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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, 1997
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
------------------- ---------------------
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 1, 1997 as reported on the New York Stock Exchange, was
approximately $1,475,170,000. 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 1, 1997, there were 48,175,503 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 30, 1998 have been incorporated by reference
into Part III of this Form 10-K.
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SYBRON INTERNATIONAL CORPORATION
TABLE OF CONTENTS
TO
1997 ANNUAL REPORT ON FORM 10-K
ITEM PAGE
---- ----
PART I
1 Business.................................................... 1
2 Properties.................................................. 14
3 Legal Proceedings........................................... 16
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..................................... 18
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
8 Financial Statements and Supplementary Data................. 31
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 61
PART III
10 Directors and Executive Officers of the Registrant.......... 61
11 Executive Compensation...................................... 61
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 61
13 Certain Relationships and Related Transactions.............. 61
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 62
Signatures.................................................. 63
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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 30, 1998
--------- ---------------------------------
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 and
Beneficial Owners and Management
Management
13. Certain Relationships and Related Not applicable
Transactions
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PART I
ITEM 1. BUSINESS
GENERAL
We, Sybron International Corporation, are a leading manufacturer of
value-added products for the laboratory and professional dental and orthodontic
markets in the United States and abroad. Our laboratory business provides
plastic labware, microscope slides, disposable diagnostic products, consumables,
temperature control apparatus and water purification systems to industrial,
academic, clinical, governmental and biotechnology laboratories. Our dental and
orthodontic businesses provide a diversified line of consumable products to
dentists and orthodontic appliances and related products to orthodontists. We
have been pursuing a growth strategy designed to increase sales and enhance
operating margins. Elements of that strategy include emphasis on acquisitions,
product line extensions, new product introductions and international growth. Our
net sales have increased from $383 million in fiscal year 1992 to $795 million
in fiscal year 1997. In fiscal year 1997, our sales outside the United States
represented approximately 32% of our net sales.
When we use the terms "Company", "Sybron", "we" or "our", we are referring
to Sybron International Corporation and its subsidiaries and their respective
predecessors. Our fiscal year ends on September 30. All references to "1995",
"1996" or "1997" mean the fiscal year ended September 30, 1995, 1996 or 1997,
respectively. All references to shares, stock prices and earnings per share have
been adjusted to reflect our two-for-one stock split issued on December 15,
1995.
Our 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, auto
sampler vials and seals, accessories for chromatography, and environmental
testing containers. Erie Scientific Company ("Erie") develops, manufactures, and
markets microscope slides, cover glass, consumables used in clinical
laboratories, disposable diagnostic products, test kits, drug screening products
and thin glass mirrors. Barnstead Thermolyne Corporation
("Barnstead/Thermolyne") develops, manufactures and markets precision heating,
stirring, measuring, sterilizing, analytical and temperature control apparatus
and water purification systems to industrial, clinical, academic, governmental
and biotechnology laboratories.
Our dental and orthodontic businesses are operated through Sybron Dental
Specialties, Inc. ("Sybron Dental Specialties"), which in turn operates two
subsidiaries and their affiliates. Kerr Corporation ("Kerr") develops,
manufactures and markets a broad range of consumable products for use in
restorative, prosthetic, and endodontic dentistry. 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.
NNI, Erie, Barnstead/Thermolyne and Sybron Dental Specialties, including
Kerr and Ormco, are referred to herein collectively as our "Operating
Subsidiaries".
Our Company, a Wisconsin corporation, is the successor by merger in January
of 1994 to Sybron Corporation, a Delaware corporation. The merger was
accomplished to change our 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, we initiated programs to reduce corporate and subsidiary expenses,
rationalize certain production facilities and sell certain operating businesses.
The Company was then resold in 1987 in a second leveraged buyout transaction.
After the 1987 buyout, we focused on maximizing cash flow in order to repay debt
incurred in connection with the Acquisition. In 1992, we went public and the
proceeds of our initial public offering (the "IPO") were used to retire a
portion of the Acquisition debt. We refinanced the balance of the Acquisition
debt in 1993 when we
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put in place a bank credit facility which, in addition to refinancing existing
debt, provided us with a line of credit designed to allow the initiation of an
acquisition program. This line of credit was amended in 1995 and 1997 to
accommodate the growth of our acquisition program. See Note 7 to our
consolidated financial statements in Item 8 of this Annual Report. Our
acquisition program, together with operating strategies which we have executed
consistently since the 1986 transaction, is designed to expand and strengthen
our worldwide sales and operating margins. Key elements of our strategy are:
Competitive Focus. We are focused on product development and
manufacturing and marketing efforts, increasing our range of specialty and
value-added laboratory, dental and orthodontic products and increasing the
range of end users for our products.
Acquisitions. Since 1993, when we adopted our strategy of growth
through acquisitions, we have made more than 40 acquisitions (including a
merger and a joint venture) in the United States and abroad, including 12
completed in 1997 and three completed in fiscal 1998 through December 1,
1997. See Note 14 to our consolidated financial statements in Item 8 of
this Annual Report. Our Operating Subsidiaries have been able to use their
existing distribution channels to market many of the acquired product
lines. We have achieved other synergies, such as the elimination of
duplicative administrative functions or the combining of manufacturing
operations, with some of these acquisitions.
New Product Introductions. Each of our Operating Subsidiaries has
consistently developed and introduced new products which have contributed
to net sales. We believe that new product introductions are important to
the ability of our Operating Subsidiaries to maintain their competitive
positions.
International Growth. We have devoted significant resources to
international manufacturing, sales and marketing efforts in order to
capitalize on international sales opportunities. As a result of our
efforts, sales outside the United States have grown from $75.2 million in
the twelve months ended September 30, 1987 to $256.1 million in 1997. In
1995, 1996 and 1997, sales outside the United States represented
approximately 36%, 36% and 32%, of our net sales, respectively. The
decrease in the percentage of foreign sales to total sales is primarily due
to acquisitions, which have been predominantly in the United States, and a
general strengthening of the U.S. dollar in 1997. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Our successful execution of these strategies resulted in a significant
expansion of the business in 1997. Overall sales growth was $120.6 million, or
$135.5 million prior to negative foreign currency effects. Internal sales
growth, prior to $14.9 million of negative currency effects, was $36.2 million
(up 5.4% from 1996). Acquisition growth has been more significant within the
laboratory segment of the business than the dental segment because the worldwide
market for laboratory products is substantially larger than that for dental
products. Net sales in the laboratory segment as a percentage of our total net
sales were 51.7%, 58.5% and 61.8% in 1995, 1996 and 1997, respectively. We
intend to pursue our acquisition strategy in both the laboratory and dental
segments but, due to the disproportionate size of these markets, we expect to
see more opportunity for growth in the laboratory segment. In addition to the
growth contributed from acquired businesses, we have been able to realize cost
benefits derived from the elimination of duplicative costs in administrative and
manufacturing areas.
