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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended July 31, 2001
Commission File No. 0-6132
CANTEL MEDICAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 22-1760285
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 Clove Road, Little Falls, New Jersey 07424
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(973) 890-7220
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
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(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Aggregate market value of registrant's capital stock held by non-affiliates
(based on shares held and the closing price quoted by NASDAQ on October 5,
2001): $79,459,178
Number of shares of common stock outstanding as of the close of the period
covered by this report: 4,559,276
Documents incorporated by reference: None.
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PART I
ITEM 1. BUSINESS.
GENERAL
Cantel Medical Corp. (the "Company" or "Cantel") is a healthcare
company concentrating primarily in infection prevention and control products and
diagnostic and therapeutic medical and scientific equipment. Through its
wholly-owned United States subsidiary, MediVators, Inc. ("MediVators"), Cantel
serves customers worldwide by designing, developing, manufacturing, marketing
and distributing innovative products for the infection prevention and control
industry. Through its wholly-owned Canadian subsidiary, Carsen Group Inc.
("Carsen" or "Canadian subsidiary"), Cantel markets and distributes medical
equipment (including flexible and rigid endoscopes), precision instruments
(including microscopes and high performance image analysis hardware and
software) and industrial equipment (including remote visual inspection devices).
Cantel's subsidiaries also provide technical maintenance service for their own
products, as well as for certain competitors' products. Unless the context
otherwise requires, references herein to the Company include Cantel and its
subsidiaries.
In September 2001, the Company acquired Minntech Corporation
("Minntech"), which became a wholly-owned subsidiary of the Company. Through
Minntech, the Company develops, manufactures and markets,
disinfection/reprocessing systems for renal dialysis as well as filtration and
separation and other products for medical and non-medical applications. See
"Acquisition of Minntech Corporation". Minntech and MediVators are sometimes
collectively referred to as the "United States subsidiaries".
The medical and infection control products distributed by Carsen
consist of medical equipment, including flexible and rigid endoscopes, endoscope
disinfection equipment, surgical equipment and related accessories. The
infection control products manufactured and distributed by MediVators consist of
endoscope disinfection equipment and related accessories and supplies. The
scientific products distributed by Carsen consist of precision instruments,
including microscopes and related accessories, microarray scanning systems and
image analysis software and hardware; and industrial technology equipment,
including borescopes, fiberscopes, video image scopes and related accessories.
Carsen distributes the majority of its medical and scientific
products pursuant to an agreement with Olympus America Inc. (the "Olympus
Agreement"), a United States affiliate of Olympus Optical Co. Ltd., a Japanese
corporation ("Olympus
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Optcial"), under which the Company has been granted exclusive distribution
rights for certain Olympus products in Canada. Most of such products are
manufactured by Olympus Optical and its affiliates. Unless the context otherwise
requires, references herein to "Olympus" include Olympus America Inc. and
Olympus Optical, and their affiliates. Carsen, or its predecessor, has been
distributing Olympus products in Canada since 1949.
Carsen also distributes other products under separate distribution
agreements, including additional medical, infection control and scientific
products and accessories.
All of MediVators' endoscope disinfection equipment is distributed
in the United States and Puerto Rico by Olympus pursuant to an agreement (the
"MediVators Agreement") under which Olympus has been granted exclusive
distribution rights in these territories. MediVators' endoscope disinfection
equipment is distributed in other countries by various third parties under
exclusive distribution agreements.
The following table gives information as to the percentage of
consolidated net sales accounted for by each operating segment during the
indicated periods.
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<Caption>
YEAR ENDED JULY 31,
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2001 2000 1999
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% % %
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Medical Products 45.3 41.7 44.9
Infection Control
Products 26.3 26.8 25.0
Scientific Products 16.8 20.0 18.2
Product Service 13.2 13.3 13.9
Elimination of inter-
company sales of
Infection Control
Products (1.6) (1.8) (2.0)
-------- -------- --------
100.0 100.0 100.0
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MEDICAL PRODUCTS AND INFECTION CONTROL PRODUCTS
Medical Products and Infection Control Products have historically
been the Company's major sources of revenue and profitability. These segments
are comprised of the medical and infection control equipment distributed and
serviced by Carsen and infection control equipment manufactured and sold by
MediVators through its worldwide distribution network.
MEDICAL EQUIPMENT. Carsen's principal source of revenue is from the
marketing and distribution to hospitals throughout
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Canada of specialized endoscopes, surgical equipment and related accessories,
the majority of which are manufactured by Olympus. Olympus is the world's
leading manufacturer of flexible endoscopes and related products.
An endoscope is a device comprised of an optical imaging system
incorporated in a flexible or rigid tube that can be inserted inside a patient's
body through a natural opening or through a small incision. Endoscopy, the use
of endoscopes in medical procedures, is a valuable aid in the diagnosis and
treatment of various disorders. Endoscopy enables physicians to study and
digitally capture an image of certain organs and body tissue and, if necessary,
to perform a biopsy (removal of a small piece of tissue for microscopic
analysis).
A flexible video endoscope consists of a high resolution solid state
image sensor contained in a flexible tube, which can be inserted into
irregularly shaped organs of a patient's body, such as the large intestine. The
control body of a flexible endoscope incorporates a steering mechanism and
contains working channels and is connected to an external light source and
processor, which permits a physician to view inside a patient's body. The
working tip of a flexible endoscope contains a lens and a solid state image
sensor and, in most cases, depending on the application, an outlet for air and
water. Most flexible endoscopes also have internal working channels which enable
accessories such as biopsy forceps to be passed to the tip. The solid state
image sensor enables a live image to be transmitted electronically to a monitor,
which image can be viewed by a physician and nurse as a medical procedure is
being performed. The flexible video endoscope and its related accessories
comprise the majority of Carsen's flexible endoscopy sales.
A rigid endoscope is a straight and narrow insertion tube consisting
of a series of relay lenses and light transmitting fibers that connect to an
external light source, which permits a surgeon to view inside a patient's body.
Flexible endoscopes are commonly used for visualization of, and
diagnosing disorders in, the esophagus, stomach, duodenum, and large intestine
(gastroenterology); upper airways and lungs (pneumology); nose and throat (ENT);
bladder, kidney and urinary tract (urology); and uterus (gynecology). Rigid
endoscopes are commonly used for urology, gynecology, orthopedics, ENT and
general surgery, including minimally invasive surgery.
Carsen also distributes various specialized medical instruments and
accessories utilized in both flexible and rigid endoscopy including scissors,
graspers, forceps and other surgical accessories; ambulatory PH and motility
monitoring equipment (which
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is used for diagnosis of various gastrointestinal and respiratory disorders);
urodynamics monitoring equipment (which is used for diagnosis of various urinary
tract disorders); endoscope disinfection equipment; insufflators (which deliver
and monitor gas to expand abdominal and other cavities); video monitors,
recorders and printers; "cold" light supplies (which provide light for endoscopy
procedures); image processors (which process digitized endoscopic images); and
carts, trolleys and cleaners.
All of the endoscopes and certain other medical instruments and
accessories distributed by Carsen are manufactured by Olympus. Other medical
products distributed by Carsen are manufactured by Sandhill Scientific, Inc.
(ambulatory PH and motility monitoring equipment), Life-Tech, Inc. (urodynamics
monitoring equipment), Sony of Canada Ltd. (video monitors, recorders and
printers), The Ruhof Corporation (enzymatic cleaners), MediSafe UK Limited (fine
lumen cleaners) and MediVators (endoscope disinfection equipment).
INFECTION CONTROL EQUIPMENT. MediVators' principal source of revenue
is from the manufacturing and sale of endoscope disinfection equipment and
related accessories and supplies to hospitals and clinics through various
distributors in the United States and internationally.
MediVators' primary products are the DSD-91E and DSD-201, for which
the original design and configuration utilized in both of these products
received FDA 510(k) clearance in March 1994. The DSD-91E and DSD-201 are
microprocessor controlled dual endoscope disinfection systems. Both systems will
disinfect two endoscopes at a time, can be used on a broad variety of endoscopes
and are programmable by the user. MediVators also manufactures less expensive
single and dual endoscope disinfection units.
Although endoscopes generally can be manually cleaned and
disinfected, there are many problems associated with such methods including the
lack of uniform cleaning procedures, personnel exposure to disinfectant fumes
and disinfectant residue levels in the endoscope.
MediVators believes its disinfection equipment offers several
advantages over manual immersion in disinfectants. The disinfectors are designed
to pump disinfectant through all working channels of the endoscope, thus
exposing all areas of the endoscope to the disinfectant, resulting in more
thorough and consistent disinfection. The level of disinfection to be achieved
depends upon many factors, principally contact time, temperature, type and
concentration of the active ingredients of the chemical disinfectant and the
nature of the microbial contamination. This process can also inhibit the build
up of residue in the working
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channels. In addition, the entire disinfecting process can be completed with
minimal participation by the operator, freeing the operator for other tasks,
reducing the exposure of personnel to the chemicals used in the disinfection
process and reducing the risk of infectious diseases. The disinfectors also
reduce the risks associated with inconsistent manual disinfecting.
In March 2001, MediVators introduced Rapicide(TM) high-level
disinfectant and sterilant, which obtained an FDA clearance for a high-level
disinfection claim of five minutes at 35 degrees Celsius. This disinfection
contact time is currently the fastest available for sale in the United States.
The development of Rapicide(TM) adds an additional consumable to the MediVators'
product line.
SCIENTIFIC PRODUCTS
The Scientific Products segment is comprised of the precision
instruments and the industrial technology equipment distributed by Carsen.
PRECISION INSTRUMENTS. Carsen distributes Olympus microscopes
and complementary scientific equipment and accessories. Other instruments
distributed by Carsen include Media Cybernetics, Inc. high resolution image
analysis software and hardware; Narishige U.S.A., Inc. micromanipulators
(which enable a viewer to manipulate objects being viewed under a
microscope); Diagnostic Instruments, Inc., Sony of Canada Ltd. and Optikon
Inc. digital cameras for research microscopy; and Virtek Vision Corp. Chip
Reader(TM)Microarray Scanner Systems , as well as optical accessories such as
high contrast optics, objectives (magnifying lenses) and reticules and video
calipers (both of which measure objects being viewed under a microscope).
The precision instruments distributed by Carsen are sold to
hospitals for cytology, pathology and histology purposes; government
laboratories for research and forensics; and private laboratories, universities
and other educational institutions for research and teaching.
INDUSTRIAL TECHNOLOGY EQUIPMENT. Carsen distributes three types of
industrial technology equipment that are similar to medical endoscopes, but are
designed for the industrial market for use in remote visual inspection ("RVI").
RVI is the application of endoscopic technology for industrial uses. The
products distributed by Carsen, most of which are manufactured by Olympus,
consist of rigid borescopes (devices that are similar to rigid endoscopes),
which use a series of relay lenses to transmit an image through a stainless
steel insertion tube; fiberscopes (devices that are similar to flexible
endoscopes), which use
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fiberoptic image carrying bundles to transmit images through a flexible
insertion tube; and video image scopes, which utilize a small, high resolution
solid state image sensor that enables a picture to be transmitted electronically
to a monitor.
The industrial technology equipment distributed by Carsen is
generally purchased by large industrial companies engaged in the oil and gas,
aerospace, chemical, power generation, mining, forestry, semiconductor and
automotive industries, that require inspections of their machinery or processes
for research and development, measurement, maintenance or quality control.
Carsen also distributes microscopes to industrial laboratories for
bio-technology, geology, pharmacology, metallography, quality control and
manufacturing applications, and develops and distributes various specialized
machine vision hardware and software, including related engineering services and
accessories utilized in automated industrial applications.
PRODUCT SERVICE
Carsen operates service centers at its Markham, Ontario facility, as
well as in Montreal, Quebec and Vancouver, British Columbia that provide
warranty and out-of-warranty service and repairs for medical, infection control
and scientific products, a majority of which are distributed by Carsen. The
products distributed by Carsen bear a product warranty that entitles the
purchaser to warranty repairs and service at a nominal charge or no charge
during the warranty period. Generally Carsen, and not the manufacturer of the
product, is responsible for the cost of warranty repairs. The warranty period
for these products is generally one year. The customer pays Carsen on a time and
materials basis for out-of-warranty service of these products.
MediVators provides a one-year warranty for repairs and service of
its infection control products. Generally, warranty repairs and service related
to the endoscope disinfection equipment are performed by the distributor for
these products. MediVators performs out-of-warranty service of its infection
control products for which the customer pays MediVators on a time and materials
basis.
DISTRIBUTION AGREEMENTS
OLYMPUS/CARSEN AGREEMENT. The majority of Carsen's sales of medical
and scientific products have been made pursuant to the Olympus Agreement, under
which Olympus has granted Carsen the exclusive right to distribute the covered
Olympus products in Canada. All products sold by Carsen pursuant to the
agreement bear the "Olympus" trademark. The Olympus Agreement expires on March
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31, 2004. If Carsen fulfills its obligations under the Olympus Agreement, the
parties will establish new minimum purchase requirements and extend the Olympus
Agreement through March 31, 2006.
During the term of the Olympus Agreement and for one year
thereafter, Carsen has agreed that it will not manufacture, distribute, sell or
represent for sale in Canada any products which are competitive with the Olympus
products covered by the Olympus Agreement.
The Olympus Agreement imposes minimum purchase obligations on Carsen
with respect to each of medical equipment, precision instruments and industrial
technology equipment. The aggregate annual minimum purchase obligations for all
such products are approximately $17.0 million, $18.8 million and $21.0 million
during the contract years ending March 31, 2002, 2003 and 2004, respectively.
The Olympus Agreement generally prohibits both Olympus and Carsen
from hiring any employee of the other party for a period of one year after the
conclusion of the employee's employment with such other party. This prohibition
remains in effect during the term of the Olympus Agreement and the first year
thereafter.
Subject to an allowance of a 10% shortfall from the minimum purchase
requirements in certain situations, Olympus has the option to terminate or
restructure the Olympus Agreement with respect to each product group for which
Carsen has failed to meet the minimum purchase requirements. If Carsen fails to
meet such requirements for both precision instruments and industrial technology
equipment, or for medical equipment, then Olympus has the option to terminate or
restructure the entire Olympus Agreement. Olympus may also terminate the Olympus
Agreement if Carsen breaches its other obligations under the Olympus Agreement.
MEDIVATORS/OLYMPUS AGREEMENT. MediVators has a four-year agreement
with Olympus, which expires on August 1, 2003, under which Olympus is granted
the exclusive right to distribute all MediVators' endoscope disinfection
equipment and related accessories and supplies in the United States and Puerto
Rico. All products sold by Olympus pursuant to this agreement bear both the
"Olympus" and "MediVators" trademarks.
This agreement provides for minimum purchase projections. Failure by
Olympus to achieve the minimum purchase projections in any contract year could
give MediVators the option to terminate the agreement. Net sales to Olympus
accounted for 18.4%, 15.8% and 12.7% of the Company's net sales in fiscal 2001,
2000 and 1999, respectively.
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DISCONTINUED OPERATIONS
On October 6, 2000, Carsen closed a transaction under an Asset
Purchase Agreement (the "Purchase Agreement") with Olympus pursuant to which
Carsen terminated its consumer products business and sold its inventories of
Olympus consumer products to Olympus. The transaction had an effective date of
July 31, 2000.
The purchase price for the inventory was $1,026,000, net of
adjustments related to estimated warranty claims and promotional program
expenses payable to Carsen's customers. During fiscal 2001, Carsen also received
additional consideration from Olympus under the Purchase Agreement, including
amounts related to transition services provided by Carsen subsequent to July 31,
2000. Such consideration included (i) fixed cash amounts aggregating
approximately $615,000 and (ii) $619,000, representing twelve and one-half
percent (12 1/2%) of Olympus' net sales of consumer products in Canada in excess
of $8,000,000 during the period from August 1, 2000 through March 31, 2001. No
additional amounts are due from Olympus.
The discontinuance of the Consumer Products business has been
reflected as a discontinued operation and is presented separately in the
Company's Consolidated Financial Statements.
ACQUISITION OF MINNTECH CORPORATION
GENERAL
On September 7, 2001, the Company completed its acquisition of
Minntech Corporation ("Minntech"), a public company based in Plymouth,
Minnesota, in a merger transaction. Since the merger and the new credit
facilities were completed subsequent to the end of fiscal 2001, the acquisition
had no impact upon the Company's results of operations for any of the periods
presented. The pro forma impact of the acquisition on the Company's financial
position and results of operations are reflected in note 16 to the Company's
Consolidated Financial Statements.
Under the terms of the Agreement and Plan of Merger, each share of
Minntech was converted into the right to receive $10.50, consisting of $6.25 in
cash, and .2216 of a share of Cantel common stock having a value of $4.25. With
respect to the stock portion of the consideration, Cantel issued 1,467,592
shares of common stock in the merger. The total consideration for the
transaction was approximately $70.3 million, excluding transaction costs. The
transaction will be accounted for as a purchase.
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In conjunction with the acquisition, on September 7, 2001 Cantel
entered into new credit facilities to fund the financed portion of the cash
consideration paid in the merger and costs associated with the merger, as well
as to replace the Company's existing working capital credit facilities, as
discussed in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and in note 8 to the Company's
Consolidated Financial Statements.
Minntech is a leader in the development, manufacturing, and
marketing of disinfection/reprocessing systems for renal dialysis as well as
filtration and separation and other products for medical and non-medical
applications. The products are available through Minntech's distribution network
in the United States and in many international markets.
DESCRIPTION OF MINNTECH PRODUCTS
Minntech has two major business segments: Renal Systems Group which
manufactures supplies, concentrates and electronic equipment for hemodialysis
treatment of patients with acute kidney failure or chronic kidney failure
associated with end-stage renal disease ("ESRD"), and Filtration and Separation
Systems Group which manufactures hollow fiber filter devices and ancillary
products for use in cardiosurgery as well as for high-purity fluid and gas
filtration systems in the pharmaceutical, electronics (microelectronic and
semiconductor), medical, and biotechnology industries. In addition, Minntech
manufactures an automated endoscope reprocessing system for Johnson & Johnson's
ASP Division which is marketed under the trade name of Unitrol(TM).
DIALYSIS PRODUCTS
CONCENTRATES
Minntech's renal dialysis treatment products include a line of acid
and bicarbonate concentrates used by kidney dialysis centers to prepare
dialysate, a chemical solution that draws waste products from the patient's
blood through a dialyzer membrane during the hemodialysis treatment. The Company
believes it provides the industry's most complete line of these concentrates in
both liquid and powder form for use in virtually all types of kidney dialysis
machines.
In April 2000, Minntech introduced the Renapak 2(TM), an innovative
dry acid concentrate manufacturing system that produces on-demand hemodialysis
concentrates in less than 30 minutes. This product eliminates substantial
freight costs and storage space required for pre-mixed concentrates. Minntech
manufactures and markets the powdered concentrate for the RenaPak 2(TM), which
features
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a convenient quality control and tracking system that allows users to
"peel-and-stick" package labels directly into their concentrate manufacturing
documentation.
