SYBRON DENTAL SPECIALTIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-16057

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SYBRON DENTAL SPECIALTIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 33-0920985
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1717 WEST COLLINS AVENUE, ORANGE, CALIFORNIA 92867
(Address of principal executive offices) (Zip Code)

(714) 516-7400
(Registrant's Telephone Number, Including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

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

Yes [ ] No [X]

At February 5, 2003, there were 38,023,246 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.

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SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

1

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

2

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

3

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to unaudited consolidated financial statements.

4

SYBRON DENTAL SPECIALTIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

1. OVERVIEW AND BASIS OF PRESENTATION

Sybron Dental Specialties, Inc. ("SDS" or the "Company") was incorporated in
Delaware on July 17, 2000. The Company was created to effect the spin-off by
Apogent Technologies Inc. ("Apogent") of its dental business. As a part of the
spin-off, which occurred on December 11, 2000, Apogent transferred to SDS, along
with certain other assets, all of the capital stock of Sybron Dental Management,
Inc. ("SDM"), which owned, directly or indirectly, the stock or other equity
interest in the subsidiaries that held substantially all of the assets and
liabilities of Apogent's then dental business. Apogent then distributed to its
shareholders, by means of pro rata distribution, all of the Company's
outstanding common stock together with related preferred stock purchase rights
(the "spin-off"). As a result, SDS became an independent, publicly traded
company. The subsidiaries of SDS market their products under brand names such as
Kerr(R), Hawe(R), Herculite(TM), Prodigy(R), Tytin(R), Demetron(R), Ormco(R),
Straight-Wire(R), inspire!(R), AOA(TM), Damon(TM), Diamond(R), Metrex(R) and
Metricide(R), which are well recognized in the dental, orthodontics and
infection prevention industries.

Prior to October 1, 2002, SDS had three business segments: a) Professional
Dental, b) Orthodontics and c) Infection Prevention. Effective October 1, 2002,
the Company consolidated its Infection Prevention segment into its Professional
Dental segment to reduce costs and coordinate marketing efforts for its
infection prevention products. As a result, all financial information presented
in this quarterly report combines the historical information of the Infection
Prevention and Professional Dental business segments into one reporting segment.

The reported net sales of the Company's Professional Dental and Orthodontics
segments were impacted by the transfer made by the Company between those
segments, in the fiscal quarter ending December 31, 2002, of its stainless steel
endodontic product line. While the responsibility for the sales and marketing of
those products was handled during fiscal year 2002 by the Orthodontics
segment, the net sales were reported in the Professional Dental business
segment. In the first quarter of the Company's 2003 fiscal year it transferred
the reporting of those sales to the Orthodontics business segment. While the
transfer impacted the respective results of operations reported for the
Professional Dental and Orthodontics segments, there was no impact on the
Company's consolidated results of operations for the quarter.

The unaudited consolidated financial statements reflect the operations of
SDS and its wholly owned subsidiaries and affiliates. The term "Apogent" as used
herein refers to Apogent Technologies Inc. and its subsidiaries. The Company's
fiscal year ends on September 30. All significant intercompany balances and
transactions have been eliminated in consolidation. The quarter ended December
31, 2002 and 2001 refer to the first quarters of fiscal years 2003 and 2002,
respectively. We have reclassified certain prior year data to conform to the
2003 presentation.

In the opinion of management, all adjustments, which are necessary for a
fair presentation of the results for the interim periods presented, have been
included. Except as described in notes 3 and 7 below, all such adjustments were
of a normal recurring nature. The results for the period ended December 31, 2002
are not necessarily indicative of the results to be expected for the full year.
Because certain disclosures have been omitted from these statements, this
information should only be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.

2. INVENTORIES

Inventories at December 31, 2002 and September 30, 2002 are presented
below.

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3. RESTRUCTURING CHARGES

In September 2002, the Company recorded a restructuring charge of
approximately $3,666 ($2,353 after tax) consisting primarily of severance and
termination costs associated with the planned termination of the employment of
71 employees employed at certain of the Company's European facilities, as a
result of the consolidation of those European facilities into the Company's Hawe
Neos facility in Switzerland. Of the $3,666 in restructuring charges,
approximately $3,064 are cash charges related to severance and contractual
obligations, $300 is a cash charge for an additional potential tax liability
included in income taxes payable, while the balance of approximately $302 are
non-cash charges. The Company expects to complete the majority of the 2002
restructuring plan by the 2003 fiscal year end.

