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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1996
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________
to ________________
Commission file number 1-11091
SYBRON INTERNATIONAL CORPORATION
(Exact name of registrant as specified in charter)
WISCONSIN 22-2849508
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 EAST WISCONSIN AVENUE 53202
Milwaukee, Wisconsin (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (414) 274-6600
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the registrant's Common
Stock on December 2, 1996 as reported on the New York Stock Exchange, was
approximately $949,546,000. Shares of Common Stock held by each executive
officer and director and by each person known to beneficially own more than 5%
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
At December 2, 1996, there were 46,989,194 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its Annual Meeting
of Shareholders to be held January 22, 1997 have been incorporated by reference
into Part III of this Form 10-K.
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SYBRON INTERNATIONAL CORPORATION
TABLE OF CONTENTS
TO
1996 ANNUAL REPORT ON FORM 10-K
ITEM PAGE
---- ----
PART I
1 Business............................................................. 1
2 Properties........................................................... 14
3 Legal Proceedings.................................................... 15
4 Submission of Matters to a Vote of Security Holders.................. 16
Executive Officers of the Registrant................................. 17
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 18
6 Selected Financial Data.............................................. 19
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 19
8 Financial Statements and Supplementary Data.......................... 30
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 57
PART III
10 Directors and Executive Officers of the Registrant................... 57
11 Executive Compensation............................................... 57
12 Security Ownership of Certain Beneficial Owners and Management....... 57
13 Certain Relationships and Related Transactions....................... 57
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 58
Signatures........................................................... 59
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SYBRON INTERNATIONAL CORPORATION
CROSS REFERENCE SHEET
HEADING(S) IN PROXY STATEMENT FOR
FORM 10-K ANNUAL MEETING OF SHAREHOLDERS
ITEM NO. TO BE HELD JANUARY 22, 1997
----------------------------------- ---------------------------------------------------
10. Directors and Executive Officers Election of Directors
of the Registrant Section 16(a) Beneficial Ownership Reporting
Compliance
11. Executive Compensation Executive Compensation
Election of Directors -- Directors' Compensation
12. Security Ownership of Certain Security Ownership of Certain Beneficial Owners
Beneficial Owners and Management and Management
13. Certain Relationships and Related Not applicable.
Transactions
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PART I
ITEM 1. BUSINESS
GENERAL
Sybron International Corporation is a leading manufacturer of value-added
products for the laboratory and professional orthodontic and dental markets in
the United States and abroad. The Company's laboratory business provides plastic
labware, microscope slides, consumables, temperature control apparatus and water
purification systems to industrial, academic, clinical, governmental and
biotechnology laboratories. The Company's orthodontic and dental businesses
provide orthodontic appliances and related products to orthodontists and a
diversified line of consumable products to dentists. The Company has been
pursuing a growth strategy designed to increase sales and enhance operating
margins. Elements of that strategy include emphasis on product line extensions,
new product introductions, acquisitions and international growth. The Company's
net sales have increased from $383 million in fiscal year 1992 to $674 million
in fiscal year 1996. In fiscal year 1996, foreign and United States export sales
represented approximately 36% of the Company's net sales.
The term "Company" as used herein refers to Sybron International
Corporation and its subsidiaries, and their respective predecessors, unless the
context otherwise requires. The Company's fiscal year ends on September 30. All
references to "1994", "1995" or "1996" reference the fiscal year ended September
30, 1994, 1995 or 1996, respectively, unless the context otherwise requires. All
references to shares, stock prices and earnings per share have been adjusted to
reflect the two-for-one stock split issued on December 15, 1995.
The Company's laboratory business is operated through three subsidiaries
and their affiliates. Nalge Nunc International Corporation ("NNI") develops,
manufactures, and markets a diversified line of reusable and disposable plastic
labware, high quality bio-pharmaceutical packaging products, recreational
containers, industrial products such as plastic tubing, sanitary tubing and
fittings, and environmental testing containers. Erie Scientific Company ("Erie")
develops, manufactures, and markets microscope slides, cover glass, consumables
used in clinical laboratories and thin glass mirrors. Barnstead Thermolyne
Corporation ("Barnstead/ Thermolyne") develops, manufactures and markets
precision heating, stirring, measuring, analytical and temperature control
apparatus and water purification systems to industrial, clinical, academic,
governmental and biotechnology laboratories.
The Company's orthodontic and dental businesses are operated through Sybron
Dental Specialties, Inc. ("Sybron Dental Specialties"), its two subsidiaries and
their affiliates. Ormco Corporation ("Ormco") develops, manufactures and markets
a broad line of orthodontic appliances including bands, brackets, wire,
adhesives, and ancillary equipment used during the course of orthodontic
treatment. Kerr Corporation ("Kerr") develops, manufactures and markets a broad
range of consumable products for use in restorative, prosthetic, and endodontic
dentistry.
NNI, Erie, Barnstead/Thermolyne and Sybron Dental Specialties, including
Kerr and Ormco, are referred to herein collectively as the "Operating
Subsidiaries".
The Company, a Wisconsin corporation, is the successor by merger in January
1994 to Sybron Corporation, a Delaware corporation. The merger was accomplished
to change the Company's corporate domicile from Delaware to Wisconsin. Sybron
Corporation, originally named Sybron Acquisition Company, was formed in 1987. In
1987, through an indirect wholly-owned subsidiary, Sybron Acquisition Company
acquired all of the outstanding shares of a company known at the time as Sybron
Corporation (the "Acquired Company") in a leveraged buyout transaction (the
"Acquisition").
In 1986, when the previous Sybron was taken private in a leveraged buyout
transaction, management initiated programs to reduce corporate and subsidiary
expenses, rationalize certain production facilities, sell certain operating
businesses and effect selective acquisitions. The company was then resold in
1987 in a second leveraged buyout transaction. After the 1987 buyout, the
company focused on maximizing cash flow in order to repay debt incurred in
connection with the Acquisition. In 1992 the Company was taken public and the
proceeds of the initial public offering were used to retire a portion of the
Acquisition debt. The balance of the Acquisition debt was refinanced in 1993
when the Company put in place a bank credit facility which, in
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addition to refinancing existing debt, provided the Company with a line of
credit designed to allow the initiation of a more aggressive acquisition
program. This program, together with operating strategies which have been
consistently executed since the 1986 transaction, is designed to expand and
strengthen the Company's worldwide sales and operating margins. Key elements of
the Company's strategy are as follows:
Competitive Focus. The Company has focused product development,
manufacturing and marketing efforts on increasing the range of specialty
and value-added laboratory, orthodontic, and dental products offered, as
well as on increasing the range of end users for such products.
New Product Introductions. Each of the Operating Subsidiaries has
consistently developed and introduced new products which have contributed
significantly to net sales. The Company believes that new product
introductions enable the Operating Subsidiaries to maintain their
competitive positions.
Acquisitions. Since July 1993, when the Company expanded its strategy
of growth through acquisitions, the Company and its Operating Subsidiaries
have made twenty-nine acquisitions in the United States and abroad,
including ten completed in 1996 and two completed in fiscal 1997 through
December 2, 1996. See Note 14 to the consolidated financial statements in
Item 8 of this Annual Report. The Operating Subsidiaries have been able to
use their existing distribution channels to market many of the acquired
product lines. Other synergies, such as the elimination of duplicative
administrative functions or the combining of manufacturing operations, have
been achieved with certain of these acquisitions.
International Growth. The Company has devoted significant resources to
international manufacturing, sales and marketing efforts in order to
capitalize on international sales opportunities. As a result of those
efforts, foreign and United States export sales have grown since 1986, from
$75.2 million in the twelve months ended September 30, 1987 to $244.5
million in 1996. In 1994, 1995 and 1996, foreign and United States export
sales represented approximately 35%, 36% and 36%, respectively, of the
Company's net sales. The international efforts have allowed the Company to
maintain its percentage of foreign and United States export sales to total
sales, despite the increase in acquisitions which have been more
predominantly domestic in nature. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Successful execution of the strategic elements described above resulted in
a significant expansion of the business in 1996. Of the $155.3 million growth in
sales, approximately $26.9 million was generated from internal growth with the
balance coming from acquired businesses. Acquisition growth has been more
significant within the laboratory segment of the business than the dental
segment due to the fact that the worldwide market for laboratory products is
substantially larger than that for orthodontic and dental products.
Historically, the Company's net sales have been rather evenly distributed
between the laboratory and dental segments. In 1996 the laboratory segment grew
to 58.5% of net sales, with the dental segment representing 41.5%. The Company
intends to pursue its acquisition strategy in both the laboratory and dental
segments but, due to the disproportionate magnitude of these markets, expects to
continue to see a greater level of opportunity for growth in the laboratory
segment. In addition to the growth contributed from acquired businesses, the
Company has been able to realize cost benefits derived from the elimination of
duplicative costs in manufacturing and administrative areas. In April 1996, the
Company announced a restructuring to realize such benefits from the
acquisitions. An after-tax restructuring charge of $6.1 million was recorded
which is expected to generate annual savings on an after-tax basis of $2.4
million.
The description of the Company's business included in this Item 1,
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and other portions of this report contain statements that
could be deemed to be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Those statements concern,
among other things, the intent, belief or current expectations of the Company or
its management with respect to the Company's operating and growth strategies,
the Company's capital expenditures, financing, regulatory matters pertaining to
the Company specifically and the industry in general, industry trends,
competition, risks attendant to foreign operations, reliance on key
distributors, environmental matters, legal proceedings and other factors
affecting the Company's financial condition or results of operations. Such
forward-looking statements involve certain risks and uncertainties, many of
which are beyond the Company's control, that could cause actual results to
differ
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materially from those contemplated in the forward-looking statements. Factors
which could cause or contribute to such differences include, but are not limited
to, those discussed in connection with such statements as well as those
described in the section entitled "Cautionary Factors" in Item 7 of this Annual
Report.
CERTAIN FINANCIAL INFORMATION
The following table sets forth net sales by Operating Subsidiary and
business segment for the years indicated.
YEARS ENDED SEPTEMBER 30,
--------------------------------
1994* 1995* 1996*
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(IN THOUSANDS)
Laboratory Segment:
NNI................................................. $114,405 $137,296 $220,352
Erie................................................ 59,070 74,062 110,747
Barnstead/Thermolyne................................ 50,276 57,039 63,225
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Subtotal....................................... 223,751 268,397 394,324
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Dental Segment:
Sybron Dental Specialties........................... 215,953 250,803 280,133
-------- -------- --------
Total Net Sales................................ $439,704 $519,200 $674,457
======== ======== ========
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* Includes acquired companies' sales since their effective dates of acquisition.
Other financial information about business segments and foreign operations
is included in Note 15 to the Company's consolidated financial statements in
Item 8 of this Annual Report, and such information is incorporated herein by
reference.