REPROCESSING OF MULTIPLE USE DIALYSERS
In response to government-mandated cost containment measures, in the
late 1970s many United States dialysis centers began cleaning, disinfecting, and
reusing dialyzers (artificial kidneys) instead of discarding them after a single
use (a procedure known as "dialyzer reuse"). Approximately 82% of U.S. dialysis
centers employ multiple-use dialyzers.
Dialyzer reuse is also widely practiced throughout most of Eastern
Europe, the Middle East, Africa and the Asia/Pacific regions. Sales of
reprocessing products have grown significantly in these markets. In order to
further improve support of its Asia/Pacific distributors, Minntech recently
opened an Asia/Pacific representative office in Singapore.
Reuse growth in Western Europe has been limited. However, due to
pending changes to the reimbursement system in several key markets, such as
Germany, the Company believes that this situation should significantly
improve.
Minntech's dialyzer reprocessing products include the Renatron(R)II
Automated Dialyzer Reprocessing System, the Renalog(R)III Data Management System
and, the RenaClear(TM) Dialyzer Cleaning System, together with Renalin(R) Cold
Sterilant and Renalin(R)100, both peracetic acid based sterilants that replace
less environmentally friendly high-level disinfectants such as formaldehyde and
glutaraldehyde. Actril(R) Cold Sterilant, primarily a dialysis machine
disinfectant, and Minncare Disinfectant, utilized for water line disinfection,
are also part of Minntech's liquid chemical germicide product line.
The Renatron(R) reprocessing system, first introduced in 1982,
provides an automated method of rinsing, cleaning, sterilizing, and testing
dialyzers for multiple use. The Renatron(R)II, the most current version of the
product introduced in 1990, includes a bar-code reader, computer, and
Renalog(R)III software system that provides dialysis centers with automated
record keeping and data analysis capabilities. The Company believes its
Renatron(R) system is faster, easier to use, and more efficient than competitive
automated systems. The Company also believes that the Renatron(R) system is one
of the top selling automated dialyzer reprocessing systems in the world.
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In May 2001 Minntech introduced the RenaClear(TM) Dialyzer Cleaning
System, the first dedicated automated dialyzer cleaning system. The system
removes blood and organic debris from difficult-to-clean dialyzers before
reprocessing, a process known as "precleaning". Precleaning is common in
dialysis units because the practice can help extend the useful clinical life of
a dialyzer. When dialyzers are precleaned by hand, many dialysis facilities
remove the dialyzer header caps (the end caps of a dialyzer) to more effectively
rinse out heavy blood debris. However, opening the dialyzer in this fashion can
increase the risk of contamination of the dialyzer components and damage to the
membrane. The RenaClear(TM) system features a high-powered fluid injector that
cleans dialyzer headers (the two internal ends of a dialyzer) without requiring
removal of the header caps. The RenaClear(TM) Dialyzer Cleaning System is
designed for use with peracetic acid-based RenaClear(TM) Disinfectant.
Minntech's Renalin(R) Cold Sterilant is a proprietary peracetic
acid-based formula which effectively cleans, disinfects, and sterilizes
dialyzers without the hazardous fumes and disposal problems related to older
glutaraldehyde and formaldehyde reprocessing solutions. The Company believes
Renalin(R) is the leading dialyzer reprocessing solution in the United States.
Renalin(R)100, a specially packaged formulation of Minntech's cold
sterilant product, was introduced in January 2001. When used with a
Renatron(R)II, converted for use with the Renatron(R)100 Series Conversion Kit,
Renalin(R)100 requires no premixing, which automates the dilution process,
reducing staff set-up time and exposure to vapors. In addition, Renalin(R)100's
packaging reduces required storage space by 66% from traditional Renalin(R).
ELECTRONICS
Minntech's major dialysis electronic products are the Sonalarm(R)
Foam Detector, a device that detects air emboli, or bubbles in blood during
hemodialysis; and the Minipump(TM) Hemodialysis Blood Pump, which circulates
blood during hemodialysis. The Sonalarm(R) and the Minipump(TM) are sold to
end-users and (in component form) to other manufacturers of blood processing
equipment.
FILTRATION AND SEPARATION PRODUCTS
HEMOCONCENTRATORS
A hemoconcentrator is used by a perfusionist (a health care
professional who operates heart-lung bypass equipment) to concentrate red blood
cells and remove excess fluid from the
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bloodstream during open-heart surgery. Because the entire blood volume of the
patient passes through the hemoconcentrator device during an open-heart
procedure, the biocompatibility of the blood-contact components of the device is
critical.
Since 1985 Minntech has manufactured and marketed a line of
hemoconcentrators. The Hemocor HPH(R) hemoconcentrator line, Minntech's current
third-generation product, succeeded the Hemocor Plus(R) second-generation
hemoconcentrator line in February 1994. During 1998, Minntech received 510(k)
market clearance from the United States Food and Drug Administration ("FDA") for
two new hemoconcentrators-the Hemocor HPH(R) 700, an adult hemoconcentrator
(December 1998), and the Hemocor HPH(R) Mini, a hemoconcentrator designed
specifically for pediatric and neonatal patients (May 1998). With the addition
of these two new hemoconcentrators, Minntech now offers a total of five
hemoconcentrator devices to meet the clinical requirements of neonatal through
large adult patients.
The entire line of Hemocor HPH(R) high performance hemoconcentrator
products contains Minntech's proprietary polysulfone fiber. The Hemocor HPH(R)
line also features a unique "no-rinse" design that allows it to be quickly and
efficiently inserted into the bypass circuit at any time during an open-heart
procedure.
HEMOFILTERS
The Renaflo(R) hemofilter, introduced in 1985, is a device that
performs hemofiltration in a slow, continuous blood filtration therapy used to
control fluid overload and acute renal failure in unstable, critically ill
patients that cannot tolerate the rapid filtration rates of conventional
hemodialysis. The hemofilter removes plasma water, waste products, and toxins
from the circulating blood of patients while conserving the cellular and protein
content of the patient's blood. Minntech's hemofilter line features no-rinse,
polysulfone fiber that requires minimal set-up time for healthcare
professionals. The hemofilter is available in five different sizes to meet the
clinical needs of neonatal through adult patients.
In October 1997, Minntech entered into a marketing and distribution
agreement with Baxter Healthcare Corporation to sell Minntech's entire line of
Renaflo(TM) II and Minifilter Plus(TM) hemofilter products in all world markets.
Minntech also entered into a Supply and Distribution Agreement with
Edwards Lifesciences on January 1, 2001, for the non-exclusive worldwide
distribution of Minntech's hemofilter line of products.
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GAS AND WATER FILTRATION
In May 2000 Minntech introduced the FiberFlo(R) Membrane Degassing
System, a high-performance hollow fiber module and customized housing for the
addition or removal of gasses from liquid streams. The FiberFlo(R) Membrane
Degassing System was developed for use in pharmaceutical manufacturing,
laboratory, medical, and bioprocessing applications. The polypropylene hollow
fiber cartridge degas module features easy operation and maintenance, minimizes
energy consumption, and can be used for CO2 and O2 removal, humidification, pH
adjustment, oxygenation, and sparging of gases to solutions.
Minntech received 510(k) clearance from the FDA in March 1999 to
market FiberFlo(R) Hollow Fiber Capsule Filters for medical applications. The
FiberFlo(R) Hollow Fiber Capsule Filter line, which made its market debut in
April 1998, is based on the same high performance hollow fiber technology used
in Minntech's polysulfone FiberFlo(R) HF Cartridge Filter product line. Capsule
filters are used in the cell and tissue engineering industry, bioprocessing,
pharmaceutical manufacturing, food and beverage processing, cosmetic
manufacturing, and electronics industries to filter spores, bacteria, and
pyrogens from aqueous solutions and gases. FiberFlo(R) Capsule Filters are
engineered for point-of-use applications that require very fine filtration.
Their hollow fiber design provides a surface area that is up to six times larger
than traditional pleated capsule filters on the market. The large surface area
provides greater capacity and longer filter life for the customer. FiberFlo(R)
Capsule Filters and Cartridge Filters are available in a variety of styles,
sizes, and configurations to meet a comprehensive range of customer needs and
applications.
FiberFlo(R) Cartridge Filters are used in high-purity industrial
water systems to filter spores, bacteria, and pyrogens from the fluids. They are
also used in medical device reprocessing to help health care facilities meet
reprocessing water quality guidelines outlined by the American Association of
Medical Instrumentation (AAMI). The cartridge filters feature large surface area
and fine filtration advantages that are similar to Minntech's capsule filter
line.
DISINFECTANTS AND OTHER
Minntech's Minncare(R) Cold Sterilant is a liquid sterilant product
that is used to sanitize high-purity water treatment systems. Minncare(R) is
based on the Minntech's proprietary peracetic-acid sterilant technology, and is
engineered to clean and disinfect reverse osmosis (RO) membranes and associated
water distribution systems. Minntech has private label agreements for both
Minncare(R) and Actril(R) sterilants with several other companies
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<Page>
in the infection control industry. Minntech also offers a line of ancillary
filtration products, including cleaning solutions, disinfectant test strips, and
filtration housings and accessories.
MARKETING
Carsen markets its products for each business segment through
separate, dedicated sales forces comprised of its own employees who are
compensated on a salary and commission basis.
MediVators sells its endoscope disinfection equipment and related
accessories, both in the United States and internationally, to distributors
operating under exclusive distribution agreements.
Minntech markets its products in the United States through a direct
sales force and through distributors. Minntech B.V., the Company's Netherlands
subsidiary, is the base for its European operations.
EFFECT OF CURRENCY FLUCTUATIONS AND TRADE BARRIERS
A substantial portion of the Company's products are imported from
the Far East and Western Europe, and the Company's United States subsidiaries
sell a portion of their products outside of the United States. Consequently, the
Company's business could be materially and adversely affected by the imposition
of trade barriers, fluctuations in the rates of exchange of various currencies,
tariff increases and import and export restrictions, affecting the United States
and Canada.
Carsen pays for a substantial portion of its products in United
States dollars, and Carsen's business could be materially and adversely affected
by the imposition of trade barriers, fluctuations in the rates of currency
exchange, tariff increases and import and export restrictions between the United
States and Canada. Additionally, Carsen's financial statements are translated
using the accounting policies described in note 2 to the Consolidated Financial
Statements. Fluctuations in the rates of currency exchange between the United
States and Canada had an adverse impact in fiscal 2001 compared with fiscal
2000, and a positive impact in fiscal 2000 compared with fiscal 1999, upon the
Company's results of operations and stockholders' equity, as described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
COMPETITION
The Company distributes substantially all of its products in highly
competitive markets, which contain many products available from nationally and
internationally recognized
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competitors of the Company. Many of such competitors have greater financial and
technical resources than the Company and are well-established, with reputations
for success in the sale and service of their products. In addition, certain
companies have developed or may be expected to develop technologies or products
that could directly or indirectly compete with the products manufactured and
distributed by the Company. In some areas, the Company competes with
manufacturers who distribute and service their own products and have greater
financial and technical resources than the Company and, as manufacturers, may
have certain other competitive advantages over the Company. The Company believes
that the world-wide reputation for the quality and innovation of its products
among consumers, the Company's reputation for providing quality product service,
particularly with respect to medical and infection control products, the
numerous customer contacts developed during its lengthy service as a distributor
of Olympus products and the distribution arrangement for certain MediVators
infection control products with Olympus, give the Company a competitive
advantage with respect to certain of its products.
Two of Minntech's competitors (Fresenius Medical Care AG and HDC
Medical, Inc.) have introduced peracetic acid-based dialyzer reprocessing
germicides, entering a market previously dominated by Minntech's Renalin(R) Cold
Sterilant product. However, Renalin(R) remains the only reprocessing chemical
that has been validated for use with the Renatron(R) dialyzer reprocessing
system and cleared for marketing as such under section 510(k) of the Federal
Food, Drug and Cosmetic Act. Renalin(R) is also the only dialyzer reprocessing
germicide that carries a sterilization claim in the United States market.
Minntech has informed its Renatron(R) customers that it is unable to guarantee
the integrity, reliability, and chemical interaction of alternative germicides
with the Renatron(R) system. Minntech believes that this validation, coupled
with Minntech's extensive dialyzer reprocessing education, administration, and
technical support services, are strong competitive advantages for their product.
However, the competitive price pressures introduced by these new germicides has
impacted Minntech's current dialyzer reprocessing chemical market share.
There is a growing trend in the dialysis industry whereby
manufacturers of supplies are acquiring chains of dialysis treatment centers.
These manufacturers have a built-in customer base for their products. However,
Minntech views its manufacturer-only status as a competitive market advantage.
Minntech believes that many dialysis treatment providers do not want to purchase
hemodialysis supplies from manufacturers who also provide dialysis service and
are, in effect, their competitors.
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<Page>
GOVERNMENT REGULATION
Many of MediVators' and Minntech's products are subject to
regulation by the FDA, which regulates the testing, manufacturing, packaging,
distribution and marketing of medical devices in the United States, including
certain products manufactured by MediVators. Certain of MediVators' and
Minntech's products may be regulated by other governmental or private agencies,
including the Environmental Protection Agency ("EPA"), Underwriters Lab, Inc.,
and comparable agencies in certain foreign countries. The FDA and other agency
clearances generally are required before MediVators or Minntech can market new
products in the United States or make significant changes to existing products.
The FDA also has the authority to require a recall or modification of products
in the event of a defect.
The Food, Drug and Cosmetic Act of 1938 and Safe Medical Device Act
of 1990, each as amended, also require compliance with specific manufacturing
and quality assurance standards. The regulations also require that each
manufacturer establish a quality assurance program by which the manufacturer
monitors the design and manufacturing process and maintains records which show
compliance with the FDA regulations and the manufacturer's written
specifications and procedures relating to the devices. The FDA inspects medical
device manufacturers for compliance with their Quality Systems Regulations
("QSR's"). Manufacturers that fail to meet the QSR's may be issued reports or
citations for non-compliance. The Company was inspected by the FDA in May 2000
and November 2000 with no serious deficiencies noted.
In addition, many of MediVators' and Minntech's products must meet
the requirements of the European Medical Device Directive ("MDD") for their sale
into the European Union. In June 2001 MediVators, and in October 2000 Minntech,
were inspected and received notification that their products continue to meet
these requirements. This certification allows MediVators and Minntech to affix
the CE mark to its products and to freely distribute such products throughout
the European Union. Federal, state and foreign regulations regarding the
manufacture and sale of MediVators' and Minntech's products are subject to
change. Neither MediVators nor Minntech can predict what impact, if any, such
changes might have on their business.
Carsen's medical and infection control products are subject to
regulation by Health Canada - Therapeutics Products Programme ("TPP"), which
regulates the distribution and marketing of medical devices in Canada. Certain
of Carsen's products may be regulated by other governmental or private agencies,
including Canadian Standards Agency ("CSA"). TPP and other agency clearances
generally are required before Carsen can market new medical
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products in Canada. TPP also has the authority to require a recall or
modification in the event of defect. In order to market its medical products in
Canada, Carsen is required to hold a Medical Device Establishment License, as
well as certain medical device licenses by product, as provided by TPP. In
addition, Carsen has applied to TPP for a drug identification number which is
required before Carsen can market and distribute the MediVators Rapicide(TM)
product in Canada.
PATENTS AND PROPRIETARY RIGHTS
MediVators' current disinfector products, including the DSD-91E,
DSD-201, SSD and the MV Series tabletop systems, utilize certain know-how
developed within the Company but have no patent protection. MediVators
holds rights under three trademark registrations worldwide and had three
trademark applications pending as of October 5, 2001.
Minntech holds rights under 98 patents worldwide covering its
products or components thereof. At October 5, 2001, Minntech also had a total of
66 pending patent applications in the United States and in foreign countries.
Minntech also holds rights under 257 trademark registrations worldwide and had
33 trademark applications pending as of October 5, 2001.
Minntech believes that patent protection is a significant factor in
maintaining its market position, but the rapid changes of technology in
reprocessing, hollow fiber membranes, dialysis, liquid and dry chemical
sterilants and other areas in which Minntech competes may limit the value of
Minntech's existing patents.
While patents have a presumption of validity under the law, the
issuance of a patent is not conclusive as to its validity or the enforceable
scope of its claims. Accordingly, there can be no assurance that Minntech's
existing patents will afford protection against competitors with similar
inventions, nor can there be any assurance that Minntech's patents will not be
infringed. Competitors may also obtain patents that Minntech would need to
license or design around. These factors also tend to limit the value of
Minntech's existing patents. Consequently, in certain instances, Minntech may
consider trade secret protection to be a more effective method of maintaining
its proprietary positions.
BACKLOG
On October 5, 2001, the Company's consolidated backlog, exclusive of
Minntech, was approximately $1,555,000, compared with approximately $1,119,000
on October 6, 2000. Minntech generally fills orders within five working days of
receipt and therefore had
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a backlog of $218,000 on October 5, 2001.
EMPLOYEES
As of October 5, 2001, the Company (exclusive of Minntech) employed
179 persons. Of the Company's employees, 116 are located in Canada and 63 are
located in the United States; 16 are executives and/or managers, 51 are engaged
in sales, 19 are engaged in customer service, 29 are engaged in product service,
26 are engaged in manufacturing, shipping and warehouse functions, 32 perform
various administrative functions and 6 are engaged in research and development.
As of October 5, 2001, Minntech employed 362 full-time persons,
including 238 full-time persons in manufacturing operations.
None of the Company's employees are represented by labor unions. The
Company considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company leases approximately 3,700 square feet of space located
in Little Falls, New Jersey which is used for the Company's executive offices.
The lease expires in November 2005, subject to the Company's option to renew for
five years. The lease provides for monthly base rent of approximately $9,000.
Carsen leases a building containing approximately 41,000 square feet
located in Markham, Ontario which is used for warehouse, service and office
space. The lease expires in July 2005, subject to the Company's option to renew
for five years. The lease provides for monthly base rent of approximately
$12,000. Additionally, Carsen leases space for two outside service facilities in
Montreal, Quebec and Vancouver, British Columbia containing approximately 850
square feet and 750 square feet, respectively.
MediVators leases approximately 27,500 square feet of space located
in Eagan, Minnesota which is used for manufacturing, warehouse and office space.
The lease expires in September 2006, subject to MediVators' option to terminate
the lease in September 2002, but only if MediVators notifies the landlord by May
2002 of its intention to exercise the early termination. The lease provides for
monthly base rent of approximately $14,000.
Minntech owns three facilities located on adjacent sites, comprising
a total of 16.5 acres of land in Plymouth, a suburb of Minneapolis, Minnesota.
One facility is a 65,000 square-foot
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building, occupied by Minntech since 1977, which is used for manufacturing and
warehousing operations. The second facility is a 110,000 square-foot building,
representing Minntech's headquarters, including executive, administrative and
sales staffs, and research operations. This building is also used for
manufacturing and warehousing. The third facility is a 43,100 square-foot
building adjacent to Minntech's headquarters and was purchased in February 2001.
