**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Forthe quarterly period ended December 31, 2006**

**or**

**o**                                 TransitionReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

For the transition periodfrom                      to                     

Commission file number 000-22673

**Sirona Dental Systems, Inc.**

(Exact name of registrantas specified in charter)

| **Delaware**                                                    | ** ** | **11-3374812**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **30-00 47th Avenue, Long Island City, New York** |   | **11101**  |   | **(718)  937-5765** |
|---------------------------------------------------|--------|------------|--------|---------------------|
| (Address of  principal executive offices)         |   | (Zip Code) |   | Telephone           |

 

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

| **Yes ****x** |   | **No ****o** |
|--------------------|--------|-------------------|

 

**Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):**

| **Large accelerated filer ****o** |   | **Accelerated  filer ****x** |   | **Non-accelerated  filer ****o** |
|----------------------------------------|--------|-----------------------------------|--------|---------------------------------------|

 

**Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).**

| **Yes ****o** |   | **No ****x** |
|--------------------|--------|-------------------|

 

Asof February 6, 2007, the number of shares outstanding of the Registrant’sCommon Stock, par value $.01 per share, was 54,674,247.

 

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**SIRONA DENTALSYSTEMS, INC.FORM 10-QFOR THE THREE MONTHS ENDED DECEMBER 31, 2006**

**Index**
|                   | ** ** | ** **                                                                                                  | ** ** | **Page**   |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I.**  | ** ** | **Financial Information (Unaudited)**                                                                       |       |       | 1 | ** ** |
| Item 1.           |       | Financial Statements                                                                                        |       |       | 1 | ** ** |
|              |       | Condensed Consolidated Balance Sheets as of December 31,  2006 and September 30, 2006        |       |       | 1 | ** ** |
|              |       | Condensed Consolidated Statements of Operations for  the three months ended December 31, 2006 and 2005 |       |       | 2 | ** ** |
|              |       | Condensed Consolidated Statements of Cash Flows for  the three months ended December 31, 2006 and 2005 |       |       | 3 | ** ** |
|              |       | Notes to Condensed Consolidated Financial Statements                                                        |       |       | 4 | ** ** |
| Item 2.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       |       | 13 | ** ** |
| Item 3.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                 |       |       | 22 | ** ** |
| Item  4.          |       | Controls  and Procedures                                                                                    |       |       | 22 | ** ** |
| **Part II.** | ** ** | **Other Information**                                                                                       |       |       | 23 | ** ** |
| Item  1.          |       | Legal Proceedings                                                                                           |       |       | 23 | ** ** |
| Item  1A.         |       | Risk Factors                                                                                                |       |       | 23 | ** ** |
| Item 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                |       |       | 23 | ** ** |
| Item 3.           |       | Defaults upon Senior Securities                                                                             |       |       | 23 | ** ** |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                         |       |       | 23 | ** ** |
| Item  5.          |       | Other Information                                                                                           |       |       | 23 | ** ** |
| Item 6.           |       | Exhibits                                                                                                    |       |       | 23 | ** ** |
| Signatures        | ** ** |                                                                                                        | 24         | ** ** |
| Certifications    | ** ** |                                                                                                        | ** ** | ** ** |

 

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**PART I**                      FINANCIALINFORMATION (UNAUDITED)

**ITEM 1.**                FINANCIALSTATEMENTS (UNAUDITED)

**SIRONA DENTALSYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                            | ** ** | **December 31,  2006**                                    | ** **    | **September 30,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|---------------|------------------------------|------------|
| ** **                                                                                                            | ** ** | **$’000s (except for share amounts)** | ** **    |
| ** **                                                                                                            | ** ** | **(unaudited)**                                                | ** **    | ** **                   | ** ** |
| **ASSETS**                                                                                                            |       |                                                           |          |                         |       |   |   |   |   |
| **Current  assets**                                                                                                   |       |                                                           |          |                         |       |   |   |   |   |
| Cash and cash equivalents                                                                                             |       |                                                           | $             | 52,623                       |       |   |   | $ | 80,560 |   |   |
| Restricted cash                                                                                                       |       |                                                           | 1,002         |                         |       |   | 953 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,176 and $837, respectively                         |       |                                                           | 98,977        |                         |       |   | 66,090 |   |   |
| Inventories, net                                                                                                      |       |                                                           | 64,404        |                         |       |   | 57,303 |   |   |
| Deferred tax assets                                                                                                   |       |                                                           | 6,942         |                         |       |   | 4,671 |   |   |
| Prepaid expenses and other current assets                                                                             |       |                                                           | 15,305        |                         |       |   | 16,074 |   |   |
| **Total current assets**                                                                                              |       |                                                           | **239,253**   |                         |       |   | **225,651** |   |   |
| Property, plant and equipment, net of accumulated  depreciation and amortization of $22,406 and $18,139, respectively |       |                                                           | 64,290        |                         |       |   | 61,042 |   |   |
| Goodwill                                                                                                              |       |                                                           | 630,547       |                         |       |   | 613,549 |   |   |
| Investments                                                                                                           |       |                                                           | 1,000         |                         |       |   | 750 |   |   |
| Intangible assets, net of accumulated amortization of  $89,020 and $66,242, respectively                              |       |                                                           | 617,573       |                         |       |   | 618,993 |   |   |
| Other non-current assets                                                                                              |       |                                                           | 5,062         |                         |       |   | 17,370 |   |   |
| Deferred tax assets                                                                                                   |       |                                                           | 2,393         |                         |       |   | 3,649 |   |   |
| **Total assets**                                                                                                      |       |                                                           | **$**         | **1,560,118**                |       |   |   | **$** | **1,541,004** |   |   |
| **LIABILITIES,  MINORITY INTEREST AND SHAREHOLDERS’ EQUITY**                                                     |       |                                                           |          |                         |       |   |   |   |   |
| **Current  liabilities**                                                                                              |       |                                                           |          |                         |       |   |   |   |   |
| Trade accounts payable                                                                                                |       |                                                           | $             | 31,198                       |       |   |   | $ | 30,303 |   |   |
| Short-term debt and current portion of long-term debt                                                                 |       |                                                           | 21,346        |                         |       |   | 14,738 |   |   |
| Income taxes payable                                                                                                  |       |                                                           | 18,423        |                         |       |   | 10,434 |   |   |
| Deferred tax liabilities                                                                                              |       |                                                           | 2,564         |                         |       |   | 3,208 |   |   |
| Accrued liabilities and deferred income                                                                               |       |                                                           | 69,749        |                         |       |   | 65,203 |   |   |
| **Total current liabilities**                                                                                         |       |                                                           | **143,280**   |                         |       |   | **123,886** |   |   |
| Long-term debt                                                                                                        |       |                                                           | 512,478       |                         |       |   | 518,634 |   |   |
| Deferred tax liabilities                                                                                              |       |                                                           | 240,514       |                         |       |   | 243,491 |   |   |
| Other non-current liabilities                                                                                         |       |                                                           | 11,147        |                         |       |   | 18,128 |   |   |
| Pension related provisions                                                                                            |       |                                                           | 50,589        |                         |       |   | 48,167 |   |   |
| Deferred income                                                                                                       |       |                                                           | 97,500        |                         |       |   | 100,589 |   |   |
| **Total liabilities**                                                                                                 |       |                                                           | **1,055,508** |                         |       |   | **1,052,895** |   |   |
| **Minority interest**                                                                                                 |       |                                                           | **300**       |                         |       |   | **263** |   |   |
| **Shareholders’  equity**                                                                                        |       |                                                           |          |                         |       |   |   |   |   |
| Preferred stock ($0.01 par value; 5,000,000 shares  authorized; none issued and   outstanding)                        |       |                                                           | —        |                         |       |   | — |   |   |
| Common  stock ($0.01 par value; 95,000,000 shares authorized:                                                         |       |                                                           |          |                         |       |   |   |   |   |
| 54,650,283 and 54,608,134 shares issued and  outstanding, respectively)                                               |       |                                                           | 547           |                         |       |   | 546 |   |   |
| Additional paid-in capital                                                                                            |       |                                                           | 586,184       |                         |       |   | 582,447 |   |   |
| Excess of purchase price over predecessor basis                                                                       |       |                                                           | (49,103       | )                            |       |   | (49,103 | ) |   |
| Accumulated deficit                                                                                                   |       |                                                           | (45,088       | )                            |       |   | (47,406 | ) |   |
| Other comprehensive income                                                                                            |       |                                                           | 11,770        |                         |       |   | 1,362 |   |   |
| **Total shareholders’ equity**                                                                                   |       |                                                           | **504,310**   |                         |       |   | **487,846** |   |   |
| **Total  liabilities, minority interest and shareholders’ equity**                                               |       |                                                           | **$**         | **1,560,118**                |       |   |   | **$** | **1,541,004** |   |   |

 

The accompanying notes are an integral part of these financial statements.

