income taxes		—			18,933			25,033			—			43,966
Income taxes		—			7,727			6,960			(178	)		14,509

Net income	$	—		$	11,206		$	18,073		$	178		$	29,457


	For The Six Months Ended March 31, 2003
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	148,993		$	113,398		$	(7,975	)	$	254,416
Cost of sales		522			62,001			60,943			(7,975	)		115,491

Gross profit		(522	)		86,992			52,455			—			138,925
Selling, general and administrative expenses		12,299			48,655			26,430			—			87,384

Operating income (loss)		(12,821	)		38,337			26,025			—			51,541
Other income (expense):
Interest expense		(7,211	)		(3,604	)		(164	)		—			(10,979	)
Amortization of deferred financing fees		—			(821	)		—			—			(821	)
Other, net		19,782			(17,008	)		(1,914	)		—			860

Income (loss) before income taxes		(250	)		16,904			23,947			—			40,601
Income taxes		(95	)		8,502			7,122			(100	)		15,429

Net income (loss)	$	(155	)	$	8,402		$	16,825		$	100		$	25,172

Condensed Consolidating Statements of Cash Flows


	For The Six Months Ended March 31, 2004
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations		Consolidated
Cash flows provided by (used in) operating activities	$	(5,600	)	$	13,775		$	19,728		$	—	$	27,903
Cash flows from investing activities:
Capital expenditures		(514	)		(3,154	)		(1,666	)		—		(5,334	)
Proceeds from sales of property, plant, and equipment		—			56			138			—		194
Payments for intangibles		—			(441	)		(118	)		—		(559	)

Net cash used in investing activities		(514	)		(3,539	)		(1,646	)		—		(5,699	)
Cash flows from financing activities:
Proceeds from credit facility		35,500			48,500			—			—		84,000
Principal payments on credit facility		(25,500	)		(81,395	)		—			—		(106,895	)
Proceed from long-term debt		—			—			2,469			—		2,469
Principal payments on long-term debt		—			(42	)		(8,688	)		—		(8,730	)
Cash received from exercise of stock options		3,353			—			—			—		3,353
Cash received from ESP plan		522			—			—			—		522

Net cash provided by (used in) financing activities		13,875			(32,937	)		(6,219	)		—		(25,281	)
Effect of exchange rate changes on cash and cash equivalents		(1,765	)		1,310			1,963			—		1,508
Net change in intercompany balances		(10,309	)		17,313			(7,004	)		—		—

Net increase (decrease) in cash and cash equivalents		(4,313	)		(4,078	)		6,822			—		(1,569	)
Cash and cash equivalents at beginning of period		3,817			1,164			17,887			—		22,868

Cash and cash equivalents at end of period	$	(496	)	$	(2,914	)	$	24,709		$	—	$	21,299

Supplemental cash flow information:
Cash paid during the period for interest	$	6,770		$	3,549		$	123		$	—	$	10,442

Cash paid during the period for income taxes	$	7,811		$			$	5,147		$	—	$	12,958

Condensed Consolidating Statements of Cash Flows


	For The Six Months Ended March 31, 2003
	Sybron Dental Specialties			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows provided by operating activities	$	6,064		$	20,531		$	12,842		$	113		$	39,550
Cash flows from investing activities:
Capital expenditures		—			(1,898	)		(958	)		—			(2,856	)
Proceeds from sales of property, plant, and equipment		—			5,234			47			—			5,281
Payments for intangibles		—			(646	)		(23	)		—			(669	)

Net cash provided by (used in) investing activities		—			2,690			(934	)		—			1,756
Cash flows from financing activities:
Proceeds from credit facility		70,500			5,000			—			—			75,500
Principal payments on credit facility		(98,500	)		(5,737	)		—			—			(104,237	)
Proceed from long-term debt		—			—			3,259			—			3,259
Principal payments on long-term debt		—			(88	)		(2,038	)		—			(2,126	)
Payment of deferred financing fees		—			(473	)		—			—			(473	)
Cash received from exercise of stock options		451			—			—			—			451