Management is not aware of any definitive market share information for the
laboratory and professional orthodontic and dental markets. Any such information
contained in this Annual Report has been developed by the Company from internal
sources and, in the case of certain estimates regarding Sybron Dental
Specialties, are based in part on information published by independent parties
or trade associations. The market share information presented herein reflects
the Company's current estimates and no assurance can be given regarding the
accuracy of such estimates.
LABORATORY SEGMENT
NNI
General: NNI, headquartered in Rochester, New York, represents the
combination of Nalge Company ("Nalge") and the Nunc group of companies ("Nunc").
Nalge, a manufacturer of reusable and disposable plastic labware products used
in general, industrial and research labs, was founded in 1949. Nunc, a
manufacturer of plastic labware used in biotechnology, medical research and
diagnostics, was founded in 1953 and acquired by the Company in July 1995. Nunc
was combined with Nalge to form NNI in order to take advantage of the marketing,
manufacturing and technological synergies between the companies. As used herein,
"NNI" means Nalge and its operations prior to the Nunc acquisition, and the
combined operations of Nalge and Nunc after the Nunc acquisition.
As a result of the Nunc acquisition and others made by NNI since the
expansion of the Company's acquisition program in 1993, NNI has significantly
broadened its product line. In addition, NNI formed its Nalge Process
Technologies Group ("NPT") in 1996, placing part of its existing industrial
business and certain of its acquisitions under a single management structure.
NPT is designed to address the sanitary fluid transport needs of biotechnology,
pharmaceutical and other industries.
Products: NNI's NALGENE(R) (Nalge) brand product line includes plastic
labware products for general laboratory purposes. This product line consists of
approximately 4,900 items including reusable products (bottles, carboys,
graduated ware, beakers and flasks) and disposable products (microfiltration and
cryogenic storage products). Other NALGENE products include products for
critical packaging applications (bottles
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for packaging of diagnostic reagents, media and specialty chemicals), consumer
products (containers, bicycle bottles and recreation containers for outdoor
camping) and plastic tubing and tanks (PVC, dairy and silicone tubing, and
corrosion-resistant tanks from 5 to 1,000 gallons in capacity). NALGENE
laboratory products are typically sold at prices ranging from $5 to $1,000. In
general, these products are designed to offer the scientist or laboratory
technician a more durable, safer and less expensive alternative to labware
products made of glass or other materials. NNI also sells I-CHEM(R)
environmental containers.
NNI's NUNC(@) brand product line consists of high quality plastic labware
used in biotechnology, medical research and diagnostics. NUNC products are
complementary to NALGENE labware products because they principally address
scientific research needs not addressed by the NALGENE products. NUNC products,
which are used for the propagation, analysis and storage of cells, are comprised
of tissue culture products, molecular biology products, storage and
transportation products and immunology products. Tissue culture products include
Cell Factories and NUNCLON(@) Flasks for use in cell culture and production of
biomaterials. A line of culture inserts is used to perform toxicological testing
of drugs and cosmetics where large numbers of samples are analyzed. NUNC
molecular biology products provide the necessary tools for fast, convenient and
safe recombinant DNA work and neurochemistry analysis. This product group
includes space-saving well plates and a multi-purpose OmniTray which are
compatible with laboratory robotics. These types of products are standard in
virtually every clinical and life science laboratory. Storage and transportation
products are used for safe handling, storage and transport of biological
samples. Immunology products are used in assay procedures in clinical
laboratories. Screening for HIV or hepatitis and tissue typing are examples of
commonly-performed immunological analyses. The diverse NUNC product line
includes a selection of product configurations and surface finishes to
accommodate a variety of immunological techniques.
NPT was formed to address the needs of biotechnology, pharmaceutical and
other industries for sanitary fluid transport. NPT takes advantage of the
combined expertise of certain acquired companies and NNI's industrial business.
The NPT product line includes plastic tubing and tanks from NNI's industrial
product line; silicone tubing and non-metallic fittings for the pharmaceutical,
semi-conductor and biotechnology industries from Sani-Tech, Inc. ("Sani-Tech"),
acquired in February 1995; pipe and tubing for ultra-pure applications from
Acutech Plastics, Inc. ("Acutech"), acquired in January 1996; hoses, fittings
and accessories used in fluid and gas transport applications from Flexible
Components, Inc. ("Flexible Components"), acquired in July 1996; and sanitary
stainless steel fittings from Pure Fit, Inc. ("Pure-Fit"), acquired in October
1996.
New Products. NNI's product development efforts are focused on expanding
product offerings for domestic and international laboratory and packaging
markets, and developing specialty products for new markets. Product development
for new markets emphasizes products that are capable of generating gross margins
consistent with its labware products, primarily by exploiting NNI's expertise
with plastic resins and molding processes. NNI periodically evaluates new grades
of resins, new resins, and innovative equipment and molding technologies as part
of its new product development effort. Recent NALGENE product introductions
include a new array of acrylic laboratory safety products (including a Beta
apron, shielded pipette rack and stand and Beta lock boxes), lab organizers,
self-venting safety wash bottles, fluorinated solvent wash bottles, autoclavable
carboys, barbed bulkhead fittings, Top Works(TM) fluid transfer systems, and a
micropackaging vial. Recent NUNC product introductions include Mutidishes and
MicroWell(TM) Plates, Lockwell(TM) Immunoassay modules, GeNunc(TM) trays and
holders, Nucleolink(TM) strips, Sonic Seal Slide Wells and Tissue Culture
Chamber Slides.
In addition, NNI has added a new line of silicone tubing and a complete
line of non-metallic fittings and accessories through the acquisitions of
Sani-Tech, Acutech, Flexible Components and Pure-Fit. During the last three
fiscal years, NNI has supported its new product development with research and
development expenditures of approximately 3% of its annual net sales.
Markets; Distribution. The Company estimates that the worldwide labware
market comprises in excess of 150,000 industrial, academic, clinical,
governmental and biotechnology laboratories. NNI believes that it has the
leading share of the domestic reusable plastic labware market in which its
NALGENE general labware products compete, and that it has the leading share of
the domestic market for disposable microporous filter units. NALGENE(@) labware
products are marketed through approximately 45 domestic and 60
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international labware distributors. Four distributors, Fisher Scientific
("Fisher"), VWR Scientific ("VWR"), the industrial products division of Baxter
Scientific Products ("Baxter Industrial"), and Curtin Matheson Scientific, Inc.
("CMS"), accounted for 53% and 50% of NALGENE product sales in 1994 and 1995,
respectively. In 1995, Fisher, VWR, Baxter Industrial and CMS consolidated into
two distributors as a result of Fisher's acquisition of CMS and VWR's
acquisition of Baxter Industrial. The two remaining distributors, Fisher and
VWR, accounted for 54% and 18% of NALGENE and NUNC product sales, respectively,
in 1996. Laboratory supply distributors offer a wide variety of supplies,
apparatus and instruments for the laboratory, primarily through catalogs. As end
users rely heavily on these catalogs in identifying suitable products and making
purchase decisions, the amount of catalog space provided and the number of
product items listed for a particular vendor are critical marketing variables.
The distributor consolidation led to soft sales for core labware products in
1995 and the first half of 1996 as the two remaining major distributors
rationalized their distribution systems. NNI's competitive advantages afforded
by its long-standing relationships with Fisher and VWR has continued after the
consolidation and the number of NNI's labware products offered by these two
remaining major distributors continues to be among the highest of any of NNI's
competitors. The Nalge-Nunc combination was designed to give both the NALGENE
and NUNC product lines a more significant presence with the major distributors.
NUNC products are very strong in Europe and are the worldwide leaders in
handling, storage and transport systems for biological samples. NUNC products
entered the United States market in 1987 and have not achieved the same market
presence as the NALGENE products. European markets in which NUNC products
participate have evolved somewhat differently in recent years than the
corresponding United States market. The conversion of laboratory equipment from
glass to plastic started later in Europe. While plastic labware makes up
approximately 60% of the market in the United States, the European labware
market remains approximately 70% glass. This is the result of generally lower
glass prices in Europe, as well as substantially less marketing of plastic
products. Both markets are expected to show continued growth in demand for
plastic labware. NUNC products are distributed in much the same way as NALGENE
products, through a combination of distributors and catalogs. In the United
States, NALGENE and NUNC products are sold through the same dealer network. In
Europe, NUNC products are distributed through a line of exclusive distributors
in all countries except Germany, where NNI maintains its own sales force.
NNI also maintains its own sales force in the United States and abroad to
help its dealers sell both NALGENE and NUNC products. NNI has a 60 person sales
force in the United States, a 12 member sales force in Germany and a 9 member
sales force supporting NNI products in other parts of Europe and the rest of the
world.
NPT's products are marketed primarily through distributors. NNI's packaging
products are marketed through distributors domestically and on a direct basis
internationally. NNI's consumer products are sold through distributors and
directly to retailers.
International. A significant portion of NNI's growth during the past five
years has come from its international markets. For the five years ended
September 30, 1996, NNI's foreign and United States export sales grew at a
compound annual rate of 32%, from approximately $16 million in fiscal 1991 to
approximately $76 million in 1996. In 1996, NNI's international sales increased
by 121% over 1995, primarily due to the full year effect of the NUNC
acquisition. Approximately $44 million, or 64%, of NUNC product sales in 1996
were to international markets.
Competition. NNI believes that its principal competitive advantages include
the ability to define specific customer needs and to develop products to address
those needs, the breadth and depth of its product lines, its expertise in
plastic molding technology and its significant brand recognition. Historically,
plastic labware was introduced as an alternative to glass labware. Accordingly,
NNI competes primarily with glass labware manufacturers on the basis of the
durability, safety and light weight of plastic versus glass. NNI competes with
plastic labware manufacturers on the basis of product design, quality, the
breadth and depth of its product lines and customer service capabilities. NNI's
principal competitors differ by product line, and NNI believes that no single
competitor offers a comparable mix of product lines, or breadth or depth within
individual product lines. NNI's principal competitors for NALGENE general
laboratory products are Corning Costar, Inc. ("Corning/Costar"), Millipore
Corporation, Wheaton Industries, Incorporated, and Kautex Werke
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Reinhold Hagen A.G. NNI's principal competitors for the NUNC products are
Corning/Costar, Becton Dickinson and Company ("Becton Dickinson"), Greiner,
Dynatech, Sarstedt and Eppendorf.
ERIE
General. Erie, founded in 1934 and headquartered in Portsmouth, New
Hampshire, has historically been a developer, manufacturer and marketer of
microscope slides, cover glass, diagnostic slides and other industrial thin
glass products for sale in the United States and abroad. Through several
acquisitions, Erie has broadened its product base to include electrophoresis
products used in molecular biology research, precision thermometers and
hydrometers for laboratories, stains, fixatives and supplies for histology and
cytology laboratories, liquid standards and reagents used with clinical
diagnostic and testing equipment, consumable histology products, and thin glass
mirrors.