1

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**SIRONA DENTALSYSTEMS, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(UNAUDITED)**

| ** **                                            | ** ** | **Three months ended  December 31, 2006**  | ** ** | **Three months ended  December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **$’000s (except per share amounts)** | ** ** |
| **Revenue**                                           |       |                                                           | **$**      | **174,799**                                                   |       |   |   | **$** | **135,882** |   |   |
| Cost of sales                                         |       |                                                           | 90,727     |                                                          |       |   | 69,664 |   |   |
| **Gross  profit**                                     |       |                                                           | **84,072** |                                                          |       |   | **66,218** |   |   |
| Selling, general and administrative expense           |       |                                                           | 47,501     |                                                          |       |   | 32,303 |   |   |
| Research and  development                             |       |                                                           | 10,280     |                                                          |       |   | 6,947 |   |   |
| Provision for  doubtful accounts and notes receivable |       |                                                           | 301        |                                                          |       |   | (140 | ) |   |
| Net other  operating (income)/expense                 |       |                                                           | (150       | )                                                             |       |   | 308 |   |   |
| **Operating  income**                                 |       |                                                           | **26,140** |                                                          |       |   | **26,800** |   |   |
| Foreign currency transactions (gain)/loss, net        |       |                                                           | (7,066     | )                                                             |       |   | 5,257 |   |   |
| (Gain)/loss on  derivative instruments                |       |                                                           | (491       | )                                                             |       |   | 275 |   |   |
| Interest expense,  net                                |       |                                                           | 8,959      |                                                          |       |   | 15,455 |   |   |
| Loss on debt  extinguishment                          |       |                                                           | 21,145     |                                                          |       |   | — |   |   |
| **Income  before taxes and minority interest**        |       |                                                           | **3,593**  |                                                          |       |   | **5,813** |   |   |
| Income tax provision                                  |       |                                                           | 1,249      |                                                          |       |   | 2,504 |   |   |
| Minority interest                                     |       |                                                           | 26         |                                                          |       |   | (1 | ) |   |
| **Net  income**                                       |       |                                                           | **$**      | **2,318**                                                     |       |   |   | **$** | **3,310** |   |   |
| Income per share                                      |       |                                                           |       |                                                          |       |   |   |   |   |
| —Basic                                           |       |                                                           | $          | 0.04                                                          |       |   |   | $ | 0.09 |   |   |
| —Diluted                                         |       |                                                           | $          | 0.04                                                          |       |   |   | $ | 0.09 |   |   |
| Weighted average  shares—basic                   |       |                                                           | 54,621,818 |                                                          |       |   | 36,972,480 |   |   |
| Weighted average shares—diluted                  |       |                                                           | 54,848,513 |                                                          |       |   | 36,972,480 |   |   |

 

The accompanying notes are an integral part of these financial statements.

2

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**SIRONA DENTALSYSTEMS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

| ** **                                                                        | ** ** | **Three months ended  December 31, 2006** | ** **  | **Three months ended  December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|---------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **$’000s**                                               | ** **  |
| **Cash flows from operating  activities**                                         |       |                                                          |        |                                                          |       |   |   |   |   |
| **Net income**                                                                    |       |                                                          | **$**       | **2,318**                                                     |       |   |   | **$** | **3,310** |   |   |
| **Adjustments  to reconcile net income to net cash used in operating activities** |       |                                                          |        |                                                          |       |   |   |   |   |
| Minority interest                                                                 |       |                                                          | 26          |                                                          |       |   | — |   |   |
| Depreciation and amortization                                                     |       |                                                          | 23,571      |                                                          |       |   | 14,130 |   |   |
| (Gain) on disposal of property, plant and equipment                               |       |                                                          | —      |                                                          |       |   | (12 | ) |   |
| (Gains)/losses on derivate instruments                                            |       |                                                          | (491        | )                                                             |       |   | 275 |   |   |
| Foreign currency transactions (gain)/loss                                         |       |                                                          | (7,066      | )                                                             |       |   | 5,257 |   |   |
| Accreted interest on long term debt                                               |       |                                                          | 2,182       |                                                          |       |   | 4,651 |   |   |
| Deferred income taxes                                                             |       |                                                          | (9,801      | )                                                             |       |   | (2,994 | ) |   |
| Amortization of debt issuance cost                                                |       |                                                          | 616         |                                                          |       |   | 2,428 |   |   |
| Loss on debt extinguishment                                                       |       |                                                          | 19,964      |                                                          |       |   | — |   |   |
| Compensation expense from stock options                                           |       |                                                          | 3,076       |                                                          |       |   | — |   |   |
| **Changes  in assets and liabilities**                                            |       |                                                          |        |                                                          |       |   |   |   |   |
| Accounts receivable                                                               |       |                                                          | (29,986     | )                                                             |       |   | (11,183 | ) |   |
| Inventories                                                                       |       |                                                          | (4,959      | )                                                             |       |   | 442 |   |   |
| Prepaid expenses and other current assets                                         |       |                                                          | (1,568      | )                                                             |       |   | 17,897 |   |   |
| Restricted Cash                                                                   |       |                                                          | (10         | )                                                             |       |   | 59 |   |   |
| Other non-current assets                                                          |       |                                                          | (829        | )                                                             |       |   | (933 | ) |   |
| Trade accounts payable                                                            |       |                                                          | (187        | )                                                             |       |   | (2,184 | ) |   |
| Accrued liabilities and deferred income                                           |       |                                                          | (896        | )                                                             |       |   | (7,721 | ) |   |
| Other non-current liabilities                                                     |       |                                                          | (7,084      | )                                                             |       |   | (6,938 | ) |   |
| Income taxes payable                                                              |       |                                                          | 7,448       |                                                          |       |   | 4,446 |   |   |
| **Net cash (used in)/provided by operating  activities**                          |       |                                                          | **(3,676**  | **)**                                                         |       |   | **20,930** |   |   |
| **Cash  flows from investing activities**                                         |       |                                                          |        |                                                          |       |   |   |   |   |
| Investment in property, plant and equipment                                       |       |                                                          | (4,754      | )                                                             |       |   | (2,389 | ) |   |
| Proceeds from sale of property, plant and equipment                               |       |                                                          | 352         |                                                          |       |   | 6 |   |   |
| Restricted short term investments/securities                                      |       |                                                          | —      |                                                          |       |   | 246 |   |   |
| Purchase of intangible assets                                                     |       |                                                          | (40         | )                                                             |       |   | (92 | ) |   |
| Purchase of long-term investments                                                 |       |                                                          | (250        | )                                                             |       |   | — |   |   |
| **Net cash used in investing activities**                                         |       |                                                          | **(4,692**  | **)**                                                         | ** ** | ** ** | **(2,229** | **)** |   |
| **Cash  flows from financing activities**                                         |       |                                                          |        |                                                          |       |   |   |   |   |
| Repayments of long-term debt                                                      |       |                                                          | (547,324    | )                                                             |       |   | (36,153 | ) |   |
| Proceeds from borrowings                                                          |       |                                                          | 529,747     |                                                          |       |   | — |   |   |
| Debt issuance cost                                                                |       |                                                          | (4,571      | )                                                             |       |   | — |   |   |
| Common shares issued on share based compensation  plans                           |       |                                                          | 540         |                                                          |       |   | — |   |   |
| **Net cash used in financing activities**                                         |       |                                                          | **(21,608** | **)**                                                         |       |   | **(36,153** | **)** |   |
| Change in cash and cash equivalents                                               |       |                                                          | (29,976     | )                                                             |       |   | (17,452 | ) |   |
| Effect of exchange rate change on cash and cash  equivalents                      |       |                                                          | 2,039       |                                                          |       |   | 623 |   |   |
| Cash and cash equivalents at beginning of period                                  |       |                                                          | 80,560      |                                                          |       |   | 65,941 |   |   |
| **Cash and cash equivalents at end of period**                                    |       |                                                          | **$**       | **52,623**                                                    |       |   |   | **$** | **49,112** |   |   |
| **Supplemental  information**                                                     |       |                                                          |        |                                                          |       |   |   |   |   |
| Interest paid                                                                     |       |                                                          | $           | 16,525                                                        |       |   |   | $ | 8,478 |   |   |
| —thereof accreted interest paid on repayment of  long-term debt              |       |                                                          | 8,594       |                                                          |       |   | — |   |   |
| Interest capitalized                                                              |       |                                                          | 122         |                                                          |       |   | 19 |   |   |
| Income taxes paid                                                                 |       |                                                          | 1,900       |                                                          |       |   | 1,048 |   |   |

 

The accompanying notes are an integral part of these financial statements.

3

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**SIRONA DENTALSYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO THECONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**1.**   General

**The Company and itsOperations**

Sirona Dental Systems, Inc.and its subsidiaries manufacture high quality, technologically advanced dentalequipment and systems solutions for the global dental equipment market. Weoffer a broad range of products across all major segments of the dentalequipment market, including CEREC, CAD/CAM systems, digital and film basedintra-oral and panoramic imaging systems, treatment centers and instruments. Werecently acquired Schick Technologies Inc. (“Schick”), a Delaware corporation, furtherexpanding our global presence and product offerings and strengthened ourresearch and development capabilities. Sirona has served equipment dealers anddentists worldwide for more than 125 years. Sirona’s headquarters are locatedin Long Island City, New York with a significant facility located in Bensheim,Germany. We maintain manufacturing and assembling facilities in the U.S. andGermany as well as sales and service facilities throughout the world.

**Basis ofPresentation**

These unaudited interim condensed consolidatedfinancial statements have been prepared in accordance with U.S. generallyaccepted accounting principles (“U.S. GAAP”). Preparation of the interimfinancial statements in conformity with U.S. GAAP requires management to makeestimates and assumptions related to the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities as at thereporting date and the reported amounts of revenues and expenses for theinterim period. Actual results could differ from those estimates. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. However, theCompany believes that the disclosures are adequate to make the information notmisleading. The year-end condensed consolidated balance sheet data was derivedfrom the audited consolidated financial statements, but does not include alldisclosures required by U.S. GAAP. These consolidated financial statementsshould be read in conjunction with the Consolidated Financial Statements andthe Notes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2006.

In the opinion of management, all adjustments(consisting of those of a normal recurring nature) considered necessary topresent fairly the financial position as of December 31, 2006 and September 30,2006 and the results of operations, and cash flows for the three months ended December 31,2006 and December 31, 2005 as applicable to interim periods have beenmade. The results of operations for the three months ended December 31,2006 are not necessarily indicative of the operating results for the fullfiscal year or future periods.