In September 2001, the Company recorded a restructuring charge of
approximately $2,400 ($1,500 after tax) consisting primarily of the severance
and termination costs associated with the termination of the employment of 63
employees that were employed at Ormco's San Diego, California manufacturing
facility, as a result of the closing of the facility. The Company completed the
closing of the facility as of June 30, 2002 and finalized all remaining costs.
Work previously performed at the facility was absorbed into the Glendora,
California facility. The proceeds (approximately $5,265) from the sale of the
facility (which was completed on January 31, 2003) offset the amount of the
restructuring charge. The Company used the proceeds from the sale to pay down
debt.

In June 1998, SDS recorded a restructuring charge of approximately $14,600
(approximately $10,700 after tax) for the rationalization of certain acquired
companies, combination of certain duplicate production facilities, movement of
certain customer service and marketing functions, and the exiting of several
product lines.

The 2002 restructuring charge activity since September 2002 and its components
are as follows:

The 2001 restructuring charge activity since September 2001 and its components
are as follows:

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The 1998 restructuring charge activity since June 1998 and its components are as
follows:

(a) The 2002 restructuring charge consists primarily of the charges for
severance and termination costs associated with the 71 employees
primarily located at several facilities throughout Europe whose
employment the Company plans to terminate as a result of the 2002
European restructuring plan. As of December 31, 2002, the employment of
15 of those 71 employees has been terminated. The 2001 restructuring
charge represents severance and termination costs associated with the
63 employees located at the Ormco San Diego facility whose employment
Ormco terminated as a result of the 2001 restructuring plan. As of
December 31, 2002, all of the employment terminations were completed
under the 2001 restructuring plan. The closing of the facility was
completed by June 30, 2002. The proceeds (approximately $5,265) from
the sale of the Ormco San Diego facility (which closed on January 31,
2003) offset the costs of closing the facility. The 1998 restructuring
charge represents severance and termination costs related to the 154
employees whose employment was terminated as a result of the 1998
restructuring plan. An adjustment of approximately $1,200 was made in
fiscal 1999 to adjust the accrual primarily representing over accruals
for anticipated costs associated with outplacement services, accrued
fringe benefits, and severance associated with employees who were
previously notified of termination and subsequently filled other
company positions.

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

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

(d) The 2002 charge represents $300 in additional potential tax liability
included in income taxes payable. The 1998 charge of $700 represents a
statutory tax relating to assets transferred from an exited sales
facility in Switzerland.

(e) Amount represents certain terminated contractual obligations.

4. SEGMENT INFORMATION

The Company's operating subsidiaries are engaged in the manufacture and sale
of dental, orthodontics and infection prevention products in the United States
and other countries. Effective October 1, 2002, the Company consolidated the
Infection Prevention segment into the Professional Dental segment and also
transferred the reporting of the sales of its endodontic product line from its
Professional Dental segment to its Orthodontics segment. The prior period
information on the business segments has been adjusted to reflect the
consolidation of the Infection Prevention and Professional Dental segments. The
prior period information was not adjusted to reflect the transfer of the
endodontic product line.

Information on these business segments is summarized as follows:

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5. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are calculated by using the
weighted average number of common shares outstanding adjusted to include the
potentially dilutive effect of outstanding stock options. The basic weighted
average number of shares outstanding was 37,989,646 and 37,894,531 for the
quarters ended December 31, 2002 and 2001, respectively. The number of
incremental diluted shares was 268,948 and 1,386,307 for the quarters ended
December 31, 2002 and 2001, respectively, which represent the dilutive effect of
options outstanding. The number of shares issuable upon the exercise of stock
options which were not included in the calculation because they were
anti-dilutive, was 3,908,151 at a weighted average exercise price of $15.69 per
share in the quarter ended December 31, 2002. There were no anti-dilutive shares
for the quarter ended December 31, 2001.

6. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

Below are the unaudited condensed consolidating balance sheets as of
December 31, 2002 and September 30, 2002, statements of operations for the three
months ended December 31, 2002 and 2001, and statements of cash flows for the
three months ended December 31, 2002 and 2001, of Sybron Dental Specialties,
Inc. and its subsidiaries, reflecting the subsidiary guarantors of the 8 1/8%
senior subordinated notes.

Intercompany balances include receivables/payables incurred in the normal
course of business in addition to investments and loans transacted by
subsidiaries of the Company with other subsidiaries or with the Company.

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CONDENSED CONSOLIDATING BALANCE SHEETS

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CONDENSED CONSOLIDATING BALANCE SHEETS

10

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

7. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized to earnings, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121 and subsequently, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," after its adoption.

The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of October 1, 2002. Upon adoption of SFAS No. 142, the Company
was required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and make any necessary
reclassifications in order to conform with the new classification criteria in
SFAS No. 141 for recognition separate from goodwill.