Net cash provided by (used in) financing activities		(27,549	)		(1,298	)		1,221			—			(27,626	)
Effect of exchange rate changes on cash and cash equivalents		(3,454	)		3,127			1,418			(113	)		978
Net change in intercompany balances		25,495			(22,698	)		(2,797	)		—			—

Net increase in cash and cash equivalents		556			2,352			11,750			—			14,658
Cash and cash equivalents at beginning of period		(4	)		(3,928	)		16,584			—			12,652

Cash and cash equivalents at end of period	$	552		$	(1,576	)	$	28,334		$	—		$	27,310

Supplemental cash flow information:
Cash paid during the period for interest	$	1,350		$	10,657		$	91		$	—		$	12,098

Cash paid during the period for income taxes	$	10		$	367		$	4,999		$	—		$	5,376

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

When we use the terms “SDS,” “we,” “us,” “Company,” or “our” in this report, unless the context requires otherwise, we are referring to Sybron Dental Specialties, Inc. and its subsidiaries and their respective predecessors that comprised Apogent’s dental business prior to the spin-off. Our fiscal year ends on September 30 and, accordingly, all references to quarters refer to our fiscal quarters. The quarters ended March 31, 2004 and 2003 refer to the second 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 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 second quarter of fiscal 2004 were $150.9 million, an increase of 12.4% over the corresponding prior year period, of which 5.4% is due to favorable currency translation, 4.5% is due to internal growth, which excludes currency fluctuations, and 2.5% is due to the acquisition of SpofaDental a.s. in the fourth quarter of fiscal 2003. For the first six month period of fiscal 2004, net sales were $282.8 million, an increase of 11.1% over the corresponding prior year period, of which 5.4% is due to favorable currency translation, 3.1% is due to net internal growth, which excludes currency fluctuations, and 2.6% is due to the acquisition of SpofaDental a.s. in the fourth quarter of fiscal 2003.

Our domestic sales for the second quarter ended March 31, 2004 were $78.4 million, representing an increase of $2.1 million or 2.7% over the comparable prior year period. For the first six months of fiscal 2004, domestic sales were $148.1 million or 1.9% over the comparable prior year period. International sales increased by $14.6 million, or 25.2%, to $72.5 million for the quarter ended March 31, 2004 compared to the same period in the prior year. In the first six months of fiscal 2004, international sales increased $25.6 million to $134.7 million, or 23.5% higher than the prior year period. Foreign currency fluctuations in the quarter and six month period ended March 31, 2004 represented $7.3 million and $13.5 million, respectively, of the increase in international sales over the comparable prior year periods. In addition, increased sales were partially due to the Spofa acquisition in August 2003.

Our revenues in our Orthodontics segment reflected strong growth in both domestic and international sales. The first full quarter sales of Ormco’s new Inspire Ice^™ clear-ceramic bracket and increasing demand for the Damon 2 self-ligating bracket resulted in higher sales in our Orthodontics segment for the second quarter and first six month period of fiscal 2004. We expect to continue to see 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. Other contributors to our growth in the Orthodontic segment in the second quarter of fiscal 2004 were our endodontic product line and our system of nearly invisible, custom-made positioners. We also 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 certain products 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 second fiscal quarter of 2004.

Our Professional Dental segment continued to experience 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 six months of fiscal 2003. The LED curing light was introduced in the first quarter of fiscal 2003 and generated significant net sales during the first two fiscal quarters of 2003. We expect our LED curing light sales comparison to prior periods to continue to reflect lower revenues for the remainder of fiscal 2004. We are continuing to introduce 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 and did not contribute significantly to revenue in the second fiscal quarter. Another factor having a slightly negative impact on our Orthodontics segment’s revenues for fiscal 2004 is the reductions to regulatory health reimbursement programs in Germany.