This building is used primarily for manufacturing and warehouse operations.
Minntech also owns a 2.3 acre parcel of undeveloped land adjacent to its
headquarters.
Minntech leases six additional properties, including three
facilities for Minntech's Dialyser Reprocessing Centers. These Centers include a
1,060 square-foot office space in Edgewood, Florida; a 3,469 square-foot
facility in Boston, Massachusetts; and a 3,216 square-foot space in Atlanta,
Georgia. The Company is currently in the process of adding an additional 1,270
square feet to the Edgewood, Florida facility.
Minntech leases three facilities which serve as warehouse and
distribution hubs for the dialysis business, including a 31,000 square-foot
facility in Middletown, Pennsylvania, a 30,000 square-foot building in Columbia,
South Carolina and a 30,132 square-foot building in Jackson, Mississippi.
Additionally, Minntech owns a 21,000 square-foot building on a 4.4
acre site in Heerlen, The Netherlands. Occupancy commenced in April 1995. The
facility serves as Minntech's European headquarters and is being used as a sales
office, manufacturing facility and warehouse.
The Company believes that its facilities are adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ National Market
under the symbol "CNTL." The following table sets forth, for the periods
indicated, the high and low closing prices for the Common Stock as reported by
NASDAQ. High and low closing prices for the year ended July 31, 2000 have been
converted to decimals for comparative purposes.
<Table>
<Caption>
HIGH LOW
YEAR ENDED JULY 31, 2001
First Quarter $10.62 $ 7.44
Second Quarter 12.00 7.50
Third Quarter 19.94 11.62
Fourth Quarter 30.00 15.40
YEAR ENDED JULY 31, 2000
First Quarter $ 5.62 $ 4.75
Second Quarter 5.37 4.37
Third Quarter 6.75 5.06
Fourth Quarter 7.81 5.33
</Table>
The Company has not paid any cash dividends on the Common Stock and
a change in this policy is not presently under consideration by the Board of
Directors.
On October 5, 2001, the closing price of the Company's Common Stock
was $20.19 and the Company had 275 record holders of Common Stock. A number of
such holders of record are brokers and other institutions holding shares of
Common Stock in "street name" for more than one beneficial owner.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The financial data in the following table is qualified in its
entirety by, and should be read in conjunction with, the financial statements
and notes thereto and other information incorporated by reference in this Form
10-K. The information below excludes Minntech for all periods presented.
CONSOLIDATED STATEMENTS OF INCOME DATA (1):
(Amounts in thousands, except per share data)
<Table>
<Caption>
YEAR ENDED JULY 31,
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net sales................ $48,995 $41,297 $37,820 $30,389 $29,681
Cost of sales (2)........ 29,468 25,117 24,162 18,999 19,295
Gross profit............. 19,527 16,180 13,658 11,390 10,386
Income from continuing...
operations before .....
interest (income) expense
and income taxes (3).... 6,965 5,141 3,867 3,104 2,683
Interest (income) expense. (42) 225 271 179 143
Income from continuing...
operations before.....
income taxes.......... 7,007 4,916 3,596 2,925 2,540
Income taxes ............ 2,851 2,085 1,936 1,287 1,438
Income from continuing
operations............ 4,156 2,831 1,660 1,638 1,102
Income (loss) from.......
discontinued operations 225 (147) (291) 57 (6)
-------- -------- -------- -------- --------
Net income............... $ 4,381 $ 2,684 $ 1,369 $ 1,695 $ 1,096
======== ======== ======== ======== ========
Earnings per common share:
Basic: (4).............
Continuing operations $ .93 $ .64 $ .38 $ .39 $ .27
Discontinued operations .05 (.03) (.07) .01 -
-------- -------- -------- -------- --------
Net income........... $ .98 $ .61 $ .31 $ .40 $ .27
======== ======== ======== ======== ========
Diluted: (4)...........
Continuing operations $ .85 $ .63 $ .36 $ .37 $ .25
Discontinued operations .04 (.03) (.06) .01 -
-------- -------- -------- -------- --------
Net income........... $ .89 $ .60 $ .30 $ .38 $ .25
======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares:
Basic.................. 4,472 4,412 4,394 4,240 4,073
Diluted................ 4,910 4,479 4,591 4,484 4,354
</Table>
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CONSOLIDATED BALANCE SHEETS DATA:
(Amounts in thousands, except per share data)
<Table>
<Caption> JULY 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Total assets ......... $31,929 $24,955 $23,726 $21,475 $18,082
Current assets........ 26,494 21,701 20,462 18,378 16,709
Current liabilities... 9,825 7,570 7,521 5,191 5,383
Working capital....... 16,669 14,131 12,941 13,187 11,326
Long-term debt........ - 125 1,567 3,004 1,594
Stockholders' equity.. 22,027 17,163 14,545 13,226 11,017
Book value per
outstanding common
share............... $ 4.83 $ 3.87 $ 3.28 $ 3.03 $ 2.64
Common shares
outstanding......... 4,559 4,438 4,441 4,367 4,166
-----------------------------
</Table>
(1) Consolidated statements of income data for fiscal 1997 through 2000 have
been reclassified from amounts previously reported to reflect shipping
expenses in cost of sales and related amounts billed to customers in net
sales. Such reclassifications are consistent with the fiscal 2001
presentation and had no impact upon earnings.
(2) Includes for fiscal 1999 an inventory write-off of $452,000 associated with
the discontinuance of MediVators' medical sharps disposal business.
(3) Includes for fiscal 1999 costs of $467,000 associated with the
discontinuance of MediVators' medical sharps disposal business, as well as
costs of $74,000 associated with the termination of a proposed acquisition.
(4) In fiscal 1999, the charge of $467,000 associated with the discontinuance
of MediVators' medical sharps disposal business reduced basic and diluted
earnings per share from continuing operations by $0.10. Without this
charge, basic and diluted earnings per share from continuing operations for
fiscal 1999, as adjusted, would have been $0.48 and $0.46, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
The results of continuing operations reflect primarily the results
of Carsen and MediVators.
Reference is made to (i) the discontinuance of the Company's
Consumer Products business, as more fully described in Item 1, "Business", and
in note 7 to the Consolidated Financial Statements, (ii) the impact on the
Company's results of operations of a weaker Canadian dollar against the United
States dollar during fiscal 2001 compared with fiscal 2000 (decrease in value of
approximately 3% based upon average exchange rates), and a stronger Canadian
dollar against the United States dollar during fiscal 2000 compared with fiscal
1999 (increase in value of approximately 3%) and (iii) the Company's acquisition
of Minntech in September 2001, as more fully described in Item 1, "Business",
and in notes 8 and 16 to the Consolidated Financial Statements. Since the
acquisition occurred subsequent to the end of fiscal 2001, the acquisition had
no impact upon the Company's results of operations for any of the years
presented.
The following table gives information as to the net sales and the
percentage to the total net sales accounted for by each operating segment of the
Company.
<Table>
<Caption>
YEAR ENDED JULY 31
-------------------------------------------------------
2001 2000 1999
-------------------------------------------------------
(Dollar amounts in thousands)
$ % $ % $ %
-------- ------- -------- ------- -------- -------
Medical Products $22,209 45.3 $17,216 41.7 $16,994 44.9
Infection Control
Products 12,868 26.3 11,079 26.8 9,433 25.0
Scientific Products 8,214 16.8 8,254 20.0 6,889 18.2
Product Service 6,491 13.2 5,508 13.3 5,271 13.9
Elimination of inter-
company sales of
Infection Control
Products (787) (1.6) (760) (1.8) (767) (2.0)
-------- -------- -------- ------- -------- -------
$48,995 100.0 $41,297 100.0 $37,820 100.0
======== ======== ======== ======= ======== =======
</Table>
FISCAL 2001 COMPARED WITH FISCAL 2000
Net sales increased by $7,698,000, or 18.6%, to $48,995,000 in
fiscal 2001, from $41,297,000 in fiscal 2000. Net sales were adversely impacted
in fiscal 2001 compared with fiscal 2000 by approximately $1,381,000 due to the
translation of
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Carsen's net sales using a weaker Canadian dollar against the United States
dollar.
This increase in sales was attributable to the increased sales of
the Company's Medical Products, Infection Control Products and Product Service
business segments. For fiscal 2001, the increased sales of Medical Products were
due primarily to an increase in demand, a portion of which was attributable to
the introduction of new flexible endoscopy products, and selling price
increases. The increased sales of Infection Control Products were primarily
attributable to an increase in demand for infection control products in the
United States. The increased sales of Product Service were primarily
attributable to an increase in demand and selling price increases.
Gross profit increased by $3,347,000, or 20.7%, to $19,527,000 in
fiscal 2001, from $16,180,000 in fiscal 2000. Gross profit was adversely
impacted in fiscal 2001 compared with fiscal 2000 by approximately $509,000 due
to the translation of Carsen's gross profit using a weaker Canadian dollar
against the United States dollar.
Gross profit as a percentage of sales increased to 39.9% in fiscal
2001, from 39.2% in fiscal 2000. The higher gross profit percentage for fiscal
2001 was primarily attributable to a buy-in of Medical Products inventories
during fiscal 2000 prior to receiving a supplier price increase, which
inventories were sold during fiscal 2001; selling price increases in Medical
Products and Product Service; and favorable sales mix associated with Product
Service and Scientific Products. Partially offsetting these increases in gross
profit percentage was the adverse impact of a weaker Canadian dollar relative to
the United States dollar as mentioned above, since the Company's Canadian
subsidiary purchases substantially all of its products in United States dollars
and sells its products in Canadian dollars.
Warehouse expenses increased by $59,000 to $511,000 for fiscal 2001,
from $452,000 for fiscal 2000. The increase was attributable to higher
depreciation and rent costs.
Selling expenses as a percentage of net sales were 11.6% for fiscal
2001, compared with 12.6% for fiscal 2000. The decrease in selling expenses as a
percentage of net sales was primarily attributable to the effect of the
increased sales against the fixed portion of selling expenses.
General and administrative expenses increased by $867,000 to
$5,410,000 for fiscal 2001, from $4,543,000 for fiscal 2000. The increase
reflects additional personnel and increases in incentive compensation, profit
sharing contributions, rent and
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amortization of computer software.
Research and development expenses increased by $113,000 to $949,000
for fiscal 2001, from $836,000 for fiscal 2000. This increase was primarily due
to additional personnel required for new products including the DSD-201 and
Rapicide(TM).
Interest income was $42,000 in fiscal 2001, compared with interest
expense of $225,000 in fiscal 2000. This change in interest was attributable to
interest income earned on cash and cash equivalents during fiscal 2001, compared
with interest expense on outstanding borrowings during fiscal 2000.
Income from continuing operations before income taxes increased by
$2,091,000, or 42.5%, to $7,007,000 for fiscal 2001, from $4,916,000 for fiscal
2000.
Income taxes consist primarily of taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 41.6% and
43.9% for fiscal 2001 and 2000, respectively. For fiscal 2001 and 2000, the
consolidated effective tax rate is lower than the Canadian effective tax rate
due to the fact that income generated by the United States operations is
substantially offset by tax benefits resulting from the utilization of net
operating loss carryforwards for Federal income tax purposes.
FISCAL 2000 COMPARED WITH FISCAL 1999
Net sales increased by $3,477,000, or 9.2%, to $41,297,000 in fiscal
2000, from $37,820,000 in fiscal 1999. Net sales were positively impacted in
fiscal 2000 compared with fiscal 1999 by approximately $801,000 due to the
translation of Carsen's net sales using a stronger Canadian dollar against the
United States dollar.
This increase in sales was attributable to the increased sales of
all business segments, with the largest increases attributable to Infection
Control Products and Scientific Products. For fiscal 2000, the increased sales
of Infection Control Products were primarily attributable to an increase in
demand for infection control products in the United States, and to a lesser
extent, continued expansion and improvement of the international distribution of
MediVators' infection control products and selling price increases. The
increased sales of Scientific Products were primarily attributable to an
increase in demand for microscopes and related imaging equipment.
Gross profit increased by $2,522,000, or 18.5%, to $16,180,000 in
fiscal 2000, from $13,658,000 in fiscal 1999. Gross
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profit was positively impacted in fiscal 2000 compared with fiscal 1999 by
approximately $294,000 due to the translation of Carsen's gross profit using a
stronger Canadian dollar against the United States dollar.
Gross profit as a percentage of sales increased to 39.2% in fiscal
2000, from 36.1% in fiscal 1999. The higher gross profit percentage for fiscal
2000 was primarily attributable to the positive impact of a stronger Canadian
dollar relative to the United States dollar, since the Company's Canadian
subsidiary purchases substantially all of its products in United States dollars
and sells its products in Canadian dollars; favorable sales mix and
manufacturing efficiencies associated with Infection Control Products; favorable
sales mix associated with Product Service; and the write-off in fiscal 1999 of
inventory in the amount of $452,000 associated with the discontinuance of
MediVators' medical sharps disposal business.
Warehouse expenses increased by $84,000 to $452,000 for fiscal 2000,
from $368,000 for fiscal 1999. The increase was attributable to increases in
rent and related costs.
Selling expenses as a percentage of net sales were 12.6% for fiscal
2000, compared with 12.3% for fiscal 1999. The increase was attributable to an
increase in personnel to support the increase in volume at the Company's
Canadian subsidiary.
General and administrative expenses increased by $646,000 to
$4,543,000 for fiscal 2000, from $3,897,000 for fiscal 1999. The increase was
primarily attributable to personnel costs, including incentive compensation, and
professional fees.
Research and development expenses increased by $47,000 to $836,000
for fiscal 2000, from $789,000 for fiscal 1999. This increase was due to an
increase in personnel costs and continuing engineering on existing products.
The Company incurred costs of $74,000 in fiscal 1999 related to
professional fees associated with the termination of a proposed acquisition.
Interest expense decreased to $225,000 in fiscal 2000, from $271,000
in fiscal 1999. This decrease was attributable to a decrease in average
outstanding borrowings during fiscal 2000 under the Company's revolving credit
facilities, partially offset by an increase in average borrowing rates.
Income from continuing operations before income taxes increased by
$1,320,000, or 36.7%, to $4,916,000 for fiscal 2000,
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from $3,596,000 for fiscal 1999. Without the write-off associated with the
discontinuance of MediVators' medical sharps disposal business, income from
continuing operations before income taxes would have increased by $853,000, or
21.0%, for fiscal 2000.
Income taxes consist primarily of taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 43.9% and
46.1% for fiscal 2000 and 1999, respectively. For fiscal 2000, the consolidated
effective tax rate is lower than the Canadian effective tax rate due to the fact
that income generated by the United States operations is substantially offset by
tax benefits resulting from the utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2001, the Company's working capital was $16,669,000,
compared with $14,131,000 at July 31, 2000. This increase primarily reflects
increases in cash and cash equivalents and accounts receivable, partially offset
by a decrease in net assets related to the discontinued business.
Net cash provided by operating activities was $1,342,000, $4,668,000
and $1,916,000 for fiscal 2001, 2000 and 1999, respectively. In fiscal 2001, net
cash provided by operating activities was primarily due to income from
continuing operations after adjusting for depreciation and amortization, and an
increase in income taxes payable, partially offset by increases in accounts
receivable and inventories. In fiscal 2000, net cash provided by operating
activities was primarily due to income from continuing operations after
adjusting for depreciation and amortization and deferred income taxes, and
decreases in inventories and accounts receivable. In fiscal 1999, net cash
provided by operating activities was primarily due to income from continuing
operations after adjusting for depreciation and amortization and the write-off
associated with the medical sharps disposal inventories, and an increase in
accounts payable and accrued expenses, partially offset by an increase in
accounts receivable.
Net cash provided by investing activities was $1,135,000 in fiscal
2001, compared with net cash used in investing activities of $1,392,000 and
$375,000 in fiscal 2000 and 1999, respectively. In fiscal 2001, net cash
provided by investing activities was primarily due to proceeds from the transfer
of the discontinued operations and a decrease in the net assets related to the
discontinued operations, partially offset by purchases of available-for-sale
securities, professional fees related to the Minntech acquisition (such fees are
included within other, net) and capital expenditures. In fiscal 2000, net cash
used in investing activities was primarily due to an increase in the net assets
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related to the discontinued operations and capital expenditures. In fiscal 1999,
net cash used in investing activities was primarily due to capital expenditures.
Net cash provided by financing activities was $404,000 in fiscal
2001, compared with net cash used in financing activities of $1,641,000 and
$1,500,000 in fiscal 2000 and 1999, respectively. These changes were principally
due to the fluctuations in outstanding borrowings under the Company's revolving
credit facilities, proceeds from the exercise of stock options and, in fiscal
2000 and 1999, purchases of Treasury Stock.
At July 31, 2001, the Company had a credit facility which provided
for (i) a $2,500,000 revolving credit facility for Cantel and MediVators and
(ii) a $5,000,000 (United States dollars) revolving credit facility for Carsen,
both of which revolving credit facilities were to expire on February 22, 2004,
and (iii) a $12,500,000 acquisition facility available to Cantel and MediVators
for permitted acquisitions in the United States through February 22, 2003. At
July 31, 2001, the Company had no outstanding borrowings under this credit
facility, and at July 31, 2000 the Company had outstanding borrowings of
$125,000 under a prior credit facility.
In conjunction with the acquisition of Minntech on September 7,
2001, the Company entered into new credit facilities to fund the financed
portion of the cash consideration paid in the merger and costs associated with
the merger, as well as to replace the Company's existing working capital credit
facilities. The new credit facilities include (i) a $25,000,000 senior secured
amortizing term loan facility from a consortium of banks (collectively the "U.S.
Lenders") (the "Term Loan Facility") used by Cantel to finance a portion of the
Minntech acquisition, (ii) a $17,500,000 senior secured revolving credit
facility from the U.S. Lenders (the "U.S. Revolving Credit Facility") used by
Cantel to finance a portion of the Minntech acquisition as well as for future
working capital requirements for the U.S. businesses of Cantel, including
Minntech and MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United
States dollars) senior secured revolving credit facility for Carsen (the
"Canadian Borrower") with a Canadian bank (the "Canadian Revolving Credit
Facility") used for Carsen's future working capital requirements. Each of the
Term Loan Facility, the U.S. Revolving Credit Facility and the Canadian
Revolving Credit Facility (collectively the "Credit Facilities") expire on
September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates
ranging from .75% to 2.00% above the lender's base rate, or at rates ranging
from 2.00% to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending
upon the Company's consolidated
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ratio of debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"). The base rates associated with the U.S. Lenders and the Canadian
Lender were 5.00% and 5.25%, respectively, at October 5, 2001. In order to
protect its interest rate exposure, the Company has entered into a three-year
interest rate cap agreement covering $12,500,000 of borrowings under the Term
Loan Facility, which caps LIBOR on this portion of outstanding borrowings at
4.50%. The Credit Facilities also provide for fees on the unused portion of such
facilities at rates ranging from .30% to .50%, depending upon the Company's
consolidated ratio of debt to EBITDA.