Intangible Assets

The Company was required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset was identified as

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having an indefinite useful life, the Company was required to test the
intangible asset for impairment in accordance with the provisions of SFAS No.
142 within the first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an indefinite
life. Any impairment loss is to be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period. The Company did not record any impairment charge upon the
adoption of SFAS No. 142.

Goodwill

In connection with SFAS No. 142's transitional goodwill impairment
evaluation, SFAS No. 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired as of the date of
adoption, October 1, 2002. To accomplish this, the Company identified its
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of October 1, 2002. The Company
then determined the fair value of each reporting unit and compared it to the
carrying amount of the reporting unit. The Company has determined that no
goodwill impairment was indicated as of October 1, 2002.

The Company recorded goodwill amortization expense in the amount of $2,173
for the three months ended December 31, 2001. No goodwill amortization expense
was recorded for the three months ended December 31, 2002.

Tables

The following table reconciles previously reported net income as if the
provisions of SFAS No. 142 were in effect in fiscal 2002:

SFAS No. 141 and SFAS No. 142 also require that the Company disclose the
following information related to its intangible assets still subject to
amortization. The following table details the balances of the amortizable
intangible assets as of December 31, 2002:

Additionally, SFAS No. 142 requires that the Company disclose the estimated
intangible asset amortization for each of the five twelve month periods
subsequent to December 31, 2002. The following table represents the estimated
amortization (calculated as of December 31, 2002) for each of the five twelve
month periods ending as of the date indicated:

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

When we use the terms "SDS," "we," "us," "Company," or "our" in this report,
unless the context requires otherwise, we are referring to Sybron Dental
Specialties, Inc. and its subsidiaries and their respective predecessors that
comprised Apogent's dental business prior to the spin-off. Our fiscal year ends
on September 30 and, accordingly, all references to quarters refer to our fiscal
quarters. The quarters ended December 31, 2002 and 2001 refer to the first
quarters of fiscal 2003 and 2002, respectively.

GENERAL

We are a leading global manufacturer and marketer of a broad range of
consumable dental products and related small equipment, as well as a
manufacturer and distributor of products for use in infection prevention in both
the medical and dental markets. On October 1, 2002, we consolidated our
Infection Prevention segment into our Professional Dental business segment to
reduce costs and coordinate marketing efforts for our infection prevention
products. As a result of this consolidation, our subsidiaries now operate in two
business segments:

o Professional Dental. We develop and manufacture a comprehensive line
of branded dental consumable products and consumable infection
prevention products sold through independent distributors to the
dental industry worldwide as well as to medical markets; and

o Orthodontics. We develop, manufacture, and market an array of
consumable orthodontic products and endodontic products to
orthodontic and endodontic specialists worldwide.

Our primary subsidiaries in each of our business segments are as follows:

It is our goal to become a premier global supplier of high quality dental
products. Key elements of our strategy to achieve this goal are: a focus on
developing innovative products, a consistent effort to improve our efficiency, a
constant attempt to increase revenue opportunities within the existing
marketplace and expand the marketplace through product innovation, and the
pursuit of strategic acquisitions, while continuing to focus on debt reduction
strategies.

RESULTS OF OPERATIONS

OVERVIEW

Our net sales for the fiscal quarter ended December 31, 2002 increased by
22.9% from the corresponding fiscal 2002 period. Operating income for the first
quarter of fiscal 2003 increased by 10% from the corresponding fiscal 2002
period.

Our domestic sales for the quarter ended December 31, 2002 increased by
24.1% from the corresponding fiscal 2002 period. International sales increased
by 21.3% for the quarter from the corresponding fiscal 2002 period. Without the
effect of currency fluctuations, international sales growth would have been
14.1% for the quarter from the corresponding fiscal 2002 period.

We believe that our increase in revenue is a result, in part of the changes
we made throughout our organization in the second half of the last fiscal year,
the introduction of our new LED curing light and the increased average tenure of
our sales force in the United States for our Orthodontics segment. The amount of
the increase, when compared to the corresponding prior year period, is magnified
by the low revenue generated by our Professional Dental segment in the first
quarter of our 2002 fiscal year. We expect to see continued revenue growth this
year, but do not expect it to be at the same level as our first fiscal 2003
quarter. In fact, we do not believe the second quarter revenue for fiscal 2003
will increase significantly over the corresponding prior year period, as the
sales for

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the Professional Dental segment were robust in that quarter and we do not expect
the sales of our new LED curing light in our subsequent fiscal 2003 quarters
will be at the level we achieved in the first quarter.