Operating income for the second quarter of fiscal 2004 was $31.5 million, representing an increase of 4.6% from the corresponding fiscal 2003 period. Our gross margins were negatively impacted by $1.5 million in expenses due to the rationalization of Ormco’s production facility in Tijuana, Mexico. The plan to close our facility and transfer production to our other facilities in Mexico was announced in January, 2004, and the closing of the facility is proceeding as planned. We expect to complete the closing by the end of the first fiscal 2005 quarter. There will be minimal additional future expense associated with the closing of the facility, and the rationalization is expected to result in an annual savings of $1.7 million. Increased selling, general and administrative expenses for the quarter ended March 31, 2004 of $6.9 million, or 15.5%, from the corresponding prior year period also had a negative impact on our operating income. The increase in selling, general and administrative expense is primarily the result of increased expenses due to foreign currency translation, increased sales commissions, increased research and development, and expenses incurred by our newly acquired company, SpofaDental a.s. We are also continuing to incur expenses in association with the Sarbanes-Oxley Section 404 compliance efforts, both in terms of one-time costs as well as ongoing expenses. Due to the recently announced delayed effective date of these rules we expect these expenses to be somewhat less than the approximately $0.8 million per quarter that was projected for the remainder of fiscal 2004.

Interest expense in the second quarter of fiscal 2004 was $4.9 million, or $0.5 million less than the prior year period. The decrease was a result of lower average debt in the quarter of $255.6 million, or $66.7 million less than in the prior year period, partially offset by an increase in the average interest rate to 7.65%, from 6.76% in the prior year period. The average interest rate is expected to continue to increase in fiscal 2004 as we pay down our floating rate debt, which carries a lower interest rate than our senior subordinated notes.

Income taxes in the second quarter of fiscal 2004 were $8.6 million, or 33.0% of income before taxes as compared to income taxes of $9.6 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%.

We are consolidating Spofa’s operations from five facilities to one facility, and we anticipate the expense to significantly offset Spofa’s profit contribution this fiscal year. We believe that we will see higher operating margins from Spofa once the consolidation is complete.

Quarter Ended March 31, 2004 Compared to the Quarter Ended March 31, 2003

Net Sales


Net Sales	Fiscal 2004		Fiscal 2003
	(in thousands)
Professional Dental	$	83,849	$	76,815
Orthodontics		67,072		57,452

Total Net Sales	$	150,921	$	134,267

Overall Company. Net sales for the quarter ended March 31, 2004 increased by $16.7 million, or 12.4%, 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 $3.9 million), (b) favorable foreign currency fluctuations (approximately $3.8 million) and (c) net sales of new products (approximately $3.1 million). The increase in net sales was partially offset by: (a) decreased net sales of existing products (approximately $2.2 million), (b) a decrease in net sales due to the transfer of the European endodontic product sales to the Orthodontics segment, which contributed approximately $1.2 million in net sales to the Professional Dental segment in the comparable prior year period and (c) increased rebate (approximately $0.4 million).

Orthodontics. Increased net sales in the Orthodontics segment resulted primarily from: (a) increased net sales of existing products (approximately $4.2 million), (b) favorable foreign currency fluctuations (approximately $3.5 million), (c) 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 second quarter of fiscal 2004 and (d) net sales of new products (approximately $0.9 million). The increase in net sales was offset by increased rebate (approximately $0.3 million).

Gross Profit


Gross Profit	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	46,426	55.4	%	$	42,470	55.3	%
Orthodontics		36,159	53.9			31,880	55.5

Total Gross Profit	$	82,585	54.7	%	$	74,350	55.4	%

Overall Company. Gross profit for the quarter ended March 31, 2004 increased by $8.2 million or 11.1% from the corresponding fiscal 2003 quarter.