The description of our 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 may 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, our
intent, belief or current expectations with respect to our operating and growth
strategies, our capital expenditures, financing or other matters, regulatory
matters pertaining to us specifically and the industry in general, industry
trends, competition, risks attendant to foreign operations, reliance on key
distributors, environmental matters and other factors affecting our financial
condition or results of operations. Such forward-looking statements involve
certain risks and uncertainties, many of which are beyond our control, that
could cause actual results to differ 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
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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 our net sales by Operating Subsidiary and
business segment for the years indicated.
YEARS ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
Laboratory Segment:
NNI............................................. $137,296 $220,352 $257,664
Erie............................................ 74,062 110,747 163,605
Barnstead/Thermolyne............................ 57,039 63,225 69,966
-------- -------- --------
Subtotal................................... 268,397 394,324 491,235
-------- -------- --------
Dental Segment:
Sybron Dental Specialties....................... 250,803 280,133 303,852
-------- -------- --------
Total Sales................................ $519,200 $674,457 $795,087
======== ======== ========
We have included other financial information about our business segments
and foreign operations in Note 15 to our consolidated financial statements in
Item 8 of this Annual Report, and such information is incorporated herein by
reference.
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 us in July 1995. Nunc was
combined with Nalge in 1996 to form NNI in order to take advantage of the
marketing, manufacturing and technological synergies between the companies. In
this report 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
initiation of the Company's acquisition program in 1993, NNI has significantly
expanded its product line. In 1996, NNI formed its Nalge Process Technologies
Group ("NPT"), placing part of its existing industrial business and certain of
its acquisitions under a single management structure, to address the sanitary
fluid transport needs of biotechnology, pharmaceutical and other industries.
Products: NNI's NALGENE(R) brand of general laboratory products consist 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 for packaging of diagnostic reagents,
media and specialty chemicals), consumer products (containers, bicycle bottles
and recreation containers for outdoor camping), plastic tubing and tanks (PVC,
dairy and silicone tubing, and corrosion-resistant tanks from 5 to 1,000 gallons
in capacity), safety products (hazard labeled containers and biohazard disposal
products), and accessories. 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 safer, less expensive and more
durable alternative to labware products made of glass or other materials. NNI
also sells I-CHEM(TM) environmental containers.
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NNI's NUNC(R) plastic labware is used in biotechnology, medical research
and diagnostics. NUNC and NALGENE brand labware products are complementary, each
addressing scientific research needs not addressed by the other. NUNC products
are used in research applications such as cell culture, molecular biology,
cryopreservation and immunology. They are based on an understanding and use of
various technologies for plastic surface modification. These technologies differ
depending on whether the application is for cell attachment in cell cultures,
for binding antibodies or antigens in immunological procedures, or for DNA
amplification.
The NPT product line includes plastic tubing and tanks, silicone tubing and
non-metallic fittings for the pharmaceutical, semi-conductor and biotechnology
industries, pipe and tubing for ultra-pure applications, hoses, fittings and
accessories used in fluid and gas transport applications and sanitary stainless
steel fittings used in such applications.
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. Recent NALGENE product introductions
include new and improved filter units and bottle top filters with a 75-mm PES
membrane, the new FastCap bottle top filter with a 90-mm PES membrane, and a
PTFE vent filter for use with NALGENE carboys. The family of NALGENE safety
products has expanded to include safety waste systems and a variety of sizes of
biohazard disposal systems. New sizes and styles of acrylic laboratory beta and
gamma-radiation shields were also added. New lab organizers are useful in all
labs. Improved self-venting safety wash bottles and fluorinated solvent wash
bottles complete the safety product line. New TOPWORKS(TM) fluid transfer
systems can customize delivery of fluids between glass or plastic containers. A
new amber micropackaging vial for light-sensitive storage of reagents in
diagnostic kits was also introduced. Unique NALGENE Silo and CANTENE(TM)
containers are the latest additions to the NALGENE Outdoor Products range.
Recent NUNC product introductions relating to cell and tissue culture,
molecular biology and immunology include Multidishes 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, in May 1997 NNI added a new line of autosampler vials and
seals and accessories for chromatography through a merger between one of our
subsidiaries and National Scientific Company. In November 1997, NNI acquired
Lida Manufacturing Corporation, a producer of syringe filters for chromatography
sample preparation, biological research, genetic research and general laboratory
filtration. During the last three fiscal years, NNI has supported its new
product development with research and development expenditures of approximately
2% to 3% of its annual net sales.
Markets; Distribution. We estimate that the worldwide labware market
comprises in excess of 150,000 industrial, academic, clinical, governmental and
biotechnology laboratories. NNI's labware products are sold to this market
primarily through approximately 45 domestic and 60 international labware
distributors. Four (primarily domestic) 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 40% of NNI net sales in 1995. 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 36% and 34% of NNI net
sales in 1996 and 1997, respectively. 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 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 labware
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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.
NALGENE product sales are very strong in the United States, where they are
leaders in reusable plastic labware, and have gained acceptance in Europe and
other markets. NUNC product sales are very strong in Europe. We believe NUNC
products are 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 U.S., 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 growth in demand for
plastic labware. In the United States, NUNC products and NALGENE products are
sold through the same dealer network. In foreign markets, NALGENE and NUNC
sometimes have different distribution. For example, 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 brand products. NNI has a 60 person
sales force in the United States, a 15 member sales force in Germany and an 11
member sales force supporting NNI products in Europe and the rest of the world.
In addition, in April 1997, NNI formed a joint venture with the owner of the
Japanese distributor of NNI's NUNC product line by acquiring 75% of the stock of
Nippon InterMed K.K. ("NIKK"). NIKK, subsequently renamed Nalge Nunc
International K.K., is consolidating NNI's sales efforts in Japan. In June 1997,
NNI opened a sales office in Singapore with a four-member sales force covering
the Asia Pacific region. NNI's sales effort in Latin America is supported by two
master distribution agreements. The Middle East and Africa are supported
directly from the United States.
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 has come from its
international markets. For the five years ended September 30, 1997, NNI's sales
outside the United States grew at a compound annual rate of approximately 33%,
from approximately $19 million in 1992 to approximately $79.3 million in 1997. A
significant portion of the increase in international sales came from NNI's
acquisition of Nunc in 1995, as over half of NUNC's sales were outside the
United States.
Competition. We believe that NNI's principal competitive advantages include
its 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 Reinhold Hagen
A.G. NNI's principal competitors for the NUNC products are Corning/Costar,
Becton Dickinson and Company, C.A. Greiner & Soehne, Dynatech Laboratories,
Inc., Sarstedt AG & Co. and Eppendorf GmbH.