The reported net sales of our Professional Dental and Orthodontics segments
were impacted by the transfer we made between those segments, in the fiscal
quarter ending December 31, 2002, of our stainless steel endodontic product
line. While the responsibility for the sales and marketing of those products was
handled during fiscal year 2002 by the Orthodontics segment, the net sales were
reported in our Professional Dental business segment. In the first quarter of
our 2003 fiscal year we transferred the reporting of those sales to the
Orthodontics business segment. While the transfer impacted the respective
results of operations we reported for the Professional Dental and Orthodontics
segments for fiscal 2003, there was no impact on our consolidated results of
operations for the quarter. We did not adjust the prior period information
reported for our Professional Dental and Orthodontics segments to reflect the
transfer of the endodontic product line.

During our first fiscal 2003 quarter, we upgraded our Oracle financial and
enterprise resource planning software to a more recent version of the software,
Oracle 11i. We tested the upgrade and did not find any significant issues but we
cannot be certain that there will not be compatibility or other conversion
issues in the future after the software is fully implemented and used.

During the second quarter of our 2003 fiscal year, we anticipate closing
several of the European offices of our Professional Dental segment. This is a
significant undertaking, as we will transition the handling of orders and
shipping of product from several locations in Europe to our Hawe Neos facility
in Switzerland. The Hawe facility will be handling orders in numerous languages
and shipping product to numerous points throughout Europe. We do not presently
expect any disruptions in our ability to accept and ship orders, but we cannot
be certain until the closings and the integration by Hawe is complete.

QUARTER ENDED DECEMBER 31, 2002 COMPARED TO THE QUARTER ENDED DECEMBER 31,
2001

NET SALES

Overall Company. Net sales for the first quarter of fiscal 2003 increased by
$22.4 million or 22.9% from the corresponding fiscal 2002 quarter.

Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from: (a) increased net sales of existing products
(approximately $6.0 million), (b) net sales of new products (approximately $5.2
million), (c) net sales of products from an acquired company (approximately $3.8
million), (d) favorable foreign currency fluctuations (approximately $1.8
million) and (e) reduced rebate expense (approximately $0.2 million). The
increase in net sales was partially offset by the transfer of the endodontic
product sales to the Orhtodontics segment (approximately $3.7 million).

Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $5.3
million), (b) the transfer of the endodontic product sales from the Professional
Dental segment (approximately $2.5 million), (c) favorable foreign currency
fluctuations (approximately $1.2 million) and (d) net sales of new products
(approximately $0.6 million). The increase in net sales was partially offset by
increased rebate expense (approximately $0.5 million).

GROSS PROFIT

Overall Company. Gross profit for the quarter ended December 31, 2002
increased by $9.9 million or 18.1% from the corresponding fiscal 2002 quarter.

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Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased net sales of existing products
(approximately $3.7 million), (b) unit volume relating to new products
(approximately $2.9 million), (c) margins relating to net sales of products from
an acquired company (approximately $2.4 million), (d) favorable foreign currency
fluctuations (approximately $1.0 million) and (e) reduced rebate expense
(approximately $0.2 million). The increase in gross profit was partially offset
by: (a) the transfer of the endodontic product line from the Professional Dental
segment to the Orthodontics segment (approximately $2.4 million), (b) an
unfavorable product mix (approximately $1.0 million), (c) unfavorable
manufacturing variances (approximately $0.8 million), (d) inventory reserve
adjustments (approximately $0.3 million, of which approximately $0.2 million is
due to an increase in obsolescence and approximately $0.1 million is due to
physical inventory adjustments) and (e) increased royalty expense (approximately
$0.1 million).

Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) increased net sales of existing products (approximately $2.5
million), (b) the transfer of the endodontic product line from the Professional
Dental segment to the Orthodontics segment (approximately $1.3 million), (c)
favorable foreign currency fluctuations (approximately $1.2 million) and (d)
unit volume relating to new products (approximately $0.4 million). The increase
in gross profit was partially offset by: (a) increased rebate expense
(approximately $0.7 million) and (b) increased royalty expense (approximately
$0.4 million).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Overall Company. Selling, general and administrative expenses for the
quarter ended December 31, 2002 increased by $7.9 million or 22.6% from the
corresponding fiscal 2002 quarter. As of October 1, 2002, we adopted SFAS No.
142 "Goodwill and Other Intangible Assets" and have ceased the amortization of
goodwill and other intangible assets resulting in decreased amortization expense
from the corresponding prior year period of approximately $2.1 million.

Professional Dental. Increased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) increased
general and administrative expenses (approximately $2.6 million), (b) increased
selling and marketing expenses (approximately $2.4 million), (c) expenses
related to an acquisition (approximately $1.8 million) and (d) an increase in
expenses relating to foreign currency fluctuations (approximately $0.5 million).
The increase in selling, general and administrative expenses was partially
offset by a decrease in amortization expense of goodwill and other intangible
assets (approximately $1.5 million).

Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $1.4 million), (b) increased selling and
marketing expenses (approximately $1.1 million) and (c) increased expenses
related to foreign currency fluctuations (approximately $0.3 million). The
increase in selling, general and administrative expenses was partially offset by
a decrease in amortization expense of goodwill and other intangible assets
(approximately $0.7 million).

OPERATING INCOME

As a result of the foregoing, operating income in the first quarter of
fiscal 2003 increased by 10.0% or $1.9 million from operating income in the
corresponding quarter of fiscal 2002.

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INTEREST EXPENSE

Interest expense was $5.6 million in the first quarter of fiscal 2003, a
decrease of $1.5 million from the corresponding fiscal 2002 quarter. The
decrease resulted from reduced average debt balances in the first quarter of
fiscal 2003 and reduced average interest rates on our credit facility.

INCOME TAXES

Taxes on income in the first quarter of fiscal 2003 were approximately $5.9
million, an increase of $1.1 million from the corresponding fiscal 2002 quarter.
The increase was primarily due to higher taxable earnings, partially offset by a
decrease in the effective tax rate for the quarter from 39.0% in fiscal 2002 to
38.0% in fiscal 2003.

NET INCOME

As a result of the foregoing, we had net income of $9.6 million in the
quarter ended December 31, 2002, as compared to net income of $7.5 million in
the corresponding fiscal 2002 period.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization of goodwill (prior to October 1, 2002) and
other intangible assets is allocated among the cost of sales, selling, general
and administrative expenses and other expense in the first quarter of fiscal
2003. Depreciation and amortization of other intangible assets decreased $2.1
million in the first quarter of fiscal 2003 compared to the same period in the
prior year primarily due to our discontinuing the amortization of goodwill and
certain other intangible assets in accordance SFAS No. 142.

CRITICAL ACCOUNTING POLICIES

In the first quarter of fiscal 2003, as a result of our adoption of SFAS No.
142, we evaluated our existing intangible assets and goodwill for impairment. In
connection with our impairment test for SFAS No. 142 (as detailed in note 7 to
our unaudited consolidated financial statements above), fair market valuations
were performed for each of the reporting units. These valuations required
certain assumptions from management regarding future operating performance as
well as various industry trends. Fluctuations in these assumptions could have a
material impact on the values ascribed to the reporting units and could result
in an indication of impairment. These assumptions include, but are not limited
to, estimated future cash flows, estimated sales growth, and weighted average
cost of capital for each of the reporting units. In order to make informed
assumptions, management relied on certain public information and statistical and
industry information as well as internal forecasts to determine the various
assumptions. In the event that the industry, general economic and company trends
change, these assumptions will change and impact the calculated fair market
values.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activities. SFAS No. 146 is
effective prospectively for exit or disposal activities initiated after December
31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146
are required to be applied prospectively after the adoption date, we cannot
determine the potential effects that adoption of SFAS No. 146 will have on our
consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (the "Interpretation"), which addresses
the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. These disclosure requirements
are included in note 6 to the unaudited consolidated financial statements. The
Interpretation also requires the recognition of a liability by a guarantor at
the inception of certain guarantees.

The Interpretation requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, this is the obligation to stand ready
to perform in the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even if it is not
probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple
elements.

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We have adopted the disclosure requirements of the Interpretation and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after December 31, 2002.

On December 31, 2002 the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 amends the
disclosure requirements in SFAS No. 123 for stock-based compensation for annual
periods ending after December 15, 2002 and for interim periods beginning after
December 15, 2002, including those companies that continue to recognize
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In addition, SFAS No. 148 provides three alternative transition
methods for companies that choose to adopt the fair value measurement provisions
of SFAS No. 123. For a complete explanation on the valuation of our stock-based
compensation consistent with the method prescribed by SFAS No. 123, please refer
to the notes to the consolidated financial statements included in our annual
report for fiscal year ended September 30, 2002. We currently believe that there
will be no impact to us upon adopting SFAS No. 148 other than the disclosure
requirements.

LIQUIDITY AND CAPITAL RESOURCES

We intend to fund our capital expenditure requirements, working capital
requirements, acquisitions, principal and interest payments, obligations under
the Sale/Leaseback (defined below), restructuring expenditures, other
liabilities and periodic expansion of facilities, to the extent available, with
funds provided by operations and short-term borrowings under the Revolver
(defined below). While cash provided from operating activities may be impacted
by lower revenues due to the slowing economy and the continued risk of a
competitive market and changes in demand for our products, we believe that our
cash flow from operations, unused amounts available under our Credit Facility
(defined below), and access to capital markets will be sufficient to satisfy our
future working capital, capital investment, acquisition and other financing
requirements for the foreseeable future. However, there can be no assurance that
this will be the case. To the extent that funds are not available from these
sources, particularly with respect to our acquisition strategy, we would have to
raise additional capital in another manner or curtail our acquisition strategy.