Erie has achieved a high degree of vertical integration in the slide and
mirror production processes. Erie's wholly-owned subsidiary in Switzerland, Erie
Electroverre S.A. ("Electroverre"), a manufacturer of thin white glass, sells
approximately 94% of the glass it manufactures to Erie's worldwide operations.
Through this subsidiary, Erie is able to exercise control over the quality of
its glass and is ensured a continuous supply of the type of thin glass
Electroverre manufactures. Approximately every six years, the sheet glass
furnace at Electroverre must be fully rebuilt, a process which takes
approximately 10 weeks. The process was last completed in the fourth quarter of
fiscal 1994 and is next scheduled to begin in the fourth quarter of fiscal year
2000. Because Erie's employees have considerable experience with this
maintenance procedure, no significant problems occurred during the most recent
rebuild. Prior to the start of a rebuild, Erie increases inventory levels of
sheet glass which it draws upon during the rebuild period.
Products. For the most part, Erie's products are used in standard
laboratory applications such as cytology, histology and hematology as well as in
biotech research laboratories. Products include plain microscope slides and
cover glass, both of which are disposable, disposable and reusable value-added
slides, electrophoresis equipment, precision thermometers and hydrometers,
consumable stains, fixatives and supplies used in histology and cytology
laboratories, consumable liquid standards and reagents, and consumable histology
products.
Plain microscope slides are the familiar clear rectangular glass plates
used to hold specimens for examination under a microscope and cover glasses are
the smaller, thinner glass plates used on the microscope slides to cover
specimens for protection during examination. Over the past several years, Erie
has pursued a product strategy that emphasizes value-added microscope slides,
which typically have higher margins than its plain slides. Value-added products
include SUPERFROST(R) and COLORFROST(R) brand printed slides, which provide an
indelible marking surface and are disposable; SUPERFROST(R) Plus adhesion
slides, which are electrically charged in a way which causes cells to adhere to
them and are disposable; and disposable and reusable diagnostic slides which are
customer designed and printed to customer specifications for use in diagnostic
test kits. The SUPERFROST(R), COLORFROST(R) and SUPERFROST(R) Plus slides all
represent significant advancement over regular slides because they increase
laboratory technician efficiency in the marking and subsequent identification of
the slides and in preparing the slides for tissue adhesion. Therefore, they are
increasingly used as alternatives to plain slides.
Precision thermometers and hydrometers are measuring instruments used in
laboratories. Erie entered this business through the acquisition of Ever Ready
Thermometer Co., Inc. ("ERTCO") in November 1994. Electrophoresis products are
used in molecular biology research. Erie entered this business through the
acquisition of Owl Scientific, Inc. ("Owl") in January 1995. Stains and
fixatives are products used to fix and stain specimens so that their
characteristics can be observed. These products, which are often used in
conjunction with microscope slides, were added through the acquisition of
Richard-Allan Scientific Company ("Richard-Allan") in May 1995 and Stephens
Scientific, Inc. ("Stephens") in July 1996. In September 1995, Erie added liquid
standards and reagents used with clinical diagnostic and testing equipment
through its acquisition of New England Reagent Laboratory, Inc. ("NERL") and, in
November 1995, it added another line of standards and calibration verification
and quality control materials through its acquisition of CASCO Standards, Inc.
("CASCO"). In September 1995, it added consumable histology products, such as
tissue cassettes used for biopsies, through its acquisition of the Secure
Medical Products product line ("Secure").
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In February 1996, Erie acquired The Naugatuck Glass Company ("Naugatuck"),
a manufacturer of thin glass mirrors principally used in the cosmetic industry.
Naugatuck uses the same type of thin glass for its mirrors as Erie uses in the
manufacture of microscope slides.
New Products. Erie's product development efforts are focused on giving its
basic products characteristics which allow lab technicians to reduce the cost of
their procedures, developing specialty products for laboratory applications, and
adapting its products for use in new technologies. In 1994, Erie completed the
development and introduction of Super Cell(TM) Culture Slides for the bio-tech
tissue culture market. Since October 1994, Erie added to its product offering
with the acquisitions of ERTCO, Owl, Richard-Allan, NERL, CASCO, Secure,
Naugatuck and Stephens. Erie also acquired the Gold Seal(R) microscope slide
product line from Becton Dickinson, an original equipment manufacturer. Although
Erie previously supplied Becton Dickinson the microscope slides for this product
line, the acquisition provided Erie the opportunity to sell this line through
its own distribution channels.
Markets; Distribution. The Company believes Erie is the leading producer of
microscope slides sold in North America and that Erie has a significant
international market share. During each of the years 1994, 1995 and 1996,
approximately 95%, 95% and 96%, respectively, of Erie's domestic slides and
cover glass were produced under private label, and during 1994 and 1995
approximately 62% and 60%, respectively, of those slides were sold to the
clinical division of Baxter Scientific Products ("Baxter Clinical"), CMS and
Fisher, who resell the slides and cover glass to laboratories via their direct
sales forces. In 1996, after the major dealer consolidation discussed above, and
after Erie began selling the Gold Seal(R) product line through its distributors
rather than to Becton Dickinson, 77.8% of its slides and cover glass were sold
to two distributors, Allegiance Corp. ("Allegiance") (the successor to Baxter
Clinical) and Fisher. In 1996, 70% of Erie's consolidated domestic sales of all
products were to Allegiance and Fisher. The consolidation of the major
laboratory distributors affected Erie's net sales in 1995 and 1996, but not to
the same extent as NNI's and Barnstead/Thermolyne's because Erie sold more to
Baxter Clinical (in 1995) and Allegiance (in 1996), which, unlike Baxter
Industrial, was not consolidated with VWR. Owl and ERTCO, however, sold their
products to Baxter Industrial, which was acquired by VWR. Because Erie is now a
full-line supplier of consumables to clinical laboratories as a result of its
acquisitions, Erie believes it has reduced the risk of any negative consequences
that could result from the consolidation of the largest laboratory distributors.
International. In addition to Electroverre, Erie owns Gerhard Menzel
Glasbearbeitungswerk GmbH & Co. K.G. ("Menzel"), a German manufacturer of slides
and cover glass, and Erie Scientific Kft, which has a manufacturing facility in
Hungary. Erie also has a joint venture with operations in Hong Kong which cuts
glass for the Asian watch crystal industry. In 1996, foreign and United States
export sales represented approximately 22% of Erie's net sales. Despite
declining in 1992 and 1993, for the five years ended September 30, 1996, Erie's
foreign and United States export sales grew at a compound annual rate of 4.6%
from approximately $19.9 million in 1991 to approximately $24.9 million for
1996.
Competition. The Company believes Erie's principal competitive advantages
include its product quality, the breadth of its product offerings, economics
associated with vertical integration, cost effective processes and its long time
relationships with key industry distributors. As a full-line supplier of
consumables to clinical laboratories, Erie has maintained a critical level of
importance to its distributors and gained visibility across all its product
lines. Erie's microscope slide and cover glass production processes utilize
state of the art automated glass cutting machinery and slide finishing
equipment. In the North American microscope slide market, Erie competes on the
basis of product features and quality, the breadth of its product line, price
and customer service. The Company believes Erie has a more complete slide
product offering on the basis of quality and product features than any of its
competitors in the slide business. In the European microscope slide market, Erie
competes primarily on the basis of price, as value-added products have not
achieved acceptance levels in Europe comparable to North America. Erie's
principal competitors are Chase Instruments Corp., Surgipath, Inc., Shandon (a
division of Life Sciences Inc.), Bio-Rad, Inc., Hoefer-Pharmacia and certain
other European and Asian companies.
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BARNSTEAD/THERMOLYNE
General. Barnstead/Thermolyne, headquartered in Dubuque, Iowa, is the
successor of Thermolyne Corporation, founded in 1942, and Barnstead Company,
founded in 1878. Barnstead/Thermolyne develops, manufactures, and markets
precision heating, stirring and temperature control apparatus, water
purification systems, liquid handling equipment, strip chart recorders,
spectrophotometers, fluorometers and replacement parts for these products. These
products are marketed primarily to laboratories in the United States and abroad
through independent distributors.
Products. Thermolyne heating, stirring and temperature control apparatus
include hot plates, stirrers, heating tapes, muffle furnaces, incubators,
dri-baths, and cryogenic storage apparatus, which are fundamental to basic
procedures performed in the laboratory. These products are marketed in a wide
variety of product sizes, temperature ranges and control features and are
typically priced between $100 and $4,000.
Barnstead systems are used to produce ultra-pure water, the most common
reagent used in laboratories. Because the water purity requirements of end-users
differ, Barnstead offers a full range of systems which incorporate distillation,
deionization, reverse osmosis, ultraviolet oxidation, absorption or filtration
technologies for purifying water. The majority of these systems are priced
between $100 and $4,000. Barnstead/Thermolyne believes it offers a broader range
of water purification systems than any of its principal competitors and believes
that its ability to manufacture systems using all major water purification
technologies provides a significant competitive advantage.
An important element of the Barnstead/Thermolyne product strategy has been
the incorporation of replacement parts and filters which are used to extend the
useful life of the products. Barnstead deionization systems include disposable
deionization cartridges which have a finite capacity for contaminants and must
be periodically replaced to maintain acceptable purity levels. Thermolyne
products incorporate replaceable components, including heating elements and
control units. Cartridges and replacement parts have higher gross margins than
most other Barnstead/Thermolyne products.
Barnstead/Thermolyne has added to its product line from time to time
through acquisitions. In 1994 it added bottle top dispensers, positive
displacement micropipettors, and small mixers used in biomolecular research
through its acquisition of Labindustries, Inc. In 1995 it added PMC(TM) brand
programmable hot plate/stirrers, TURNER(R) brand fluorometers and
spectrophotometers, and LINEAR(TM) brand strip chart recorders through its
acquisition of Biomolecular, Inc.
New Products. Barnstead/Thermolyne devotes considerable resources to the
identification, development and introduction of new products. In recent years
Barnstead/Thermolyne has introduced a number of new products that have
contributed significantly to sales. Examples of recently introduced products
include the further expansion of the EASYpure(R) line of pure water products,
two new LABQUAKE(R) brand shaker/rotators, new purification cartridges for
equipment manufacturers, a new line of asphalt ashing furnaces and several
original equipment manufacturer dri-baths for life science customers. During the
past three fiscal years, Barnstead/Thermolyne has supported its new product
development with research and development expenditures of approximately 3% of
its annual net sales.