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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. Erie has achieved a
high degree of vertical integration in the slide production process. 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 slide operations in various parts of the world. 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.
Since 1994, Erie has significantly broadened its product base through
acquisitions to include precision thermometers and hydrometers for general
laboratory use, electrophoresis equipment and disposables used in molecular
biology research, stains, fixatives and supplies for histology and cytology
laboratories, chemical standards and reagents for diagnostic test equipment,
thin glass mirrors and other coated glass products, diagnostic test kits for
detecting the causes of gastrointestinal infections, drug screening products,
and a variety of clinical and industrial microbiology products.
Products. Erie's first products were plain microscope slides, the familiar
clear rectangular glass plates used to hold specimens for examination under a
microscope, and cover glass, 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 strategy for these products which
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. They, therefore, are
increasingly used as alternatives to plain slides.
Erie has broadened its product offerings through an aggressive acquisition
program. It leveraged its expertise in glass manufacturing and technology by
acquiring The Naugatuck Glass Company, a manufacturer of thin glass mirrors
principally used in the cosmetic industry, in February 1996. Naugatuck uses the
same type of thin glass for its mirrors as Erie uses in the manufacture of
microscope slides.
Erie has leveraged its expertise in the laboratory market by acquiring
companies which provide a number of laboratory, diagnostic and microbiology
products. It added precision thermometers and hydrometers used in laboratories
through the acquisition of Ever Ready Thermometer Co., Inc. in November 1994. It
added electrophoresis products used in molecular biology research through the
acquisition of Owl Scientific, Inc. in January 1995, and broadened its
electrophoresis line through the acquisition of Integrated Separation Systems in
July 1997. Stains and fixatives used in histology laboratories were added
through the acquisition of Richard-Allan Scientific Company in May 1995 and
Stephens Scientific, Inc. 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. and, in November
1995, it added another line of standards and calibration verification and
quality control materials through its acquisition of CASCO Standards, Inc. 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. Erie added diagnostic testing kits, used to detect a variety of
parasitic, bacterial and viral causes of infections, through the acquisition of
Trend Scientific, Inc. in January 1997, and further enhanced this product line
through the acquisition of Alexon Biomedical, Inc. in April 1997. Erie became a
significant manufacturer of microbiology products, including plated media, when
it acquired Remel Limited Partnership in April 1997. Erie added to the Remel
business by acquiring Carr-Scarborough Microbiologicals, Inc. in July 1997, and
Clinical Standards Laboratories, Inc. in November 1997. Drug screening products
were added with the acquisition of Drug Screening Systems, Inc. in June 1997.
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New Products. Apart from the addition of new products through its
acquisition program, Erie's laboratory product development efforts are focused
on giving its basic products characteristics which allow lab technicians to take
cost out of their procedures, developing specialty products for laboratory
applications, and adapting its products for use in new technologies. New
products include EVER SAFE(TM) thermometers (an array of organic indicating
thermometers targeted at mercury free laboratories), precast gels for
electrophoresis applications, specialty glass containers primarily for the
aerospace industry and hematology stains.
Markets; Distribution. Although it has been a significant supplier of
microscope and other diagnostic slides to the laboratory industry for many
years, as a result of its acquisition program Erie is now a broad supplier of
products used in standard laboratory applications such as cytology, histology,
hematology and microbiology as well as in biotech research laboratories. In the
United States, most of Erie's products are sold through laboratory distributors,
with the exception of Remel's products, which are sold direct to customers
through its own national distribution system. In 1995 and 1996, approximately
43% and 45%, respectively, of Erie's sales were through its two major
distributors, Allegiance Corp. or its predecessor, the clinical division of
Baxter Scientific Products ("Allegiance"), and Fisher (including CMS). In 1997,
with the addition of Remel, sales to Allegiance and Fisher were 31% of Erie's
sales.
International. In addition to Electroverre, Erie owns Gerhard Menzel
Glasbearbeitungswerk GmbH & Co. K.G., a German manufacturer of slides and cover
glass, and Erie Scientific Kft, which has a microscope slide manufacturing
facility in Hungary. Erie also has a joint venture in Hong Kong which cuts glass
for the Asian watch crystal industry. In 1997, sales outside the United States
represented approximately 17% of Erie's consolidated net sales. For the five
fiscal years ended September 30, 1997, Erie's sales outside the United States
grew at a compound annual rate of approximately 7% from approximately $19.1
million in 1992 to approximately $26.4 million in 1997.
Competition. We believe Erie's principal competitive advantages include its
product quality, the breadth of its product offerings, economics associated with
vertical integration and product sourcing opportunities, cost effective
processes, and its long time relationships with the 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. Although Erie has significant
competition in many of its businesses (notably, Becton Dickinson Microbiology
Systems with respect to Remel's microbiology products, Shandon (a division of
Life Sciences Inc.) with respect to Richard Allan's products, and Bio-Rad, Inc.
and Hoefer-Pharmacia with respect to Owl's products), we believe that none of
Erie's competitors can match its breadth of product offerings.
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, bench top sterilizers, strip
chart recorders, spectrophotometers, fluorometers, and replacement parts for
these products. These products are marketed primarily to laboratories and dental
offices 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, sterilizers 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 $5,000.
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 point of use 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 $5,000. We believe that Barnstead/Thermolyne offers
a broader range of water purification systems than any of its principal
competitors, and that its ability to manufacture systems using all major water
purification technologies provides a significant competitive advantage.
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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(R) brand
programmable hotplate/stirrers, TURNER(R) brand fluorometers and
spectrophotometers, and LINEAR(R) brand strip chart recorders through its
acquisition of Biomolecular, Inc. In 1997, it acquired the HARVEY(R) bench top
sterilizer business from Getinge/Castle, 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 new products introduced in 1997
include the new NANOPURE INFINITY(TM) line of modular pure water products, a new
line of Safety Stirring Hotplates, the Mega Mix large capacity stirring
hotplate, the STERILE MAX(TM) large capacity benchtop sterilizer, a line of
sterilization verification indicators, a new line of TURNER(R)
spectrophotometers, and the LOCATOR PLUS(TM) line of cryobiological storage
systems. During the past three fiscal years, Barnstead/Thermolyne has supported
its new product development with research and development expenditures of
approximately 2% to 3% of its annual net sales.