It is currently our intent to reduce total debt and to continue to pursue
our acquisition strategy when those acquisitions appear to be in the best
interest of the stockholders, taking into account our level of debt and interest
expense. If acquisitions continue at our historical pace, of which there can be
no assurance, we may require financing beyond the capacity of our Credit
Facility (defined below). In addition, certain acquisitions previously completed
contain "earnout provisions" requiring further payments in the future if certain
financial results are achieved by the acquired companies.

The statements contained in the immediately preceding paragraph concerning
our intent to continue to pursue our acquisition strategy are forward-looking
statements. Our ability to continue our acquisition strategy is subject to a
number of uncertainties, including, but not limited to, our ability to raise
capital beyond the capacity of our credit facilities and the availability of
suitable acquisition candidates at reasonable prices.

Approximately $22.1 million of cash was generated from operating activities
in the first three months of fiscal 2003, as compared to approximately $8.2
million from the same period of the prior year. The approximate $13.9 million
increase in cash flows from operations was primarily due to: (a) a decrease in
the net change in inventories from the prior year period of approximately $11.2
million, (b) an increase in the net change in accrued payroll and employee
benefits from the prior year period of approximately $7.7 million, (c) an
increase in the net change in other assets and liabilities of approximately $6.5
million from the prior year period, (d) an increase in the net change in other
current liabilities from the prior year period of approximately $5.6 million,
(e) an increase in the net change in accounts payable from the prior year period
of approximately $4.1 million, (f) a decrease in the net change in prepaid
expenses and other current assets from the prior year period of approximately
$3.1 million, (g) an increase in the net change of income taxes payable from the
prior year period of approximately $2.9 million, (h) increased earnings from the
prior year period of approximately $2.1 million, (i) an increase in the net
change in the loss (gain) on sales of property, plant and equipment from the
prior year period of approximately $0.4 million, (j) an increase in inventory
provisions from the prior year period of approximately $0.3 million, (k) an
increase in the amortization of deferred financing fees of approximately $0.2
million from the prior year period and (l) an increase in the provision for
losses on doubtful receivables from prior year period of approximately $0.1
million. The increase in cash flows from operations were partially offset by the
following: (a) an increase in the net change in accounts receivable from the
prior year period of approximately $20.9 million, (b) a decrease in the net
change in deferred income taxes from the prior year period of approximately $3.7
million, (c) a decrease in the net change in accrued interest of approximately
$3.0 million, (d) a decrease in amortization expense of goodwill and other
intangible assets from the prior year period of approximately $2.1 million, (e)
a decrease in the net change in the restructuring reserve of approximately $0.5
million and (f) a decrease in the tax benefit from issuance of our common stock
under our employee stock option plan of approximately $0.1 million from the
prior period.

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Approximately $1.1 million of cash was used in investing activities in the
first three months of fiscal year 2003, a decrease of approximately $2.1 million
from the same period of the prior year. The decrease was primarily due to: (a) a
decrease in capital expenditures of approximately $2.5 million from the prior
year period and (b) a decrease in net payments for intangibles from the prior
year period of approximately $0.1 million, partially offset by decreased
proceeds from the sales of property, plant and equipment from the prior year
period of approximately $0.5 million.

Approximately $10.3 million of cash was used in financing activities in the
first three months of fiscal 2003, an increase of approximately $6.0 million
from the prior year period. The increase was primarily due to: (a) a decrease in
the net loan proceeds of approximately $5.4 million from the prior year period,
(b) an increase in deferred financing fees from the prior year period of
approximately $0.5 million and (c) a decrease in cash received from the exercise
of stock options of approximately $0.1 million from the prior year period.

CREDIT FACILITIES AND SENIOR SUBORDINATED NOTES

On June 6, 2002, we terminated our then existing $450.0 million credit
facility and entered into a $350.0 million syndicated credit facility for which
Credit Suisse First Boston is the administrative agent. The credit facility (the
"Credit Facility"), provides for a five-year $120.0 million revolving credit
facility (the "Revolver"), a seven-year $200.0 million term loan (the "Term Loan
B") and a five-year $30.0 million revolving credit facility (the "Euro
Tranche"). Sybron Dental Management, Inc., Kerr Corporation, Ormco Corporation
and Pinnacle Products, Inc. (the "Domestic Borrowers") are joint and several
borrowers under the Revolver and the Term Loan B, and Hawe Neos Holdings S.A.
("Hawe Neos") is the borrower under the Euro Tranche. In addition to the Credit
Facility, we completed the sale of $150.0 million of 8 1/8% senior subordinated
notes due 2012 (the "Senior Subordinated Notes") in a private offering. We used
the proceeds of the Term Loan B, together with proceeds from the issuance of the
Senior Subordinated Notes, to repay all of the $332.9 million of borrowings
outstanding as of June 6, 2002 under our previous credit facility.