The Term Loan Facility and the U.S. Revolving Credit Facility
provide for available borrowings based upon percentages of the U.S. Borrowers'
eligible accounts receivable and inventories; require the U.S. Borrowers to meet
certain financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
are guaranteed by the U.S. Borrowers. The Canadian Revolving Credit Facility
provides for available borrowings based upon percentages of the Canadian
Borrower's eligible accounts receivable and inventories; requires the Canadian
Borrower to meet certain financial covenants; and is secured by substantially
all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the
Term Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility. Such
borrowings are at interest rates of 3.25% above LIBOR.
During fiscal 2001 compared with fiscal 2000, the average value of
the Canadian dollar decreased by approximately 3% relative to the value of the
United States dollar. A change in the value of the Canadian dollar against the
United States dollar affects the Company's results of operations because the
Company's Canadian subsidiary purchases substantially all of its products in
United States dollars and sells its products in Canadian dollars. Such currency
fluctuations also result in a corresponding change in the United States dollar
value of the Company's assets that are denominated in Canadian dollars.
Under the Canadian Revolving Credit Facility, Carsen has a
$20,000,000 (United States dollars) foreign currency hedging facility which is
available to hedge against the impact of such currency fluctuations on purchases
of inventories. At October 5, 2001, Carsen had commitments for foreign currency
forward contracts (all of which are outstanding under the previous Carsen credit
facility) aggregating $750,000 (United States dollars), to hedge against
possible declines in the value of the Canadian dollar which
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would otherwise result in higher inventory costs. Such contracts represent a
portion of the Canadian subsidiary's projected purchases of inventories during
October 2001. The weighted average exchange rate of the forward contracts open
at October 5, 2001 was $1.5263 Canadian dollar per United States dollar, or
$.6552 United States dollar per Canadian dollar. The exchange rate published by
the Wall Street Journal on October 5, 2001 was $1.5693 Canadian dollar per
United States dollar, or $.6372 United States dollar per Canadian dollar.
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS No. 133"). In accordance with SFAS No. 133, these
foreign currency forward contracts are designated as hedges, and recognition of
gains and losses is deferred within other comprehensive income until settlement
of the underlying commitments. Realized gains and losses are recorded within
cost of sales upon settlement. The adoption of SFAS No. 133 did not have a
material impact on operations; however, it resulted in a $107,000 gain being
recorded in other comprehensive income. During fiscal 2001, this entire gain of
$107,000 was included in income. Additionally, the fair value of the Company's
derivatives was $31,000 at July 31, 2001, which resulted in the recording of an
unrealized gain of $31,000 during fiscal 2001.
For purposes of translating the balance sheet, at July 31, 2001
compared with July 31, 2000, the value of the Canadian dollar decreased by
approximately 3% compared to the value of the United States dollar. As a result,
at July 31, 2001, the negative cumulative foreign currency translation
adjustment was increased by $409,000 to $2,506,000, compared to $2,097,000 at
July 31, 2000, thereby further decreasing stockholders' equity.
The Company believes that its current cash position, anticipated
cash flows from continuing operations and the funds available under the new
revolving credit facilities will be sufficient to satisfy the Company's cash
operating requirements for the foreseeable future based upon the current level
of operations, including the operations of Minntech. At October 5, 2001,
approximately $8,311,000 was available under the new revolving credit
facilities.
As of July 31, 2001, the Company had net operating loss
carryforwards for financial statement and domestic tax reporting purposes
("NOLs") of approximately $14,065,000 which will expire through July 31, 2021.
Of this amount, approximately $640,000 represents NOLs accumulated by MediVators
prior to the MediVators merger, which may only be used against the future
earnings of MediVators and are subject to annual limitations due to an ownership
change. The valuation allowance related to the Company's
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NOLs will be reversed in connection with the purchase price allocation for the
Minntech acquisition, based upon an assessment of the combined companies
expected future results of operations.
In addition, the Company and its Canadian subsidiary cannot file
consolidated tax returns, for Canadian or United States income tax purposes.
Therefore, the Company's U.S. NOLs cannot be utilized to reduce Canadian federal
or provincial income taxes payable by the Canadian subsidiary on its taxable
income. This has resulted in the payment of income taxes by the Company in
Canada, notwithstanding NOL's utilized, or net losses sustained, by the Company
in the United States.
Inflation has not significantly impacted the Company's operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. All forward-looking
statements involve risks and uncertainties, including, without limitation,
acceptance and demand of new products, the impact of competitive products and
pricing, the Company's ability to successfully integrate and operate acquired
and merged businesses and the risks associated with such businesses, and the
risks detailed in the Company's filings and reports with the Securities and
Exchange Commission. Such statements are only predictions, and actual events or
results may differ materially from those projected.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK.
Foreign currency market risk: A substantial portion of the Company's
products are imported from the Far East and Western Europe, and the Company's
United States subsidiaries sell a portion of their products outside of the
United States. Consequently, the Company's business could be materially and
adversely affected by the imposition of trade barriers, fluctuations in the
rates of exchange of various currencies, tariff increases and import and export
restrictions, affecting the United States and Canada.
Carsen pays for a substantial portion of its products in United
States dollars, and Carsen's business could be materially and adversely affected
by the imposition of trade barriers, fluctuations in the rates of currency
exchange, tariff increases and import and export restrictions between the United
States and Canada. Additionally, Carsen's financial statements are translated
using the accounting policies described in Note 2 to the Consolidated Financial
Statements. Fluctuations in the rates of currency exchange between the United
States and Canada had an adverse impact in fiscal 2001 compared with fiscal
2000, and a
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positive impact in fiscal 2000 compared with fiscal 1999, upon the Company's
results of operations and stockholders' equity, as described in Management
Discussion and Analysis of Financial Condition and Results of Operations.
Interest rate market risk: The Company has two new credit facilities
for which the interest rate on outstanding borrowings is variable. Therefore,
interest expense is principally affected by the general level of interest rates
in the United States and Canada. In order to protect its interest rate exposure,
the Company has entered into a three-year interest rate cap covering $12,500,000
of borrowings under the Term Loan Facility, which caps LIBOR on this portion of
outstanding borrowings at 4.50%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements, which is Item 14(a),
and the Consolidated Financial Statements and schedule attached to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its accountants on
accounting or financial disclosure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The current directors and executive officers of the Company are as
follows:
<Table>
<Caption>
Name Age Position
---- --- --------
Charles M. Diker 66 Chairman of the Board and
Director
Alan J. Hirschfield 66 Vice Chairman of the Board,
Director and Chairman of the
Compensation Committee
Robert L. Barbanell 71 Director, Chairman of the Audit
Committee and a member of the
Compensation Committee
Joseph M. Cohen 64 Director and a member of
the Compensation Committee
Darwin C. Dornbush, Esq. 71 Secretary and Director
Morris W. Offit 64 Director and a member of the
Audit Committee
James P. Reilly 61 President, Chief Executive Officer
and Director
John W. Rowe, M.D. 57 Director
Fred L. Shapiro, M.D. 67 Director
Bruce Slovin 65 Director and a member of the
Audit Committee
Joseph L. Harris 54 Senior Vice President -
Corporate Development
Roy K. Malkin 55 President and Chief Executive
Officer of Minntech and
MediVators
Craig A. Sheldon 39 Vice President and Chief
Financial Officer
William J. Vella 45 President and Chief Executive Officer
of Carsen
</Table>
Mr. Diker has served as Chairman of the Board of the Company since
April 1986. He is currently a private investor. Mr. Diker is also a director of
International Specialty Products (NYSE), a specialty chemical company, Chyron
Corporation (OTC), a supplier of graphics for the television industry, and AMF
Bowling, Inc. (NYSE), an owner and operator of bowling centers and a
manufacturer of bowling equipment.
Mr. Hirschfield has served as Vice Chairman of the Board of the
Company since January 1988. He is currently a private investor and consultant.
From July 1992 to February 2000, Mr. Hirschfield served as Co-Chairman and
Co-Chief Executive Officer of
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Data Broadcasting Corp. (NASDAQ), a communication services and technology
company. Mr. Hirschfield is also a director of Interactive Data Corp. (formerly
Data Broadcasting Corp.) as well as Chyron Corporation (OTC), a supplier of
graphics for the television industry and JNET, Inc. (NYSE), an internet venture
investor and incubator company.
Mr. Barbanell has served as President of Robert L. Barbanell
Associates, Inc., a financial consulting company, since July 1994. Mr. Barbanell
is also Chairman of the Board and a director of Pride International, Inc.
(NYSE), an oil drilling contractor, and a director of Blue Dolphin Energy
Company (NASDAQ), an oil and gas company.
Mr. Cohen has served as Chairman of JM Cohen & Co., L.L.C., a family
investment group, since February 2000. From July 1998 until February 2000, Mr.
Cohen was Chairman of SG Cowen Securities Corp., a securities firm. From June
1967 until July 1998, Mr. Cohen was Managing Partner and Chairman of Cowen &
Company, a research and investment banking firm.
Mr. Dornbush has served as Secretary of the Company since July 1990.
He has been a partner in the law firm of Dornbush Mensch Mandelstam & Schaeffer,
LLP, which has been general counsel to the Company for more than the past five
years. Mr. Dornbush is also a director of Benihana, Inc. (NASDAQ), a company
which operates Japanese restaurants.
Mr. Offit has served as Chief Executive Officer of OFFITBANK (a
Wachovia company), a limited purpose trust company chartered by the New York
State Banking Department, since July 1990. Mr. Offit is a Trustee of Johns
Hopkins University where he served as Chairman of the Board of Trustees from
1990 through 1996.
Mr. Reilly has served as President and Chief Executive Officer of
the Company since June 1989. Mr. Reilly is a certified public accountant.
Dr. Rowe has served as Chairman, President and CEO of Aetna US
Healthcare since September 2000. From July 1998 until September 2000, Dr. Rowe
was President and Chief Executive Officer of Mount Sinai NYU Health. From July
1988 until July 1998, Dr. Rowe was President of the Mount Sinai Hospital. From
July 1988 until July 1999, Dr. Rowe was President of the Mount Sinai School of
Medicine. He also serves as a Professor of Medicine and of Geriatrics at the
Mount Sinai School of Medicine.
Dr. Shapiro has served as a consultant to Hennepin Faculty
Associates, a non-profit organization involved in medical education, research
and patient care, from July 1995 to June 1999,
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President of Hennepin Faculty Associates from January 1984 to June 1995, and
Medical Director of the Regional Kidney Disease Program from July 1966 to
January 1984. He has also been a Professor of Medicine at the Hennepin County
Medical Center and the University of Minnesota from July 1976 to the present.
Prior to the merger with Cantel, Dr. Shapiro served as a director of Minntech
since 1982.
Mr. Slovin served as President and a director of MacAndrews & Forbes
Holdings Inc. and Revlon Group, Inc., privately held industrial holding
companies, from 1985 until December 2000. Mr. Slovin is a director M&F Worldwide
Corp. (NYSE), a manufacturer of licorice extract and flavorings, and a
manufacturer and supplier of movie cameras and similar technologies for the
feature film industry.
Mr. Harris has served as Senior Vice President - Corporate
Development since November 2000. From June 1996 until October 2000, Mr. Harris
was employed by Smith Kline Beecham PLC., an international pharmaceutical and
consumer healthcare company, most recently as Senior Vice President - Corporate
Development and Planning. Prior to June 1996, Mr. Harris was employed by Eastman
Kodak Company, an international imaging company, most recently as a Managing
Director - Corporate Development.
Mr. Malkin has served as President and Chief Executive Officer of
Minntech since September 2001, and as President and Chief Executive Officer of
MediVators since June 1999. From June 1984 until July 1994 and from November
1996 until May 1999, Mr. Malkin was President and Chief Executive Officer of RKM
Enterprises Ltd., a multi-national consulting group for the healthcare industry.
From July 1994 until October 1996, Mr. Malkin was employed by Steris
Corporation, most recently as Senior Vice President.
Mr. Sheldon has served as Chief Financial Officer of the Company
since October 2001, and as Vice President and Controller of the Company from
November 1994 until October 2001. Mr. Sheldon is a certified public accountant.
Mr. Vella has served as President and Chief Executive Officer of
Carsen since October 2001, as President and Chief Operating Officer of Carsen
from December 1996 until October 2001, as Executive Vice President from January
1995 until November 1996, and prior thereto in various sales and sales
management positions since October 1981.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's
directors, executive officers, and any persons holding more than ten percent of
the Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in their ownership to the
Securities and Exchange Commission ("SEC"). Specific due dates have been
established by the SEC, and the Company is required to disclose in this Report
any failure to file by those dates. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for their 2001 fiscal year
transactions and (ii) the written representations received from one or more of
such persons that no annual Form 5 reports were required to be filed for them
for the 2001 fiscal year, the Company believes that there has been compliance
with all Section 16(a) filing requirements applicable to such officers,
directors, and ten-percent beneficial owners for such fiscal year, except for
annual Form 5 reports for all directors of the Company, excluding Dr. Shapiro,
which reports were due by September 14, 2001 but were not filed until October
15, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal years ended July 31,
2001, 2000 and 1999, compensation, including salary, bonuses, stock options and
certain other compensation, paid by the Company to the Chief Executive Officer
and to the other executive officers of the Company who received more than
$100,000 in salary and bonus during fiscal year 2001:
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<Page>
<Table>
<Caption>
SUMMARY COMPENSATION TABLE
----------------------------------------------------
Long-Term
Compensation
Annual Compensation (1) Awards (2)
----------------------- ------------
Name and Salary Bonus Options
Principal Position Year ($) ($) (#)
------------------ ---- ------- ------ -------
Charles M. Diker 2001 160,000 0 1,000
Chairman of the 2000 150,000 0 1,000
Company 1999 150,000 0 51,000
James P. Reilly(3) 2001 303,188 171,757 1,000
President and 2000 288,750 141,967 1,000
Chief Executive 1999 275,000 98,494 101,000
Officer of the
Company
Joseph L. Harris(4) 2001 195,000 75,000 150,000
Senior Vice
President -
Corporate
Development
Roy K. Malkin(5) 2001 192,500 46,000 0
President and 2000 175,000 60,000 5,000
Chief Executive 1999 20,192 0 50,000
Officer of Minntech
Corporation and
MediVators, Inc.
Craig A. Sheldon(6) 2001 136,250 40,000 0
Vice President 2000 121,750 30,000 25,000
and Chief 1999 109,000 18,000 6,000
Financial Officer
of the Company
William J. Vella(7) 2001 179,444 103,548 0
President and 2000 169,950 40,000 25,000
Chief Executive 1999 144,997 69,668 10,000
Officer of
Carsen Group Inc.
</Table>
--------------------------------
(1) The Company did not pay or provide other forms of annual compensation (such
as perquisites and other personal benefits) to the above-named executive
officers having a value exceeding the lesser of $50,000 or 10% of the total
annual salary and bonus reported for such officers, with the exception of
(i) a
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one-time relocation allowance provided to Mr. Malkin in the amount of
$58,877 paid during fiscal 2000 and (ii) reimbursement to a Company
affiliated with Mr. Diker of office expenses amounting to $24,000 in fiscal
2001 and $12,000 in fiscal 2000.
(2) The Company has no long-term incentive compensation plan other than the
1997 Employee Stock Option Plan, the 1998 Directors' Stock Option Plan and
various individually granted options described herein. The Company does not
award stock appreciation rights, restricted stock awards or long-term
incentive plan pay-outs.
(3) In March 1999, the Company entered into a four-year employment agreement
with James P. Reilly (the "Employment Agreement") which was effective as of
August 1, 1998. The Employment Agreement provides for (i) an annual base
salary of $275,000, subject to annual increases equal to the greater of 5%
or a cost of living formula, (ii) annual incentive compensation equal to 6%
of the increase in the current fiscal year's pre-tax income over the
highest pre-tax income of any prior fiscal year commencing July 31, 1998,
subject to adjustment for specified events, (iii) bonuses of $65,000 which
were paid upon each of the execution of the Employment Agreement, August 1,
1999 and August 1, 2000, (iv) participation in employee health, insurance
and other benefit plans, (v) maintenance by the Company of a life insurance
policy on the life of Mr. Reilly in the face amount of $500,000 payable to
his designated beneficiary, and (vi) use of a Company owned or leased
automobile. In addition, Mr. Reilly was granted a stock option under the
Company's 1997 Employee Stock Option Plan to purchase 100,000 shares of
Common Stock at an exercise price equal to $6.00 (the fair market value of
the shares on the date of grant) and having a ten-year term. If the
Employment Agreement expires and Mr. Reilly's employment is terminated
thereafter for any reason, Mr. Reilly will be entitled to a severance
payment equal to one year's base salary plus the amount of his bonus for
the most recently completed fiscal year (the "Severance Amount"). In the
event of a "Change In Control" (as defined in the Employment Agreement),
Mr. Reilly has a nine-month option to terminate his employment and receive
a severance payment on a formula based on his average compensation over the
previous three years. If such termination was prior to August 1, 1999,
severance would have been 2.5 times such average compensation. After August
1, 1999 such amount is reduced by 2.5% per month, but not below the
Severance Amount described above. The Employment Agreement contains a
non-competition provision applicable for two years following termination of
Mr. Reilly's employment. The Company has the right to terminate the
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Agreement for death, disability and "cause" (as defined in the Employment
Agreement) and Mr. Reilly has the right to terminate the Employment
Agreement upon three month's notice.
(4) On November 1, 2000, the Company entered into a three-year employment
agreement with Mr. Joseph L. Harris. The term of the agreement will be
extended by 18 months if certain relocation conditions are satisfied by Mr.
Harris. Mr. Harris' employment agreement provides for (i) an annual base
salary of $260,000, subject to annual increases based on a cost of living
formula, (ii) minimum guaranteed bonuses equal to $100,000, $75,000 and
$50,000 on each of the first three anniversaries of his employment
agreement, respectively, (iii) incentive compensation equal to .75% of the
total consideration paid or received by the Company with respect to an
acquisition or divestiture transaction during the employment period, such
incentive bonus to be reduced by the minimum guaranteed bonuses specified
above, (iv) a relocation bonus of $150,000 (subject to satisfaction of
certain relocation provisions), payable over three years, (v) participation
in employee health, insurance and other benefit plans, (vi) maintenance by
the Company of a life insurance policy on the life of Mr. Harris in a face
amount equal to Mr. Harris' base salary payable to his designated
beneficiary, and (vii) use of a Company owned or leased automobile. In
addition, Mr. Harris was granted a non-plan option to purchase 26,250
shares of Common Stock and an option to purchase 123,750 shares of Common
Stock under the 1997 Employee Stock Option Plan. Both options have ten-year
terms and have exercise prices of $8.88 (the fair value of the shares on
the date of grant). The Company will grant to Mr. Harris on each of the
first two anniversaries of his employment agreement a non-plan option to
purchase 50,000 shares of Common Stock at an exercise price equal to the
fair value of the shares on the date of grant. In the event of a "Change in
Control" (as defined in the employment agreement), Mr. Harris may terminate
his employment and continue to receive his base salary and bonus following
such termination through the end of the term of the employment agreement.