Markets; Distribution. We estimate that the worldwide labware market
consists of over 150,000 industrial, academic, clinical, governmental, and
biotechnology laboratories. Barnstead/Thermolyne products are sold to this
market primarily through approximately 50 domestic and 90 international
laboratory supply distributors and a sizable network of dental supply
distributors. The major laboratory distributors, Fisher (including CMS) and VWR
(including Baxter Industrial), accounted for approximately 47% and 41% of
Barnstead/Thermolyne's net sales in 1995 and 1996, respectively. In 1997,
Barnstead/Thermolyne sales to these laboratory distributors decreased to
approximately 33% of net sales, due to our acquisition of the HARVEY(R) line of
sterilization products which are sold primarily through dental rather than
laboratory distributors.
As end users rely heavily on distribution catalogs and known trademarks
such as BARNSTEAD(R), THERMOLYNE(R), LABINDUSTRIES(R), PMC(R), TURNER(R),
LINEAR(R), and HARVEY(R) in identifying suitable products and making purchase
decisions, Barnstead/Thermolyne believes that the long-standing marketing
cooperation between Barnstead/Thermolyne and its distributors continues to
represent an important competitive advantage. The number of Barnstead/Thermolyne
products offered in the distributor catalogs are among the highest of any of its
competitors.
International. Barnstead/Thermolyne has developed an extensive 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 1997, sales outside the United States represented approximately 26%
of Barnstead/Thermolyne's net sales. For the five fiscal years ended September
30, 1997, Barnstead/Thermolyne's sales outside the United States grew at a
compound annual rate of approximately 13%, from approximately $10.3 million in
1992 to approximately $18.8 million in 1997.
Competition. We believe that Barnstead/Thermolyne's 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 in the
laboratory market are Corning/Costar, Millipore Corporation and Lindberg/Blue M
(owned by
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General Signal Corp.). In the dental sterilizer market, its principal
competitors are Midmark Corporation, Tuttnauer U.S.Co. LTD. and Scican U.S.A.
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, industrial jewelry
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 acquired through acquisitions in the past five years in these
areas include dental curing lights of Demetron Research Corp. in December 1993,
infection control products of Metrex Research Corporation in March 1995,
infection control products of Micro-Aseptic Products, Inc. in July 1996,
infection control products and restorative materials of E & D Dental Products,
Inc. in August 1996, dental laboratory products of belle de st. claire, inc. in
November 1995 and diamond dental burs of Precision Rotary Instruments in January
1997. 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, material technology is very
dynamic in the dental industry and developments in this technology can present
growth opportunities through their impact on the techniques and products used by
dentists.
Kerr expects modest growth in the domestic market for traditional products;
this should augment the demand for new products that make the dentist more
efficient. In 1997, Kerr introduced a new bonding agent, OptiBond Solo(TM),
directed toward that end. The unique material delivery system utilized by this
product (the first unit dose bonding agent on the market) is designed to
minimize waste while providing better infection 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. 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
belleGlass HP(TM) (an indirect restorative composite), Extrude XP(TM) Putty (an
impression material) and OptiBond Solo(TM) 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 de st. claire has
broadened Kerr's dental laboratory product line, the acquisition of E&D has
added a restorative material and the addition of Precision Rotary Instruments
has enhanced Kerr's dental bur product line.
Distribution. Kerr's dental products are sold both domestically and
internationally through distributors. The Company has 42 sales representatives
in the United States and 50 abroad dedicated to dental sales. Kerr also sells
infection control products into the medical market through a nationwide group of
independent
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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
product through the dealer network.
International. Kerr's international efforts accounted for approximately
46%, 45% and 43% of Kerr's overall sales in 1995, 1996 and 1997, respectively.
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, 1997,
Kerr's sales outside the United States grew at a compound annual rate of
approximately 5% from approximately $63 million in 1992 to approximately $82
million in 1997.
Competition. We believe that Kerr's 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 rubberbands and power chains to consolidate space. 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 SPIRIT(R) MB aesthetic brackets, the gold-plated MINI DIAMOND GOLD
SERIES(R) 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 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. Although the market for Ormco's traditional products
is relatively mature domestically, the market is experiencing growth in the
adolescent segment. We believe that the international market for orthodontic
products presents a significant growth opportunity as worldwide awareness of
dental aesthetics grows. As with other healthcare markets, over the past few
years the orthodontic market has experienced some consolidation of provider
practices, and the formation of management organizations and buying groups, to
bring administrative efficiencies and buying power to orthodontic practices. We
believe
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Ormco is well positioned to compete in this environment because its marketing
philosophy is geared toward making orthodontic practices more efficient through
product innovation and customer service.
Ormco's products are marketed by approximately 64 direct salespersons in
the United States, Canada, Australia, Switzerland, Germany, Japan, Mexico and
New Zealand and by dealers and distributors in other parts of the world. 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. Sales outside the United States represented approximately 46%, 47%, and
44% of Ormco's net sales for 1995, 1996 and 1997, respectively. Despite a
decline in international sales in 1997, for the five fiscal years ended
September 30, 1997, Ormco's sales outside the United States grew at a compound
annual rate of approximately 12% from $29 million in 1992 to $50 million in
1997. The strength in the U.S. dollar reduced sales at Ormco by approximately
$4.8 million in 1997 when compared to 1996.
Competition. Ormco has over 25 competitors in the United States, including
"A"-Company Orthodontics, American Orthodontics, GAC Orthodontics, and Unitek
(owned by 3M Corporation). Ormco competes primarily on the basis of product
quality, the level of customer service, price and new product offerings.
COMPETITION
As we have described throughout Item 1 above, numerous competitors
participate in our laboratory and dental businesses, a number of which have
substantially greater financial and other resources than ours. There can be no
assurance that we will not encounter increased competition in the future.
BACKLOG
Our total backlog orders at September 30, 1995, 1996 and 1997 were
approximately $12.5 million, $26.7 million and $36.3 million, respectively. We
expect all 1997 backlog orders to be filled within the current fiscal year.
RESEARCH AND DEVELOPMENT
We have a number of research and development programs in our various
businesses, and we consider them to be of importance in maintaining our market
positions. We spent approximately $11.0 million, $13.7 million and $14.7 million
on research and development in 1995, 1996 and 1997, respectively.
EMPLOYEES
Our companies employed approximately 6,300 people at the end of 1997,
approximately 500 of which are covered by collective bargaining agreements. We
believe our employee relations 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, NNI and Barnstead/Thermolyne expire on January 31, 1998,
December 20, 1998, and March 1, 1999, respectively.
PATENTS, TRADEMARKS AND LICENSES
Our subsidiaries' products are sold under a variety of trademarks and trade
names. They own all of the trademarks and trade names we believe to be material
to the operation of their 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 we believe to
have widespread name brand recognition in its respective field and all of which
we intend to continue to protect. Our subsidiaries also own various patents,
including the U.S. patents for the marking surface of Erie's SUPERFROST(R) and
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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, we do not
believe any single patent, trademark or license is material to the operations of
our business as a whole.