The Credit Facility is jointly and severally guaranteed by Sybron Dental
Specialties, Inc., the Domestic Borrowers and each of our present and future
direct and indirect wholly-owned domestic subsidiaries, and is secured by
substantially all assets of each such entity, including the capital stock of
each domestic subsidiary. In addition, the Credit Facility is secured by a
pledge of 65% of the capital stock of each of our first-tier material foreign
subsidiaries. The Euro Tranche is also guaranteed by certain foreign
subsidiaries and is secured by a pledge of 100% of the capital stock of certain
foreign subsidiaries and by some of the assets of our Swiss subsidiary, Hawe
Neos, certain direct subsidiaries of Hawe Neos and certain of our other indirect
foreign subsidiaries.

The Credit Facility may be prepaid at any time without penalty except for
LIBOR and Euro-LIBOR breakage costs. Under the Credit Facility, subject to
certain exceptions, we are required to apply all of the proceeds from any
issuance of debt, half of the proceeds from any issuance of equity, half of our
excess annual cash flow and, subject to permitted reinvestments, all amounts
received in connection with any sale of our assets and casualty insurance and
condemnation or eminent domain proceedings, in each case to repay the
outstanding amounts under the facility.

The Term B Loan amortizes 1% annually for the first six years, payable
quarterly, with the balance to be paid in the seventh year in equal quarterly
installments. The Term B Loan bears interest, at our option, at either (a) the
LIBOR rate, plus between 225 and 275 basis points, or (b) between 125 and 175
basis points plus the higher of (i) the rate from time to time publicly
announced by Credit Suisse First Boston as its prime rate, or (ii) the rate
which is 1/2 of 1% in excess of the federal funds rate, in each case as
determined on a quarterly basis according to the rating of the Credit Facility
by Standard and Poor's and Moody's. The per annum initial interest rate for the
first six months was LIBOR, plus 250 basis points. As of December 31, 2002 the
amount outstanding on the Term B Loan was $154.2 million. The average interest
rate at December 31, 2002 on the Term B Loan was 5.09% after giving effect to
the interest rate swap agreements we had in effect as of that date.

The Revolver bears interest, at our option, at a per annum rate equal to
either (a) the LIBOR rate, plus between 175 and 250 basis points, or (b) between
75 and 150 basis points plus the higher of (i) the rate from time to time
publicly announced by Credit Suisse First Boston as its prime rate, or (ii) the
rate which is 1/2 of 1% in excess of the federal funds rate, in each case as
determined on a quarterly basis according to a leveraged-based pricing grid with
leverage ratios from 1.75x to 3.0x. The per annum initial interest rate on the
Revolver for the first six months was LIBOR plus 225 basis points. The annual
commitment fee on the unused portion of the Revolver will vary between 0.375% to
0.5% based on the quarterly leverage ratio. As of December 31, 2002 the amount
outstanding on the Revolver was $13.5 million. The average interest rate at
December 31, 2002 on the Revolver was 5.05%. The Revolver also provides for the
issuance of standby letters of credit and commercial letters of credit as
required in the ordinary course of business. As of December 31, 2002, a total of
$2.8 million in letters of credit was issued. As of December 31, 2002 the amount
available under the Revolver was $103.7 million.

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The Euro Tranche will bear interest, at our option, at Euro-LIBOR or at base
rates with margins identical to those of the Revolver. The annual commitment fee
on the unused portion of the Euro Tranche will vary between 0.375% to 0.5% based
on the quarterly leverage ratio. As of December 31, 2002, there was no
outstanding balance under the Euro Tranche and the amount available was $30.0
million.

The Credit Facility contains certain covenants, including, without
limitation, restrictions on: (i) debt and liens, (ii) the sale of assets, (iii)
mergers, acquisitions and other business combinations, (iv) transactions with
affiliates, (v) capital expenditures, (vi) restricted payments, including
repurchase or redemptions of the notes, (vii) the repurchase or redemption of
stock from stockholders and (viii) loans and investments, as well as
prohibitions on the payment of cash dividends. The Credit Facility also has
certain financial covenants, including, without limitation, maximum leverage
ratios, minimum fixed charge coverage ratios, minimum net worth and maximum
capital expenditures.

Effective December 10, 2002, the Credit Facility was amended to allow the
purchase by the Company of up to $25.0 million of its common stock.