Markets; Distribution. The Company estimates that the worldwide labware
market comprises in excess of 150,000 industrial, academic, clinical,
governmental and biotechnology laboratories. Barnstead/Thermolyne believes that
it has significant shares of the domestic laboratory markets for hot
plates/stirrers, muffle furnaces, water deionization purification systems and
water distillation purification systems. Barnstead/ Thermolyne products are sold
through approximately 50 domestic and 90 international laboratory supply
distributors. Baxter, CMS, Fisher and VWR accounted for approximately 51% and
47% of Barnstead/ Thermolyne's net sales during 1994 and 1995, respectively, and
Fisher and VWR accounted for approximately 41% of Barnstead/Thermolyne's net
sales during 1996. The consolidation of these major distributors led to some
disruption in Barnstead/Thermolyne's laboratory business in 1995, and this
softness continued for the first half of 1996 as the two remaining major
distributors rationalized their distribution systems. As end users rely heavily
on distribution catalogs and known trademarks, such as BARNSTEAD(R),
THERMOLYNE(R), LABINDUSTRIES(R), PMC(TM), TURNER(R), and LINEAR(TM), in
identifying suitable products and making purchase decisions,
Barnstead/Thermolyne believes that the long-standing marketing cooperation
between
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Barnstead/Thermolyne and its distributors, including the two major distributors,
continues to represent an important competitive advantage. The number of
Barnstead/Thermolyne products offered in the distributor catalogs is among the
highest of any of its competitors.
International. Barnstead/Thermolyne has developed a network of
international distributors. In addition, Barnstead/Thermolyne believes that it
has been able to consistently meet the needs of specific regions and countries
through the modification of product designs and the provision of special product
labeling. In fiscal year 1996, United States export sales represented
approximately 23% of Barnstead/Thermolyne's net sales. For the five fiscal years
ended September 30, 1996, Barnstead/Thermolyne's United States export sales grew
at a compound annual rate of 8%, from approximately $9.9 million in 1991 to
approximately $14.8 million in 1996.
Competition. Barnstead/Thermolyne believes that its principal competitive
advantages include the breadth and depth of its product lines, product quality,
its significant brand recognition, price, and its extensive network of
distributors. Barnstead/Thermolyne's principal competitors differ by product
line, and Barnstead/ Thermolyne believes that no single competitor offers a mix
of product lines, or breadth or depth within individual product lines,
comparable to Barnstead/Thermolyne. Barnstead/Thermolyne's principal competitors
are Corning/Costar, Millipore Corporation, and Lindberg/Blue M (owned by General
Signal Corp.).
DENTAL SEGMENT
SYBRON DENTAL SPECIALTIES
Sybron Dental Specialties' headquarters is located in Orange, California.
Because the Sybron Dental Specialties' businesses are operated through its
subsidiaries, Kerr and Ormco, the businesses of those subsidiaries are described
below.
KERR
General. Kerr, founded in 1891, develops, manufactures, and markets a broad
range of consumable dental products, including restorative materials (which
include amalgam alloys, composites, cavity liners and ancillary products),
curing lights, impression materials, endodontic instruments and materials,
dental burs, preventive products, laboratory products and infection control
products. Kerr's sales are made primarily through dental distributors serviced
by approximately 92 sales representatives worldwide.
Products and Markets. Kerr's major product groups include endodontic
instruments and materials, impression materials, composite filling materials and
bonding agents, amalgam alloys and amalgamators, dental burs, curing lights,
infection control products and material used in the dental lab. Kerr believes
that it is among the market leaders domestically in each of these product
groups. Products recently acquired in these areas include dental curing lights
of Demetron Research Corp. ("Demetron") in December 1993, infection control
products of Metrex Research Corporation ("Metrex") in March 1995, infection
control products of Micro-Aseptic Products, Inc. ("Micro-Aseptic") in July 1996,
infection control products and restorative materials of E & D Dental Products,
Inc. in August 1996, and dental laboratory products of belle de st. claire, inc.
("Belle") in November 1995. Kerr also manufactures and markets products
specifically for the jewelry industry. Although many of Kerr's traditional
products are long time industry standards and in the mature phase of their
cycles in developed markets, there is significant growth potential for these
products in developing markets such as Latin America, Asia and Eastern Europe.
In addition, as dental materials evolve, they can present growth opportunities
through their impact on the techniques and products used by the average dentist.
The Company expects modest growth in the domestic market for traditional
products; this should be augmented by the demand for new products that make the
dentist more efficient. Kerr introduced a new impression material, Extrude
PS(TM), directed toward that end in 1996. The product has a unique delivery
system designed to minimize waste while providing better operator control. Kerr
is committed to growing market share through product development and promotional
activities.
New Products. Kerr commits considerable resources in an effort to meet the
needs of today's dentist, and it considers its product development program to be
of importance in maintaining its market position.
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Approximately 2% to 3% of annual net sales is dedicated to new product
development. With each major product group requiring diverse technical
expertise, Kerr is well positioned to take advantage of various market trends.
Recently introduced products such as Tytin FC(TM) (a dental alloy), Nexus(TM)
Luting Agent (a universal luting agent), Extrude PS(TM), and Optilux(TM) 500 (a
new curing light), have significantly contributed to Kerr's net sales.
The addition of Micro-Aseptic to Metrex has benefited Kerr's infection
control product line. The acquisition of Belle has broadened Kerr's dental
laboratory product line.
Distribution. Kerr's dental products are sold both domestically and
internationally through distributors. The Company has approximately 42 sales
representatives in the United States and approximately 50 abroad dedicated to
dental sales. Kerr also sells infection control products into the medical market
through a nationwide group of independent manufacturer representatives who sell
through dealers to end users. The mission of the Kerr dental sales force and the
independent manufacturer representatives is to provide training and technical
support to dealers and help pull the Kerr products through the dealer network.
International. Kerr's international efforts accounted for approximately
46%, 46% and 45% of Kerr's overall sales in 1994, 1995 and 1996, respectively.
The percentage of Kerr's international sales dropped slightly in 1996 because
the sales of Kerr's acquisitions have been domestically oriented. In addition to
the United States, Kerr has manufacturing facilities in Canada and Italy. As the
economies in the emerging markets of Eastern Europe, South America and the Far
East develop, so will their need for dental products. Kerr is well positioned to
take advantage of this trend due to its extensive experience in selling
internationally and the quality of its existing international dealer network.
For the five years ended September 30, 1996, Kerr's foreign and United States
export sales grew at a compound annual rate of 6.6% from approximately $56
million in fiscal 1991 to approximately $77 million in 1996.
Competition. Kerr believes its principal competitive advantages include the
breadth of its product lines, brand name recognition, and its programs to
educate the dentist regarding techniques and products. Kerr's principal
competitors are GC America, Inc., 3M Corporation, Dentsply International Inc.,
Espe GmbH & Co., and Ivoclar.
ORMCO
General. Ormco, founded in 1960, develops, manufactures, and markets a
broad line of orthodontic appliances and related products for sale in the United
States and abroad. Ormco provides the orthodontist with the bands, brackets,
wires, adhesives and ancillary supplies used during the course of orthodontic
treatment.
Products. Ormco offers a broad range of orthodontic appliances in the
following major product groups: brackets, bands and buccal tubes, wires and
elastomeric products. Brackets, bands, buccal tubes and wires are manufactured
from a variety of metals to exacting specifications for standard use or to meet
the custom specifications of a particular orthodontist. Elastomeric orthodontic
products include power chains to consolidate space and rubberbands. Ormco also
manufactures and markets a line of orthodontic instruments and instruments for
microscopic endodontics, and distributes adhesives and general supply products
manufactured by others. Ormco's subsidiary, Allesee Orthodontic Appliances,
Inc., manufactures custom-made positioners, retainers and other accessories for
the orthodontist.
New Products. Ormco devotes considerable resources to the identification,
development and introduction of new products. During the past three fiscal
years, Ormco has supported its new product development with research and
development expenditures of approximately 2% to 3% of its annual net sales.
Ormco believes the direct contact of its sales force with orthodontists
facilitates the identification and verification of market trends and new product
opportunities. Ormco works closely with orthodontists to improve existing
products and develop new products primarily through its Champion program through
which selected orthodontists assist Ormco in designing, developing and
ultimately educating users on new product and technique innovations. In recent
years, Ormco has introduced a number of new products which have contributed
significantly to Ormco's net sales. Examples of recently introduced products
include Optimesh(TM) and Spirit(TM) MB brackets, advanced wires and the
Orthos(TM) treatment system.
The acquisition of Excellence in Endodontics, Inc. ("EIE") in April 1995
introduced Ormco to a new line of products. EIE is a leading innovator in the
development of techniques and instruments for microscopic
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endodontics. The acquisition of Analytic Technology Corporation in October 1995
added a manufacturer of equipment used in endodontic treatment. These products
were placed under Ormco management because they are suited to Ormco's marketing
techniques.
Markets; Distribution. The Company believes that Ormco is the leading
manufacturer and marketer of orthodontic and related products in the world.
Although the market for Ormco's traditional products is relatively mature
domestically, the market continues to experience growth in the adult population.
The Company believes that the international market for orthodontic products
presents a significant growth opportunity as worldwide awareness of dental
aesthetics grows.
Ormco's products are marketed by approximately 62 direct salespersons in
the United States, Canada, Australia, Switzerland, Germany, Japan, Mexico and
New Zealand and by dealers and distributors internationally. Ormco's direct
sales force, its dealers and distributors are supported by trade journal
advertising, trade shows, seminars and telemarketing.
International. In addition to its direct distribution of products in
Australia, New Zealand, Canada, Germany, Switzerland, Japan and Mexico, Ormco
has exclusive distributors in key European markets such as France, Italy and
Spain. Foreign and United States export sales represented approximately 45%,
46%, and 47% of Ormco's net sales for fiscal years 1994, 1995 and 1996,
respectively. For the five fiscal years ended September 30, 1996, Ormco's
foreign and United States export sales grew at a compound annual rate of 13.6%
from $27 million in 1991 to $51 million in 1996.
Competition. Ormco believes its principal competitive advantages include
significant expertise in new product development and marketing, product quality,
a high level of customer service, and its ability to develop and implement new
manufacturing and marketing techniques. Ormco competes primarily on the basis of
new product offerings, product quality, and the level of customer service.
Ormco's principal competitors are Unitek (owned by 3M Corporation), "A" --
Company Orthodontics, GAC Orthodontics and American Orthodontics.
COMPETITION
As described above, the Company has numerous competitors in its laboratory
and dental businesses, a number of which have substantially greater financial
and other resources than the Company. There can be no assurance that the Company
will not encounter increased competition in the future.
BACKLOG
Total backlog orders at September 30, 1994, 1995 and 1996 were
approximately $11.3 million, $12.5 million and $26.7 million, respectively. All
1996 backlog orders are expected to be filled within the current fiscal year.
RESEARCH AND DEVELOPMENT
The Company has a number of research and development programs in its
various businesses. The Company considers these product development programs to
be of importance in maintaining its market position. The amounts spent on
research and development activities in 1994, 1995 and 1996 were approximately
$9.5 million, $11.0 million and $13.7 million, respectively.