MEDICAL DEVICE REGULATION
Certain of our 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 our Operating Subsidiaries 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 begin, 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, the 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 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. 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.
The FDA is expected to publish its decision on the classification early in 1998.
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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. We are aware of at least one foreign government
agency that, 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 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
Our operations entail a number of environmentally sensitive production
processes. Compliance with environmental laws and regulations along with
regulations relating to workplace safety is a significant factor in our
businesses. Our 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 our foreign facilities
are subject to local laws and regulations regarding the environment. Our
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 our operations into the
environment could expose us to significant liability. Similarly, third party
lawsuits relating to environmental and workplace safety issues could result in
substantial liability. We believe that we are in substantial compliance with all
applicable environmental and workplace safety laws.
See Item 3, "Legal Proceedings", Note 13 to our consolidated financial
statements contained in Item 8 of this Annual Report and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General" for further information regarding environmental matters.
RAW MATERIALS
Our 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. We
do not foresee any significant difficulty in obtaining necessary materials or
supplies.
RISKS ATTENDANT TO FOREIGN OPERATIONS
We conduct our business in numerous foreign countries and as a result are
subject to risks of fluctuations in exchange rates of various foreign currencies
and other risks associated with foreign trade. For the years 1995, 1996 and
1997, our sales outside the United States accounted for approximately 36%, 36%
and 32%, 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 our sales of laboratory products is made through
the major independent distributors, which historically have been Fisher, VWR,
Baxter Scientific Products and CMS. As discussed previously, these major
distributors experienced significant consolidation in 1995, with Fisher
acquiring CMS
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and VWR acquiring the industrial products division of Baxter Scientific
Products. 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 our 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 our business. Our subsidiaries in the
laboratory segment do not have any contractual relationships with these
distributors. However, our subsidiaries have long-standing relationships with
them and, in certain cases, their predecessors. Although not to the same extent
as the laboratory segment, Kerr also sells through distributors. Two of Kerr's
large distributors, Henry Schein, Inc. and Sullivan Dental Products, Inc, merged
in November 1997. We do not believe this merger will have a material impact on
Kerr's sales. The loss of certain of Kerr's distributors could have a material
adverse effect on our results of operations or financial condition.
ITEM 2. PROPERTIES
Our subsidiaries operate manufacturing facilities in the United States and
certain foreign countries. The principal domestic facilities of our
subsidiaries, other than NNI's Nunc facility in Naperville, Illinois, are
leased.
The following table sets forth information regarding our principal
properties by Operating Subsidiary. Properties 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, leased
warehouse and headquarters
New Castle, Delaware 25,900 sq. ft./manufacturing, leased
warehouse and offices
Wiesbaden, Germany 21,000 sq. ft./warehouse leased
Naperville, Illinois 103,000 sq. ft./manufacturing, owned
warehouse and office
Roskilde, Denmark 151,000 sq. ft./manufacturing owned
and office
Lafayette, New Jersey 36,000 sq. ft./manufacturing, leased
warehouse and offices
Bridgewater, New Jersey 44,000 sq. ft./manufacturing, leased
warehouse and offices
Reading, Pennsylvania 46,000 sq. ft./manufacturing, leased
warehouse and offices
Kenosha, Wisconsin 27,000 sq. ft./manufacturing, leased
warehouse and offices
Erie
Portsmouth, New Hampshire 141,000 sq. ft./manufacturing leased
and 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
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SUBSIDIARY/LOCATION OF FACILITY BUILDING SPACE AND USE OWNED OR LEASED
- ------------------------------- ---------------------- ---------------
Woburn, Massachusetts 32,000 sq. ft./manufacturing leased
East Providence, Rhode Island 38,000 sq. ft./manufacturing leased
Kalamazoo, Michigan 40,000 sq. ft./manufacturing leased
Naugatuck, Connecticut 80,000 sq. ft./manufacturing owned
Holtsville, New York 30,000 sq. ft./manufacturing owned
Wayne, New Jersey 32,500 sq. ft./manufacturing leased
Lenexa, Kansas 123,000 sq. ft./manufacturing, owned
warehouse and office
Lake Charles, Louisiana 23,000 sq. ft./manufacturing owned
and offices
Ramsey, Minnesota 25,000 sq. ft./manufacturing leased
and offices
Portland, Maine 33,000 sq. ft./manufacturing leased
and offices
Decatur, Georgia 30,000 sq. ft./office and leased
warehouse
Barnstead/Thermolyne
Dubuque, Iowa 180,000 sq. ft./manufacturing leased
and 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, leased
warehouse and 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 leased
manufacturing
Glendora, California 66,000 sq. ft./manufacturing leased
Redmond, Washington 29,000 sq. ft./manufacturing, leased
warehouse and offices
Uman, Yucatan, Mexico 35,000 sq. ft./manufacturing owned
We consider our plants and equipment to be well-maintained and suitable for
their purposes. We have, from time to time, expanded and will continue to expand
facilities as the need arises. We expect to fund such expansions through
internally generated funds or borrowings under our Credit Facilities, as defined
in Note 7 to our consolidated financial statements 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".
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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 the
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 Company and its subsidiaries are
vigorously defending lawsuits and other claims against them. With the exception
of the specific sites discussed below, based upon the insurance available under
our 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 the pending cases and claims would not have a
material adverse effect on the results of operations or financial condition of
the Company. There can be no assurance as to this, however, or that litigation
having such a material adverse effect will not arise in the future.
A subsidiary of the Company has been identified as a potentially
responsible party ("PRP") at the Aqua-Tech site in South Carolina (the
"Aqua-Tech Site") with respect to a previously owned facility. An action has
been conducted at the Aqua-Tech Site 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 not expected to be completed
prior to the end of 1998. Because the study, which involves extensive testing
required to characterize the existence, extent and nature of any 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 Company's results of operations or financial condition.
On May 2, 1996, Combustion Engineering, Inc. ("CE"), a subsidiary of ABB
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 our consolidated financial statements 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
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and offices of our executive
officers, who 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............... 53 Chairman of the Board, President and Chief Executive
Officer
Dennis Brown................... 50 Vice President -- Finance, Chief Financial Officer and
Treasurer
R. Jeffrey Harris.............. 42 Vice President -- General Counsel and Secretary
David T. Della Penta........... 49 President, NNI
Frank H. Jellinek, Jr.......... 52 President, Erie
Randy Hoff..................... 47 President, Barnstead/Thermolyne
Floyd W. Pickrell, Jr.......... 52 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 Viasystems Group Inc.
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 and Yellow Springs
Instrument, Incorporated.