Mr. Harris was not employed by the Company prior to November 2000.
(5) In May 1999, MediVators entered into an employment agreement with Roy K.
Malkin that expires on July 31, 2002. Mr. Malkin's employment agreement
provides for (i) an annual base salary of $175,000, subject to annual
increases equal to no less than 5% or a cost of living formula, (ii) annual
incentive compensation commencing July 31, 2000, equal to 5% of the
increase in MediVators' current fiscal year's pre-tax income over
MediVators' highest pre-tax income of any prior fiscal year, (iii)
participation in employee health, insurance
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and other benefit plans, (iv) maintenance by MediVators of a life insurance
policy on the life of Mr. Malkin in the face amount of $250,000 payable to
his designated beneficiary, (v) use of a Company owned or leased automobile
and (vi) the Company to grant Mr. Malkin an option to purchase 50,000
shares of Common Stock under the 1997 Employee Stock Option Plan at an
exercise price equal to $5.25 (the fair market value of the shares on the
date of grant). Mr. Malkin was not employed by the Company prior to May
1999. Mr. Malkin became President and Chief Executive Officer of Minntech
in September 2001 and was not compensated in such capacity during the
periods presented.
(6) Mr. Sheldon became Chief Financial Officer in October 2001 and was not
compensated in such capacity during the periods presented.
(7) Mr. Vella was paid his salary and bonus in Canadian dollars. The dollar
amounts above have been translated from Canadian dollars to U.S. dollars
based upon an average exchange rate during the respective fiscal year.
OPTION GRANTS IN FISCAL 2001
The following stock option information is furnished with respect to
the Company's Chief Executive Officer and the other executive officers of the
Company named in the Compensation Table above, for stock options granted during
fiscal 2001. Stock options were granted without tandem stock appreciation
rights.
<Table>
<Caption>
% of Total
Number of Options Potential Realizable
Shares Granted to Value at Assumed
Underlying Employees Exercise Annual Rates of Stock
Options During the Price Per Expiration Price Appreciation
Name Granted Fiscal Year Share ($) Date For Option Term ($)(1)
---- ---------- ----------- --------- ---------- ----------------------
5% 10%
------- ---------
Charles M. Diker 1,000 (2) 0.6 25.24 7/30/06 6,973 15,409
James P. Reilly 1,000 (2) 0.6 25.24 7/30/06 6,973 15,409
Joseph L. Harris 150,000 (3) 98.7 8.88 10/31/10 837,688 2,122,865
</Table>
---------------------------------------
(1) Represents the potential realizable value of the options granted at assumed
5% and 10% rates of compounded annual stock price appreciation from the
date of grant of such options.
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<Page>
(2) These options were granted under the Company's 1998 Directors' Stock Option
Plan. The exercise price per share of the options is the market value per
share on the date of grant. The options are subject to vesting as follows:
50% of the total shares covered by the options vest on the first
anniversary of the date of grant and the remaining 50% vest on the second
anniversary of such date of grant.
(3) These options were granted pursuant to Mr. Harris' employment agreement and
include 26,250 non-plan options and 123,750 options granted under the
Company's 1997 Employee Stock Option Plan.
AGGREGATED OPTION EXERCISES IN FISCAL 2001
AND FISCAL YEAR-END OPTION VALUES
The following information is furnished for the fiscal year ended
July 31, 2001 with respect to the Company's Chief Executive Officer and the
other executive officers of the Company named in the Compensation Table above,
for stock option exercises during fiscal 2001 and unexercised stock option
values at July 31, 2001.
<Table>
<Caption>
Number of Shares Value of
Underlying Unexercised Unexercised in-the-Money
Shares Options at 7/31/01 (#) Options at 7/31/01 ($)
Acquired on Value ---------------------------- -----------------------------
Name Exercise (#) Realized($)(1) Exercisable Non-Exercisable Exercisable Non-Exercisable
---- ------------ -------------- ----------- --------------- ----------- ----------------
Charles M. Diker 3,000 25,140 158,500 1,500 2,848,025 8,730
James P. Reilly 0 0 58,498 51,502 1,130,237 970,768
Joseph L. Harris 0 0 37,500 112,500 613,500 1,840,500
Roy K. Malkin 0 0 34,584 20,416 691,334 408,116
Craig A. Sheldon 18,000 309,438 0 23,000 0 454,458
William J. Vella 24,750 275,750 0 26,250 0 516,863
</Table>
(1) Value realized is calculated as the market value of the shares exercised
using the closing price of the Company's common stock on such exercise
date. The value realized is for informational purposes only and does not
purport to represent that such individual actually sold the underlying
shares, or that the underlying shares were sold on the date of exercise.
Furthermore, such value realized does not take into consideration
individual income tax consequences.
STOCK OPTIONS
An aggregate of 250,000 shares of Common Stock was reserved for
issuance or available for grant under the Company's 1991 Employee Stock Option
Plan (the "1991 Employee Plan"), which
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<Page>
expired in fiscal 2001. Options granted under the 1991 Employee Plan are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). All options
outstanding at July 31, 2001 under the 1991 Employee Plan have a term of five
years and are currently exercisable in full. At July 31, 2001, options to
purchase 12,500 shares of Common Stock at prices between $5.50 and $7.375 per
share (the fair market value of the shares at the time of grant) were
outstanding under the 1991 Employee Plan. No additional options will be granted
under the 1991 Employee Plan.
An aggregate of 1,000,000 shares of Common Stock is reserved for
issuance or available for grant under the Company's 1997 Employee Stock Option
Plan, as amended (the "1997 Employee Plan"). Options granted under the 1997
Employee Plan are intended to qualify as incentive stock options within the
meaning of Section 422 of the Code. The 1997 Employee Plan is administered in
all respects by the Stock Option Committee. The Stock Option Committee may
determine the employees to whom options are to be granted and the number of
shares subject to each option. Under the terms of the 1997 Employee Plan, all
employees of the Company or subsidiaries of the Company are eligible for option
grants. The option exercise price of options granted under the 1997 Employee
Plan is fixed by the Stock Option Committee but must be no less than 100% of the
fair market value of the shares of Common Stock subject to the option at the
time of grant, except that in the case of an employee who possesses more than
10% of the total combined voting power of all classes of stock of the Company
("a 10% Holder") , the exercise price must be no less than 110% of said fair
market value. Options may be exercised by the payment in full in cash or by the
tendering or cashless exchange of shares of Common Stock having a fair market
value, as determined by the Stock Option Committee, equal to the option exercise
price. Options granted under the 1997 Employee Plan may not be exercised more
than ten years after the date of grant, five years in the case of an incentive
stock option granted to a 10% Holder. All options outstanding at July 31, 2001
under the 1997 Employee Plan have a term of five years, except for 100,000
options granted to Mr. Reilly and 123,750 options granted to Mr. Harris under
the terms of their respective employment agreements, each of which have a term
of ten years. At July 31, 2001, options to purchase 393,000 shares of Common
Stock at prices between $4.875 and $9.63 per share were outstanding under the
1997 Employee Plan, and 545,875 shares were available for grant under the 1997
Employee Plan.
An aggregate of 200,000 shares of Common Stock was reserved for
issuance or available for grant under the Company's 1991 Directors' Stock Option
Plan (the "1991 Directors' Plan"), which expired in fiscal 2001. Options granted
under the 1991 Directors' Plan do not qualify as incentive stock options within
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the meaning of Section 422 of the Code. At July 31, 2001, options to purchase
101,000 shares of Common Stock at prices between $2.00 and $10.25 per share (the
fair market value of the shares at the time of grant) were outstanding under the
1991 Directors' Plan. All of the options have a ten-year term and are
exercisable in full. No additional options will be granted under the 1991
Directors' Plan.
An aggregate of 200,000 shares of Common Stock is reserved for
issuance or available for grant under the Company's 1998 Directors' Stock Option
Plan (the "1998 Directors' Plan"). Options granted under the 1998 Directors'
Plan do not qualify as incentive stock options within the meaning of Section 422
of the Code. The 1998 Directors' Plan provides for the automatic grant to each
of the Company's directors of options to purchase 1,000 shares of Common Stock
on the last business day of the Company's fiscal year. In addition, an option to
purchase 500 shares of Common Stock is granted automatically on the last
business day of each fiscal quarter to each director (exclusive of Messrs. Diker
and Reilly and any other director who is a full-time employee of the Company)
provided that the director attended any regularly scheduled meeting of the
Board, if any, held during such quarter. Each such option grant is at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options granted prior to July 31, 2000 have a term of ten years and
options granted on and after July 31, 2000 have a term of five years. The fiscal
year options are exercisable in two equal annual installments commencing on the
first anniversary of the grant thereof and the quarterly options are exercisable
in full immediately. At July 31, 2001 options to purchase 37,500 shares of
Common Stock at prices between $5.125 and $25.24 per share were outstanding
under the 1998 Directors' Plan, and 162,500 shares were available for grant
under the 1998 Directors' Plan.
The Company also has outstanding options granted by MediVators
prior to the MediVators merger under the MediVators 1991 Stock Option Plan (the
"MediVators Plan") which became fully exercisable as a result of the MediVators
merger. At July 31, 2001, one option to purchase 1,607 shares of Common Stock at
a price of $6.08 per share was outstanding under the MediVators Plan. No
additional options will be granted under the MediVators Plan.
In October 1996, Mr. Diker was granted a ten-year non-plan option
to purchase 50,000 shares of Common Stock at an exercise price of $7.375 per
share. In October 1997, Mr. Diker was granted a ten-year non-plan option to
purchase 50,000 shares of Common Stock at an exercise price of $7.00 per share.
In October 1998, Mr. Diker was granted a ten-year non-plan option to purchase
50,000 shares of Common Stock at an exercise price of $7.75 per share. All of
said options are exercisable in full.
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In October 1998, Dr. Rowe was granted a ten-year non-plan option to
purchase 10,000 shares of Common Stock at an exercise price of $8.00 per share.
In March 1999, Dr. Rowe was granted a ten-year non-plan option to purchase
10,000 shares of Common Stock at an exercise price of $6.375 per share. All of
said options are exercisable in full.
In October 2000, Mr. Cohen was granted a five-year non-plan option
to purchase 10,000 shares of Common Stock at an exercise price of $8.38 per
share. This option is exercisable in three equal annual installments beginning
October 2000.
In November 2000, Mr. Harris was granted a ten-year, non-plan
option to purchase 26,250 shares of Common Stock at an exercise price of $8.88
per share. This option is exercisable immediately.
In September 2001, Dr. Shapiro was granted a five-year non-plan
option to purchase 10,000 shares of Common Stock at an exercise price of $18.49
per share. This option is exercisable in three equal annual installments
beginning September 2001.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS AND THE STOCK OPTION COMMITTEE
The Compensation Committee of the Company's Board of Directors (the
"Committee") is responsible for setting and administering the policies which
govern annual executive compensation. The Committee is currently comprised of
three members, Mr. Hirschfield, Chairman, and Messrs. Barbanell and Cohen, each
of whom are non-employee directors.
Executive compensation for the fiscal year ended July 31, 2001
consisted of base salary plus bonus when earned. The policy of the Committee, in
consultation with the Chairman and the Chief Executive Officer, where
appropriate, is to provide compensation to the Chief Executive Officer and the
Company's other executive officers reflecting the contribution of such
executives to the Company's growth in sales and earnings, the implementation of
strategic plans consistent with the Company's long-term objectives, and the
enhancement of shareholder value.
Each of Messrs. Reilly, Harris and Malkin are employed and
compensated pursuant to written employment agreements as described above.
Long-term incentive compensation policy consists exclusively of the
award of stock options under the Company's 1991 Employee Plan and 1997 Employee
Plan and, in the case of officers
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who serve as directors of the Company, non-discretionary annual option grants of
1,000 shares under the Company's 1991 Directors' Plan and 1998 Directors' Plan.
The Stock Option Committee under the 1991 Employee Plan and the
1997 Employee Plan is responsible for the award of stock options. Three
non-employee directors, Messrs. Hirschfield, Barbanell and Cohen, currently
serve on the Stock Option Committee, which administers the granting of options
under the 1991 Employee Plan and the 1997 Employee Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No officer of the Company served on the Company's Compensation
Committee during its last fiscal year. Mr. Reilly, the President and Chief
Executive Officer of the Company, however, participated in deliberations
concerning executive compensation, except with respect to the compensation of
the Chairman of the Board and himself.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF SECURITIES
The following table sets forth stock ownership information as of
October 5, 2001 concerning (i) each director of Cantel, (ii) each person
(including any "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934) who is known by Cantel to beneficially own more than five (5%)
percent of the outstanding shares of Cantel's Common Stock, (iii) the Chief
Executive Officer and the other executive officers named in the Summary
Compensation Table above, and (iv) Cantel's executive officers and directors as
a group:
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<Table>
<Caption>
Amount and
Nature of
Name and Address Beneficial Percentage
of Beneficial Owners Position with the Company Ownership (1) of Class
-------------------- ------------------------- ------------- -----------
Charles M. Diker Chairman of the Board and 972,633 (2) 15.7
767 Fifth Ave. 26th Fl. Director
New York, New York
Alan J. Hirschfield Vice Chairman of the Board 228,833 (3) 3.8
and Director
Robert L. Barbanell Director 51,269 (4) *
Joseph M. Cohen Director 8,167 (5) *
Darwin C. Dornbush, Esq. Secretary and Director 25,180 (6) *
Morris W. Offit Director 57,200 (7) *
James P. Reilly President and CEO and 171,948 (8) 2.8
Director
John W. Rowe, M.D. Director 26,500 (9) *
Fred L. Shapiro, M.D. Director 23,446 *
Bruce Slovin Director 163,000 (10) 2.7
Joseph L. Harris Senior Vice President - 48,750 (11) *
Corporate Development
Roy K. Malkin President and CEO of 34,584 (12) *
Minntech Corporation
and MediVators, Inc.
Craig A. Sheldon Vice President and 1,775 *
Chief Financial Officer
William J. Vella President and CEO of 25,006 (13) *
Carsen Group Inc.
All officers and 1,838,291 (14) 28.4
directors as a group
of 14 persons
* Less than 1%
</Table>
----------------------------------
(1) Unless otherwise noted, Cantel believes that all persons named
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in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days from October 5, 2001 upon the exercise of options. Each
beneficial owner's percentage ownership is determined by assuming that
options that are held by such person (but not those held by any other
person) and which are exercisable within 60 days from October 5, 2001 have
been exercised.
(2) Includes 158,500 shares which Mr. Diker may acquire pursuant to stock
options. Does not include an aggregate of 590,890 shares owned by (i) Mr.
Diker's wife, (ii) certain trusts for the benefit of Mr. Diker's children,
(iii) certain accounts with Weiss, Peck and Greer, an investment firm, over
which accounts Mr. Diker exercises investment discretion, (iv) the
DicoGroup, Inc., a corporation of which Mr. Diker serves as Chairman of the
Board, and (v) a non-profit corporation of which Mr. Diker and his wife are
the principal officers and directors. Mr. Diker disclaims beneficial
ownership as to all of the foregoing shares.
(3) Includes 23,500 shares which Mr. Hirschfield may acquire pursuant to stock
options.
(4) Includes 20,500 shares which Mr. Barbanell may acquire pursuant to stock
options. Does not include 2,500 shares owned by Mr. Barbanell's wife as to
which Mr. Barbanell disclaims beneficial ownership.
(5) Includes 8,167 shares which Mr. Cohen may acquire pursuant to stock
options.
(6) Includes 17,500 shares which Mr. Dornbush may acquire pursuant to stock
options.
(7) Includes 18,500 shares which Mr. Offit may acquire pursuant to stock
options.
(8) Includes 58,498 shares which Mr. Reilly may acquire pursuant to stock
options. Does not include 87,115 shares owned by Mr. Reilly's wife as to
which Mr. Reilly disclaims beneficial ownership.
(9) Includes 26,500 shares which Dr. Rowe may acquire pursuant to stock
options.
(10) Includes 25,000 shares which Mr. Slovin may acquire pursuant
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to stock options. Does not include 20,000 shares owned by a charitable
foundation established by Mr. Slovin as to which Mr. Slovin disclaims
beneficial ownership.
(11) Includes 48,750 shares which Mr. Harris may acquire pursuant to stock
options.
(12) Includes 34,584 shares which Mr. Malkin may acquire pursuant to stock
options.
(13) Includes 1,500 shares which Mr. Vella may acquire pursuant to stock
options.
(14) Includes 441,499 shares which may be acquired pursuant to stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K for the fiscal year ended July 31, 2001.
1. CONSOLIDATED FINANCIAL STATEMENTS:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of
July 31, 2001 and 2000.
(iii) Consolidated Statements of Income for the years ended
July 31, 2001, 2000 and 1999.
(iv) Consolidated Statements of Changes in Stockholders'
Equity for the years ended July 31, 2001, 2000 and 1999.
(v) Consolidated Statements of Cash Flows for the years
ended July 31, 2001, 2000 and 1999.
(vi) Notes to Consolidated Financial
Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
(i) Schedule II - Valuation and Qualifying Accounts for the
years ended July 31, 2001, 2000 and 1999.
All other financial statement schedules are omitted since they are
not required, not applicable, or the information has been included in the
Consolidated Financial Statements or Notes thereto.
3. EXHIBITS:
2(a) - Asset Purchase Agreement dated as of March 16, 1998 among
Registrant, Chris Lutz Medical, Inc., Christopher C. Lutz and Bonolyn L.
Lutz. (Incorporated herein by reference to Exhibit 2(a) to Registrant's 1998
Annual Report on Form 10-K [the "1998 10-K"].)
2(b) - Asset Purchase Agreement between Carsen Group Inc. and
Olympus America Inc. dated as of October 6, 2000, among
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Registrant, Carsen Group Inc. and Olympus America Inc. (Incorporated by
reference to Exhibit (2) of Registrant's Current Report on Form 8-K dated
October 23, 2000 [ the "2000 8-K"]).
2(c) - Agreement and Plan of Merger dated as of May 30, 2001 by
and among Cantel Medical Corp., Canopy Merger Corp. and Minntech
Corporation. (Incorporated by reference to Exhibit (2) of Registrant's
Current Report on Form 8-K dated May 31, 2001.)
3(a) - Registrant's Restated Certificate of Incorporation dated
July 20, 1978. (Incorporated herein by reference to Exhibit 3(a) to Registrant's
1981 Annual Report on Form 10-K.)
3(b) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on February 16, 1982. (Incorporated herein by reference to
Exhibit 3(b) to Registrant's 1982 Annual Report on Form 10-K.)
3(c) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on May 4, 1984. (Incorporated herein by reference to Exhibit
3(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended April
30, 1984.)
3(d) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on August 19, 1986. (Incorporated herein by reference to
Exhibit 3(d) of Registrant's 1986 Annual Report on Form 10-K.)
3(e) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on December 12, 1986. (Incorporated herein by reference to
Exhibit 3(e) of Registrant's 1987 Annual Report on Form 10-K [the "1987 10-K"].)