Our ability to meet our debt service requirements and to comply with such
covenants is dependent upon our future performance, which is subject to
financial, economic, competitive and other factors affecting us, many of which
are beyond our control. We were in compliance with all such covenants at
December 31, 2002.

Prior to June 6, 2002, we had a credit facility that we entered into in
connection with the spin-off on December 11, 2000, which allowed for borrowings
up to $450.0 million from ABN AMRO Bank N.V. and certain other lenders. This
credit facility was composed of a $150.0 million five year tranche A term loan,
a $150.0 million seven year tranche B term loan, under which Kerr and Ormco were
borrowers, and a five year revolving credit facility up to $150.0 million, under
which Sybron Dental Management, Inc., was the borrower.

The tranche A term loan bore interest primarily at the adjusted interbank
offered rate for Eurodollar deposits plus 275 basis points. The tranche B term
loan bore interest primarily at the adjusted interbank offered rate for
Eurodollar deposits plus 375 basis points. Borrowings under the previous
revolving credit facility generally bore interest on the same terms as those
under the tranche A term loan, plus we paid a commitment fee on the average
unused portion of the revolving credit facility of 0.5%.

In connection with entering into our Credit Facility on June 6, 2002, we
issued $150.0 million of Senior Subordinated Notes bearing interest at 8 1/8%,
maturing on June 15, 2012. The Senior Subordinated Notes are our unsecured
obligations, subordinated in right of payment to all our existing and future
senior debt in accordance with the subordination provisions of the indenture.

Prior to January 1, 2003, Sybron Dental Management, Inc. ("SDM") was a
guarantor subsidiary of Sybron Dental Specialties, Inc. ("SDS") for our Senior
Subordinated Notes. Effective January 1, 2003, the management company, SDM,
merged into SDS; however, as both SDS and SDM are guarantors of our Senior
Subordinated Notes, there will be no impact on the status of the guarantors of
the Senior Subordinated Notes.

The Senior Subordinated Notes are generally not redeemable at our option
before June 15, 2005. Some limited redemption is allowed if we receive cash from
an equity offering. At any time and from time to time on or after June 15, 2007,
we may redeem the Senior Subordinated Notes, in whole or in part, at a
redemption price equal to the percentage of principal amount set forth below
plus accrued and unpaid interest to the redemption date.

As a result of the terms of our Credit Facility, we are sensitive to a rise
in interest rates. A rise in interest rates would result in increased interest
expense on our outstanding debt with variable interest rates. In order to reduce
our sensitivity to interest rate increases, from time to time we enter into
interest rate swap agreements. As of December 31, 2002, we had three interest
rate swap agreements outstanding aggregating a notional amount of approximately
$60.7 million. Under the terms of the swap agreements, we are required to pay
fixed rate amounts equal to the swap agreement rates listed below. In exchange
for the payment of the fixed rate

21

amounts, we receive floating rate amounts equal to the three-month LIBOR rate in
effect on the date of the swap agreements and the subsequent reset dates. For
the swap agreements, the rate resets on the quarterly anniversary of the swap
agreement dates until the swap agreement's expiration dates. The net interest
rate paid by us on the indicated notional amount is approximately equal to the
sum of the relevant swap agreement rate plus the applicable Eurodollar rate
margin. The swap agreement rates and durations as of December 31, 2002 are as
follows:

SALE/LEASEBACK

In 1988, we completed the sale and leaseback (the "Sale/Leaseback") of our
then principal domestic manufacturing and office facilities with an unaffiliated
third party. The transaction has been accounted for as a financing for financial
statement purposes, thus the facilities remain in property, plant and equipment.
The transaction was treated as a sale for income tax purposes. The financing
obligation is being amortized over the initial 25-year lease term.

The initial term of each lease is 25 years with five five-year renewal
options. On the fifth anniversary of the leases and every five years thereafter
(including renewal terms), the rent is increased by the percentage equal to 75%
of the percentage increase in the Consumer Price Index over the preceding five
years. The percentage increase to the rent in any five-year period is capped at
15%. Beginning January 1, 1999 annual payments increased to $1.5 million. The
next adjustment will occur January 1, 2004. As a result of the spin-off, the
Sale/Leaseback was amended to extend the leases an additional 5 years, increase
the basic rent by $0.15 million per year, and provides us the option to purchase
the leased premises at fair market value from June 1, 2008 to May 31, 2009. We
pay all costs of maintenance and repair, insurance, taxes and all other expenses
associated with the properties.

We have the option to purchase the facilities according to the terms of any
bona fide offer received by the lessor from a third party at any time during the
term of the leases. We may be obligated to repurchase the property upon the
event of a breach of certain covenants or occurrence of certain other events.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The following table lists our contractual obligations and other commercial
commitments for the indicated periods (calculated as of December 31, 2002);