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
We have not since our inception paid any dividends on our 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 our consolidated financial statements contained in Item 8 of this
Annual Report, for a description of certain restrictions on our ability to pay
dividends. Subject to such limitations, any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our earnings, financial condition and other requirements. We have no current
intention to pay cash dividends on our Common Stock.
Based upon record ownership as of December 1, 1997, the number of holders
of our Common Stock is 406.
Our 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 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
FISCAL 1997 HIGH LOW
----------- ---- ---
First Quarter.................................... $33.750 $28.750
Second Quarter................................... 34.750 26.750
Third Quarter.................................... 40.750 27.125
Fourth Quarter................................... 43.750 39.250
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Income Data(a):
Net sales...................... $395,404 $439,704 $519,200 $674,457 $795,087
Income before extraordinary
items and cumulative effect
of accounting change......... 25,793 43,015 51,800 57,584 81,876
Extraordinary items............ (8,531)(b) -- (2,885)(b) -- (673)(b)
Cumulative effect of accounting
change....................... -- (420)(c) -- -- --
Net income..................... 17,262 42,595 48,915 57,584 81,203
Earnings per share:
Earnings per common share
before extraordinary items
and cumulative effect of
accounting change............ .57(d) .92 1.10 1.20(d) 1.65
Extraordinary items............ (.19) -- (.06) -- (.01)
Cumulative effect of accounting
change....................... -- (.01) -- -- --
Earnings per common share...... .38(d) .91 1.04 1.20(d) 1.64
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AS OF SEPTEMBER 30,
--------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ----------
(IN THOUSANDS)
Balance Sheet Data:
Total assets................ $481,291 $557,676 $852,083 $974,613 $1,221,511
Long-term debt.............. 249,309 223,565 406,547 481,037 645,733
Shareholders' equity........ 126,353 176,775 227,250 283,079 366,956
- ---------------
(a) Includes results of acquired companies since their effective dates of
acquisition with the exception of the merger of National Scientific Company
with a wholly owned subsidiary of ours formed for that purpose, whose
results are included from October 1, 1996. See Note 14 to our consolidated
financial statements contained in Item 8 of this Annual Report.
(b) Amount resulted from the refinancing of our debt. See Note 7 to our
consolidated financial statements 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 4 to our
consolidated financial statements contained in Item 8 of this Annual Report.
(d) Includes a restructuring charge of $.06 and $.13 per share in fiscal 1993
and 1996, respectively. See Note 11 to our consolidated financial statements
contained in Item 8 of this Annual 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 our
consolidated financial statements and their notes contained in Item 8 of this
Annual Report.
Our growth in sales and operating income in 1997 has been achieved through
the successful implementation of our operating strategies. Overall sales growth
of 17.9% from 1996 reflects an increase in both the domestic and international
sectors. Domestic sales grew by $109.0 million, bolstered by sales of new
products and by 11 domestic acquisitions. Acquisitions accounted for
approximately $86.0 million of the domestic 1997 sales growth. International
sales grew by $11.6 million. Acquisitions accounted for approximately $13.3
million of the international sales growth, while unfavorable foreign currency
effects decreased international sales by approximately $14.9 million.
As discussed in Item 1, "Business -- General", we have maintained an active
program of developing and marketing both new products and product line
extensions. We believe that new product introductions are important to the
ability of our Operating Subsidiaries to maintain their competitive positions.
We have also pursued numerous acquisition opportunities, completing more than 40
acquisitions since 1993, 12 of which we completed in 1997. Acquisitions
completed in 1997 were as follows:
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APPROXIMATE ACQUISITION
COMPANY ANNUAL SALES DATE DESCRIPTION
------- ------------ ----------- -----------
Pure Fit, Inc.................. $ 2.7 million 10/96 Manufacturer of stainless steel fittings
used in the fabrication and assembly of
sanitary and food grade hose.
D&W, Inc....................... $ 0.5 million 10/96 Manufacturer of cut glass.
Trend Scientific, Inc.......... $ 2.5 million 1/97 Manufacturer of diagnostic testing
systems for microbiology laboratories.
Precision Rotary Instruments... $ 4.4 million 2/97 Manufacturer of carbide and diamond
dental burs.
Harvey(R) bench top sterilizer
business line of
Getinge/Castle, Inc.......... $10.0 million 3/97 Manufacturer of bench top sterilizers.
Alexon Biomedical, Inc......... $ 5.9 million 4/97 Manufacturer of diagnostic test kits for
intestinal infections.
Remel Limited Partnership...... $63.3 million* 5/97 Manufacturer and distributor of an
extensive line of microbiology and
diagnostic products.
Nippon Intermed K.K............ $ 9.1 million 5/97 Acquired 75% of the outstanding stock of
a Japanese distributor of NNI products.
National Scientific Company.... $10.0 million 5/97 Manufacturer of supplies for the
laboratory industry primarily used in
chromatography analysis.
Drug Screening Systems, Inc.... $ 2.2 million 6/97 Manufacturer of on-site drug screening
products.
Carr-Scarborough
Microbiologicals, Inc........ $ 8.8 million 7/97 Manufacturer of medical diagnostic
products used to detect bacteria and
fungi involved in infections.
Integrated Separation
Systems...................... $ 4.0 million 7/97 Manufacturer of electrophoresis gels,
reagents, equipment and related
accessories.
- ---------------
* Includes pro forma estimate for Chrisope Technologies L.C., acquired by Remel
Limited Partnership in November 1996.
These acquisitions are consistent with our strategy of acquiring product
lines that can be manufactured in existing facilities, sold through existing
sales and distribution networks, or both. We intend to continue to seek out
acquisition candidates consistent with our strategy. However, there can be no
assurance of the number or size of future acquisitions.
As described in Item 3, "Legal Proceedings", one of our subsidiaries is
involved as a PRP at the Aqua-Tech Site, and another is involved in legal
proceedings relating 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 and will not be completed prior
to the end of 1998, an estimate of our 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 our share of waste allegedly sent to the
site is reportedly not more than 1% of the total waste sent, we believe that any
ultimate liability with respect to the Aqua-Tech Site will not have a material
adverse effect on our results of operations or financial condition.
20
24
As previously reported, 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" or
"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. The CE Litigation has not yet advanced beyond the filing of
the complaint.
Prior to commencement of the CE Litigation, CE conducted testing at the
Site to determine the nature, extent and location of any onsite contamination.