EMPLOYEES
The Company employed approximately 5,700 persons at September 30, 1996,
approximately 488 of which are covered by collective bargaining agreements. The
Company believes that its employee relations at each subsidiary and at its
corporate offices are generally good. Kerr's hourly employees at the Romulus
facility are members of the United Autoworkers Union, Barnstead/Thermolyne's
hourly employees are members of the International Brotherhood of Electrical
Workers, and NNI's hourly employees at its Naperville, Illinois facility are
members of the International Brotherhood of Teamsters. The labor contracts at
Kerr, Barnstead/ Thermolyne and NNI expire on January 31, 1998, March 1, 1998,
and December 20, 1998, respectively.
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PATENTS, TRADEMARKS AND LICENSES
The Company's products are sold under a variety of trademarks and trade
names. The Company's subsidiaries own all of the trademarks and trade names that
the Company believes to be material to the operation of its businesses,
including the KERR(R) trademark, the NALGE(R) and NALGENE(R) trademarks, the
NUNC(TM) and NUNCLON(R) trademarks, Erie's SUPERFROST(R) and COLORFROST(R)
trademarks, the THERMOLYNE(R) and BARNSTEAD(R) trademarks and the ORMCO(R)
trademark, each of which the Company believes to have widespread name brand
recognition in its respective field and all of which the Company intends to
continue to protect. The Company's subsidiaries also own various patents,
including the United States patents for the marking surface of Erie's
SUPERFROST(R) and COLORFROST(R) slides, both of which expire in 2001, employ
various patented processes and from time to time acquire licenses from owners of
patents to apply patented processes to their operations. Except as referred to
above, the Company does not believe any single patent, trademark or license is
material to the operations of its business as a whole.
MEDICAL DEVICE REGULATION
Certain of the Company's products are medical devices which are subject to
regulation by, among other governmental agencies, the United States Food and
Drug Administration (the "FDA"). Pursuant to the Federal Food, Drug, and
Cosmetic Act (the "FDCA"), the FDA regulates virtually all phases of the
manufacture, sale, and distribution of medical devices, including their
introduction into interstate commerce, their manufacture, advertising, labeling,
packaging, marketing, distribution and recordkeeping. Pursuant to the FDCA and
FDA regulations, certain facilities of Erie, NNI, Kerr, Ormco, and
Barnstead/Thermolyne are registered with the FDA as medical device manufacturing
establishments.
Medical devices are classified into either Class I, II or III. Class I and
II devices are not expressly approved by the FDA. However, pursuant to section
510(K) of the FDCA, the manufacturer or distributor of a Class I or II device
that is initially introduced commercially on or after May 28, 1976, must notify
the FDA of its intent to commercially introduce the device through the
submission of a premarket notification (a "510(K) Notice"). Before commercial
distribution can commence, the FDA must review the 510(K) Notice and clear the
device for commercial distribution. The FDA normally has 90 days to review the
510(K) Notice and grant or deny clearance to market on the basis that it is
substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(K) Notice may be
significantly delayed. In order to clear a Class I or II device for marketing,
the FDA must determine, from the information contained in the 510(K) Notice and
any additional information that is submitted, that the device is substantially
equivalent to one or more Class I or II devices that are legally marketed in the
United States. Certain Class I devices are exempt from the 510(K) premarket
notification requirement and manufacturers of such products may proceed to
market without any submission to the FDA. If a device is not considered
"substantially equivalent", it is regulated as a Class III medical device. In
general, a Class III medical device must be expressly approved by the FDA for
commercial distribution pursuant to the submission of a premarket approval
application ("PMA"). A PMA must contain, among other information, substantial
information about the manufacture of the device and data from adequate and
well-controlled clinical trials that demonstrate that the device is both safe
and effective. The PMA approval process is substantially more complex and
lengthy than the 510(K) premarket notification process.
A medical device, whether cleared for marketing under the 510(K) pathway or
pursuant to a PMA approval, is subject to ongoing regulatory oversight by the
FDA to ensure compliance with regulatory requirements, including, but not
limited to, product labeling requirements and limitations, including those
related to promotion and marketing efforts, current good manufacturing practice
requirements, recordkeeping, and medical device (adverse reaction) reporting.
Dental mercury is currently regulated by the FDA as a Class I device (not
exempt from the 510(K) premarket notification requirement), and amalgam alloy is
regulated as a Class II device. In February 1993, FDA reported to its Dental
Products Advisory Panel that it planned to regulate encapsulated mercury and
amalgam alloy, like those sold by Kerr, as a single Class II device. At the same
time, the FDA planned to propose the reclassification of dental mercury as a
Class II device, so as to conform to the Class II designation
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for amalgam alloy and to the planned Class II designation for encapsulated
mercury and amalgam alloy. In October 1994, the FDA's Dental Products Panel of
the Medical Devices Advisory Committee voted unanimously to recommend
reclassification of dental mercury from Class I to Class II. Currently, the FDA
is preparing a proposal for the reclassification of mercury from Class I to
Class II and for a Class II designation for encapsulated mercury and amalgam
alloy. Class II devices, unlike Class I devices, may be subject to performance
standards or special controls. At this time, there are no performance standards
or special controls applicable to mercury or to encapsulated mercury and amalgam
alloy, although it is possible that the FDA could propose special controls
during the reclassification process. With a Class II designation, the amalgam
products would not be subject to the PMA process.
All dental amalgam filling materials, including Kerr's dental amalgam
products, contain mercury. The use of mercury in various products, including
dental amalgams, is being examined by various groups and U.S. and foreign
governmental agencies as a part of an effort to reduce the amount of mercury
discharged into the environment. One foreign government agency, as a result of a
study it conducted, has proposed a plan which would discontinue the use of
amalgams once a suitable alternative is found.
In addition to the environmental concerns about mercury in dental amalgams,
certain groups have expressed concerns about health effects allegedly caused by
the mercury in amalgams. These groups are active in lobbying state, federal and
foreign lawmakers and regulators to pass laws or adopt regulatory changes or
recommendations regarding alleged potential health risks of dental amalgams. To
date these efforts have resulted in restrictions on or recommendations against
the use of amalgams in certain clinical situations by health authorities in some
countries, even though such health authorities point out there is no scientific
evidence to suggest that amalgam is causing illness in the general population.
Such actions have been taken to reduce human exposure to mercury where other
safe and practical alternatives to dental amalgam exist. In the United States,
the FDA's Dental Devices Panel, the National Institute of Health, and the United
States Public Health Service have each indicated that the use of amalgams does
not cause verifiable adverse effects in patients who have amalgam fillings. All
of these agencies have recommended further research on the subject and, in large
part because of their initiatives, research with respect to potential health
effects of dental amalgams is ongoing at various places around the world.
ENVIRONMENTAL MATTERS
The Company's operations entail a number of environmentally sensitive
production processes and compliance with environmental laws and regulations
along with regulations relating to workplace safety is a significant factor in
the Company's businesses. The Company's domestic facilities are subject to
federal, state and local laws and regulations concerning, among other things,
solid and hazardous waste disposal, air emissions and waste water discharge, and
the Company's foreign facilities are subject to local laws and regulations
regarding the environment. The Company's operations are also subject to
regulation relating to workplace safety, both in the United States and abroad.
Violations of any of these laws and regulations or the release of toxic or
hazardous materials used in the Company's operations into the environment could
expose the Company to significant liability. Similarly, third party lawsuits
relating to environmental and workplace safety issues could result in
substantial liability. The Company believes that it is in substantial compliance
with all applicable environmental and workplace safety laws.
See Item 3, "Legal Proceedings", Note 13 to the consolidated financial
statements of the Company contained in Item 8 of this Annual Report, and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General".
RAW MATERIALS
The Operating Subsidiaries purchase a wide range of raw materials and
supplies from a number of suppliers and do not rely on sole sources to any
material extent. The Company does not foresee any significant difficulty in
obtaining necessary materials or supplies.
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RISKS ATTENDANT TO FOREIGN OPERATIONS
The Company conducts its business in numerous foreign countries and as a
result is subject to risks of fluctuations in exchange rates of various foreign
currencies and other risks associated with foreign trade. For 1994, 1995 and
1996, the Company's foreign and United States export sales accounted for
approximately 35%, 36% and 36%, respectively, of consolidated net sales. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- General" for further information concerning the possible
effects of foreign currency fluctuations and currency hedges intended to
mitigate their impact.
RELIANCE ON KEY DISTRIBUTORS
A substantial portion of the Company's sales of laboratory products is made
through the major independent distributors, which historically have been Fisher,
VWR, Baxter Scientific Products and CMS. As set forth above, these major
distributors experienced significant consolidation in 1995, with Fisher
acquiring CMS and VWR acquiring Baxter Industrial. This consolidation slowed
sales in the domestic segment of the laboratory business in 1995 and during the
first half of 1996. The softness was primarily due to consolidation of
inventories by the distributors and not due to a deterioration of end-user
demand.
Because of the significance of the Company's sales to these major
laboratory distributors, the loss of any one of them (now Fisher, VWR and
Allegiance) could have a materially adverse effect on the Company's business.
The Operating Subsidiaries in the laboratory segment do not have any contractual
relationships with such distributors. However, such subsidiaries within this
segment have long-standing relationships with these distributors and, in certain
cases, their predecessors. Although not to the same extent as the laboratory
segment, Kerr also sells through distributors. The loss of certain of Kerr's
distributors could have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 2. PROPERTIES
The Company's Operating Subsidiaries operate manufacturing facilities in
the United States and certain foreign countries. The principal domestic
facilities of the Company's Operating Subsidiaries other than NNI's Nunc
facility in Naperville, Illinois, are leased.
The following table sets forth information regarding the Company's
principal properties, including those owned by the Company's subsidiaries.