All amounts are reportedin thousands of U.S. dollars ($), except per share amounts or as otherwisedisclosed.

***Fiscal year***

The Company’s fiscal yearis October 1 to September 30.

4

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***Principles of consolidation***

The consolidated financial statements include, aftereliminating inter-company transactions and balances, the accounts of SironaDental Systems, Inc. and its subsidiaries.

Certain prior periodamounts have been reclassified to conform to current period presentation.

**2.**   RecentlyIssued Accounting Pronouncements

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements.” Among other requirements, SFAS 157defines fair value and establishes a framework for measuring fair value andalso expands disclosure about the use of fair value to measure assets andliabilities. SFAS 157 prescribes a single definition of fair value as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. SFAS157 is effective beginning the first fiscal year that begins after November 15,2007. The Company is evaluating the impact of SFAS 157 but does not believethis pronouncement will have a material effect on its consolidated financialposition or results of operations.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS158 requires an employer to: (a) recognize in its statement offinancial position an asset for a plan’s overfunded status or a liability for aplan’s under-funded status; (b) measure a plan’s assets and itsobligations that determine its funded status as of the end of the employer’sfiscal year (with limited exceptions); (c) recognize changes in the fundedstatus of a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income of a businessentity and in changes in net assets of a not-for-profit organization. Therequirement to recognize the funded status of a benefit plan and the disclosurerequirements are effective for the Company for the fiscal year ending on September 30,2007. The Company already measures plan assets and benefit obligations asof the date of fiscal year-end. The Company will initially recognize the fundedstatus of its defined benefit plans and provide the required disclosures as ofthe end of the fiscal year 2007. The Company does not expect that the adoption of SFAS No. 158 willhave a material impact on its consolidated financial position or results ofoperations

In July 2006, the FASB issued FASB InterpretationNo. 48 (“FIN”) No. 48, *“Accountingfor Uncertainty in Income Taxes”* which is an interpretation of FASBStatement 109, *“Accounting for Income Taxes.”*FIN 48 requires managements to perform a two-step evaluation of all taxpositions, ensuring that these tax return positions meet the “more-likely thannot” recognition threshold and can be measured with sufficient precision todetermine the benefit recognized in the financial statements. These evaluationsprovide management with a comprehensive model for how a company shouldrecognize, measure, present, and disclose in its financial statements certaintax positions that the Company has taken or expects to take on income taxreturns. FIN 48 is effective for the Company’s fiscal year ending September 30,2008. The Company is still determining the effect FIN 48 will have on itsconsolidated financial statements.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), which providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current yearmisstatement. The guidancein SAB 108 must be applied to annual financial statements for fiscal yearsending after November 15, 2006. Management is in the process of assessingthe impact of adopting SAB 108, but does not expect that it will have amaterial impact on its consolidated financial statements.

5

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**3.   The Exchange**

On September 25, 2005, Schick, which on June 20,2006 was renamed Sirona Dental Systems, Inc., entered into an ExchangeAgreement with Sirona Holdings Luxco S.C.A. (“Luxco”) and Sirona Holding GmbH (“SironaHolding”) providing for the issuance of 36,972,480 shares of Schick commonstock to Luxco in exchange for Luxco’s entire economic interest in SironaHolding (the “Exchange”), which consisted of all of the issued and outstandingshare capital of Sirona Holding and the existing indebtedness of Sirona Holdingowed to Luxco in the amount of $205.6 million as of June 20, 2006. It wasalso agreed that Schick shareholders would receive a special $2.50 per sharecash dividend.

The Exchange was completed on June 20, 2006.Schick has been included in the Company’s consolidated statement of operationssince such date. The cash dividend was paid on June 23, 2006. Sirona Holdingis deemed to be the acquiring company under U.S. GAAP because Luxco, SironaHolding’s shareholder, has a controlling ownership interest in the combinedcompany, Sirona Holding’s designees to the board represent a majority of thedirectors and  Sirona Holding’s senior management represents a majority ofmanagement.

The transaction was accounted for as a purchasebusiness combination in accordance with FASB Statement No. 141, BusinessCombinations (“SFAS 141”). The carrying values of Schick’s assets and liabilitieswere adjusted to their fair values on June 20, 2006, and the differencebetween the purchase price and the fair value of the net assets and liabilitieswas recorded as goodwill.

The purchase price was comprised of 17,615,660 Schickshares outstanding on June 20, 2006. Based on the average of the closingprices for a range of trading days (September 22, 2005 through September 28,2005, inclusive) around the announcement date of September 26, 2005 of theExchange Agreement, the fair value is $24.96 per share, or approximately$439,687. The purchase price also includes the estimated fair value of 862,220vested stock options which were not exercised prior to the Exchange ($15,363),458,179 unvested stock options ($8,111), reduced by the unvested optionsrelating to services to be provided in the future ($7,638), and directacquisition costs of $7,338. The fair value of the vested and unvested optionswas estimated using the Black-Scholes model and assumptions as follows: therelevant exercise price, a market price of $24.96 (average of closing pricesaround the Exchange announcement date), volatility of 34.0%, estimated life offive years, and a risk free rate of 3.73%. The cost of the acquired business isreduced by the unearned portion of the unvested options relating to services tobe provided in the future.

Thetotal purchase price of Schick in the Exchange was as follows:

| **$’000s**                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
|----------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| Purchase price                                                             |       |       |        |
| Schick common  stock                                                       |       | $          | 439,687     |       |
| Schick restricted  vested options                                          |       | 15,363     |        |
| Schick unvested options                                                    |       | 8,111      |        |
| Schick unvested  options relating to services to be provided in the future |       | (7,638     | )           |
| Sirona direct  transaction costs                                           |       | 7,338      |        |
|                                                                       |       | **$**      | **462,861** |       |

 

6

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Theallocation of the purchase price was finalized in the quarter ended December 31,2006 as follows:

| **$’000s**                            | ** ** | ** **  | ** **  | ** ** | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|
| Current assets                             |       | $           | 41,431      |       |
| Property, plant  and equipment             |       | 1,335       |        |
| Intangible assets  subject to amortization |       | 132,300     |        |
| Trade name not  subject to amortization    |       | 24,000      |        |
| In process  research and development       |       | 6,000       |        |
| Goodwill                                   |       | 124,302     |        |
| Receivable from  Luxco                     |       | 205,566     |        |
| Other assets                               |       | 1,060       |        |
| **Total assets**                           | ** ** | **535,994** | ** **  |
| Current  liabilities                       |       | (12,445     | )           |
| Deferred taxes                             |       | (60,688     | )           |
| **Total liabilities assumed**              | ** ** | **(73,133** | **)**       |
| **Purchase  Price**                        | ** ** | **$**       | **462,861** | ** ** |

 

The Company believes the acquisition will strengthenits competitive position in the technology-driven Imaging Systems segment byuniting research and development capabilities to accelerate product developmentand expanding its global presence, particularly in the significant U.S. market,and is also expected to provide certain synergies.

For further discussion of the Exchange please refer tothe Company’s Annual Report on Form 10-K for the fiscal year ended September 30,2006.

**4.   EmployeeShare-Based Compensation**

The total stock compensation expense for the Company’sstock option plans amounted to $3,076 for the three months endedDecember 31, 2006. These expenses include the impact of the new stockoption plan discussed below.

On December 13, 2006 the Company granted 525,000stock options under a new Equity Incentive Plan (“the new Plan”). The stockoptions vest over a period of 4 years and expire ten years after the date ofthe grant. The new plan provides for granting in total up to 2,275,000 stockoptions to employees and is subject to stockholder approval.

Thefair values of the stock options granted under the new plan were estimatedusing the Black-Scholes option pricing model using the assumptions in thefollowing table. The exercise price is equal to the fair market value of ourstock at the grant date. The expected volatility is based on our historicalstock volatility. The risk-free rate is based on the U.S. Treasury yield curvein effect at the time of the grant and has a term equal to the expected life ofthe options. The expected life represents the period of time the options areexpected to be outstanding based on anticipated employee behavior. The expecteddividend yield is based on the Company’s history of not paying regulardividends in the past and the Company’s current intention not to pay dividendsin the foreseeable future.

| Exercise price        |   | $39.46     |   |
|-----------------------|--------|------------|--------|
| Expected  volatility  |   | 44%        |   |
| Risk-free rate        |   | 4.47%      |   |
| Expected life         |   | 6.25 years |   |
| Expected  dividends   |   | —     |   |
| Grant date fair value |   | $19.70     |   |

 

7

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**5.   ComprehensiveIncome**

Comprehensive income for thethree months ended December 31, 2006 was $12,726 comprising netincome of $2,318 and other comprehensive income in the form of a cumulativetranslation adjustment of $10,408. The cumulative translation adjustmentincludes gains on intercompany foreign currency transactions of a long-terminvestment nature between entities consolidated in these financial statementsin the amount of $8,076.

Comprehensive income for the three months endedDecember 31, 2005 was $2,989. This amount comprised net income of $3,310and other comprehensive income (cumulative translation adjustment losses) of$(321).