Professional Dental. Increased gross profit in the Professional Dental segment resulted primarily from: (a) gross profit derived from the net sales of products from an acquired company (approximately $2.1 million), (b) favorable foreign currency fluctuations (approximately $2.1 million) and (c) gross profit relating to new products (approximately $1.9 million). The increase in gross profit was partially offset by: (a) decreased net sales of existing products (approximately $1.3 million), (b) increased rebate (approximately $0.4 million), (c) 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 to the Professional Dental segment in the comparable prior year period and (d) a change in product mix (approximately $0.1 million).

Orthodontics. Increased gross profit in the Orthodontics segment resulted primarily from: (a) favorable foreign currency fluctuations (approximately $3.5 million), (b) increased net sales of existing products (approximately $2.3 million), (c) favorable manufacturing variances (approximately $0.8 million), (d) gross profit relating to new products (approximately $0.5 million) and (e) increased gross profit due to the transfer of the European endodontic product line from the Professional Dental segment, which contributed approximately $0.2 million in gross profit to the Orthodontics segment in the second quarter of fiscal 2004. The increase in gross profit was partially offset by: (a) costs related to the closure of the manufacturing facility in Mexico (approximately $1.5 million), (b) a change in product mix (approximately $0.6 million), (c) inventory adjustments (approximately $0.4 million, primarily due to physical inventory adjustments), (d) increased rebate (approximately $0.3 million) and (e) increased royalty expense (approximately $0.2 million).

Selling, General and Administrative Expenses


Selling, General and Administrative Expenses	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	27,786	33.1	%	$	24,793	32.3	%
Orthodontics		23,336	34.8			19,473	33.9

Total Selling, General and Administrative Expenses	$	51,122	33.9	%	$	44,266	33.0	%

Overall Company. Selling, general and administrative expenses for the quarter ended March 31, 2004 increased by $6.9 million or 15.5% 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 $1.1 million), (b) an increase in expenses relating to foreign currency fluctuations (approximately $1.1 million), (c) increased selling and marketing expenses (approximately $0.5 million), (d) increased general and administrative expenses (approximately $0.2 million) and (e) increased 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 general and administrative expenses (approximately $2.0 million), (b) increased selling and marketing expenses (approximately $1.5 million), (c) increased expenses related to foreign currency fluctuations (approximately $0.3 million) and (d) increased research and development expenses (approximately $0.1 million).

Operating Income


Operating Income	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	18,640	22.2	%	$	17,677	23.0	%
Orthodontics		12,823	19.1			12,407	21.6

Total Operating Income	$	31,463	20.8	%	$	30,084	22.4	%

As a result of the foregoing, operating income for the quarter ended March 31, 2004 increased by 4.6% or $1.4 million from operating income in the corresponding quarter of fiscal 2003.

Interest Expense

Interest expense was $4.9 million in the second quarter of fiscal 2004, a decrease of $0.5 million from the corresponding fiscal 2003 quarter. The decrease resulted from reduced average debt balances from $322.3 million in fiscal 2003 to $255.6 million in fiscal 2004, partially offset by an increase in the average interest rate on debt from 6.76% in fiscal 2003 to 7.65% in fiscal 2004. Debt that was paid down in the second quarter of fiscal 2004 was adjustable rate debt with a lower average interest rate. This decrease in debt and increase in average interest rates is expected to continue for the balance of the year.

Income Taxes

Taxes on income in the second quarter of fiscal 2004 were $8.6 million, or 33.0% of income before taxes as compared to taxes on income of $9.6 million, or 38.0% of income before taxes in the corresponding 2003 period.

Six Months Ended March 31, 2004 Compared to the Six Months Ended March 31, 2003

Net Sales


Net Sales	Fiscal 2004		Fiscal 2003
	(in thousands)
Professional Dental	$	155,293	$	147,743
Orthodontics		127,485		106,673

Total Net Sales	$	282,778	$	254,416

Overall Company. Net sales for the six months ended March 31, 2004 increased by $28.4 million, or 11.1%, from the corresponding fiscal 2003 period.