Properties of less than 20,000 square feet have been omitted from this table:
SUBSIDIARY/LOCATION OF FACILITY BUILDING SPACE AND USE OWNED OR LEASED
- --------------------------------------- -------------------------------------------- ---------------
PROPERTIES USED BY LABORATORY SEGMENT
- ---------------------------------------
NNI
Penfield, New York 266,000 sq. ft./manufacturing, warehouse and leased
headquarters
Auburn, New York 49,600 sq. ft./manufacturing, warehouse and owned
offices
New Castle, Delaware 25,900 sq. ft./manufacturing, warehouse and leased
offices
Wiesbaden, Germany 21,000 sq. ft./warehouse leased
Naperville, Illinois 103,000 sq. ft./manufacturing, warehouse and owned
office
Roskilde, Denmark 151,000 sq. ft./manufacturing and office owned
Lafayette, New Jersey 36,000 sq. ft./manufacturing, warehouse and leased
offices
Bridgewater, New Jersey 44,000 sq. ft./manufacturing, warehouse and leased
offices
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SUBSIDIARY/LOCATION OF FACILITY BUILDING SPACE AND USE OWNED OR LEASED
- --------------------------------------- -------------------------------------------- ---------------
Erie
Portsmouth, New Hampshire 126,000 sq. ft./manufacturing and leased
headquarters
Braunschweig, Germany 40,000 sq. ft./manufacturing owned
Romont, Switzerland 176,000 sq. ft./manufacturing owned
Aguadilla, Puerto Rico 23,000 sq. ft./manufacturing leased
West Paterson, New Jersey 20,000 sq. ft./manufacturing leased
Woburn, Massachusetts 30,000 sq. ft./manufacturing leased
East Providence, Rhode Island 35,000 sq. ft./manufacturing leased
Kalamazoo, Michigan 36,000 sq. ft./manufacturing leased
Naugatuck, Connecticut 75,000 sq. ft./manufacturing owned
Holtsville, New York 31,400 sq. ft./manufacturing leased
Wayne, New Jersey 32,500 sq. ft./manufacturing leased
Barnstead/Thermolyne
Dubuque, Iowa 180,000 sq. ft./manufacturing and leased
headquarters
PROPERTIES USED BY DENTAL SEGMENT
- --------------------------------------
Sybron Dental Specialties
Orange, California 104,000 sq. ft./headquarters, leased
administration, manufacturing and
warehouse
Kerr
Morrisburg, Ontario 30,000 sq. ft./manufacturing owned
Danbury, Connecticut 30,000 sq. ft./office, warehouse and leased
manufacturing
Romulus, Michigan 220,000 sq. ft./manufacturing leased
Scafati, Italy 39,000 sq. ft./manufacturing owned
Ormco
Mexicali, Mexico 21,000 sq. ft./office and manufacturing leased
Glendora, California 66,000 sq. ft./manufacturing leased
Redmond, Washington 29,000 sq. ft./manufacturing, warehouse and leased
offices
Uman, Yucatan, Mexico 35,000 sq. ft./manufacturing owned
The Company considers its plants and equipment to be well-maintained and
suitable for their purposes. The Company, from time to time, has expanded and
will continue to expand facilities as the need arises. The Company expects to
fund such expansions through internally generated funds or borrowings under its
existing Credit Facilities, as defined in Note 7 to the consolidated financial
statements of the Company contained in Item 8 of this Annual Report. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
ITEM 3. LEGAL PROCEEDINGS
The Company or its subsidiaries are at any one time parties to a number of
lawsuits or subject to claims arising out of their respective operations, or
their operation of businesses divested in the 1980's for which certain
subsidiaries may continue to have legal or contractual liability, including
products liability, workplace safety and environmental claims and cases, some of
which involve claims for substantial damages. The
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Company or its subsidiaries are vigorously defending lawsuits or claims against
them. Subject to the qualifications stated below relating to the Aqua-Tech Site
(as defined below) and the Rochester Site (as defined below), based upon the
insurance available under the Company's insurance program and the potential for
liability with respect to claims which are uninsured, the Company believes that
any liabilities which might foreseeably result from any of its pending cases and
claims would not have a material adverse effect on the results of operations or
financial condition of the Company and its subsidiaries taken as a whole. There
can be no assurance as to this, however, or that litigation having such a
material adverse effect will not arise in the future.
Among the lawsuits previously reported is one in which Kerr obtained a
judgement on a jury verdict in its favor holding that a case brought by a former
employee alleging that Kerr intentionally caused him to contract silicosis (a
lung disease) by exposing him to silica had been brought beyond the applicable
statute of limitations. The jury verdict has been confirmed by the Supreme Court
of the state in which the action was pending, and the plaintiff's appeals have
thus been exhausted.
A facility previously owned by one of the Company's subsidiaries has been
identified as a potentially responsible party ("PRP") at the Aqua-Tech site in
South Carolina (the "Aqua-Tech Site") at which an action has been conducted for
the removal of surface contaminants under the supervision of the Environmental
Protection Agency ("EPA") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"). The Company's
total contribution to such effort, which has been paid, was approximately
$46,000. The site has been placed by the EPA on the federal National Priority
List under CERCLA, which is a prerequisite to any federally-mandated requirement
for long-term remedial work at the site under CERCLA, such as would be involved
in soil and groundwater remediation. The Company is participating with a PRP
group composed of approximately 100 parties in an agreement with the EPA to
undertake a remedial investigation and feasibility study which will be used by
the EPA to determine what remedy, if any, should be required at the site. This
study is expected to be completed in early 1998. Because the study, which
involves extensive testing required to characterize the extent and nature of
contamination to determine potential remedies, has not yet been completed, an
estimate of the Company's potential liability cannot be made. However, although
CERCLA does provide for joint and several liability, because the Company's share
of waste allegedly sent to the site is reportedly not more than 1% of the total
waste sent, the Company believes any ultimate liability will not have a material
adverse effect on the results of operations or financial condition of the
Company and its subsidiaries taken as a whole.
On May 2, 1996, Combustion Engineering, Inc. ("CE"), a subsidiary of Asea
Brown Boveri Ltd. ("ABB"), commenced legal proceedings (the "CE Litigation")
against the Company with respect to the former Taylor Instruments facility in
Rochester, New York (the "Rochester Site"), a discontinued operation. The CE
Litigation, brought in the New York Supreme Court, Monroe County, New York,
relates to the previously reported claims ABB has made for reimbursement to it
of expenses associated with the remediation of alleged environmental
contamination at the Rochester Site. The Rochester Site was sold to CE in 1983
by the predecessor of a subsidiary of the Company.
See Note 13 to the consolidated financial statements of the Company
contained in Item 8 of this Annual Report, and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- General".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and offices held of the
executive officers of the Company, which include the presidents of NNI, Erie,
Barnstead/Thermolyne, Sybron Dental Specialties, Kerr and Ormco. All executive
officers hold office at the pleasure of the Board of Directors.
NAME AGE POSITIONS
- ---------------------------- --- ---------------------------------------------------------
Kenneth F. Yontz............ 52 Chairman of the Board, President and Chief Executive
Officer
Dennis Brown................ 49 Vice President -- Finance, Chief Financial Officer and
Treasurer
R. Jeffrey Harris........... 41 Vice President -- General Counsel and Secretary
David T. Della Penta........ 48 President, NNI
Frank H. Jellinek, Jr. ..... 51 President, Erie
Randy Hoff.................. 46 President, Barnstead/Thermolyne
Floyd W. Pickrell, Jr. ..... 51 President, Sybron Dental Specialties, Ormco and Kerr
The following sets forth the principal occupations, as well as
directorships, for the periods specified of the executive officers, including
the presidents of the Operating Subsidiaries.
Mr. Yontz. President and Chief Executive Officer of the Company since
October 1987; Chairman of the Board since December 1987; President and Chief
Executive Officer of the Acquired Company from February 1986 until September
1992; Director of the Acquired Company from February 1986 to March 1988;
previously Group Vice President and Executive Vice President of the
Allen-Bradley Company. Director of Berg Electronics, Inc., Playtex Products,
Inc. and Thompson Minwax Co.
Mr. Brown. Joined the Company in January 1993 as Vice President -- Finance
and Chief Financial Officer and also became Treasurer of the Company in October
1993; previously served as President of Allen-Bradley Europe from March 1990 to
January 1993, and Treasurer of The Marmon Group, Inc., from January 1987 to
March 1990.
Mr. Harris. Joined the Acquired Company in 1985 as Assistant Counsel and
served as Corporate Counsel and Assistant Secretary from May 1986 until the
Company's acquisition of the Acquired Company; served as Vice President and
Assistant Secretary of the Company from October 1987 to January 1988; Vice
President -- General Counsel and Secretary of the Company since January 1988.
Mr. Della Penta. Joined the Acquired Company in 1970 and joined Nalge in
1981 as Controller, becoming Vice President -- Finance in 1982; became Vice
President -- Manufacturing of Nalge in 1986 and Vice President -- Marketing of
Nalge in 1987; appointed as Nalge's President in May 1989; appointed President
of NNI in November 1995. Director of Sear Brown Associates, Yellow Springs
Instrument, Incorporated and JAM, Inc.
Mr. Jellinek. Joined Erie in 1967 and has served as President of Erie since
1975; has from time to time held general management responsibilities for various
former businesses of the Acquired Company.
Mr. Hoff. Joined the Acquired Company in 1983 as Laboratory Group Planning
Executive, and Thermolyne Corporation in 1986 as Vice President, Sales and
Marketing. He became Vice President, Sales and Marketing of Barnstead/Thermolyne
upon its formation in 1988. In January 1995, he was appointed
Barnstead/Thermolyne's President.
Mr. Pickrell. Appointed President of Sybron Dental Specialties in August
1993; appointed President of Kerr in August 1993; joined Ormco in 1978 and has
served as Ormco's President since March 1983; previously served as Ormco's Vice
President of Marketing and as its National Sales Manager.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has not since its inception paid any dividends on its Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" in Item 7 of this
Annual Report, and Note 7 to the consolidated financial statements of the
Company contained in Item 8 of this Annual Report, for a description of certain
restrictions on the ability of the Company to pay dividends. Subject to such
limitations, any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other factors, the Company's
earnings, financial condition and other requirements. The Company has no current
intention to pay cash dividends on its Common Stock.
Based upon record ownership as of December 2, 1996, the approximate number
of holders of the Company's Common Stock is 406.
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "SYB". The market information set forth below is based on New York Stock
Exchange sales prices.
FISCAL 1995 HIGH LOW
--------------------------------------------- ------- -------
First Quarter................................ $18.000 $15.563
Second Quarter............................... 18.188 16.125
Third Quarter................................ 20.375 17.625
Fourth Quarter............................... 21.438 19.688
FISCAL 1996 HIGH LOW
--------------------------------------------- ------- -------
First Quarter................................ $24.125 $18.438
Second Quarter............................... 25.000 21.875
Third Quarter................................ 27.500 23.125
Fourth Quarter............................... 29.750 24.375
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Income Data(a):
Net sales......................... $382,595 $395,404 $439,704 $519,200 $674,457
Income before extraordinary items
and cumulative effect of
accounting change.............. 21,376 25,793 43,015 51,800 57,584
Extraordinary items............... -- (8,531)(b) -- (2,885)(b) --
Cumulative effect of accounting
change......................... -- -- (420)(c) -- --
Net income........................ 21,376 17,262 42,595 48,915 57,584
Dividends on preferred stock(d)... 12,268 -- -- -- --
Net income applicable to common
stock.......................... 9,108 17,262 42,595 48,915 57,584
Earnings per share:
Earnings per common share before
extraordinary items and
cumulative effect of accounting
change......................... .30 .57(e) .92 1.10 1.20(e)
Extraordinary items............... -- (.19) -- (.06) --
Cumulative effect of accounting
change......................... -- -- (.01) -- --
Earnings per common share......... .30 .38(e) .91 1.04 1.20(e)
AS OF SEPTEMBER 30,
--------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Total assets............................ $472,419 $481,291 $557,676 $852,083 $974,613
Long-term debt.......................... 270,388 249,309 223,565 406,547 481,037
Shareholders' equity.................... 101,440 126,353 176,775 227,250 283,079
- ---------------
(a) Amounts include the results of acquired businesses from their respective
dates of acquisition. See Note 14 to the consolidated financial statements
of the Company contained in Item 8 of this Annual Report.