3(f) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on April 3, 1987. (Incorporated herein by reference to Exhibit
3(f) of Registrant's 1987 10-K.)
3(g) - Certificate of Change of Registrant, filed on July 12, 1988.
(Incorporated herein by reference to Exhibit 3(g) of Registrant's 1988 Annual
Report on Form 10-K.)
3(h) - Certificate of Amendment of Certificate of Incorporation of
Registrant filed on April 17, 1989. (Incorporated herein by reference to Exhibit
3(h) to Registrant's 1989 Annual Report on Form 10-K.)
3(i) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on May 10, 1999. (Incorporated herein by reference to Exhibit
3(i) to Registrant's 2000 Annual
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Report on Form 10-K [the "2000 10-K"].)
3(j) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on April 5, 2000. (Incorporated herein by reference to Exhibit
3(j) to Registrant's 2000 10-K.)
3(k) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on September 6, 2001.
3(l) - Registrant's By-Laws adopted June 1, 1976, as amended
through the date of this Report. (Incorporated herein by reference to Exhibit
3(d) to Registrant's 1985 Annual Report on Form 10-K.)
10(a) - Registrant's 1991 Employee Stock Option Plan, as amended.
(Incorporated herein by reference to Exhibit 10(a) to Registrant's 1991 Annual
Report on Form 10-K [the "1991 10-K"].)
10(b) - Form of Stock Option Agreement under Registrant's 1991
Employee Stock Option Plan. (Incorporated herein by reference to Exhibit 10(b)
to Registrant's 1991 10-K.)
10(c) - Registrant's 1991 Directors' Stock Option Plan.
(Incorporated herein by reference to Exhibit 10(c) to Registrant's 1991 10-K.)
10(d) - Form of Stock Option Agreement under the Registrant's
1991 Directors Stock Option Plan. (Incorporated herein by reference to
Exhibit 10(d) to Registrant's 1991 10-K.)
10(e) - Agreement between Carsen Group Inc. and Olympus America
Inc., dated April 1, 1994. (Incorporated by reference to Exhibit 10(g) to
Registrant's 1994 Annual Report on Form 10-K.)
10(f) - MediVators' 1991 Stock Option and Compensation Plan as
amended. (Incorporated by reference to Exhibit 10P to MediVators'
Registration Statement on Form S-3, File No. 33-79764.)
10(g) - Stock Option Agreement, dated as of October 17, 1996 ,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(v) to Registrant's 1996 Annual Report on Form 10-K.)
10(h) - Registrant's 1997 Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10(s) to Registrant's 1997 Annual
Report on Form 10-K [the "1997 10-K"].)
10(i) - Form of Incentive Stock Option Agreement under
Registrant's 1997 Employee Stock Option Plan. (Incorporated by reference to
Exhibit 10(t) to Registrant's 1997 10-K.)
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10(j) - First Amendment to Distribution Agreement between
Olympus America Inc. and Carsen Group Inc., dated as of August 26, 1997,
among Registrant and Olympus America Inc. (Incorporated by reference to
Exhibit 10(y) of Registrant's 1997 10-K.)
10(k) - Stock Option Agreement, dated as of October 16, 1997,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(x) of Registrant's 1998 10-K.)
10(l) - Form of Non-Plan Stock Option Agreement between the
Registrant and Darwin C. Dornbush. (Incorporated by reference to Exhibit
10(y) to Registrant's 1998 10-K.)
10(m) - Stock Option Agreement, dated as of October 5, 1998,
between the Registrant and John W. Rowe. (Incorporated by reference to
Exhibit 10(z) to Registrant's 1998 10-K.)
10(n) - Non-Competition Agreement, dated as of March 16, 1998,
between the Registrant, Christopher C. Lutz and Bonolyn L. Lutz.
(Incorporated by reference to Exhibit 10(aa) of Registrant's 1998 10-K.)
10(o) - Employment Agreement, dated as of May 19, 1999, between
the Registrant and Roy K. Malkin. (Incorporated by reference to Exhibit
10(z) to Registrant's 1999 Annual Report on Form 10-K [the "1999 10-K"].)
10(p) - Employment Agreement, dated as of August 1, 1998,
between the Registrant and James P. Reilly. (Incorporated by reference to
Exhibit 10(aa) of Registrant's 1999 10-K.)
10(q) - Distributor Agreement dated as of August 1, 1999, among
MediVators, Inc. and Olympus America Inc. - Endoscope Division.
(Incorporated by reference to Exhibit 10(ee) to Registrant's 1999 10-K.)
10(r) - Stock Option Agreement, dated as of October 30, 1998,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(ff) to Registrant's 1999 10-K.)
10(s) - Stock Option Agreement, dated as of March 10, 2000,
between the Registrant and John W. Rowe. (Incorporated by reference to
Exhibit 10(gg) to Registrant's 1999 10-K.)
10(t) - Second Amendment to Distribution Agreement between
Olympus America Inc. and Carsen Group Inc. dated as of October 6, 2000, among
Carsen Group Inc. and Olympus America Inc. (Incorporated by reference to
Exhibit (1) of Registrant's 2000 8-K).
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10(u) - Registrant's 1998 Director's Stock Option Plan.
(Incorporated herein by reference to Exhibit 10(gg) to Registrant's 2000
10-K.)
10(v) - Form of Quarterly Stock Option Agreement under the
Registrant's 1998 Directors Stock Option Plan. (Incorporated herein by reference
to Exhibit 10(hh) to Registrant's 2000 10-K.)
10(w) - Form of Annual Stock Option Agreement under the
Registrant's 1998 Directors Stock Option Plan. (Incorporated herein by reference
to Exhibit 10(ii) to Registrant's 2000 10-K.)
10(x) - Stock Option Agreement, dated as of October 10, 2000,
between the Registrant and Joseph M. Cohen. (Incorporated herein by
reference to Exhibit 10(jj) to Registrant's 2000 10-K.)
10(y) - Employment Agreement, dated as of November 1, 2000,
between the Registrant and Joseph L. Harris. (Incorporated herein by
reference to Exhibit 10(a) to Registrant's April 30, 2001 Quarterly Report on
Form 10-Q.)
10(z) - Stock Option Agreement, dated as of November 1, 2000
between the Registrant and Joseph L. Harris. (Incorporated herein by
reference to Exhibit 4.2 to Registrant's Form S-8 dated March 19, 2001.)
10(aa)- Credit Agreement dated as of September 7, 2001 among
Cantel Medical Corp., the Banks, Financial Institutions and Other
Institutional Lenders named therein, Fleet National Bank and PNC Bank,
National Association.
10(bb)- Loan Agreement dated as of September 7, 2001 between
Carsen Group Inc. and National Bank of Canada.
10(cc)- Stock Option Agreement dated as of September 7, 2001
between the Registrant and Fred L. Shapiro.
21 - Subsidiaries of Registrant.
23 - Consent of Ernst & Young LLP.
(b) REPORTS ON FORM 8-K:
A report on Form 8-K was filed on May 31, 2001 indicating that the
Company and Canopy Merger Corp., a wholly-owned subsidiary of the Company, had
entered into an Agreement and Plan of Merger with Minntech Corporation.
There were no other reports on Form 8-K filed during the three months
ended July 31, 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANTEL MEDICAL CORP.
Date: October 29, 2001 By: /s/ James P. Reilly
--------------------------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
By: /s/ Craig A. Sheldon
------------------------------------
Craig A. Sheldon, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Charles M. Diker Date: October 29, 2001
----------------------------
Charles M. Diker, a Director
and Chairman of the Board
/s/ James P. Reilly Date: October 29, 2001
----------------------------
James P. Reilly, a Director
and President
/s/ Robert L. Barbanell Date: October 29, 2001
----------------------------
Robert L. Barbanell, a Director
/s/ Joseph M. Cohen Date: October 29, 2001
----------------------------
Joseph M. Cohen, a Director
/s/ Darwin C. Dornbush Date: October 29, 2001
----------------------------
Darwin C. Dornbush, a Director
/s/ Alan J. Hirschfield Date: October 29, 2001
----------------------------
Alan J. Hirschfield, a Director
/s/ Morris W. Offit Date: October 29, 2001
----------------------------
Morris W. Offit, a Director
/s/ John W. Rowe Date: October 29, 2001
----------------------------
John W. Rowe, a Director
/s/ Fred L. Shapiro Date: October 29, 2001
----------------------------
Fred L. Shapiro, a Director
/s/ Bruce Slovin Date: October 29, 2001
----------------------------
Bruce Slovin, a Director
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CANTEL MEDICAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2001
<Page>
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . 1
Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . 2
Consolidated Statements of Income . . . . . . . . . . 3
Consolidated Statements of Changes
in Stockholders' Equity . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . 6
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited the accompanying consolidated balance sheets of Cantel Medical
Corp. as of July 31, 2001 and 2000 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended July 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cantel
Medical Corp. at July 31, 2001 and 2000 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
September 21, 2001
<Page>
<Table>
<Caption>
CANTEL MEDICAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
JULY 31,
2001 2000
---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,050 $ 2,169
Available-for-sale securities 1,057 -
Accounts receivable, net of allowance for doubtful accounts
of $62 in 2001 and $66 in 2000 11,768 8,970
Inventories 8,166 6,992
Net assets related to discontinued business - 3,095
Prepaid expenses and other current assets 453 475
-------------- --------------
Total current assets 26,494 21,701
Property and equipment, at cost:
Furniture and equipment 2,185 2,107
Leasehold improvements 541 467
-------------- --------------
2,726 2,574
Less accumulated depreciation and amortization (1,882) (1,673)
-------------- --------------
844 901
Intangible assets, net 1,207 1,345
Other assets 3,384 1,008
-------------- --------------
$ 31,929 $ 24,955
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,115 $ 5,054
Compensation payable 1,337 943
Other accrued expenses 2,562 979
Income taxes 1,811 594
-------------- --------------
Total current liabilities 9,825 7,570
Long-term debt - 125
Deferred income taxes 77 97
Commitments and contingencies - -
Stockholders' equity:
Preferred Stock, par value $1.00 per share; authorized
1,000,000 shares; none issued - -
Common Stock, par value $.10 per share; authorized
12,000,000 shares; issued 2001 - 4,733,159 shares, outstanding 2001 -
4,559,276 shares; issued 2000-
4,597,220 shares, outstanding 2000 - 4,438,381 shares 473 460
Additional capital 20,240 19,502
Retained earnings 4,477 96
Accumulated other comprehensive loss (2,143) (2,097)
Treasury Stock, 2001 - 173,883 shares at cost; 2000 -
158,839 shares at cost (1,020) (798)
-------------- --------------
Total stockholders' equity 22,027 17,163
-------------- --------------
$ 31,929 $ 24,955
============== ==============
</Table>
See accompanying notes.
2
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
<Table>
<Caption>
YEAR ENDED JULY 31,
2001 2000 1999
--------------- -------------- ---------------
Net sales:
Product sales $ 42,504 $ 35,789 $ 32,549
Product service 6,491 5,508 5,271
--------------- -------------- ---------------
Total net sales 48,995 41,297 37,820
--------------- -------------- ---------------
Cost of sales:
Product sales 26,027 22,211 20,604
Product service 3,441 2,906 3,106
Write-off of medical sharps inventories - - 452
--------------- -------------- ---------------
Total cost of sales 29,468 25,117 24,162
--------------- -------------- ---------------
Gross profit 19,527 16,180 13,658
Expenses:
Warehouse 511 452 368
Selling 5,692 5,208 4,663
General and administrative 5,410 4,543 3,897
Research and development 949 836 789
Costs associated with proposed acquisition - - 74
--------------- -------------- ---------------
Total operating expenses 12,562 11,039 9,791
--------------- -------------- ---------------
Income from continuing operations before interest
(income) expense and income taxes 6,965 5,141 3,867
Interest (income) expense (42) 225 271
--------------- -------------- ---------------
Income from continuing operations before income taxes 7,007 4,916 3,596
Income taxes 2,851 2,085 1,936
--------------- -------------- ---------------
Income from continuing operations 4,156 2,831 1,660
Loss from discontinued operations - (97) (291)
Gain (loss) on disposal of discontinued operations 225 (50) -
--------------- -------------- ---------------
Net income $ 4,381 $ 2,684 $ 1,369
=============== ============== ===============
Earnings per common share:
Basic:
Continuing operations $ 0.93 $ 0.64 $ 0.38
Discontinued operations 0.05 (0.03) (0.07)
--------------- -------------- ---------------
Net income $ 0.98 $ 0.61 $ 0.31
=============== ============== ===============
Diluted:
Continuing operations $ 0.85 $ 0.63 $ 0.36
Discontinued operations 0.04 (0.03) (0.06)
--------------- -------------- ---------------
Net income $ 0.89 $ 0.60 $ 0.30
=============== ============== ===============
</Table>
See accompanying notes.
3
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JULY 31, 2001, 2000 AND 1999
<Table>
<Caption>
COMMON STOCK
-------------------------------- ACCUMULATED TOTAL
NUMBER OF RETAINED OTHER TREASURY STOCK-
SHARES ADDITIONAL EARNINGS COMPREHENSIVE STOCK, HOLDERS'
OUTSTANDING AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) AT COST EQUITY
------------- ------------ ------------- -------------- --------------- ----------- ----------
Balance, July 31, 1998 4,367,201 $ 437 $19,019 $ (3,957) $ (2,273) $ - $13,226
Exercise of options 154,882 15 315 330
Purchases of
Treasury Stock (77,400) (393) (393)
Escrow settlement
related to
acquisition (4,138) (30) (30)
Translation adjustment 43 43
Net income 1,369 1,369
------------- ------------ ------------- -------------- ------------ ----------- ------------
Balance, July 31, 1999 4,440,545 452 19,304 (2,588) (2,230) (393) 14,545
Exercise of options 42,336 8 198 (198) 8
Purchases of
Treasury Stock (44,500) (207) (207)
Translation adjustment 133 133
Net income 2,684 2,684
------------- ------------ ------------- -------------- ------------ ----------- ------------
Balance, July 31, 2000 4,438,381 460 19,502 96 (2,097) (798) 17,163
Exercise of options 120,895 13 738 (222) 529
Translation adjustment (409) (409)
Unrealized gain on
available-for-sale
securities 332 332
Unrealized gain on
currency hedging 31 31
Net income 4,381 4,381
------------- ------------ ------------- -------------- ------------ ----------- ------------
Balance, July 31, 2001 4,559,276 $ 473 $20,240 $ 4,477 $ (2,143) $ (1,020) $22,027
============= ============ ============= ============== ============ =========== ============
</Table>
See accompanying notes.
4
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<Table>
<Caption>
YEAR ENDED JULY 31,
2001 2000 1999
--------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 4,156 $ 2,831 $ 1,660
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Income (loss) from discontinued operations 225 (147) (291)
Depreciation and amortization of continuing operations 553 463 419
Depreciation and amortization of discontinued operations - 87 63
Write-off of medical sharps inventories - - 452
Deferred income taxes - 256 39
Changes in assets and liabilities:
Accounts receivable (3,025) 492 (2,672)
Inventories (1,350) 568 (249)
Other current assets 99 379 178
Accounts payable and accrued expenses (489) (68) 1,938
Income taxes 1,173 (193) 379
--------------- -------------- ---------------
Net cash provided by operating activities 1,342 4,668 1,916
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (367) (320) (272)
Purchases of available-for-sale securities (725) - -
Cash provided by (used in) discontinued operations 773 (909) 179
Proceeds from transfer of discontinued operations 2,350 - -
Other, net (896) (163) (282)
--------------- -------------- ---------------
Net cash provided by (used in) investing activities 1,135 (1,392) (375)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under credit facilities (125) (1,436) (1,409)
Capital lease obligations - (6) (28)
Proceeds from exercise of stock options 529 8 330
Purchases of Treasury Stock - (207) (393)
--------------- -------------- ---------------
Net cash provided by (used in) financing activities 404 (1,641) (1,500)
--------------- -------------- ---------------
Increase in cash and cash equivalents 2,881 1,635 41
Cash and cash equivalents at beginning of year 2,169 534 493
--------------- -------------- ---------------
Cash and cash equivalents at end of year $ 5,050 $ 2,169 $ 534
=============== ============== ===============
</Table>
See accompanying notes.
5
<Page>
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2001, 2000 AND 1999
1. BUSINESS DESCRIPTION
Cantel Medical Corp. ("Cantel") had two wholly-owned operating subsidiaries
(collectively known as the "Company") at July 31, 2001. Its United States
subsidiary, MediVators, Inc. ("MediVators" or "United States subsidiary") is
engaged in the manufacturing, marketing, distribution and service of infection
control products. Its Canadian subsidiary, Carsen Group Inc. ("Carsen" or
"Canadian subsidiary") is engaged in the marketing, distribution and service of
medical and infection control and scientific products in Canada.
Effective July 31, 2000, Carsen discontinued its Consumer Products business and
the results of Consumer Products have been presented as a discontinued
operation, as described in note 7 to the Consolidated Financial Statements.
On September 7, 2001, the Company completed its acquisition of Minntech
Corporation ("Minntech") which became a wholly-owned subsidiary of Cantel, as
more fully described in note 16 to the Consolidated Financial Statements.
Minntech is engaged in the development, manufacturing and marketing of
disinfection/reprocessing systems for renal dialysis as well as filtration and
separation and other products for medical and non-medical applications. The
products are available through Minntech's distribution network in the United
States and in many international markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cantel Medical
Corp. and its wholly-owned subsidiaries. Since the Company's acquisition of
Minntech was completed subsequent to the end of fiscal 2001, such acquisition
had no impact upon the Company's results of operations for any of the periods
presented. All significant intercompany transactions and balances have been
eliminated in consolidation.
REVENUE RECOGNITION
Revenue on product sales is recognized as products are shipped to customers or
when title passes, net of provisions for sales allowances and similar items.
Revenue on service sales is
6
<Page>
recognized when repairs are completed and the products are shipped to customers.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of Carsen are translated into United States dollars at
year-end exchange rates; sales and expenses are translated using average
exchange rates during the year. The cumulative effect of the translation of
Carsen's financial statements is presented as a component of accumulated other
comprehensive loss. Foreign exchange gains and losses related to the purchase of
inventories are included in cost of sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
AVAILABLE-FOR-SALE-SECURITIES
Available-for-sale securities are carried at fair value, with the unrealized
gain reported as a component of accumulated other comprehensive loss. The
securities consist exclusively of equity securities in Minntech purchased for
$725,000 during September 2000. Gross unrealized gains on such securities during
fiscal 2001 were $332,000.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and improvements are
capitalized, while maintenance and repair costs are expensed. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the respective accounts and any resulting gain or loss is
included in income. Depreciation and amortization are provided on either the
straight-line method or, for certain furniture and equipment, the declining
balance method, over the estimated useful lives of the assets which generally
range from 3-7 years for furniture and equipment and the life of the lease for
leasehold improvements.
OTHER ASSETS
Inventories of sales samples which have not turned over within one year and
medical loaners available for customers are included
7
<Page>
in other assets and are carried at the lower of cost or net realizable value.