Professional Dental. Increased net sales in the Professional Dental segment resulted primarily from: (a) the net sales of products from an acquired company (approximately $7.6 million), (b) favorable foreign currency fluctuations (approximately $6.5 million) and (c) net sales of new products (approximately $3.6 million). The increase in net sales was partially offset by: (a) decreased net sales of existing products (approximately $6.9 million), (b) a decrease in net sales due to the transfer of the European endodontic product sales to the Orthodontics segment, which contributed approximately $2.5 million in net sales to the Professional Dental segment in the comparable prior year period, and (c) increased rebate (approximately $0.7 million).

Orthodontics. Increased net sales in the Orthodontics segment resulted primarily from: (a) increased net sales of existing products (approximately $7.8 million), (b) favorable foreign currency fluctuations (approximately $7.1 million), (c) net sales of new products (approximately $3.0 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 $2.6 million in net sales to the Orthodontics segment in the first six months of fiscal 2004, and (e) reduced rebate (approximately $0.3 million).

Gross Profit


Gross Profit	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	84,549	54.4	%	$	80,873	54.7	%
Orthodontics		69,994	54.9			58,052	54.4

Total Gross Profit	$	154,543	54.7	%	$	138,925	54.6	%

Overall Company. Gross profit for the six months ended March 31, 2004 increased by $15.6 million or 11.2% from the corresponding fiscal 2003 period.

Professional Dental. Increased gross profit in the Professional Dental segment resulted primarily from: (a) gross profit derived from the net sales of products from an acquired company (approximately $3.9 million), (b) favorable foreign currency fluctuations (approximately $3.2 million) and (c) gross profit relating to new products (approximately $2.2 million). The increase in gross profit was partially offset by: (a) decreased net sales of existing products (approximately $3.9 million), (b) increased rebate (approximately $0.7 million), (c) decreased gross profit due to the transfer of the European endodontic product line to the Orthodontics segment, which contributed approximately $0.6 million in gross profit for the Professional Dental segment in the comparable prior year period, (d) inventory adjustments (approximately $0.3 million) and (e) a change in product mix (approximately $0.1 million).

Orthodontics. Increased gross profit in the Orthodontics segment resulted primarily from: (a) favorable foreign currency fluctuations (approximately $7.1 million), (b) increased net sales of existing products (approximately $4.3 million), (c) favorable manufacturing variances (approximately $3.0 million), (d) gross profit relating to new products (approximately $1.6 million), (e) increased gross profit due to the transfer of the European endodontic product line from the Professional Dental segment, which contributed approximately $0.4 million in gross profit to the Orthodontics segment in the first six months of fiscal 2004 and (f) decreased rebate (approximately $0.3 million). The increase in gross profit was partially offset by: (a) a change in product mix (approximately $2.9 million), (b) costs related to the closure of the manufacturing facility in Mexico (approximately $1.5 million), (c) increased royalty expense (approximately $0.3 million) and (d) inventory adjustments (approximately $0.1 million).

Selling, General and Administrative Expenses


Selling, General and Administrative Expenses	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	54,313	35.0	%	$	49,422	33.5	%
Orthodontics		45,311	35.5			37,962	35.6

Total Selling, General and Administrative Expenses	$	99,624	35.2	%	$	87,384	34.3	%

Overall Company. Selling, general and administrative expenses for the six months ended March 31, 2004 increased by $12.2 million or 14.0% from the corresponding fiscal 2003 period.

Professional Dental. Increased selling, general and administrative expenses in the Professional Dental segment resulted primarily from: (a) expenses of an acquired company (approximately $2.6 million), (b) an increase in expenses relating to foreign currency fluctuations (approximately $1.4 million), (c) increased selling and marketing expenses (approximately $1.2 million) and (d) increased research and development expenses (approximately $0.1 million). The increase in selling, general and administrative expenses was offset by decreased general and administrative expenses (approximately $0.4 million).