(b) Amount resulted from the refinancing of the Company's debt. See Note 7 to
the consolidated financial statements of the Company contained in Item 8 of
this Annual Report.
(c) Amount resulted from the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." See Note 1(g) to the
consolidated financial statements of the Company contained in Item 8 of this
Annual Report.
(d) On May 2, 1992 the Company consummated an initial public offering of its
common stock. At that time all senior preferred stock was redeemed and all
junior preferred stock was converted to common stock.
(e) Includes a restructuring charge of $.06 and $.13 per share in fiscal 1993
and 1996, respectively. See Note 11 to the consolidated financial statements
of the Company contained in Item 8 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
The growth in the Company's 1996 sales and operating income has been
achieved through the successful implementation of management's business
strategies. Overall sales growth of 29.9% was achieved through an
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increase in both the domestic and international sectors. Domestic sales grew by
$97.3 million, bolstered by sales of new products and by ten domestic
acquisitions. Acquisitions accounted for approximately $85.8 million of the
domestic sales growth. International sales grew by $57.9 million, aided by
recovering international economies and the acquisition of Nunc. Acquisitions
accounted for approximately $42.6 million of the international sales growth. The
modest internal domestic growth can be attributed to softness in the Company's
core domestic laboratory business experienced primarily in the first half of
1996. Although end user demand remained healthy, demand from the Company's
largest domestic laboratory distributors was weak in the wake of significant
dealer consolidation. In 1995 the Company's principal distributors, Fisher, CMS,
VWR and Baxter Industrial, combined into two distributors through Fisher's
acquisition of CMS and VWR's acquisition of Baxter Industrial. This distributor
consolidation is believed to have been responsible for the slowness in domestic
laboratory sales during the first half of 1996 as distributor inventories were
reduced. See Item 1, "Business -- Laboratory Segment".
As discussed in Item 1, "Business -- General", management has maintained an
active program of developing and marketing both new products and product line
extensions. The Company believes that new product introductions have enabled the
Operating Subsidiaries to maintain their competitive positions. Management has
also sought out and pursued numerous acquisition opportunities, completing
twenty-nine such acquisitions since 1993, ten of which were completed by the
Company in 1996. Acquisitions completed in 1996 were as follows:
APPROXIMATE ACQUISITION
COMPANY ANNUAL SALES DATE DESCRIPTION
- --------------------------- ------------- ----------- -----------------------------------------
Analytic Technology
Corporation.............. $ 2.1 million 10/95 Manufacturer of equipment used in
conjunction with endodontic treatment.
CASCO Standards, Inc....... $ 3.2 million 11/95 Manufacturer of liquid standards as well
as calibration verification and quality
control materials used with clinical
diagnostic and testing equipment.
belle de st. claire,
inc...................... $ 2.9 million 11/95 Manufacturer of a broad line of products
for the dental laboratory.
Acutech Plastics, Inc...... $ 9.9 million 1/96 Manufacturer of pipe and tubing for
ultra-pure applications.
Naugatuck Glass Company.... $17.6 million 2/96 Manufacturer of thin glass mirrors used
primarily in the cosmetics industry.
Precision Glassworks
L.L.C.................... $ 0.5 million 5/96 Supplier of glass and mirrors to the
cosmetic and scientific markets.
Stephens Scientific........ $11.4 million 7/96 Manufacturer of solvents, imbedding
waxes, reagent grade alcohols and tissue
freezing aerosol, all products used in
histology laboratories.
Flexible Components,
Inc...................... $11.4 million 7/96 Manufacturer of flexible hoses, fittings,
and accessories used in fluid and gas
transport applications in the
pharmaceutical, biotech, food and
beverage, air, and gas industries.
Micro-Aseptic
Products, Inc............ $ 4.5 million 7/96 Marketer of infection control products,
disinfectant and decontaminant cleaners,
deodorizers, antiseptic hand and skin
cleaners and related products to the
medical and dental markets.
E&D Dental Products,
Inc...................... $ 5.4 million 8/96 Wholesale supplier of dental products.
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These acquisitions are consistent with the Company's strategy of making
acquisitions which provide product lines that can be manufactured in existing
facilities, sold through existing sales and distribution networks, or both. The
Company intends to continue to seek out acquisition candidates consistent with
its business strategy. However, there can be no assurance of the number or size
of future acquisitions.
As described in Item 3, "Legal Proceedings", one of the Company's
subsidiaries is involved as a PRP at the Aqua-Tech Site, and another is involved
in legal proceedings with respect to environmental claims against it with
respect to the Rochester Site. Because the testing has not been done to
determine what remedy, if any, should be required at the Aqua-Tech Site, an
estimate of the Company's potential liability with respect to this site cannot
be made at this time. However, and although CERCLA does provide for joint and
several liability, because the Company's share of waste allegedly sent to the
site is reportedly not more than 1% of the total waste sent, the Company
believes that any ultimate liability with respect to the Aqua-Tech Site will not
have a material adverse effect on the results of operations or financial
condition of the Company and its subsidiaries as a whole.
With respect to the Rochester Site, as reported previously, on May 2, 1996,
Combustion Engineering, Inc. ("CE") commenced legal proceedings in the New York
Supreme Court, County of Monroe (the "CE Litigation"), against the Company with
respect to the former Taylor Instruments ("Taylor") facility in Rochester, New
York (the "Rochester Site"), a discontinued operation. According to CE's
complaint, its claims are based on an asset purchase and sale agreement dated as
of September 30, 1983, pursuant to which Taylor was sold to CE (the "1983
Agreement"), and an agreement between a subsidiary of the Company and CE dated
August 14, 1987 (the "1987 Agreement"). The complaint alleges that under the
1983 Agreement the Company retained certain liabilities for, and indemnified CE
with respect to, environmental contamination, hazards and other conditions that
existed at the time of the sale of Taylor to CE, and that under the 1987
Agreement, the Company agreed to bear 70 percent of the costs thereafter
incurred to clean up, remediate and remove mercury from the land and buildings
at the Rochester Site. CE's complaint seeks declaratory relief and claims
damages of at least $10 million with respect to expenses CE has incurred and
expects to incur to remediate and remove mercury contamination from the land and
buildings sold to CE at the Rochester Site. The complaint also seeks declaratory
relief and claims damages in excess of $1 million with respect to expenses
incurred and expected to be incurred for remediating other alleged environmental
hazards associated with the Rochester Site. Some of CE's claims relate to the
cost to demolish and dispose of the buildings at the Rochester Site, which CE
maintains it had to do because the buildings were contaminated with mercury. CE
previously informed the Company that CE claims that the Company's share of such
demolition and disposal costs is approximately $4.2 million. The Company denies
it has any liability for such costs. CE's remaining claims relate to alleged
soil and groundwater contamination, including mercury contamination, for which
the Company also denies liability. CE implemented a plan in early 1996 to assess
the extent of potential soil and groundwater contamination at the Rochester
Site, the preliminary results of which have been provided by CE to the Company.
The preliminary results indicate there is mercury and inorganic and volatile
organic compound contamination in the soil and groundwater at certain Rochester
Site locations. CE is preparing a voluntary clean-up proposal based on these
results which it plans to present to the New York Department of Environmental
Conservation (the "NYDEC") for consideration. The cost to remediate the
Rochester Site will depend upon the remediation standards incorporated into any
voluntary agreement between CE and the NYDEC. Because the clean-up standards
which may be applied have not been determined, the extent of remediation to be
undertaken, and its cost, is unknown. As a result, the Company cannot, at this
time, estimate the cost of the soil and groundwater remediation claims. The
Company previously reported that prior to beginning the Rochester Site
assessment which generated the current test results, CE had indicated to the
Company that, based upon information available to it and subject to a number of
caveats, including the lack of assessment information and the fact that clean-up
standards which may be applied to the Rochester Site have not been determined,
the cost to remediate the soil and groundwater would range from $3 million to $5
million. Because the bases for this estimate were not disclosed by CE to the
Company, the Company cannot make a judgement about how the preliminary test
results it has been provided would affect this estimate. The Company intends to
pursue insurance coverage for CE's claims and has therefore provided notice of
CE's claims to its third party liability insurance carriers. To date the
carriers have denied coverage.
For additional information regarding factors that may influence the
Company's performance, see Item 1, "Business" and Item 3, "Legal Proceedings".
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The Company's results of operations reflect goodwill amortization, other
amortization, and depreciation, which are non-cash charges, totaling $30.4
million, $33.7 million, and $44.1 million in 1994, 1995 and 1996, respectively.
Due to the acquisition activity and associated amortization of stepped up assets
and goodwill, the Company expects depreciation and amortization to continue to
increase through fiscal 1997. In fiscal 1998, such depreciation of stepped-up
assets associated with the Acquisition is expected to decrease by approximately
$2.9 million, primarily as a result of the completed write-off of depreciation
associated with machinery and equipment with a ten year life. As discussed below
in "Liquidity and Capital Resources", the Company's earnings before interest,
taxes, depreciation and amortization ("EBITDA") amounted to $120.5 million,
$141.7 million and $180.3 million in 1994, 1995 and 1996, respectively. EBITDA
represents, for any relevant period, net income (except that extraordinary items
and the cumulative effect on prior years of adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") are
excluded) plus (i) interest expense, (ii) provision for income taxes, (iii)
depreciation, and (iv) amortization, all determined on a consolidated basis and
in accordance with generally accepted accounting principles.
Substantial portions of the Company's net sales, net income and cash flows
from operations are derived internationally. The financial position and the
results of operations from substantially all of the Company's international
operations, other than most United States export sales, are measured using the
local currency of the countries in which such operations are conducted and are
translated into United States dollars. While the reported income of foreign
subsidiaries will be impacted by a weakening or strengthening of the United
States dollar in relation to a particular local currency, the effects of foreign
currency fluctuations are partially mitigated by the fact that manufacturing
costs and other expenses of foreign subsidiaries are generally incurred in the
same currencies in which sales are generated. Such effects of foreign currency
fluctuations are also mitigated by the fact that such subsidiaries' operations
are conducted in numerous foreign countries and, therefore, in numerous foreign
currencies. In addition, the Company's United States export sales may be
impacted by foreign currency fluctuations to the relative value of the United
States dollar as foreign customers may adjust their level of purchases upward or
downward according to the weakness or strength of the United States dollar. In
order to hedge against future strengthening of the United States dollar, in June
and July 1993 and in October 1994, the Company employed currency hedges through
the purchase of a series of options. In June and July 1993, options were
purchased with a United States dollar notional amount of approximately $23.0
million at a cost of approximately $1.1 million. All of these options expired
worthless. In October 1994 the purchased options had a United States dollar
notional amount of approximately $21.2 million at a cost of approximately $0.2
million. The October 1994 options expired worthless but protected the Company
from potential detrimental effects of currency movements as compared to the
prior year. From time to time, management may employ additional currency hedges
to further mitigate the impact of foreign currency fluctuations. If currency
hedges are not employed, the Company is exposed to earnings volatility as a
result of foreign currency fluctuations.