It has continued to conduct onsite and offsite testing following commencement of
the CE Litigation. In addition, CE negotiated and entered into a voluntary
clean-up agreement ("VCA") concerning the Site with the New York State
Department of Environmental Conservation (the "NYSDEC"). Under the terms of the
VCA, CE and NYSDEC are to negotiate onsite and offsite cleanup goals. CE and
NYSDEC are currently negotiating cleanup goals for onsite soil contamination. As
part of the negotiations, CE submitted to NYSDEC a series of technical memoranda
which summarize the results of investigations conducted by CE into the onsite
contamination. CE also submitted to NYSDEC a draft technical memorandum which
proposes onsite cleanup goals for soil contaminated by mercury,
Trichloroethylene ("TCE") and total volatile organic compounds ("TVOCs"). CE's
submission estimated that the remediation of mercury contaminated soils would
cost approximately $2.3 million based on a proposed plan to excavate and remove
mercury contaminated soils exceeding CE's proposed cleanup goal, and that the
remediation of TCE and TVOC contaminated soils would cost between $40,000 and
$6.1 million, depending upon the remedial method for TCE and TVOC contaminated
soils ultimately agreed upon by CE and NYSDEC. Once the cleanup goals for onsite
soil contamination are established, CE and NYSDEC plan to address both onsite
and offsite ground water contamination in conjunction with the negotiations
concerning offsite cleanup goals. CE and NYSDEC agreed in the VCA to reach
agreement on offsite cleanup goals by January 31, 1998. To assist in those
negotiations, CE is presently contemplating whether to perform an additional
investigation of groundwater to further define the nature and extent of any
offsite groundwater contamination emanating from the Site. The Company believes
the cost estimates developed by CE for the onsite soil remediation are not
reliable or meaningful cost estimates as they are based on insufficient data and
information. In addition, because CE and NYSDEC have not yet reached agreement
on either onsite or offsite cleanup goals, or on the remedial method for
achieving the yet-to-be-agreed-upon onsite and offsite cleanup goals, and
because the extent of the Company's liability, if any, to CE is uncertain, the
Company cannot estimate the potential cost to it of CE's claims.
The Company has 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 our
performance, see Item 1, "Business" and Item 3, "Legal Proceedings".
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25
Our results of operations reflect goodwill amortization, other
amortization, and depreciation, which are non-cash charges, totaling $33.7
million, $44.1 million and $48.9 million in 1995, 1996 and 1997, respectively.
Depreciation and amortization increased in 1997 due to our acquisition activity
and associated amortization of stepped up assets and goodwill. In fiscal 1998,
depreciation of stepped-up assets associated with the leveraged buyout in 1987
of a company known at the time as Sybron Corporation (the "Acquisition") will
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. This decrease is expected to be entirely offset by past and
continuing acquisition activity. As discussed below in "Liquidity and Capital
Resources", our earnings before interest, taxes, depreciation and amortization
("EBITDA") amounted to $141.7 million, $180.3 million and $228.0 million in
1995, 1996 and 1997, respectively. EBITDA represents, for any relevant period,
net income (except that extraordinary items 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 our net sales, net income and cash flows from
operations are derived internationally. The financial position and the results
of operations from substantially all our international operations, other than
most U.S. export sales, are measured using the local currency of the countries
in which such operations are conducted and are translated into U.S. dollars.
While the reported income of foreign subsidiaries will be impacted by a
weakening or strengthening of the U.S. 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.
Effects of foreign currency fluctuations are also mitigated by the fact that our
subsidiaries' operations are conducted in numerous foreign countries and,
therefore, in numerous foreign currencies. In addition, our U.S. export sales
may be impacted by foreign currency fluctuations due to the relative value of
the U.S. dollar as foreign customers may adjust their level of purchases upward
or downward according to the weakness or strength of the U.S. dollar. In order
to hedge against future strengthening of the U.S. dollar, from time to time in
the past and most recently in October 1997 we employed currency hedges through
the purchase of a series of options. In October 1997 we purchased options with a
U.S. dollar notional amount of approximately $13.6 million at a cost of
approximately $0.4 million. These options will expire in the third and fourth
quarter of fiscal 1998 and are designed to protect us from potential detrimental
effects of currency movements associated with the United States dollar versus
the German mark and the French franc as compared to the 1997 third and fourth
quarters. From time to time, we may employ additional currency hedges to
mitigate the impact of foreign currency fluctuations.
Based on a preliminary study, we expect to incur total expenses of
approximately $1.0 million to modify certain computer information systems in
order to enable proper processing of transactions relating to the year 2000 and
beyond. We expect most of these expenses to be incurred in fiscal 1998. We
continue to evaluate other appropriate courses of corrective action, including
the replacement of certain systems at an estimated cost of $2.6 million which
would be capitalized and amortized over the systems useful lives. We do not
expect the amounts to be expensed over the next two years to have a material
effect on our financial position or results of operations. In 1997,
approximately $0.2 million was expensed on year 2000 issues.
The following table sets forth our domestic sales and sales outside the
United States in 1995, 1996 and 1997. See also Note 15 to our consolidated
financial statements contained in Item 8 of this Annual Report.
YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
Domestic sales........................................ $332,646 $429,988 $539,006
Sales outside the United States....................... 186,554 244,469 256,081
-------- -------- --------
Total sales........................................... $519,200 $674,457 $795,087
======== ======== ========
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RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
Net Sales. Net sales for the year ended September 30, 1997 were $795.1
million, an increase of 17.9% from 1996 net sales of $674.5 million. Net sales
in the laboratory segment were $491.2 million in 1997, an increase of 24.6% from
1996 net sales of $394.3 million. Increased net sales in the laboratory segment
resulted primarily from: (i) net sales of products of acquired companies
(approximately $89.3 million), (ii) price increases (approximately $7.0
million), (iii) net sales of new products (approximately $5.2 million) and (iv)
increased net sales of existing products (approximately $1.8 million ),
partially offset by unfavorable foreign currency fluctuations (approximately
$6.0 million). In the dental segment, net sales were $303.9 million in 1997, an
increase of 8.5% from 1996 net sales of $280.1 million. Increased net sales in
the dental segment resulted primarily from: (i) increased net sales of existing
products (approximately $16.3 million), (ii) net sales of products of acquired
companies (approximately $9.9 million) and (iii) net sales of new products
(approximately $6.4 million), partially offset by unfavorable foreign currency
fluctuations (approximately $8.9 million).