Orthodontics. Increased selling, general and administrative expenses in the Orthodontics segment resulted primarily from: (a) increased selling and marketing expenses (approximately $4.0 million) as a result of the increase in net sales, (b) increased general and administrative expenses (approximately $2.0 million), (c) increased expenses related to foreign currency fluctuations (approximately $1.0 million) and (d) increased research and development expenses (approximately $0.3 million).

Operating Income


Operating Income	Fiscal 2004		Percent of Net Sales		Fiscal 2003		Percent of Net Sales
	(in thousands, except percentages)
Professional Dental	$	30,236	19.5	%	$	31,451	21.3	%
Orthodontics		24,683	19.4			20,090	18.8

Total Operating Income	$	54,919	19.4	%	$	51,541	20.3	%

As a result of the foregoing, operating income for the six months ended March 31, 2004 increased by 6.6% or $3.4 million from operating income in the corresponding fiscal 2003 period.

Interest Expense

Interest expense was $10.1 million in the first six months of fiscal 2004, a decrease of $0.9 million from the corresponding fiscal 2003 period. The decrease resulted from reduced average debt balances from $329.5 million in fiscal 2003 to $262.7 million in fiscal 2004, partially offset by an increase in the average interest rate on debt from 6.62% in fiscal 2003 to 7.56% 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 six months of fiscal 2004 were $14.5 million, or 33.0% of income before taxes as compared to taxes on income of $15.4 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 (“Credit Facility”). The borrowings under our Credit Facility are made from our $150.0 million revolving credit facility, which is part of our $350 million syndicated credit facility. As of March 31, 2004, $123.3 million of the $150.0 million revolving credit facility was available for borrowing.

Cash provided by operations for the six months ended March 31, 2004 was $27.9 million, as compared to $39.6 million for the six months ended March 31, 2003, a decrease of $11.6 million. The decrease resulted primarily from decreases in accrued payroll due to increased incentive compensation payments in the first quarter of fiscal 2004, decreased accrued rebates due to increased rebate payments in the second quarter of fiscal 2004, decreased accounts payable, as well as increases in inventory, prepaids and accounts receivable. Working capital increased to $147.0 million at March 31, 2004 from $132.7 million at September 30, 2003. The current ratio increased to 2.7 at March 31, 2004 from 2.4 at September 30, 2003, primarily due to the decreases in accounts payable and accrued rebates previously discussed. Days sales outstanding (“DSO”) was 56.7 for the three months ended March 31, 2004, as compared to 57.3 days for the three months ended March 31, 2003 and 60.1 for the three months ended September 30, 2003. Inventory days were 121 as of March 31, 2004, as compared to 139 days at March 31, 2003 due to our increased focus on supply chain and inventory management. We expect inventory levels to increase modestly over the remainder of the fiscal year, as inventory of certain products is built to cover expected demand during the transition of manufacturing from our Tijuana facility to other facilities in Mexico.

Capital expenditures for property, plant and equipment were $5.3 million and $2.9 million for the first six months of 2004 and 2003, respectively. We expect capital expenditures for all of fiscal 2004 to be approximately $11.0 to $13.0 million.

Net cash used for financing activities for the six months ended March 31, 2004 was $25.3 million. Net debt repayments were $29.2 million, offset by cash received from the exercise of stock options and the employee stock purchase plan of $3.9 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 our debt covenants is dependent upon our future performance, which is subject to financial, economic, competitive and other factors affecting us, many of which are beyond our control. We were in compliance with all such covenants at March 31, 2004.

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 March 31, 2004, we had $248.8 million in total long-term borrowings (including current portion), and $247.5 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 March 31, 2004, goodwill and other intangible assets with indefinite lives represented approximately 45% 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 offer 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.

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 March 31, 2004.