**6.   Inventories,Net**

| ** **        | ** ** | **December 31,** | ** **        | **September 30,** | ** ** |
|-------------------|------------|-----------------------|-------------------|------------------------|------------|
| ** **        | ** ** | **2006**              | ** **        | **2006**               | ** ** |
| ** **        | ** ** | **$’000s**       | ** **        |
| Finished goods    |       |                  | $ 31,036     |                   |       |   | $ 28,382 |   |   |
| Work in progress  |       |                  | 13,141            |                   |       |   | 11,688 |   |   |
| Raw materials     |       |                  | 29,387            |                   |       |   | 25,630 |   |   |
|              |       |                  | **73,564**        | ** **             | ** ** | ** ** | **65,700** |   |   |
| Inventory reserve |       |                  | (9,160            | )                      |       |   | (8,397 | ) |   |
|              |       |                  | **$ 64,404** | ** **             | ** ** | ** ** | **$ 57,303** |   |   |

 

**7**.   Intangible Assets andGoodwill

| ** **                             | ** ** | ** **           | ** ** | **Accumulated**  | ** **        | ** ** | ** ** |
|----------------------------------------|------------|----------------------|------------|------------------|-------------------|------------|------------|
| ** **                             | ** ** | **Gross**            | ** ** | **amortization** | ** **        | **Net**    | ** ** |
| ** **                             | ** ** | ** **           | ** ** | **$’000s**  | ** **        | ** ** | ** ** |
| **As of  December 31, 2006**      |       |                 |       |             |              |       |       |   |   |
| Patents &  Licenses           |       | $  138,083 |       |             | $ 21,598     |       |       | $  116,485 |   |
| Trademarks                             |       | 128,254              |       |             | 53                |       |       | 128,201 |   |
| Technologies and  dealer relationships |       | 440,256              |       |             | 67,369            |       |       | 372,887 |   |
|                                   |       | 706,593              |       |             | 89,020            |       |       | 617,573 |   |
| Goodwill                               |       | 630,547              |       |             | —            |       |       | 630,547 |   |
| **Total  intangible assets**           | ** ** | **$ 1,337,140** | ** ** | ** **       | **$ 89,020** | ** ** | ** ** | **$ 1,248,120** | ** ** |

 

 

| ** **                             | ** ** | ** **           | ** ** | **Accumulated**  | ** **        | ** ** | ** ** |
|----------------------------------------|------------|----------------------|------------|------------------|-------------------|------------|------------|
| ** **                             | ** ** | **Gross**            | ** ** | **amortization** | ** **        | **Net**    | ** ** |
| ** **                             | ** ** | ** **           | ** ** | **$’000s**  | ** **        | ** ** | ** ** |
| **As of  September 30, 2006**     |       |                 |       |             |              |       |       |   |   |
| Patents &  Licenses           |       | $  132,736 |       |             | $ 17,168     |       |       | 115,568 |   |
| Trademarks                             |       | 124,282              |       |             | 28                |       |       | 124,254 |   |
| Technologies and  dealer relationships |       | 428,217              |       |             | 49,046            |       |       | 379,171 |   |
|                                   |       | 685,235              |       |             | 66,242            |       |       | 618,993 |   |
| Goodwill                               |       | 613,549              |       |             | —            |       |       | 613,549 |   |
| **Total  intangible assets**           | ** ** | **$ 1,298,784** | ** ** | ** **       | **$ 66,242** |       | ** ** | **1,232,542** | ** ** |

 

8

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The change in the value ofgoodwill from September 30, 2006 to December 31, 2006 is related tochanges as a result of the finalization of the purchase price allocation of($2,446) as well as differences in exchange rates of $19,444.

**8.   Short-Term Debtand Current Portion of Long-Term Debt**

Short-term debt relates tothe revolving credit facility made available under the Company’s new seniorcredit facility (discussed below) utilized to the amount of Euro 15 million($19.8 million) as well as the current portion of other long-term debt andaccrued interest on long-term debt ($1.6 million).

**9.   Long-Term Debt**

| ** **                                                                                                                            | ** ** | **December 31,** | ** **                                                    | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------------------------------------------------------|------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**              | ** **                                                    | **2006**               | ** ** |
| ** **                                                                                                                            | ** ** | **$’000s**       | ** **                                                    |
| Senior syndicated loan, Tranche A                                                                                                     |       |                  | $         — |                   |       |   | $ 118,013 |   |   |
| Senior syndicated  loan, Tranche B                                                                                                    |       |                  |                                                          |                   |       |   | 158,587 |   |   |
| Senior syndicated  loan, Tranche C                                                                                                    |       |                  | —                                                        |                   |       |   | 139,574 |   |   |
| Mezzanine loan                                                                                                                        |       |                  | —                                                        |                   |       |   | 115,344 |   |   |
| Senior term loan,  Tranche A1, variable rate repayable in annual installments starting November 2009  through November 2011 |       |                  | 150,102                                                       |                   |       |   |   |   |   |
| Senior term loan,  Tranche A2, variable rate repayable in annual installments starting November 2009  through November 2011 |       |                  | 362,088                                                       |                   |       |   |   |   |   |
| Other debt                                                                                                                            |       |                  | 1,853                                                         |                   |       |   | 1,854 |   |   |
| ** **                                                                                                                            | ** ** | ** **            | **514,043**                                                   |                   | ** ** | ** ** | **533,372** |   |   |
| Less current  portion                                                                                                                 |       |                  | 1,565                                                         |                   |       |   | 14,738 |   |   |
| ** **                                                                                                                            | ** ** | ** **            | **$ 512,478**                                            |                   | ** ** | ** ** | **$ 518,634** |   |   |

**Senior Term Loans**

On November 22, 2006, Sirona Dental Systems, Inc.entered into a new senior credit facility (the “Senior Facilities Agreement”)as original guarantor, with Schick Technologies, Inc., a New York companyand wholly owned subsidiary of Sirona (“Schick NY”), as original borrower andoriginal guarantor, with Sirona Dental Systems GmbH, as original borrower andoriginal guarantor, with Sirona Dental Services GmbH, as original borrower andoriginal guarantor and with Sirona Dental Systems LLC, Sirona Holding GmbH andwith Sirona Immobilien GmbH as original guarantors. Initial borrowings underthe Senior Facilities Agreement plus excess cash were used to retire theoutstanding borrowings under the Company’s previous credit facilities.

The Senior Facilities Agreement, includes: (1) aterm loan A1 in an aggregate principal amount of $150 million (the “tranche A1term loan”) available to Sirona’s subsidiary, Schick NY, as borrower; (2) aterm loan A2 in an aggregate principal amount of Euro 275 million (the “trancheA2 term loan”) available to Sirona’s subsidiary, Sirona Dental Services GmbH,as borrower; and (3) a $150 million revolving credit facility available toSirona Dental Systems GmbH, Schick NY and Sirona Dental Services GmbH, asinitial borrowers. The revolving credit facility is available forborrowing in Euro, U.S.$, Yen or any other freely available currency agreed toby the facility agent. The facilities are made available on an unsecuredbasis. Subject to certain limitations, each European guarantor guarantees theperformance of each European borrower, except itself, and each U.S. guarantorguarantees the performance of each U.S. borrower, except itself. There are nocross-border guarantees since all guarantees are by entities that have the samefunctional currency as the currency in which the respective guaranteedborrowing is denominated.

9

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Each of the senior term loans has a five year maturityand is to be repaid in three annual installments beginning on November 24,2009 and ending on November 24, 2011. Of the amounts borrowed under theterm loan facilities, 70% is due on November 24, 2011. At the Company’scurrent leverage multiples, the new facilities bear interest at a margin of 75basis points plus, in the case of Euro-denominated loans, EURIBOR and, in thecase of other loans, LIBOR.

The Senior Facilities Agreement contains a margin ratchet.Pursuant to this provision, which applies from November 24, 2007 onwards,the applicable margin will vary between 90 basis points and 45 basis points perannum according to our leverage multiple (i.e. the ratio of consolidated totalnet debt to consolidated adjusted EBITDA as defined in the Senior FacilitiesAgreement).

The Senior Facilities Agreement contains restrictivecovenants that limit Sirona’s ability to make loans, make investments,including in joint ventures, incur additional indebtedness, make acquisitionsor pay dividends, subject to agreed upon exceptions. The Company has agreed tocertain financial debt covenants in relation to the financing. The covenantsstipulate that the Company must maintain certain ratios in respect of interestpayments and defined earnings measures. If the Company breaches any of thecovenants, the loans will be become repayable on demand.

Debt issuance costs of$4.6 million were incurred in relation to the new financing and werecapitalized as deferred charges.

**Debt Extinguishment**

The retirement of theborrowings under the Company’s previous credit facilities, the seniorsyndicated loan tranches A, B and C and the mezzanine loan facility, wasaccounted for as a debt extinguishment in accordance with SFAS 140 “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities”. The unscheduled repayment of the mezzanine facility by theCompany resulted in a prepayment fee of Euro 0.9 million($1.2 million). In addition, $19.9 million of unamortized debt issuancecosts relating to the previous credit facilities were written off in theperiod. As a result, a loss on debt extinguishment totaling $21.1 millionwas recognized in the period.

**10.   Income Taxes**

For fiscal year 2007 anestimated effective tax rate of 35% has been applied, which is positivelyimpacted by structural changes as a result of the refinancing. This compares toan effective tax rate of 88.3% for fiscal year 2006, which was adverselyimpacted by foreign income for which no foreign tax credit was available andthe non-tax deductible charge related to the write-off of IPR&D inconnection with the Exchange.