Gross Profit. Gross profit for the year ended September 30, 1997 was $403.2
million, an increase of 19.0% from 1996 gross profit (before the restructuring
charge discussed below) of $338.9 million. Gross profit in the laboratory
segment was $231.2 million (47.1% of segment net sales), an increase of 28.1%
from 1996 gross profit of $180.5 million (45.8% of segment net sales). Increased
gross profit in the laboratory segment was primarily from: (i) the effects of
acquired companies (approximately $43.0 million) and (ii) increased volume
(approximately $15.0 million), partially offset by (i) increased material costs
(approximately $2.5 million), (ii) unfavorable foreign currency fluctuations
(approximately $2.3 million), (iii) higher fixed overhead (approximately $1.1
million ) and (iv) increased scrap (approximately $0.9 million). In the dental
segment, gross profit was $172.0 million (56.6% of segment net sales), an
increase of 8.6% from 1996 gross profit of $158.3 million (56.5% of segment net
sales). Increased gross profit in the dental segment was primarily from : (i)
increased volume (approximately $13.1 million) and (ii) the effects of acquired
companies (approximately $4.7 million), partially offset by unfavorable foreign
currency impacts (approximately $4.3 million).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1997 were $223.2 million (28.1% of net sales) as
compared to $194.6 million (before the restructuring charges discussed below)
(28.9% of net sales) in 1996. General and administrative expenses at the
corporate level, including amortization of goodwill, were $18.5 million in 1997,
representing a decrease of 14.8% from $21.7 million in 1996. Decreases at the
corporate level were primarily from (i) reduced legal expense (approximately
$1.9 million), (ii) reduced pension and postretirement expense (approximately
$0.8 million) and (iii) reduced foreign corporate overhead (approximately $0.3
million). Selling, general and administrative expenses at the subsidiary level,
including amortization of intangibles, were $204.7 million, representing a $31.8
million (18.4%) increase over $172.9 million in 1996. Increases at the
subsidiary level were primarily due to: (i) increased selling, general and
administrative expenses as a result of acquired businesses (approximately $18.0
million), (ii) increased marketing expenses (approximately $5.1 million), (iii)
increased general and administrative expenses (approximately $4.0 million), (iv)
increased amortization of intangibles primarily as a result of acquisitions
(approximately $2.9 million), (v) unfavorable foreign currency impacts
(approximately $1.8 million) and (vi) increased research and development
expenses (approximately $0.7 million).
Restructuring Charge. In March of 1996, we 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 $4.5 million and $3.2 million
were charged against this reserve in 1996 and 1997, respectively. As of
September 30, 1997 approximately $0.6 million of the established liability
remains to be expended and is recorded in other current liabilities. We expect
to charge the remaining $0.6 million over the remaining terms of certain lease
and severance arrangements. Principal items in the reserve are severance and
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27
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 $180.0
million (22.6% of net sales) for 1997, as compared with $136.7 million (20.3% of
net sales) in 1996. Operating income in the laboratory segment was $112.3
million (22.9% of segment net sales) as compared to $82.6 million (20.9% of
segment net sales) in 1996. Operating income in the dental segment was $67.7
million (22.3% of segment net sales) in 1997 as compared to $54.1 million (19.3%
of segment net sales) in 1996. Both the laboratory and dental segment margins
were unfavorably impacted in 1996 by the nonrecurring restructuring charge
referred to above.
Interest Expense. Interest expense was $43.2 million in 1997, an increase
of $8.0 million from 1996. The increase resulted from a higher average debt
balance in 1997, resulting primarily from our acquisition activity.
Income Taxes. Taxes on income were $54.0 million, an increase of $10.7
million. The increase was primarily the result of increased taxable earnings.
Extraordinary Item. As a result of the Second Amendment to the Credit
Facilities (as defined later herein), we wrote off, as an extraordinary item,
approximately $1.0 million (approximately $0.7 million net of income tax) of
unamortized deferred financing fees.
Net Income. As a result of the foregoing, we had net income of $81.2
million in 1997, as compared to net income of $57.6 million in 1996.
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 1997 due to additional
depreciation and amortization from the step-up of assets and goodwill recorded
from the various acquisitions as well as routine operating capital expenditures.
New Accounting Pronouncements. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share". This change will require us to report both basic and
diluted earnings per share ("EPS") beginning in fiscal 1998 and is expected to
result in basic EPS increasing over previously reported primary and fully
diluted EPS by $.01, $.03 and $.06 in 1995, 1996 and 1997, respectively. Diluted
EPS is expected to remain the same as previously reported primary and fully
diluted EPS in 1995, 1996 and 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). As a result of SFAS 130,
we will be required to separately report comprehensive income components
previously excluded from our net income. Comprehensive income includes all
changes to our equity during a period except those resulting from investments by
or distributions to shareholders. Because comprehensive income is subject to
external factors beyond our control, including but not limited to foreign
currency fluctuations and economic factors, we cannot at this time estimate
impacts from SFAS 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 establishes standards for the way we are to
report information about operating segments in annual financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. We believe that we
currently comply with FAS 131.
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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 29.9% from 1995 net sales of $519.2 million. Net sales
in the laboratory segment were $394.3 million in 1996, an increase of 46.9% from
1995 net sales of $268.4 million. Increased net sales in the laboratory segment
resulted primarily from: (i) net sales from the acquisition of Nunc
(approximately $57.0 million), (ii) net sales of products from other acquired
companies (approximately $53.8 million), (iii) an increase in net sales of
existing products (approximately $6.4 million), (iv) price increases
(approximately $6.2 million) and (v) net sales of new products (approximately
$2.4 million), partially offset by an unfavorable foreign currency impact
(approximately $0.2 million). In the dental segment, net sales were $280.2
million in 1996, an increase of 11.7% from 1995 net sales. Increased net sales
in the dental segment resulted primarily from: (i) net sales of products from
acquired companies (approximately $17.6 million), (ii) sales of new products
(approximately $12.8 million) 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 1996, before a restructuring charge
discussed below, was $338.9 million, an increase of 30.4% from 1995 gross profit
of $259.8 million. Gross profit in the laboratory segment was $180.5 million
(45.8% of segment net sales), an increase of 50.3% from 1995 gross profit of
$120.1 million (44.7% of segment net sales). Increased gross profit in the
laboratory segment was primarily from: (i) the gross profit from the acquisition
of Nunc (approximately $28.0 million), (ii) the additional gross profit from
other acquisitions (approximately $19.7 million), (iii) increased sales volume
(approximately $6.0 million), (iv) a favorable product mix (approximately $4.8
million), (v) decreased material costs (approximately $1.5 million) and (vi)
various inventory factors (approximately $0.3 million). In the dental segment,
gross profit was $158.4 million (56.5% of segment net sales), an increase of
13.3% from 1995 gross profit of $139.7 million (55.7% of segment net sales).
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 1996, 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 1995. 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
in 1996, representing a $42.3 million (32.4%) increase over 1995. 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).
Restructuring Charge. In March of 1996, we recorded a restructuring charge
of $8.3 million ($6.1 million aftertax 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 $4.5 million was charged against
this reserve as of September 30, 1996. As of September 30, 1996 approximately
$3.8 million of the established liability remained to be expended and was
recorded in other current liabilities. The Company charged approximately $3.2
million against the reserve in 1997 and the remaining $0.6 million will be
charged some t