At March 31, 2004, an unrealized loss of $2.0 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 March 31, 2004 are as follows (in thousands, except rates):

Currency

Trade Date

Effective Date

Maturity

Date

Local

Currency

Amount

Floor Rate

Ceiling Rate

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

Euro

01/09/2004

01/14/2005

03/15/2005

9,000

1.24

1.30

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

Yen

01/27/2004

01/14/2005

03/15/2005

180,000

107.00

100.25

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.

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

8¹/8%

CHF 22.50

6.450%

06/26/02

06/28/02

06/15/07

$15.0

8¹/8%

CHF 22.50

6.390%

06/27/02

07/01/02

06/15/07

$7.5

8¹/8%

CHF 11.25

6.390%

06/27/02

07/01/02

06/15/07

$7.5

8¹/8%

CHF 11.25

6.390%

06/25/02

06/27/02

06/15/07

$4.0

8¹/8%

JPY 486.00

3.650%

At March 31, 2004, an unrealized loss of $6.0 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 March 31, 2004. 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 March 31
Liabilities	2005			2006			2007			2008			2009			Thereafter			Fair Value
	(in thousands, except percentages)
Long-Term Debt:
Fixed Rate Debt		—			—			—			—			—		$	150,000		$	166,875
Average Interest Rate		8.125	%		8.125	%		8.125	%		8.125	%		8.125	%		8.125	%
Variable Rate Debt	$	1,453		$	848		$	855		$	23,364		$	897		$	71,365		$	98,782
Average Interest Rate		4.515	%		5.525	%		6.270	%		6.860	%		7.305	%		7.665	%

For the quarter ended March 31, 2004, 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 March 31, 2004, an unrealized loss of $1.7 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 March 31, 2004 (in thousands):


Loan	Notional Amount		Term	Trade	Effective	Maturity	Three Months Ended March 31, 2004		Fair Value (Pre-tax)
Kerr B	$	15,991	4 years	1/2/2001	3/30/2001	3/31/2005	$	165.9	$	767.4
Ormco B		25,345	5 years	1/2/2001	3/30/2001	6/30/2006		286.9		2,043.8

Total	$	41,336					$	452.8	$	2,811.2

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 4. Submission of Matters to a Vote of Security Holders

The Company, a Delaware corporation, held its Annual Meeting of Stockholders on February 6, 2004. A quorum was present at the Annual Meeting, with 35,946,414 shares out of a total of 38,355,754 shares entitled to cast votes represented in person or by proxy at the meeting. The only matter before the stockholders was the election of three directors to serve as Class I Directors until the 2007 Annual Meeting of Stockholders and until their respective successors were duly elected and qualified.

The stockholders voted to elect Floyd W. Pickrell, Jr., William E.B. Siart, and James R. Parks to serve as Class I directors until the 2007 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. The results of the vote are as follows:


	Mr. Pickrell	Mr. Siart	Mr. Parks
For	34,439,599	33,845,467	33,905,902
Withheld From	1,506,815	2,100,947	2,040,512

The terms of office as directors of Kenneth F. Yontz, Dennis Brown, Donald N. Ecker and Robert W. Klemme continued after the meeting.

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 January 27, 2004, 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.

On April 28, 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 and six month period ended March 31, 2004.

On May 7, 2004, the Company filed a report on Form 8-K describing a plan adopted in accordance with Rule 10b5-1(c)(1) under the Securities and Exchange Act of 1934 on April 28, 2004 which allows Floyd W. Pickrell, Jr., the President and Chief Executive Officer of the Company, to exercise options he holds to purchase the Company’s stock and sell such shares over the course of the next six months. The plan expires in October 2004.

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: May 12, 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

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004


Exhibit Number	Description	Incorporated Herein By Reference To	Filed Herewith
3.1	(a) Restated Certificate of Incorporation of the Registrant (b) Certificate of Designation, Preferences and Rights of Series A Preferred Stock	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”) 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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