**11.   Income Per Share**

The computation of basicand diluted income per share is as follows:

| ** **                                        | ** ** | **Three months ended**                                        | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **December 31, 2006**                                         | ** ** | **December 31, 2005**  | ** ** |
| ** **                                        | ** ** | **$’000s (except for per share amounts)** | ** ** |
| Net income                                        |       |                                                                    | $          | 2,318                            |       |   |   | $ | 3,310 |   |   |
| Weighted average  shares outstanding—basic   |       |                                                                    | 54,621,818 |                             |       |   | 36,972,480 |   |   |
| Dilutive effect  of stock options                 |       |                                                                    | 226,695    |                             |       |   | — |   |   |
| Weighted average  shares outstanding—diluted |       |                                                                    | 54,848,513 |                             |       |   | 36,972,480 |   |   |
| Income per share                                  |       |                                                                    |       |                             |       |   |   |   |   |
| Basic                                             |       |                                                                    | $          | 0.04                             |       |   |   | $ | 0.09 |   |   |
| Diluted                                           |       |                                                                    | $          | 0.04                             |       |   |   | $ | 0.09 |   |   |

 

10

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Income per shareinformation for the three-month period ended December 31, 2005 is based onthe number of shares which were issued in connection with the Exchange. Becausethe Company did not grant stock options prior to the Exchange, basic anddiluted income per share for periods prior to the Exchange is the same. Optionsto acquire 570,000 shares of common stock have been excluded from thecomputation of diluted income per share because the option price exceeds theaverage share price during the period.

**12.   Product Warranty**

The following tableprovides the changes in the product warranty accrual for the three months endedDecember 31, 2006 and December 31, 2005

| ** **                                        | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                        | ** ** | **$’000s**       | ** ** |
| Balance at beginning of the period                |       |                  | $          | 10,879                |       |   |   | $ | 9,276 |   |   |
| Accruals for  warranties issued during the period |       |                  | 4,035      |                  |       |   | 3,493 |   |   |
| Warranty  settlements made during the period      |       |                  | (3,412     | )                     |       |   | (2,530 | ) |   |
| Translation  adjustment                           |       |                  | 432        |                  |       |   | (164 | ) |   |
| Balance at the end of  the period                 |       | ** **            | **$**      | **11,934**            |       | ** ** | ** ** | **$** | **10,075** |   |   |

 

**13.   Interest**

| ** **                             | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                             | ** ** | **$’000s**       | ** ** |
|                                   |       |                  |       |                  |       |   |   |   |   |
| Interest expense                       |       |                  | $          | 9,545                 |       |   |   | $ | 12,784 |   |   |
| Interest expense  from related parties |       |                  | —     |                  |       |   | 3,480 |   |   |
| Interest income                        |       |                  | (586       | )                     |       |   | (809 | ) |   |
| Net interest expense                   |       | ** **            | **$**      | **8,959**             |       | ** ** | ** ** | **$** | **15,455** |   |   |

 

**14.   Pension Plans**

Components of net periodicbenefit costs are as follows:

| ** **                 | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                 | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                 | ** ** | **$’000s**       | ** ** |
| Service cost               |       |                  | $          | 95                    |       |   |   | $ | 81 |   |   |
| Interest cost              |       |                  | 536        |                  |       |   | 460 |   |   |
| Net periodic benefit  cost |       | ** **            | **$**      | **631**               |       | ** ** | ** ** | **$** | **541** |   |   |

 

**15.   Segment Reporting**

The following tablesreflect the results of the Company’s reportable segments under the Company’smanagement reporting system. The segment performance measure used to monitorsegment performance is gross profit excluding the impact of the MDP Transaction(as defined in “Item 2, Transactions Accounted for as BusinessCombinations”) and the Exchange because this measure is considered to betterreflect the performance of each segment as it eliminates the need to allocatecentrally incurred costs and 

11

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significantpurchase accounting impacts that the Company does not believe arerepresentative of the performance of the segments. Furthermore, the Companymonitors performance geographically by region. As the Company manages itsbusiness on both a product and a geographical basis, U.S. GAAP requiressegmental disclosure based on product information.

| ** **                                 | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **$’000s**       | ** ** |
| **Revenue External**                       |       |                  |       |                  |       |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                  | $          | 52,475                |       |   |   | $ | 58,672 |   |   |
| Imaging Systems                            |       |                  | 58,879     |                  |       |   | 29,619 |   |   |
| Treatment Centers                          |       |                  | 40,572     |                  |       |   | 29,393 |   |   |
| Instruments                                |       |                  | 22,868     |                  |       |   | 16,552 |   |   |
| **Total**                                  |       | ** **            | **$**      | **174,794**           |       | ** ** | ** ** | **$** | **134,236** |   |   |
| **Revenue  Internal**                      |       |                  |       |                  |       |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                  | $          | —                |       |   |   | $ | — |   |   |
| Imaging Systems                            |       |                  | 52         |                  |       |   | 18 |   |   |
| Treatment Centers                          |       |                  | 2          |                  |       |   | 12 |   |   |
| Instruments                                |       |                  | 3,490      |                  |       |   | 2,737 |   |   |
| Intercompany elimination                   |       |                  | (3,544     | )                     |       |   | (2,767 | ) |   |
| **Total**                                  |       | ** **            | **$**      | **—**            |       | ** ** | ** ** | **$** | **—** |   |   |
| **Revenue  Total**                         |       |                  |       |                  |       |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                  | $          | 52,475                |       |   |   | $ | 58,672 |   |   |
| Imaging Systems                            |       |                  | 58,931     |                  |       |   | 29,637 |   |   |
| Treatment Centers                          |       |                  | 40,574     |                  |       |   | 29,405 |   |   |
| Instruments                                |       |                  | 26,358     |                  |       |   | 19,289 |   |   |
| **Total**                                  |       | ** **            | **$**      | **178,338**           |       | ** ** | ** ** | **$** | **137,003** |   |   |
| **Segment  Performance Measure**           |       |                  |       |                  |       |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                  | $          | 38,521                |       |   |   | $ | 44,003 |   |   |
| Imaging Systems                            |       |                  | 34,840     |                  |       |   | 13,652 |   |   |
| Treatment Centers                          |       |                  | 16,879     |                  |       |   | 10,664 |   |   |
| Instruments                                |       |                  | 11,047     |                  |       |   | 8,506 |   |   |
| **Total**                                  |       | ** **            | **$**      | **101,287**           |       | ** ** | ** ** | **$** | **76,825** |   |   |
| **Depreciation  and Amortization Expense** |       |                  |       |                  |       |   |   |   |   |
| Dental CAD/CAM Systems                     |       |                  | $          | 579                   |       |   |   | $ | 474 |   |   |
| Imaging Systems                            |       |                  | 1,036      |                  |       |   | 641 |   |   |
| Treatment Centers                          |       |                  | 645        |                  |       |   | 570 |   |   |
| Instruments                                |       |                  | 699        |                  |       |   | 606 |   |   |
| **Total**                                  |       | ** **            | **$**      | **2,959**             |       | ** ** | ** ** | **$** | **2,291** |   |   |

 

12

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***Reconciliation of the results of the segmentperformance measure to the consolidated statements of operations***

The following table and discussion provide areconciliation of the total results of operations of the Company’s businesssegments under management reporting to the consolidated financial statements.As of October 1, 2006 the Company changed the basis of accounting for itsmanagement reporting from statutory German accounting standards to U.S. GAAP,the basis used to prepare the consolidated financial statements. As a result,the differences shown between management reporting and U.S. GAAP for the threemonths ended December 31, 2006, have been reduced to the impacts ofpurchase accounting. Purchase accounting effects are not included in thesegment performance measure as the Company does not believe these to berepresentative of the performance of each segment.

Inter-segmenttransactions are based on amounts which management believes are approximate tothe amounts of transactions with unrelated third parties.

| ** **                                            | ** ** | **Three months** | ** **  | **Three months** | ** ** |
|-------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                            | ** ** | **ended**             | ** **  | **ended**             | ** ** |
| ** **                                            | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
| ** **                                            | ** ** | **2006**              | ** **  | **2005**              | ** ** |
| ** **                                            | ** ** | **$’000s**       | ** **  |
| **Revenue**                                           | ** ** |                  | ** **  | ** **            |       |   | ** ** | ** ** |   |
| Total segments                                        |       |                  | $           | 174,794               |       |   |   | $ | 134,236 |   |   |
| Electronic center                                     |       |                  | 5           |                  |       |   | 19 |   |   |
| Differences management reporting vs U.S. GAAP         |       |                  | —      |                  |       |   | 1,627 |   |   |
| Consolidated revenue                                  |       |                  | **174,799** | ** **            |       |   | **135,882** |   |   |
| **Depreciation  and Amortization**                    | ** ** |                  | ** **  | ** **            |       |   | ** ** | ** ** |   |
| Total segments                                        |       |                  | 2,959       |                  |       |   | 2,291 |   |   |
| Electronic center and corporate                       |       |                  | 361         |                  |       |   | 426 |   |   |
| Differences management reporting vs. U.S. GAAP        |       |                  | 20,251      |                  |       |   | 11,413 |   |   |
| Consolidated depreciation and amortization            |       |                  | **23,571**  | ** **            | ** ** | ** ** | **14,130** |   |   |
| **Segment  Performance Measure**                      | ** ** |                  | ** **  | ** **            |       |   | ** ** | ** ** |   |
| Total segments                                        |       |                  | 101,287     |                  |       |   | 76,825 |   |   |
| Electronic center and corporate                       |       |                  | 844         |                  |       |   | (137 | ) |   |
| Differences management reporting vs. U.S. GAAP        |       |                  | (18,059     | )                     |       |   | (10,470 | ) |   |
| Consolidated gross profit                             |       |                  | **84,072**  | ** **            |       |   | **66,218** |   |   |
| Selling, general and administrative expense           |       |                  | 47,501      |                  |       |   | 32,303 |   |   |
| Research and  development                             |       |                  | 10,280      |                  |       |   | 6,947 |   |   |
| Provision for  doubtful accounts and notes receivable |       |                  | 301         |                  |       |   | (140 | ) |   |
| Net other  operating (income) / loss                  |       |                  | (150        | )                     |       |   | 308 |   |   |
| Foreign currency  transaction (gain) / loss           |       |                  | (7,066      | )                     |       |   | 5,257 |   |   |
| (Gain) / loss on  derivative instruments              |       |                  | (491        | )                     |       |   | 275 |   |   |
| Interest expense,  net                                |       |                  | 8,959       |                  |       |   | 15,455 |   |   |
| Loss on debt  extinguishment                          |       |                  | 21,145      |                  |       |   | — |   |   |
| **Income Before Income Taxes and  Minority Interest** |       |                  | **$**       | **3,593**             | ** ** |   |   | **$** | **5,813** |   |   |

 

**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) should be read in conjunction with the unaudited interim condensed consolidatedfinancial statements and notes included elsewhere in this Quarterly Report andthe MD&A included in our Annual Report on Form 10-K for thefiscal year ended September 30, 2006.