At July 31, 2001, other assets included professional fees and bank financing
costs of $2,283,000 associated with the Minntech merger.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), the Company has elected
to follow Accounting Principal Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" ("APB 25") and related interpretations in accounting for
its stock option plans. Under APB 25, no compensation expense is recognized at
the time of option grant if the exercise price of the Company's employee stock
option is fixed and equals or exceeds the fair market value of the underlying
common stock on the date of grant.
INCOME TAXES
The Company accounts for income taxes by the liability method in accordance
with SFAS No. 109 "ACCOUNTING FOR INCOME TAXES".
No income taxes have been provided on the undistributed earnings ($18,982,000 at
July 31, 2001) of Carsen since the Company does not intend to repatriate such
earnings unless no additional United States taxes would result upon such
repatriation.
INTANGIBLE ASSETS
In connection with the acquisition of Chris Lutz Medical, Inc. during fiscal
1998, Cantel acquired intangible assets consisting primarily of customer lists,
intellectual property, a non-compete agreement and goodwill. These intangible
assets are being amortized on the straight-line method over the estimated useful
lives of the assets ranging from 3-20 years. Amortization expense on intangible
assets was $143,000, $148,000 and $167,000 for fiscal 2001, 2000 and 1999,
respectively.
The carrying value of the Company's intangible assets is reviewed if the facts
and circumstances suggest that they may be permanently impaired. Such review is
based upon the undiscounted expected future operating profit derived from such
businesses. In the event such result is less than the carrying value of the
intangible assets, the carrying value of the intangible assets is reduced to an
amount that reflects the expected future benefit.
8
<Page>
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed based upon the weighted average
number of common shares outstanding during the year.
Diluted earnings per common share are computed based upon the weighted average
number of common shares outstanding during the year plus the dilutive effect of
options using the treasury stock method and the average market price for the
year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
During fiscal 2001, the Company adopted SFAS 133, as amended, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). Because of the
Company's minimal use of hedging activities, the adoption of this statement did
not have a significant effect on the financial position or results of operations
of the Company.
In the fourth quarter of fiscal 2001, the Company adopted the Financial
Accounting Standards Board's Emerging Issues Task Force No. 00-10, "ACCOUNTING
FOR SHIPPING AND HANDLING FEES AND COSTS" ("EITF 00-10"). The adoption of EITF
00-10 has resulted in a reclassification to reflect shipping expenses in cost of
sales and related amounts billed to customers in net sales. The effect on the
Company's Consolidated Statements of Income was to increase net sales by
$293,000, $309,000 and $275,000 in fiscal 2001, 2000 and 1999, respectively, to
increase cost of sales by $337,000, $370,000 and $339,000 in fiscal 2001, 2000
and 1999, respectively, and to decrease operating expenses by $44,000, $61,000
and $64,000 in fiscal 2001, 2000 and 1999, respectively. These reclassifications
had no effect on income from continuing operations.
In June 2001, the Financial Accounting Standards Board issued SFAS 141,
"BUSINESS COMBINATIONS" ("SFAS 141") and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" ("SFAS 142"). SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable
9
<Page>
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). Upon adoption
of SFAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under SFAS
141 will be reclassified to goodwill. The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. Companies
are required to adopt SFAS 142 for fiscal years beginning after December 15,
2001, but early adoption is permitted. The Company will adopt SFAS 142 on August
1, 2001, which is the beginning of fiscal 2002. In connection with the adoption
of SFAS 142, the Company will be required to perform a transitional goodwill
impairment assessment. The Company has not yet determined the impact these
standards will have on its results of operations and financial position.
Goodwill amortization amounted to $35,000 during fiscal 2001.
3. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS
130"), which establishes standards for the reporting and disclosure of
comprehensive income and its components in the financial statements. The
adoption of SFAS 130 had no impact on the Company's net income and a minimal
impact upon stockholders' equity. The Company's comprehensive income for the
years ended July 31, 2001, 2000 and 1999 are set forth in the following table:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
-----------------------------------
Net income $4,381,000 $2,684,000 $1,369,000
Other comprehensive income (loss):
Unrealized gain on securities 332,000 - -
Unrealized gain on currency
hedging 31,000 - -
Foreign currency translation
adjustment (409,000) 133,000 43,000
----------- ----------- ----------
Comprehensive income $4,335,000 $2,817,000 $1,412,000
=========== =========== ==========
</Table>
4. UNUSUAL CHARGES
During fiscal 1999, the Company discontinued MediVators' medical sharps disposal
business, which business had virtually no sales and was not significant to the
results of operations for the Company's Infection Control business in fiscal
1999. In connection with this discontinued business, the Company wrote-off its
remaining net investment in the amount of $467,000, of which
10
<Page>
$452,000 represented inventories and is included within cost of sales.
Additionally, the Company incurred costs of $74,000 in fiscal 1999 related to
professional fees associated with the termination of a proposed acquisition.
5. HEDGING ACTIVITIES
Effective August 1, 2000, the Company adopted SFAS 133, which requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not designated as hedges must be adjusted to fair value
through earnings. If the derivative is designated as a hedge, depending on the
nature of the hedge, changes in the fair value of the derivatives will either be
offset against the change in the fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of the
change in fair value of a derivative that is designated as a hedge will be
immediately recognized in earnings.
The Company's Canadian subsidiary purchases and pays for a substantial portion
of its products in United States dollars and is therefore exposed to
fluctuations in the rates of exchange between the United States dollar and
Canadian dollar. In order to hedge against the impact of such currency
fluctuations on the purchases of inventories, Carsen enters into foreign
currency forward contracts on firm purchases of such inventories in United
States dollars. Total commitments for such foreign currency forward contracts
amounted to $3,750,000 (United States dollars) at July 31, 2001 and cover a
portion of Carsen's projected purchases of inventories through October 2001.
These foreign currency forward contracts are designated as hedges, and therefore
recognition of gains and losses is deferred within other comprehensive income
until settlement of the underlying commitments. Realized gains and losses are
recorded within cost of sales upon settlement. The Company does not hold any
derivative financial instruments for speculative or trading purposes.
The adoption of SFAS 133 on August 1, 2000 did not have a material impact on
operations; however, it resulted in a $107,000 gain being recorded in other
comprehensive income. During fiscal 2001, this entire gain of $107,000 was
included in income. Additionally, the fair value of the Company's derivatives
was $31,000 at July 31, 2001, which resulted in the recording of an unrealized
gain of $31,000 during fiscal 2001. The entire July 31, 2001 deferred gain of
$31,000 will be recognized in earnings during fiscal 2002.
11
<Page>
6. INVENTORIES
A summary of inventories is as follows:
<Table>
<Caption>
July 31,
2001 2000
---------- ----------
Parts $2,294,000 $1,811,000
Finished Goods 5,872,000 5,181,000
---------- ----------
Total $8,166,000 $6,992,000
========== ==========
</Table>
7. DISCONTINUED OPERATIONS
On October 6, 2000, Carsen closed a transaction under an Asset Purchase
Agreement (the "Purchase Agreement") with Olympus America Inc. ("Olympus")
pursuant to which Carsen terminated its consumer products business and sold its
inventories of Olympus consumer products to Olympus. The transaction had an
effective date of July 31, 2000.
The purchase price for the inventory was $1,026,000, net of adjustments related
to estimated warranty claims and promotional program expenses payable to
Carsen's customers. During fiscal 2001, Carsen also received additional
consideration from Olympus under the Purchase Agreement, including amounts
related to transition services provided by Carsen subsequent to July 31, 2000.
Such consideration included (i) fixed cash amounts aggregating approximately
$615,000 and (ii) $619,000, representing twelve and one-half percent (12 1/2%)
of Olympus' net sales of consumer products in Canada in excess of $8,000,000
during the period from August 1, 2000 through March 31, 2001. No additional
amounts are due from Olympus.
The discontinuance of the Consumer Products business has been reflected as a
discontinued operation and is presented separately in the Company's Consolidated
Financial Statements.
12
<Page>
Operating results of the Consumer Products business, including results related
to the disposal of the business, are as follows:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
---------------------------------------
Net sales $ - $15,825,000 $12,557,000
============ ============ ============
Pretax operating loss $ - $ (164,000) $ (531,000)
Income tax benefit - (67,000) (240,000)
------------ ------------ ------------
Loss from discontinued operations $ - $ (97,000) $ (291,000)
============ ============ =============
Pretax gain on disposal $ 380,000 $ 36,000 $ -
Income tax expense 155,000 86,000 -
------------ ---------- ------------
Gain (loss) on disposal $ 225,000 $ (50,000) $ -
============ ============ ============
</Table>
The components of net assets (liabilities) related to the discontinued business
in the Consolidated Balance Sheets and the activity during fiscal 2001 are set
forth below:
<Table>
<Caption>
July 31, Cash Received Other Gain (Loss) July 31,
2000 From Olympus Settlements on Disposal 2001
----------- ------------ ------------ ----------- -----------
Trade accounts receivable,
net of allowance for
doubtful accounts of
$99,000 at July 31, 2000 $3,047,000 $ - $(3,132,000) $ 85,000 $ -
Consideration due under
Purchase Agreement 1,989,000 (2,350,000) 13,000 348,000 -
Inventories 235,000 - (84,000) (151,000) -
Accounts payable (1,531,000) - 1,531,000 - -
Accrued expenses:
Customer promotions (332,000) - 227,000 105,000 -
Compensation and other (313,000) - 224,000 (7,000) (96,000)
----------- ------------ ------------ ------------ -----------
Net assets (liabilities)
related to discontinued
business $3,095,000 $(2,350,000) $(1,221,000) $ 380,000 $ (96,000)
=========== ============ ============ =========== ============
</Table>
At July 31, 2001, net liabilities related to the discontinued business are
included within other accrued expenses.
8. FINANCING ARRANGEMENTS
At July 31, 2001, the Company had a credit facility which provided for (i) a
$2,500,000 revolving credit facility for Cantel and MediVators and (ii) a
$5,000,000 (United States dollars) revolving credit facility for Carsen, both of
which revolving credit facilities were to expire on February 22, 2004, and (iii)
a $12,500,000 acquisition facility available to Cantel and MediVators for
permitted acquisitions in the United States through February
13
<Page>
22, 2003. At July 31, 2001, the Company had no outstanding borrowings under this
credit facility, and at July 31, 2000 the Company had outstanding borrowings of
$125,000 under a prior credit facility.
In conjunction with the acquisition of Minntech on September 7, 2001, the
Company entered into new credit facilities to fund the financed portion of the
cash consideration paid in the merger and costs associated with the merger, as
well as to replace the Company's existing working capital credit facilities. The
new credit facilities include (i) a $25,000,000 senior secured amortizing term
loan facility from a consortium of banks (collectively the "U.S. Lenders") (the
"Term Loan Facility") used by Cantel to finance a portion of the Minntech
acquisition, (ii) a $17,500,000 senior secured revolving credit facility from
the U.S. Lenders (the "U.S. Revolving Credit Facility") used by Cantel to
finance a portion of the Minntech acquisition as well as for future working
capital requirements for the U.S. businesses of Cantel, including Minntech and
MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars)
senior secured revolving credit facility for Carsen (the "Canadian Borrower")
with a Canadian bank (the "Canadian Revolving Credit Facility") used for
Carsen's future working capital requirements. Each of the Term Loan Facility,
the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility
(collectively the "Credit Facilities") expire on September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates ranging from .75%
to 2.00% above the lender's base rate, or at rates ranging from 2.00% to 3.25%
above the London Interbank Offered Rate ("LIBOR"), depending upon the Company's
consolidated ratio of debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The base rates associated with the U.S. Lenders and the
Canadian Lender were 5.00% and 5.25%, respectively, at October 5, 2001. In order
to protect its interest rate exposure, the Company has entered into a three-year
interest rate cap agreement covering $12,500,000 of borrowings under the Term
Loan Facility, which caps LIBOR on this portion of outstanding borrowings at
4.50%. The Credit Facilities also provide for fees on the unused portion of such
facilities at rates ranging from .30% to .50%, depending upon the Company's
consolidated ratio of debt to EBITDA.
The Term Loan Facility and the U.S. Revolving Credit Facility provide for
available borrowings based upon percentages of the U.S. Borrowers' eligible
accounts receivable and inventories; require the U.S. Borrowers to meet certain
financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
14
<Page>
are guaranteed by the U.S. Borrowers. The Canadian Revolving Credit Facility
provides for available borrowings based upon percentages of the Canadian
Borrower's eligible accounts receivable and inventories; requires the Canadian
Borrower to meet certain financial covenants; and is secured by substantially
all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term Loan
Facility and $9,000,000 under the U.S. Revolving Credit Facility. Such
borrowings are at interest rates of 3.25% above LIBOR.
9. INCOME TAXES
The provision for income taxes consists of the following:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
------------------------------------------------------------------------
United
States $ 200,000 $ - $ 74,000 $ - $ 22,000 $ -
Canada 2,651,000 - 2,008,000 3,000 1,875,000 39,000
---------- --------- ---------- --------- ---------- ---------
Total $2,851,000 $ - $2,082,000 $ 3,000 $1,897,000 $ 39,000
========== ========= ========== ========= ========== =========
</Table>
The components of income (loss) from continuing operations before income taxes
are as follows:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
----------------------------------------------
United States $ 630,000 $ 338,000 $ (556,000)
Canada 6,377,000 4,578,000 4,152,000
----------- ---------- -------------
Total $7,007,000 $4,916,000 $3,596,000
=========== ========== =============
</Table>
The effective tax rate differs from the United States statutory tax rate (34%)
due to the following:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
------------------------------------------
Expected statutory tax expense $2,382,000 $1,671,000 $1,223,000
Canadian dividend withholding
taxes 18,000 50,000 21,000
Differential attributable to
Canadian operations 483,000 454,000 502,000
Utilization of NOLs (152,000) (100,000) -
Benefit not recognized on
domestic operating losses - - 189,000
State and local taxes 120,000 10,000 1,000
---------- ----------- ----------
Total $2,851,000 $2,085,000 $1,936,000
========== =========== ==========
</Table>
15
<Page>
Deferred income taxes recorded in the consolidated balance sheets at July 31,
2001 and 2000 include deferred tax assets related to net operating loss
carryforwards ("NOLs") and cumulative temporary differences of $5,032,000 and
$5,401,000, respectively, which have been fully offset by valuation allowances,
as well as deferred tax liabilities of $77,000 and $348,000, respectively. The
valuation allowances have been established equal to the full amount of the
deferred tax assets, as the Company was not assured at July 31, 2001 and 2000
that it was more likely than not that a benefit will be realized. The valuation
allowance related to the Company's NOLs and cumulative temporary differences
will be reversed in connection with the purchase price allocation for the
Minntech acquisition, based upon an assessment of the combined companies
expected future results of operations.
For financial statement and domestic tax reporting purposes, the Company has
NOLs of approximately $14,065,000 at July 31, 2001, which expire through July
31, 2021. Of this amount, approximately $640,000 represents NOLs accumulated by
MediVators prior to the MediVators merger, which may only be used against the
future earnings of MediVators and are subject to annual limitations due to an
ownership change. The NOLs presented are based upon the tax returns as filed and
are subject to examination by the Internal Revenue Service.
10. COMMITMENTS AND CONTINGENCIES
DISTRIBUTION AGREEMENTS
OLYMPUS/CARSEN AGREEMENT
The majority of Carsen's sales of medical and scientific products have been made
pursuant to an agreement (the "Olympus Agreement") with Olympus under which
Olympus has granted Carsen the exclusive right to distribute the covered Olympus
products in Canada. All products sold by Carsen pursuant to the agreement bear
the "Olympus" trademark. The Olympus Agreement expires on March 31, 2004. If
Carsen fulfills its obligations under the Olympus Agreement, the parties will
establish new minimum purchase requirements and extend the Olympus Agreement
through March 31, 2006.
During the term of the Olympus Agreement and for one year thereafter, Carsen has
agreed that it will not manufacture, distribute, sell or represent for sale in
Canada any products which are competitive with the Olympus products covered by
the Olympus Agreement.
The Olympus Agreement imposes minimum purchase obligations on Carsen with
respect to each of medical equipment, precision instruments and industrial
technology equipment. The aggregate
16
<Page>
annual minimum purchase obligations for all such products are approximately
$17.0 million, $18.8 million and $21.0 million during the contract years ending
March 31, 2002, 2003 and 2004, respectively.
The Olympus Agreement generally prohibits both Olympus and Carsen from hiring
any employee of the other party for a period of one year after the conclusion of
the employee's employment with such other party. This prohibition remains in
effect during the term of the Olympus Agreement and the first year thereafter.
Subject to an allowance of a 10% shortfall from the minimum purchase
requirements in certain situations, Olympus has the option to terminate or
restructure the Olympus Agreement with respect to each product group for which
Carsen has failed to meet the minimum purchase requirements. If Carsen fails to
meet such requirements for both precision instruments and industrial technology
equipment, or for medical equipment, then Olympus has the option to terminate or
restructure the entire Olympus Agreement. Olympus may also terminate the Olympus
Agreement if Carsen breaches its other obligations under the Olympus Agreement.
MEDIVATORS/OLYMPUS AGREEMENT
MediVators has a four year agreement with Olympus (the "MediVators Agreement")
which expires on August 1, 2003, under which Olympus is granted the exclusive
right to distribute all MediVators' endoscope disinfection equipment and related
accessories and supplies in the United States and Puerto Rico. All products sold
by Olympus pursuant to this agreement bear both the "Olympus" and "MediVators"
trademarks.
This agreement provides for minimum purchase projections. Failure by Olympus to
achieve the minimum purchase projections in any contract year could give
MediVators the option to terminate the agreement. Net sales to Olympus accounted
for 18.4%, 15.8% and 12.7% of the Company's net sales in fiscal 2001, 2000 and
1999, respectively.
Sales to Olympus are recognized on a bill and hold basis based upon the receipt
of a written purchase order from Olympus, the completion date specified in the
order, the actual completion of the manufacturing process and the invoicing of
goods. At July 31, 2001 and 2000, accounts receivable included bill and hold
receivables of approximately $867,000 and $897,000, respectively.
LEASE OBLIGATIONS
Aggregate future minimum rental commitments at July 31, 2001 under operating
leases for property (including a new lease entered into
17
<Page>
by MediVators in September 2001 but excluding Minntech) and equipment are as
follows:
<Table>
Year Ending July 31,
2002 $ 504,000
2003 497,000
2004 466,000
2005 447,000
2006 217,000
Thereafter 31,000
----------
Total rental commitments $2,162,000
==========
</Table>
Rent expense aggregated $502,000, $429,000 and $440,000 for fiscal 2001, 2000
and 1999, respectively, which includes amounts previously allocated to the
discontinued operations.