The following table sets forth the domestic net sales and foreign and
United States export net sales by the Company in 1994, 1995 and 1996. See also
Note 15 to the consolidated financial statements of the Company contained in
Item 8 of this Annual Report.
YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
Domestic net sales.................................... $287,674 $332,646 $429,988
Foreign and United States export net sales............ 152,030 186,554 244,469
-------- -------- --------
Total net sales....................................... $439,704 $519,200 $674,457
======== ======== ========
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RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1995
Net Sales. Net sales for the year ended September 30, 1996 were $674.5
million, an increase of $155.3 million (29.9%) from net sales of $519.2 million
for the corresponding 1995 period. Sales in the laboratory segment were $394.3
million in the 1996 period, an increase of 46.9% from the 1995 period. Increased
sales in the laboratory segment resulted primarily from: (i) sales from Nunc
following its acquisition (approximately $57.0 million), (ii) sales of products
from other acquired companies (approximately $53.8 million), (iii) an increase
in sales of existing products at NNI (approximately $6.3 million) and Erie
(approximately $1.8 million), (iv) price increases at Barnstead/Thermolyne
(approximately $2.2 million), Erie (approximately $2.1 million) and NNI
(approximately $1.9 million) and (v) increased volume from sales of new products
at NNI with respect to NALGENE products (approximately $2.2 million, primarily
their micropackaging vials and an OEM product, Roche Cobas bottles) and
Barnstead/Thermolyne (approximately $0.2 million, primarily their line of
asphalt ashing furnaces), partially offset by discontinued sales of products at
NNI's trade molding business (approximately $1.7 million) and an unfavorable
foreign currency impact at Erie (approximately $0.2 million). In the dental
segment, net sales were $280.1 million in the 1996 period, an increase of 11.7%
from the 1995 period. Increased sales in the dental segment resulted primarily
from: (i) sales of products from acquired companies (approximately $17.6
million), (ii) increased volume from sales of new products (approximately $12.8
million, primarily from the ORTHOS(TM) and copper Ni-Ti(TM) product lines
manufactured by Ormco, and Kerr's TYTIN FC(TM) Alloy) and (iii) favorable
foreign currency impacts (approximately $0.3 million), partially offset by
decreased sales of existing products (approximately $1.7 million).
Gross Profit. Gross profit for the year ended September 30, 1996, before a
restructuring charge discussed below, was $338.9 million, an increase of 30.4%
from gross profit of $259.8 million for the corresponding 1995 period. Gross
profit in the laboratory segment was $180.5 million (45.8% of net segment
sales), an increase of 50.3% from $120.1 million (44.7% of net segment sales)
during the 1995 period. Increased gross profit in the laboratory segment was
primarily from: (i) the gross profit from Nunc following its acquisition
(approximately $28.0 million), (ii) the additional gross profit from other
acquired companies (approximately $19.7 million), (iii) increased sales volume
at NNI with respect to NALGENE products (approximately $4.3 million),
Barnstead/Thermolyne (approximately $1.1 million) and Erie (approximately $0.6
million), (iv) a favorable product mix at NNI (approximately $2.4 million), Erie
(approximately $1.6 million) and Barnstead/ Thermolyne (approximately $0.8
million), (v) decreased material costs at NNI (approximately $1.5 million) and
various inventory factors at NNI (approximately $1.0 million), partially offset
by inventory factors at Erie (approximately $0.7 million). In the dental
segment, gross profit was $158.3 million (56.5% of net segment sales), an
increase of 13.3% from gross profit of $139.7 million (55.7% of net segment
sales) during the 1995 period. Increased gross profit in the dental segment was
primarily from: (i) the additional gross profit from acquired businesses
(approximately $12.4 million) and (ii) increased sales volume (approximately
$6.7 million), partially offset by increased material costs (approximately $1.0
million).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the 1996 period, prior to a restructuring charge
discussed below, were $194.6 million (28.9% of net sales) as compared to $150.7
million (29.0% of net sales) in the 1995 period. General and administrative
expenses at the corporate level, including amortization of goodwill, were $21.7
million in 1996, representing an increase of 7.8% from $20.1 million in 1995.
Increases at the corporate level were primarily due to: (i) an increase in
insurance expense (approximately $0.8 million) and (ii) an increase in employee
benefits expense (approximately $0.2 million). Selling, general and
administrative expenses at the subsidiary level, including amortization of
intangibles, were $172.9 million, representing a $42.3 million (32.4%) increase
over the 1995 period. Increases at the subsidiary level were primarily due to:
(i) increased selling, general and administrative expenses as a result of
acquired businesses (approximately $20.7 million), (ii) increased marketing
expenses (approximately $7.3 million), (iii) increased general and
administrative expenses (approximately $6.2 million), (iv) increased
amortization of intangibles primarily as a result of the purchase of Nunc
(approximately $6.0 million), (v) increased research and development expenses
(approximately $1.4 million) and (vi) unfavorable foreign currency impacts
(approximately $0.7 million).
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Restructuring Charge. In March of 1996, the Company recorded a
restructuring charge of $8.3 million ($6.1 million after-tax or $0.13 per share)
for the rationalization of certain acquired companies, combination of certain
production facilities, movement of certain customer service and marketing
functions and the exiting of several product lines. Approximately $5.0 million
was charged against this reserve as of September 30, 1996. As of September 30,
1996 approximately $3.3 million of the established liability remains to be
expended and is recorded in other current liabilities. The Company expects to
charge approximately $3.0 million against the reserve in fiscal 1997 and the
remaining $0.3 million some time thereafter. Principal items in the reserve are
severance and termination costs for approximately 130 notified employees
(primarily production, sales and marketing personnel) (approximately $2.3
million), remaining lease payments and shutdown costs on exited facilities
(approximately $2.1 million), the non-cash write-off of certain fixed assets and
inventory associated with exited product lines, primarily of Sybron Dental
Specialties (approximately $2.5 million), a statutory tax penalty (approximately
$0.7 million) and other related restructuring costs (approximately $0.7
million).
Operating Income. As a result of the foregoing, operating income was $136.7
million (20.3% of net sales) for the year ended September 30, 1996, as compared
with $109.1 million (21.0% of net sales) in the 1995 period. Operating income in
the laboratory segment was $82.6 million (20.9% of net segment sales) as
compared to $55.2 million (20.6% of net segment sales) in 1995. Operating income
in the dental segment was $54.1 million (19.3% of net segment sales) in 1996 as
compared to $53.9 million (21.5% of net segment sales) in 1995. Both the
laboratory and dental segment operating income were negatively impacted in 1996
by the restructuring charge referred to above.
Interest Expense. Interest expense was $35.2 million in the 1996 period, an
increase of $12.2 million from the 1995 period. The increase resulted from a
higher average debt balance in 1996, resulting primarily from the Company's
acquisition activity.
Income Taxes. Taxes on income increased $10.2 million. This was primarily
the result of increased taxable earnings and the impact of non-deductible
goodwill associated with acquisitions.
In October 1995, the Company made a payment to the Internal Revenue Service
of approximately $14.2 million as final settlement for the tax years ended
December 31, 1986 through September 30, 1989. As a result of this settlement,
the Company increased goodwill as of September 30, 1995 by approximately $7.2
million for tax incurred prior to the acquisition of the Acquired Company in
October 1987. The remaining portion of approximately $7.0 million had been
accrued in prior years as taxes payable.
Net Income. As a result of the foregoing, the Company had net income of
$57.6 million for the year ended September 30, 1996, as compared to net income
of $48.9 million after inclusion of an extraordinary item discussed below in the
1995 period.
Depreciation and Amortization. Depreciation and amortization expense is
allocated among cost of sales, selling, general and administrative expenses and
other expense. Depreciation and amortization increased in 1996 due to additional
depreciation and amortization from the step-up of assets and goodwill recorded
from the acquisition of Nunc, as well as from additions from other acquisitions
and capital expenditures.
New Accounting Pronouncements. SFAS 123 was issued by the Financial
Accounting Standards Board in October 1995. SFAS 123 establishes financial and
reporting standards for stock-based compensation plans. Adoption is not required
by the Company until fiscal 1997. Under SFAS 123, the Company may choose to
reflect the fair value of stock options as compensation cost based on the value
of the option which is recognized over the vesting period or retain the current
approach set forth in APB Opinion 25 and expand its footnote disclosure to
provide pro forma disclosure as if it had adopted the fair value accounting
method. The Company expects to retain its current accounting methodology and
expand its footnote disclosure when SFAS 123 is adopted.
24
28
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1994
Net Sales. Net sales for the year ended September 30, 1995 were $519.2
million, an increase of $79.5 million (18.1%) from net sales of $439.7 million
for the corresponding 1994 period. Sales in the laboratory segment were $268.4
million in the 1995 period, an increase of 20.0% from the 1994 period. Increased
sales in the laboratory segment resulted primarily from: (i) sales from the
acquisition of Nunc (approximately $11.9 million), (ii) sales of products from
other acquired companies (approximately $23.1 million), (iii) price increases at
Nalge (approximately $2.3 million), Erie (approximately $1.4 million), and at
Barnstead/Thermolyne (approximately $1.2 million), (iv) increased volume from
sales of new products at Barnstead/Thermolyne (approximately $3.2 million,
primarily their new line of asphalt ashing furnaces) and at Nalge (approximately
$1.4 million, primarily the BioProcess products and PES membranes) and (v) a
favorable foreign currency impact at Erie (approximately $2.3 million),
partially offset by a reduction in sales of existing products at Nalge
(approximately $1.9 million) and Erie (approximately $0.4 million). In the
dental segment, net sales were $250.8 million in the 1995 period, an increase of
16.1% from the 1994 period. Increased sales in the dental segment resulted
primarily from: (i) sales of products from acquired companies (approximately
$13.7 million), (ii) increased volume from sales of new products (approximately
$11.2 million, primarily from Ormco's OPTIMESH(TM), a specially treated
orthodontic bonding pad, Ormco's ORTHOS(TM) product line, Kerr's EXTRUDE MPV(R)
impression materials, and Kerr's PRODIGY(TM) hybrid composite filling
materials), (iii) favorable foreign currency impacts (approximately $7.3