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This report containsforward-looking statements that involve risk and uncertainties. All statements,other than statements of historical facts, included in this report regardingthe Company, its financial position, products, business strategy and plans andobjectives of management of the Company for future operations, areforward-looking statements. When used in this report, words such as “anticipate,”“believe,” “estimate,” “expect,” “intend,” “objectives,” “plans” and similarexpressions, or the negatives thereof or variations thereon or comparableterminology as they relate to the Company, its products or its management,identify forward-looking statements. Such forward-looking statements are basedon the beliefs of the Company’s management, as well as assumptions made by andinformation currently available to the Company’s management. Actual resultscould differ materially from those contemplated by the forward-lookingstatements as a result of various factors, including, but not limited to, thosecontained in the “Risk Factors” Section of our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2006. All forward lookingstatements speak only as of the date of this report and are expressly qualifiedin their entirely by the cautionary statements included in this report. Weundertake no obligation to update or revise forward-looking statements whichmaybe made to reflect events or circumstances that arise after the date made orto reflect the occurrence of unanticipated events other than required by law.

Except as otherwisedisclosed all amounts are reported in U.S. dollars ($).

**Overview**

Sirona is a leadingmanufacturer of high-tech dental equipment. Sirona focuses on developinginnovative systems and solutions for dentists globally. Sirona has servedequipment dealers and dentists worldwide for more than 125 years. The Companyhas its headquarters in Long Island City, New York and in addition the Companyhas a significant facility in Bensheim, Germany. Sirona manages its business onboth a product and geographic basis and has four reporting segments: DentalCAD/CAM Systems, Imaging Systems, Treatment Centers and Instruments. Productsfrom each category are marketed in all geographical sales regions.

**Significant Factors That Affect Sirona’s Results ofOperations**

***Increased Focus onSirona’s Position in the U.S. Market and Further Global Expansion***

From October 1, 2003to September 30, 2006, Sirona experienced strong revenue growth, with U.S.dollar revenue increasing on average by 31% annually. Bolstered by the Schickacquisition, this trend continued in the first quarter of fiscal year 2007.Several products have generated significant interest in the U.S. market,including, but not limited to, CEREC, inLab, inEos, the ORTHOPHOS XG line, C8 +and electrical Handpieces and SIROlaser.

Sirona works together withlarge distributors, including Patterson Dental and Henry Schein, accounting for34% and 16%, respectively, of Sirona’s global revenue for the three monthperiod ended December 31, 2006.

In addition to increasedU.S. market penetration, Sirona has pursued expansion in the rest of the world.Over the last three years, sales in the rest of the world grew on average by15% annually, which also shows in the year-over-year comparison for the firstfiscal year 2007 quarter. To support this growth, Sirona expanded its localpresence and distribution channels by establishing new sales and servicelocations in Spain, France and the United Kingdom in 2004, in Japan andAustralia in 2005 and in China in 2006. This expansion has resulted inincreased sales, gross profit and selling, general and administrative(SG&A) expense.

***TransactionsAccounted for as Business Combinations***

The change in control ofthe Sirona business to Luxco, a Luxembourg-based holding entity owned by thefunds managed by Madison Dearborn Partners, Beecken Petty O’Keefe andmanagement of Sirona, through a leveraged buy-out transaction on June 30,2005 (“MDP Transaction”) and the Exchange, 

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completedon June 20, 2006 (see Note 3 to the unaudited consolidated financialstatements), were accounted for as business combinations.

As a result of thesetransactions, Sirona’s cost of goods sold, research and development, SG&Aexpense and operating results have been and will continue to be materiallyaffected by higher depreciation and amortization costs arising from the step-upto fair value of Sirona’s assets and liabilities. Taxes, interest and netincome have also been and will continue to be substantially impacted by thestructural changes resulting from these business combinations.

IPR&D projectsacquired in connection with the Exchange and the MDP Transaction, with fairvalues of $6.0 million and $33.8 million, respectively, wereappraised and charged to the income statement at the respective dates ofacquisition. The projects primarily related to (i) 3D-Imaging,(ii) enhancements to the CAD/CAM system’s hardware and software,(iii) the new treatment center platform and (iv)intra-oral digitalimaging. The fair value of $6.0 million in connection with the Exchangerelated primarily to the intra-oral digital imaging projects. As ofDecember 31, 2006, the 3D-Imaging and the majority of the CAD/CAM system’senhancements have been completed.

The remaining estimatedcosts to complete the significant projects at December 31, 2006 were(i) $1.0 million for an outstanding enhancement to the CAD/CAM system,(ii) $13.3 million for the new treatment center platform, and(iii) $1.3 million for the intra-oral digital imaging projects. Theestimated percentages of completion of the significant projects as ofDecember 31, 2006 were (i) 50%, (ii) 30% and (iii) 30%.

As of December 31,2006 (i) the enhancements to the CAD/CAM system’s hardware and softwareproject was in the approximately half way through the product development phasewith the remaining steps prior to the project release phase being thefinalization of project development including working models, beta testing andregulatory approvals, (ii) the new treatment center platform was at theend of the concept development phase with the remaining steps prior to theproduct release phase being the remaining product development phase includingworking models, beta testing and regulatory approvals, and (iii) theintra-oral digital imaging projects are in product development phases with theremaining steps prior to the project release phase being the finalization ofproject development including working models, beta testing and regulatoryapprovals.

It is anticipated that theprojects will be completed in fiscal year 2008 and begin to generate cash inthe fiscal year following their completion. There are no specific risks anduncertainties associated with these projects; however the general risksrelating to the Company as discussed under “Risk Factors” as set forth in ourForm 10-K for the fiscal year ended September 30, 2006 may apply.

***Fluctuations inU.S. Dollar/Euro Exchange Rate***

Although the U.S. dollaris Sirona’s reporting currency, its functional currency varies depending on thecountry of operation. For the three months ended December 31, 2006,approximately 49% of Sirona’s revenue and approximately 78% of its expenseswere in Euros. During the periods under review, the U.S. dollar/Euro exchangerate has fluctuated significantly, thereby impacting Sirona’s financialresults. Between October 1, 2005 and December 31, 2006, the U.S.dollar/Euro exchange rate used to calculate items included in Sirona’sfinancial statements varied from a low of 1.177 to a high of 1.332 and as of December 31,2006 and September 30, 2006 the exchange rates were 1.2669 and 1.3181,respectively. To manage this variability in its operating results, Sirona hasentered into foreign exchange forward contracts. As of December 31, 2006,these contracts had notional amounts totaling $20.9 million. As theseagreements are relatively short-term (generally six months), continuedfluctuation in the U.S. dollar could materially affect Sirona’s results ofoperations.

Loans made to Sirona underthe new senior credit facility entered into November 22, 2006 aredenominated in the functional currency of the respective borrowers. See “—Liquidityand Capital Resources” for a discussion of our new senior credit facility.However, intercompany loans are denominated in the functional currency of onlyone of the parties to the loan agreements. Where 

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intercompanyloans are of a long-term investment nature, the potential non-cash fluctuationsin currency exchange rates are reflected within other comprehensive income.These fluctuations may be significant in any period due to changes in theexchange rates between the Euro and the U.S. dollar.

***Fluctuations inQuarterly Operating Results***

Sirona’squarterly operating results have varied in the past and are likely to vary inthe future. These variations result from a number of factors, many of which aresubstantially outside its control, including:

·       thetiming of new product introductions by Sirona or its competitors;

·       thetiming of industry trade shows;

·       developmentsin government reimbursement policies;

·       changesin product mix;

·       Sirona’sability to supply products to meet customer demand;

·       fluctuationsin manufacturing costs;

·       incometax incentives; and

·       currencyfluctuation.

Due to the variationswhich Sirona has experienced in its quarterly operating results, it does notbelieve that period-to-period comparisons of results of operations of Sironaare necessarily meaningful or reliable as indicators of future performance.

**Taxes**

The German tax authorityis currently examining the Company’s tax returns for the years 2001 to 2004.The Company does not believe the results of the examination will have anadverse material effect on the Company’s financial position, results ofoperations or liquidity.