11. STOCKHOLDERS' EQUITY
An aggregate of 250,000 shares of Common Stock was reserved for issuance or
available for grant under the Company's 1991 Employee Stock Option Plan (the
"1991 Employee Plan"), which expired in fiscal 2001. All options outstanding at
July 31, 2001 under the 1991 Employee Plan have a term of five years and are
exercisable in full. At July 31, 2001, options to purchase 12,500 shares of
Common Stock were outstanding under the 1991 Employee Plan. No additional
options will be granted under the 1991 Employee Plan.
An aggregate of 1,000,000 shares of Common Stock is reserved for issuance or
available for grant under the Company's 1997 Employee Stock Option Plan, as
amended (the "1997 Employee Plan"), through October 15, 2007. Options under the
1997 Employee Plan are granted at no less than 100% of the market price at the
time of the grant, typically become exercisable in four equal annual
installments and expire up to a maximum of ten years from the date of the grant.
At July 31, 2001, options to purchase 393,000 shares of Common Stock were
outstanding under the 1997 Employee Plan and 545,875 shares were available for
grant.
An aggregate of 200,000 shares of Common Stock was reserved for issuance or
available for grant under the Company's 1991 Directors' Stock Option Plan (the
"1991 Directors' Plan"), which expired in fiscal 2001. All options outstanding
at July 31, 2001 under the 1991 Directors' Plan have a term of ten years and are
exercisable in full. At July 31, 2001, options to purchase 101,000 shares of
Common Stock were outstanding under the 1991 Directors' Plan. No additional
options will be granted under the 1991 Directors' Plan.
An aggregate of 200,000 shares of Common Stock is reserved for issuance or
available for grant under the Company's 1998 Directors' Stock Option Plan (the
"1998 Directors' Plan"). Options under the
18
<Page>
1998 Directors Plan are granted to directors only at no less than 100% of the
market price at the time of grant. Under the plan, options to purchase 1,000
shares are granted annually on the last business day of the Company's fiscal
year to each member of the Company's Board of Directors. The annual options are
exercisable, as to 50% of the number of shares, on the first anniversary of the
grant of such options and are exercisable for the balance of such shares on the
second anniversary of the grant of such options. On a quarterly basis, options
to purchase 500 shares are granted to each member of the Company's Board, except
for employees of the Company, in attendance at that quarter's Board of Directors
meeting. The quarterly options are exercisable immediately. Options granted
prior to July 31, 2000 have a term of ten years and options granted on or after
July 31, 2000 have a term of five years. At July 31, 2001, options to purchase
37,500 shares of Common Stock were outstanding under the 1998 Directors' Plan
and 162,500 shares were available for grant.
The Company also has outstanding non-plan options which have been granted at the
market price at the time of grant and expire up to a maximum of ten years from
the date of grant, and options granted by MediVators prior to the Merger under
the MediVators 1991 Stock Option Plan which became fully exercisable as the
result of the Merger. No additional options will be granted under the MediVators
Stock Option Plan.
In accordance with the provisions of SFAS 123, the Company has elected to follow
APB Opinion 25 and related interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation expense. If the Company
had elected to recognize compensation expense based on the fair value of the
options granted at grant date as prescribed by SFAS 123, income and diluted
earnings per share from continuing operations would have been $3,702,000 and
$0.75, respectively, for fiscal 2001, $2,458,000 and $0.55, respectively, for
fiscal 2000 and $1,288,000 and $0.28, respectively, for fiscal 1999. The pro
forma effect on income from continuing operations for these years may not be
representative of the pro forma effect on income from continuing operations in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to fiscal 1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model with the following assumptions: expected
dividend yield of 0%; expected stock price volatility ranging from .31 to .69;
risk-free interest rate at date of grant ranging from 3.59% to 6.19%; and
expected weighted average option lives of 1-10 years. Additionally, all options
were considered to be non-deductible for tax purposes in the valuation model.
The weighted average fair value of options
19
<Page>
granted in fiscal 2001, 2000 and 1999 was $7.29, $2.65 and $2.76 per share,
respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility and the
expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
20
<Page>
A summary of stock option activity follows:
<Table>
<Caption>
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at July 31, 1998 695,163 $5.03
Granted 305,000 6.36
Canceled (88,944) 6.20
Exercised (158,064) 2.23
---------
Outstanding at July 31, 1999 753,155 6.02
Granted 146,500 5.48
Canceled (52,595) 6.07
Exercised (79,275) 2.59
---------
Outstanding at July 31, 2000 767,785 6.27
Granted 181,500 10.09
Canceled (55,489) 7.94
Exercised (135,939) 5.53
---------
Outstanding at July 31, 2001 757,857 $7.19
=========
Exercisable at July 31, 1999 426,365 $5.63
=========
Exercisable at July 31, 2000 449,827 $6.52
=========
Exercisable at July 31, 2001 444,148 $6.98
=========
</Table>
The following table summarizes additional information related to stock options
outstanding at July 31, 2001:
<Table>
<Caption>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at July 31, 2001 (Months) Price at July 31, 2001 Price
--------------- ---------------- ----------- -------- ---------------- -----------
$1.75 - $ 4.00 17,500 18 $3.08 17,500 $3.08
$4.25 - $ 6.81 347,607 60 $5.66 173,564 $5.71
$7.00 - $10.25 392,750 84 $8.72 253,084 $8.11
------- -------
$1.75 - $10.25 757,857 72 $7.19 444,148 $6.98
======= =======
</Table>
21
<Page>
12. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
----------------------------------
Numerator for basic
and diluted earnings
per share:
Income from continuing
operations $4,156,000 $2,831,000 $1,660,000
Gain (loss) from
discontinued operations 225,000 (147,000) (291,000)
---------- ---------- ----------
Net income $4,381,000 $2,684,000 $1,369,000
========== ========== ==========
Denominator for basic
and diluted earnings
per share:
Denominator for basic
earnings per share -
weighted average number
of shares outstanding 4,471,623 4,411,805 4,394,406
Dilutive effect of options
using the treasury stock
method and the average
market price for the
year 438,555 67,676 196,934
---------- ---------- ----------
Denominator for diluted
earnings per share -
weighted average number
of shares and common
stock equivalents 4,910,178 4,479,481 4,591,340
========== ========== ==========
Basic earnings per share:
Continuing operations $ 0.93 $ 0.64 $ 0.38
Discontinued operations 0.05 (0.03) (0.07)
---------- ---------- ----------
Net income $ 0.98 $ 0.61 $ 0.31
========== ========== ==========
Diluted earnings per share:
Continuing operations $ 0.85 $ 0.63 $ 0.36
Discontinued operations 0.04 (0.03) (0.06)
---------- ---------- ----------
Net income $ 0.89 $ 0.60 $ 0.30
========== ========== ==========
</Table>
In fiscal 1999, the charge of $467,000 associated with the discontinuance of
MediVators' medical sharps disposal business, as discussed in note 4 to the
Consolidated Financial Statements,
22
<Page>
reduced basic and diluted earnings per share from continuing operations by
$0.10. Without this charge, basic and diluted earnings per share from continuing
operations for fiscal 1999, as adjusted, would have been $0.48 and $0.46,
respectively.
13. RETIREMENT PLANS
The Company has a 401(k) Savings and Retirement Plan for the benefit of eligible
United States employees. Contributions by the Company are both discretionary and
non-discretionary and are limited in any year to the amount allowable by the
Internal Revenue Service.
Carsen has a profit-sharing plan for the benefit of eligible employees.
Contributions by Carsen are discretionary and aggregate contributions are
limited in any year to the amount allowable as a deduction in computing taxable
income.
Aggregate contributions under these plans were $232,000, $181,000 and $108,000
for fiscal 2001, 2000 and 1999, respectively.
14. SUPPLEMENTAL INCOME STATEMENT AND CASH FLOW INFORMATION
Advertising costs charged to expenses were $26,000, $13,000 and $63,000 for
fiscal 2001, 2000 and 1999, respectively.
Interest paid was $19,000, $228,000 and $280,000 for fiscal 2001, 2000 and 1999,
respectively.
Income tax payments, which related principally to the Company's Canadian
subsidiary, were $1,905,000, $2,082,000 and $1,319,000 for fiscal 2001, 2000 and
1999, respectively.
15. INFORMATION AS TO OPERATIONS IN DIFFERENT INDUSTRIES AND FOREIGN AND
DOMESTIC OPERATIONS
Cantel is a healthcare company concentrating primarily in infection prevention
and control products and diagnostic and therapeutic medical equipment. Through
its United States subsidiary, Cantel serves customers worldwide by designing,
developing, manufacturing, marketing and distributing innovative products for
the infection prevention and control industry. Through its Canadian subsidiary,
Cantel markets and distributes medical equipment (including flexible and rigid
endoscopes), precision instruments, (including microscopes and high performance
image analysis hardware) and industrial equipment (including remote visual
inspection devices). Cantel's subsidiaries also provide technical maintenance
services for their own products, as well as for certain competitors' products.
23
<Page>
The medical, infection prevention and control and scientific products
distributed by the Company consist of diagnostic and therapeutic medical
equipment, including flexible and rigid endoscopes, endoscope disinfection
equipment, surgical equipment and related accessories that are sold to
hospitals; precision instruments, including microscopes and high performance
image analysis hardware and related accessories that are sold to educational
institutions, hospitals and government and industrial laboratories; and
industrial technology equipment, including borescopes, fiberscopes and video
image scopes that are sold primarily to large industrial companies.
In accordance with SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION", the Company has determined its reportable business
segments based upon an assessment of product types, organizational structure,
customers and internally prepared financial statements. The primary factors used
by management in analyzing segment performance are net sales and operating
income.
24
<Page>
(a) Information as to operating segments is summarized below:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
-------------------------------------------
Net sales from continuing
operations:
Medical Products $22,209,000 $17,216,000 $16,994,000
Infection Control
Products 12,868,000 11,079,000 9,433,000
Scientific Products 8,214,000 8,254,000 6,889,000
Product Service 6,491,000 5,508,000 5,271,000
Elimination of inter-
company sales of
Infection Control
Products (787,000) (760,000) (767,000)
------------ ------------ ------------
Total $48,995,000 $41,297,000 $37,820,000
============ ============ ============
Operating income from continuing
operations:
Medical Products $ 4,277,000 $ 2,909,000 $ 3,038,000
Infection Control
Products (1) 2,232,000 1,599,000 412,000
Scientific Products 343,000 531,000 231,000
Product Service 2,187,000 1,878,000 1,600,000
Elimination of inter-
company operating
(loss) income of
Infection Control Products (14,000) 1,000 (25,000)
----------- ------------ ------------
9,025,000 6,918,000 5,256,000
General corporate expenses (2,060,000) (1,777,000) (1,389,000)
Interest income (expense) 42,000 (225,000) (271,000)
------------ ------------ ------------
Income from continuing
operations before income
taxes(1) $ 7,007,000 $ 4,916,000 $ 3,596,000
============ ============ ============
</Table>
(1) Includes for fiscal 1999 costs of $467,000 associated with the
discontinuance of MediVators' medical sharps disposal business. Without this
write-off, fiscal 1999 operating income for Infection Control Products would
have been $879,000 and income from continuing operations before income taxes
would have been $4,063,000.
25
<Page>
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
-------------------------------------------
Identifiable assets:
Medical Products $11,242,000 $ 7,830,000 $ 8,637,000
Infection Control
Products 5,392,000 4,732,000 5,317,000
Scientific Products 4,592,000 5,226,000 4,865,000
Product Service 2,129,000 1,825,000 1,819,000
General corporate (principally
cash and cash equivalents) 8,574,000 2,247,000 843,000
----------- ----------- -----------
Continuing operations 31,929,000 21,860,000 21,481,000
Discontinued operations - 3,095,000 2,245,000
----------- ----------- -----------
Total $31,929,000 $24,955,000 $23,726,000
=========== =========== ===========
Capital expenditures:
Medical Products $ 105,000 $ 83,000 $ 122,000
Infection Control
Products 135,000 135,000 66,000
Scientific Products 38,000 41,000 49,000
Product Service 27,000 25,000 35,000
General corporate 62,000 36,000 -
----------- ----------- -----------
Continuing operations 367,000 320,000 272,000
Discontinued operations - 76,000 90,000
----------- ----------- -----------
Total $ 367,000 $ 396,000 $ 362,000
=========== =========== ===========
Depreciation and amortization:
Medical Products $ 153,000 $ 100,000 $ 85,000
Infection Control
Products 286,000 286,000 265,000
Scientific Products 56,000 40,000 41,000
Product Service 40,000 32,000 24,000
General corporate 18,000 5,000 4,000
----------- ----------- -----------
Continuing operations 553,000 463,000 419,000
Discontinued operations - 87,000 63,000
----------- ----------- -----------
Total $ 553,000 $ 550,000 $ 482,000
=========== =========== ===========
</Table>
26
<Page>
(b) Information as to geographic areas is summarized below:
<Table>
<Caption>
Year Ended July 31,
2001 2000 1999
-------------------------------------------
Net sales from continuing
operations:
United States $12,721,000 $10,729,000 $ 9,141,000
Canada 36,274,000 30,568,000 28,679,000
----------- ----------- -----------
Total $48,995,000 $41,297,000 $37,820,000
=========== =========== ===========
Total assets:
United States $10,423,000 $ 5,696,000 $ 5,573,000
Canada 21,506,000 19,259,000 18,153,000
----------- ----------- -----------
Total $31,929,000 $24,955,000 $23,726,000
=========== =========== ===========
</Table>
16. ACQUISITION OF MINNTECH CORPORATION (UNAUDITED)
On September 7, 2001, the Company completed its acquisition of Minntech
Corporation ("Minntech"), a public company based in Plymouth, Minnesota, in a
merger transaction. Since the merger and the new credit facilities were
completed subsequent to the end of fiscal 2001, the acquisition had no impact
upon the Company's results of operations for any of the periods presented.
Under the terms of the Agreement and Plan of Merger, each share of Minntech was
converted into the right to receive $10.50, consisting of $6.25 in cash, and
.2216 of a share of Cantel common stock having a value of $4.25. With respect to
the stock portion of the consideration, Cantel issued 1,467,592 shares of common
stock in the merger. The total consideration for the transaction was
approximately $70.3 million, excluding transaction costs. The transaction will
be accounted for as a purchase and in accordance with the provisions of SFAS
141.
In conjunction with the acquisition, on September 7, 2001 Cantel entered into
new credit facilities to fund the financed portion of the cash consideration
paid in the merger and costs associated with the merger, as well as to replace
the Company's existing working capital credit facilities, as discussed in note 8
to the Consolidated Financial Statements.
Minntech is a leader in the development, manufacturing, and marketing of
disinfection/reprocessing systems for renal dialysis as well as filtration and
separation and other products for medical
27
<Page>
and non-medical applications. The products are available through Minntech's
distribution network in the United States and in many international markets.
Set forth below are selected unaudited pro forma consolidated financial data for
the transaction. The selected unaudited pro forma consolidated statement of
income data for fiscal 2001 combines information from consolidated statements of
income of Cantel and Minntech as if the merger had been completed on August 1,
2000, the first day of fiscal 2001. The selected unaudited pro forma
consolidated balance sheet data combines information from the balance sheets of
Cantel and Minntech as if the merger had been completed on July 31, 2001. This
pro forma information is provided for illustrative purposes only, and does not
necessarily indicate what the operating results or financial position of the
combined company might have been had the merger actually occurred at these
dates, nor does it necessarily indicate what the combined company's future
operating results or financial position will be. This information also does not
reflect any cost savings from operating efficiencies or other improvements which
may be achieved by combining the companies.
Selected unaudited pro forma consolidated statement of income data:
<Table>
<Caption>
Year Ended
July 31, 2001
-------------
Net sales $127,926,000
Income from continuing operations 3,920,000
Earnings from continuing operations:
Basic $ 0.66
Diluted $ 0.61
Weighted average common shares:
Basic 5,940,000
Diluted 6,378,000
</Table>
Selected unaudited pro forma consolidated balance sheet data:
<Table>
<Caption>
July 31, 2001
-------------
Total assets $114,943,000
Current assets 64,089,000
Current liabilities 31,113,000
Long-term debt 32,000,000
Stockholders' equity $ 49,843,000
Common shares outstanding 6,027,000
</Table>
The results presented in the selected unaudited pro forma consolidated statement
of income data have been prepared using the following assumptions: (i) cost of
sales reflects a step-up in the
28
<Page>
cost basis of Minntech's inventories; (ii) amortization of intangible assets and
depreciation of fixed assets based upon preliminary estimates of the fair values
of such assets using estimated useful lives of seven years for all such assets;
(iii) in accordance with the provisions of SFAS 142, no amortization expense for
the goodwill generated as a result of the merger has been reflected; (iv)
interest expense on the senior bank debt at an effective interest rate of 7% per
annum; and (v) calculation of the income tax effects of the pro forma
adjustments.
The selected unaudited pro forma consolidated balance sheet data has been
prepared using the following assumptions: (i) issuance of 1,467,592 shares of
common stock in the merger; (ii) use of existing cash to fund a portion of the
cash consideration given to Minntech shareholders as well as costs related to
the merger; (iii) obtaining senior bank debt of approximately $34 million to
finance a portion of the $6.25 per share cash consideration given to former
Minntech shareholders for each outstanding share of Minntech common stock; (iv)
preliminarily allocating the purchase price to the net assets of Minntech
acquired in the transaction based upon the estimated fair values of the tangible
and intangible assets acquired and the liabilities assumed, and to further
record the remaining excess purchase price as goodwill (the purchase adjustments
made in connection with the development of the selected unaudited pro forma
information are preliminary and have been estimated solely for purposes of
developing such information). Minntech has recorded an estimated liability of
$1,900,000 at June 30, 2001 related to certain state sales and use tax
exposures; such liability will be evaluated after the resolution of this
contingency, and adjusted if necessary as part of the purchase price
allocation.
Minntech's results of operations for the twelve months ended July 31, 2001
included charges of approximately $1,540,000 for sales and use taxes and
$300,000 in legal and consulting expenses associated with the merger. Without
these charges and the related income taxes, pro forma consolidated income from
operations for fiscal 2001 would have been approximately $5,015,000, and pro
forma consolidated basic and diluted earnings per share would have been $0.84
and $0.79, respectively.
29
<Page>
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------------------------------
BALANCE AT BALANCE
BEGINNING DEDUCTIONS AT END
OF PERIOD ADDITIONS (RECOVERIES) OF PERIOD
---------------------------------------------------
Allowance for
doubtful accounts:
Continuing operations:
Year ended
July 31, 2001 $ 66,000 $ 9,000 $ 13,000 $ 62,000
==================================================
Year ended
July 31, 2000 $ 40,000 $ 39,000 $ 13,000 $ 66,000
==================================================
Year ended
July 31, 1999 $ 40,000 $ 49,000 $ 49,000 $ 40,000
==================================================
Discontinued operations:
Year ended
July 31, 2001 $ 99,000 $ - $ 99,000 $ -
==================================================
Year ended
July 31, 2000 $ 41,000 $ 81,000 $ 23,000 $ 99,000
==================================================
Year ended
July 31, 1999 $ 22,000 $ 12,000 $ (7,000) $ 41,000
==================================================
</Table>
30