**Results of Operations**

***Three Months Ended December 31,2006 Compared to Three Months Ended December 31, 2005***

Revenue for the threemonths ended December 31, 2006 was $174.8 million, an increase of $38.9 million,or 28.6%, as compared with the three months ended December 31, 2005. On aconstant currency basis, adjusting for the fluctuations in the $/Euro rate,total revenue increased by 22.0%. On a reported basis (constant-currencybasis), growth rates for the Imaging Systems segment are 99% (up 86% constantcurrency), the Instruments segment are 38% (up 28% constant currency), theTreatment Center Segment 38% (up 28% constant currency), whereas the DentalCAD/CAM Systems segment revenue decreased by 11% (down 14% constant currency).The positive Imaging Systems segment development in the three month period thatended December 31, 2006 was attributable to the inclusion of the Schickoperations. The Instrument segment revenue increase was driven by new products,such as the SIROlaser and SIROpure instruments. The Treatment Center revenueparticularly benefited from strong sales in Germany, China and the Middle-East.The Dental CAD/CAM Systems segment faced a challenging year-over-yearcomparison as revenues in the first quarter of fiscal year 2006 were verystrong. CAD/CAM revenues were also impacted by investment caution awaiting thelaunch of our new products. Revenue changes were volume driven, while prices ingeneral remained stable.

Revenue in the UnitedStates for the three months ended December 31, 2006 increased by 31.5%compared to the same period last year. This development was attributable to theinclusion of the Schick operations. Revenue growth in the rest of the world was27.1%. On a constant currency basis, revenue in the rest of the world increasedby 17.3%. The revenue growth in the rest of the world was primarily due tostrong sales in Germany, Spain, China and Canada and the Middle East. TheGerman economy was solid in the first quarter, driven by the announcedVAT-increase which became effective January 1, 2007.

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***Cost of Sales***

Cost of sales for thethree months ended December 31, 2006 was $90.7 million, an increase of$21.1 million, or 30.2%, as compared with the three months ended December 31,2005. Cost of sales included amortization and depreciation expense resultingfrom the step-up to fair values of inventories and tangible and intangibleassets, which was $19.2 million for the three months ended December 31,2006, compared with $12.0 million for the three months ended December 31,2005. The quarter-over-quarter increase in amortization and depreciationexpense mainly resulted from the fair value adjustments related to theExchange. Excluding these amounts, costs of sales as a percentage of revenuedecreased to 40.9% for the three months ended December 31, 2006 comparedwith 42.5% for the three months ended December 31, 2005 and gross profitas a percentage of revenue increased by 1.6 percentage points from 57.5% to59.1%. The improvement was driven by strong German sales and a favorableproduct mix in the Treatment Center segment as well as the Schick productlines, which were the main drivers of the positive gross profit margindevelopment in the Imaging Systems segment.

***Selling, General and Administrative***

For the three months endedDecember 31, 2006, SG&A expense was $47.5 million, an increase of$15.2 million, or 47.0%, as compared with the three months ended December 31,2005. SG&A expense included amortization and depreciation resulting fromthe step-up to fair values of tangible and intangible assets as well asnon-cash option expense in the amount of $3.8 million for the three monthsended December 31, 2006, compared with $0.1 million for the three monthsended December 31, 2005. The year-over-year increase in amortization anddepreciation expense reflects the step-up to the fair values of certain assetsresulting from the Exchange. Excluding these amounts, as a percentage ofrevenue, SG&A expense increased to 25.0% for the three months ended December 31,2006 as compared with 23.7% for the three months ended December 31, 2005.The increase was primarily due to the inclusion of Schick, increased costsassociated with the growth in revenue and with Sirona’s expanded presence invarious markets, including the United States and China. Furthermore,administration expenses increased year-over-year driven by costs for thepreparation and audit of U.S. GAAP accounts and SEC filings as well as withSarbanes Oxley compliance, which was not applicable in the first quarter ended December 31,2005.

***Research and Development***

R&D expense for thethree months ended December 31, 2006 was $10.3 million, an increase of$3.3 million, or 48.0%, as compared with the three month ended December 31,2005. The quarter-over-quarter increase was primarily driven by the inclusionof the Schick operations in the first quarter of fiscal year 2007. As apercentage of revenue, R&D expense increased to 5.9% for the three monthsended December 31, 2006, compared with 5.1% for the three months ended December 31,2005.

***Gain and Loss on Foreign Currency Transactions***

Gain on foreign currencytransactions for the three months ended December 31, 2006 amounted to $7.1million compared to a loss of $5.3 million for the three months ended December 31,2005. For the three months ended December 31, 2006 the gain includedforeign currency gains upon the repayment of the U.S. dollar denominated bankdebt of $3.9 million and an unrealized non-cash foreign currency gain of $4.0million on the U.S. dollar denominated deferred income, resulting from thetranslation adjustment of Patterson’s exclusivity payment. The loss for thethree months ended December 31, 2005 included an unrealized non-cashforeign currency loss resulting from translation adjustments to the carryingvalue of the U.S. dollar denominated bank debt of $2.9 million.

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***Interest Expense***

Net interest expense forthe three months ended December 31, 2006 was $9.0 million, compared to$15.4 million for the three months ended December 31, 2005. This decreasewas primarily due to the cessation of interest on a shareholder loan prior tothe Exchange, which has been eliminated on consolidation since June 20, 2006as well as the Company’s retirement of its previous credit facilities on November 24,2006, and refinancing on more favorable terms of interest under the Company’snew senior credit facility.

***Debt Extinguishment***

The retirement of theborrowings under the Company’s previous credit facilities, the seniorsyndicated loan tranches A, B and C and the mezzanine loan facility, wasaccounted for as a debt extinguishment in accordance with SFAS 140 “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities.” The unscheduled repayment of the mezzanine facility by theCompany resulted in a prepayment fee of Euro 0.9 million ($1.2 million).In addition, $19.9 million of unamortized debt issue costs relating to theprevious credit facilities were written off in the period. As a result, a losson debt extinguishment totaling $21.1 million was recognized in the period.

***Net Income***

Sirona’s net income forthe three months ended December 31, 2006 was $2.3 million, a decrease of $1.0million, as compared with the three months ended December 31, 2005. Asdescribed above, Sirona’s net income was significantly impacted by the MDPTransaction, the Exchange and the debt extinguishment. For the three monthsended December 31, 2006, amortization and depreciation expense resultingfrom the step-up of fair values of intangible and tangible assets related tothe Exchange and the MDP Transaction was $13.0 million (net of tax impact of $7.0 million).In addition, the gain upon the repayment of the Tranche A U.S. dollardenominated bank debt as well as the deferred income from the exclusivitypayment was $5.1 million (net of tax impact of $2.8 million) andoption expenses were $2.0 million (net of tax impact of $1.1 million).Furthermore losses of $13.3 million were recorded on debt extinguishment(net of a tax impact of $7.8 million). Excluding these items in bothperiods, net income increased due to higher revenue and improved gross margins,partially offset by higher SG&A and R&D expenses.

**Liquidity andCapital Resources**

Historically,Sirona’s principal uses of cash, apart from operating requirements, includingresearch and development expenses, have been for interest payments, debtrepayment and acquisitions. Operating capital expenditures are approximatelyequal to operating depreciation (excluding any effects from the increasedamortization and depreciation expense resulting from the step-up to fair valuesof Sirona’s and Schick’s assets and liabilities required under purchaseaccounting). Sirona’s management believes that Sirona’s working capital issufficient for its present requirements.

| ** **                                           | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                           | ** ** | **$’000s**       | ** ** |
| Net cash (used in)/ provided by operating activities |       |                  | $          | (3,676                | )          |   |   | $ | 20,930 |   |   |
| Net cash (used  in) investing activities             |       |                  | (4,692     | )                     |       |   | (2,229 | ) |   |
| Net cash (used  in) financing activities             |       |                  | (21,608    | )                     |       |   | (36,153 | ) |   |
| Decrease in cash during  the period                  |       |                  | $          | (29,976               | )          |   |   | $ | (17,452 | ) |   |

 

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***Net Cash (Used in)/Provided by Operating Activities***

Net cash (used in)/provided by operating activitiesrepresents net cash from operations, returns on investments, interest andtaxation.

Net cash (used in)/provided by operating activitieswas ($3.7) million for the three months ended December 31, 2006 comparedto $20.9 million for the three months ended December 31, 2005. The primarycontributors were the changes in assets and liabilities in both periods. Duringthe three months ended December 31, 2006 the increase in accountsreceivable and inventories was mainly driven by strong revenues, particularlyin November and December 2006.

***Net Cash Used in Investing Activities***

Net cash used in investing activities represents cashused for capital expenditures, financial investments and disposals. The primarycontributors to the investing cash outflow in both quarters are capitalexpenditures in the course of normal operating activities.

Net cash used in investingactivities was $4.7 million for the three months ended December 31, 2006,compared to $2.3 million for the three months ended December 31, 2005.

***Net Cash Used In Financing Activities***

Net cash used in financing activities was $21.6million for the three months ended December 31, 2006 compared to $36.2million for the three months ended December 31, 2005. Net cash used infinancing activities in the three months ended December 31, 2006 reflectedthe refinancing of the Company’s prior credit facilities as of November 24,2006. The cash used in financing activities in the three month period ended December 31,2005 comprised unscheduled prepayments of the Mezzanine loan (€15.0million or $18.1 million) as well as Tranche C (€15.0 million or $18.1million).

Sirona’s managementbelieves that its operating cash flows and available cash (including restrictedcash), together with its long-term debt borrowings, will be sufficient to fundits working capital needs, research and development expenses (including but notlimited to the acquired in-process research and development) anticipatedcapital expenditure and debt service requirements.

***Capital Resources***

***Senior term loans***

On November 22, 2006, Sirona Dental Systems, Inc.entered into a new senior credit facility (the “Senior Facilities Agreement”)as original guarantor, with Schick Technologies, Inc., a New York companyand wholly owned subsidiary of Sirona (“Schick NY”), as original borrower andoriginal guarantor, with Sirona Dental Systems GmbH, as original borrower andoriginal guarantor, with Sirona Dental Services GmbH, as original borrower andoriginal guarantor and with Sirona Dental Systems LLC, Sirona Holding GmbH and withSirona Immobilien GmbH as original guarantors. Initial borrowings under theSenior Facilities Agreement plus excess cash were used to retire theoutstanding borrowings under the Company’s previous credit facilities.

The Senior Facilities Agreement, includes: (1) aterm loan A1 in an aggregate principal amount of $150 million (the “tranche A1term loan”) available to Sirona’s subsidiary, Schick NY, as borrower; (2) aterm loan A2 in an aggregate principal amount of Euro 275 million (the “trancheA2 term loan”) available to Sirona’s subsidiary, Sirona Dental Services GmbH,as borrower; and (3) a $150 million revolving credit facility available toSirona Dental Systems GmbH, Schick NY and Sirona Dental Services GmbH, asinitial borrowers. The revolving credit facility is available forborrowing in Euro, U.S.$, Yen or any other freely available currency agreed toby the facility agent. The facilities are made available on an unsecuredbasis. Subject to certain limitations, each European guarantor guarantees theperformance of each European 

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borrower, except itself,and each U.S. guarantor guarantees the performance of each U.S. borrower,except itself.

Each of the senior term loans has a five year maturityand is to be repaid in three annual installments beginning on November 24,2009 and ending on November 24, 2011. Of the amounts borrowed under theterm loan facilities, 70% is due on November 24, 2011. At the Company’scurrent leverage multiples, the new facilities bear interest at a margin of 75basis points plus, in the case of Euro-denominated loans, EURIBOR and, in thecase of other loans, LIBOR.

The Senior Facilities Agreement contains a marginratchet. Pursuant to this provision, which applies from November 24, 2007onwards, the applicable margin will vary between 90 basis points and 45 basispoints per annum according to our leverage multiple (i.e. the ratio ofconsolidated total net debt to consolidated adjusted EBITDA as defined in theSenior Facilities Agreement).

The Senior FacilitiesAgreement contains restrictive covenants that limit Sirona’s ability to makeloans, make investments, including in joint ventures, incur additionalindebtedness, make acquisitions or pay dividends, subject to agreed uponexceptions. The Company has agreed to certain financial debt covenants inrelation to the financing. The covenants stipulate that the Company mustmaintain certain ratios in respect of interest payments and defined earningsmeasures. If the Company breaches any of the covenants, the loans will bebecome repayable on demand.

**Other Financial Data (unaudited)**

| ** **                  | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                  | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                  | ** ** | **$’000s**       | ** ** |
| Net income                  |       |                  | $          | 2,318                 |       |   |   | $ | 3,310 |   |   |
| Net interest  expense       |       |                  | 8,959      |                  |       |   | 15,455 |   |   |
| Provision for  income taxes |       |                  | 1,249      |                  |       |   | 2,504 |   |   |
| Depreciation                |       |                  | 3,623      |                  |       |   | 2,946 |   |   |
| Amortization                |       |                  | 19,948     |                  |       |   | 11,184 |   |   |
| EBITDA                      |       |                  | $          | 36,097                |       |   |   | $ | 35,399 |   |   |

 

EBITDA is anon-GAAP financial measure that is reconciled to net income, its most directlycomparable GAAP measure, in the accompanying financial tables. EBITDA isdefined as net earnings before interest, taxes, depreciation, and amortization.Sirona’s management utilizes EBITDA as an operating performance measure inconjunction with GAAP measures, such as net income and gross margin calculatedin conformity with GAAP. EBITDA should not be considered in isolation or as asubstitute for net income prepared in accordance with GAAP. There are materiallimitations associated with making the adjustments to Sirona’s earnings tocalculate EBITDA and using this non-GAAP financial measure. For instance,EBITDA does not include:

·       interestexpense, and because Sirona has borrowed money in order to finance itsoperations, interest expense is a necessary element of its costs and ability togenerate revenue;

·       depreciationand amortization expense, and because Sirona uses capital assets, depreciationand amortization expense is a necessary element of its costs and ability togenerate revenue; and

·       taxexpense, and because the payment of taxes is part of Sirona’s operations, taxexpense is a necessary element of costs and impacts Sirona’s ability tooperate.

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In addition, other companies may define EBITDAdifferently. EBITDA, as well as the other information in this filing, should beread in conjunction with Sirona’s financial statements and footnotes containedin the documents that Sirona files with the U.S. Securities and ExchangeCommission.

In addition to EBITDA, the accompanying financialtables also set forth certain supplementary information that Sirona believes isuseful for investors in evaluating Sirona’s underlying operations. Thissupplemental information includes gains/losses recorded in the periodspresented relating to early extinguishment of debt, stock option grants,revaluation of dollar-denominated exclusivity payment and borrowings where thefunctional currency is Euro, and the Schick acquisition. Sirona’s managementbelieves that these items are either nonrecurring or noncash in nature, andshould be considered by investors in assessing Sirona’s financial condition,operating performance and underlying strength.

Sirona’s managementuses EBITDA together with this supplemental information as an integral part ofits reporting  and planning processes andas one of the primary measures to, among other things:

(i)    monitorand evaluate the performance of Sirona’s business operations;

(ii)   facilitatemanagement’s internal comparisons of Sirona’s historical operating performanceof its business operations;

(iii)facilitatemanagement’s external comparisons of the results of its overall business to thehistorical operating  performance ofother companies that may have different capital structures and debt levels;

(iv)  analyze andevaluate financial and strategic planning decisions regarding future operatinginvestments; and

(v)   plan forand prepare future annual operating budgets and determine appropriate levels ofoperating investments.

(vi)  review andassess the operating  performance ofSirona’s management team and as a measure in evaluating employee compensationand bonuses;

Sirona’s management believes that EBITDA and thesessupplemental information is useful to investors as it provides them with disclosuresof Sirona’s operating results on the same basis as that used by Sirona’smanagement.

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**Supplemental Information**

| ** **                                                                                                                           | ** ** | **Three months** | ** ** | **Three months** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **ended**             | ** ** | **ended**             | ** ** |
| ** **                                                                                                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                           | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                                                                                                                           | ** ** | **$’000s**       | ** ** |
| Transaction related costs                                                                                                            |       |                  | $          | —                |       |   |   | $ | 220 |   |   |
| Fair value  increase in inventory                                                                                                    |       |                  | —     |                  |       |   | 922 |   |   |
| Loss on debt  extinguishment                                                                                                         |       |                  | 21,145     |                  |       |   | — |   |   |
| Share-based  compensation                                                                                                            |       |                  | 3,076      |                  |       |   | — |   |   |
| Unrealized,  non-cash (gain) on revaluation of the carrying value of the $-denominated exclusivity  fee                              |       |                  | (3,954     | )                     |       |   | — |   |   |
| Foreign currency  exchange (gain) on the early extinguishment of $-denominated bank debt                                             |       |                  | (3,885     | )                     |       |   | — |   |   |
| Unrealized,  non-cash (gain)/loss on revaluation of the carrying value of $-denominated  bank loans and short-term shareholder loans |       |                  | (591       | )                     |       |   | 2,916 |   |   |
|                                                                                                                                 |       |                  | $          | 15,791                |       |   |   | $ | 4,058 |   |   |

 

**Recent AccountingPronouncements Issued**

See note 2 to theunaudited consolidated financial statements for discussion of recently issuedaccounting pronouncements.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been nomaterial changes to the Company’s market risk since September 30, 2006.

**ITEM 4.**                CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934), as of December 31, 2006. Based upon thisevaluation, our chief executive officer and chief financial officer concludedthat, as of December 31, 2006, the Company’s disclosure controls andprocedures were effective. Our disclosure controls and procedures are designedto ensure that information relating to the Company, including our consolidatedsubsidiaries, that is required to be disclosed in the reports we file or submitunder the Securities Exchange Act of 1934 are recorded, processed, summarizedand reported within the time periods specified in Commission’s rules andforms.

**Changes in InternalControl over Financial Reporting**

No change in our internalcontrol over financial reporting (as defined in rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) occurred duringthe quarter ended December 31, 2006 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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**PART II.**

**ITEM 1.**                LEGALPROCEEDINGS

There are currently nomaterial legal proceedings pending.

**ITEM 1A.**        RISKFACTORS

There are no materialchanges from risk factors as previously disclosed by the Company in its AnnualReport on Form 10-K.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

None.

**ITEM 4.**                SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of security holders during the quarter ended December 31, 2006.

**ITEM 5.**                OTHERINFORMATION

None.

**ITEM 6.**                EXHIBITS

Thefollowing Exhibits are included in this report:

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Item Title** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
| 10.1             |       | Senior Facilities Agreement between Sirona Dental  Systems, Inc., Schick Technologies, Inc., Sirona Dental Systems  GmbH, Sirona Dental Services GmbH, Sirona Dental Systems LLC, Sirona Holding  GmbH, Sirona Immobilien GmbH, J.P. Morgan PLC, UBS Limited, JPMorgan Chase  Bank, N.A., and J.P. Morgan Europe Limited, dated November 22, 2006  (incorporated by reference to the Annual Report on Form 10-K for  the year ended September 30, 2006). |
| 31.1             |       | Certification of Principal  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2             |       | Certification of Principal  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1             |       | Section 1350  Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.2             |       | Section 1350  Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

Date: February 9,2007
|        | Sirona Dental Systems, Inc. |
|--------|----------------------------------|
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ SIMONE  BLANK |
|   |                             | Simone Blank, Executive Vice  President and Chief Financial Officer  (Principal Financial and Accounting  Officer)  (Duly authorized signatory) |

 

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