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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2003
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-31337
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 orga
nization) 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:
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<Caption>
Name of each exchange
Title of each class on which registered
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Common Stock, $.10 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: none
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 / /
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. / /
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant (based on shares held and the closing price
quoted by the New York Stock Exchange on October 2, 2003): $86,152,000
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the close of business on October 2, 2003: 9,313,118
Documents incorporated by reference: Definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934
in connection with the 2003 Annual Meeting of Stockholders of Registrant.
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FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report contains
forward looking statements that involve a number of 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, including the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 2003. Such
statements are only predictions, and actual events or results may differ
materially from those projected.
AVAILABILITY OF REPORTS
Cantel Medical Corp. (the "Company" or "Cantel") files reports and other
information with the Securities and Exchange Commission ("SEC") pursuant to the
information requirements of the Securities Exchange Act of 1934, as amended.
Readers may read and copy any document the Company files at the SEC's public
reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. The Company's filings are also
available to the public from commercial document retrieval services and at the
SEC's website at www.sec.gov.
We make available on our internet website free of charge our Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to such reports as soon as practicable after we electronically file
such reports with the SEC. Our website address is www.cantelmedical.com. The
information contained in our website is not incorporated by reference in this
Report.
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PART I
ITEM 1. BUSINESS.
GENERAL
Cantel Medical Corp. is a healthcare company providing infection
prevention and control products, specialized medical device reprocessing
systems, water treatment systems, sterilants, diagnostic imaging and therapeutic
medical equipment primarily focused on endoscopy, hollow fiber membrane
filtration and separation technologies for medical and non-medical applications,
and scientific instrumentation. The Company also provides technical maintenance
services for its products.
The Company's wholly-owned United States subsidiary, Minntech
Corporation ("Minntech"), which was acquired in September 2001, designs,
develops, manufactures, markets and distributes disinfection/sterilization
reprocessing systems, sterilants and other supplies for renal dialysis;
filtration and separation products for medical and non-medical applications; and
endoscope reprocessing systems, sterilants and other supplies. The Company's
MediVators, Inc. ("MediVators") subsidiary, which accounted for the majority of
the Company's endoscope reprocessing business, was combined with Minntech's
existing facilities in September 2002 and was legally merged into Minntech in
November 2002. Through its wholly-owned Canadian subsidiary, Carsen Group Inc.
("Carsen" or "Canadian subsidiary"), Cantel markets and distributes medical
equipment (including flexible endoscopes, endoscope disinfection equipment,
surgical equipment including rigid endoscopes, and related accessories),
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 products. Unless the context otherwise requires, references
herein to the Company include Cantel and its subsidiaries.
On August 1, 2003, the Company acquired two companies in the water
treatment industry. Biolab Equipment Ltd. ("Biolab") became a wholly-owned
subsidiary of Carsen, and Mar Cor Services, Inc. ("Mar Cor") became a
wholly-owned subsidiary of Cantel. Through Biolab and Mar Cor, the Company
provides water treatment equipment design, project management, installation,
maintenance, service deionization and mixing systems to the medical community
and high purity and ultra-pure water systems for the medical, pharmaceutical,
biotechnology, research and semiconductor industries. On September 26, 2003,
Minntech acquired the endoscope reprocessing systems and accessory infection
control technologies of The Netherlands based Dyped Medical B.V. ("Dyped"). See
"Acquisitions".
Minntech distributes its products in the United States primarily
through its own distribution network with the exception of its endoscope
reprocessing products and certain filtration and
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separation products, and in many international markets either directly or under
various third party distribution agreements. Minntech's MediVators endoscope
reprocessing products are distributed in the United States and Puerto Rico by
Olympus America Inc. ("Olympus") pursuant to an agreement (the "MediVators
Agreement") under which Olympus has been granted exclusive distribution rights
in these territories. Minntech's Netherlands subsidiary, Minntech B.V., with
offices in The Netherlands and the United Kingdom, is the headquarters for its
European operations. Minntech Japan K.K., Minntech's Japan subsidiary, and
Minntech Singapore, a branch office of Minntech B.V., serve as Minntech's base
in the Asia/Pacific market.
Carsen distributes the majority of its endoscopy and surgical products
and a portion of its scientific products related to precision instruments
pursuant to an agreement with Olympus America Inc. (the "Olympus Agreement"),
and distributes a portion of its scientific products related to industrial
technology equipment pursuant to an agreement with Olympus Industrial America
Inc. (the "Olympus Industrial Agreement") (collectively the "Olympus
Agreements"), both of which are United States affiliates of Olympus Corporation,
a Japanese corporation, under which the Company has been granted exclusive
distribution rights for certain Olympus products in Canada. Most of such
products are manufactured by Olympus Corporation and its affiliates. Unless the
context otherwise requires, references herein to "Olympus" include Olympus
America Inc., Olympus Industrial America Inc., and Olympus Corporation, 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 endoscopy and surgical
products, endoscope reprocessing products and scientific products and
accessories.
ACQUISITIONS
MINNTECH
On September 7, 2001, the Company completed its acquisition of
Minntech, a public company based in Plymouth, Minnesota, in a merger
transaction. Minntech is included in the Company's results of operations for
fiscal 2003, the portion of fiscal 2002 subsequent to its acquisition on
September 7, 2001, and is excluded from the Company's results of operations for
fiscal 2001.
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 a fraction of a share of Cantel common stock having a value of $4.25.
With respect to the stock portion of the consideration, Cantel issued
approximately 2,201,000 shares of common stock in the merger. The total
consideration for the transaction, including transaction costs, was
approximately $78,061,000 (including cash of $41,396,000, shares of Cantel
common
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stock with a fair market value of $28,144,000, Cantel's existing investment in
Minntech of $725,000 and final transaction costs, including severance
obligations, of approximately $7,796,000).
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
described in Management's Discussion and Analysis of Financial Condition and
Results of Operations and in note 9 to the Company's Consolidated Financial
Statements.
The reasons for the acquisition of Minntech were the: (i) overall
strategic fit between Cantel and Minntech relative to their respective product
lines, markets and distribution channels; (ii) expectation that the merger would
be accretive to Cantel's future earnings per share, increase the liquidity of
Cantel's common stock and better position the Company to utilize its existing
net operating loss carryforwards to offset taxable income generated in the
United States; (iii) potential synergies and efficiencies that could be realized
through a combination of the companies; (iv) complementary nature of the
companies' infection prevention and control and medical device reprocessing
products, thereby giving the combined company an expanded range of products and
technology in medical device reprocessing; (v) opportunity to diversify into
non-hospital markets with a direct non-hospital based sales force, thus enabling
the combined company to take advantage of cross-selling opportunities,
joint-product development, joint-marketing and distribution and other new
business initiatives; (vi) opportunity to further expand internationally,
particularly in Europe and Asia; (vii) potential growth of Minntech's filtration
business and the potential expansion of hemofiltration technologies into
emerging therapeutic blood procedures; (viii) opportunity for Cantel to further
expand its business into the design, manufacture and distribution of proprietary
products; (ix) enhancement of Cantel's research and development capabilities;
and (x) access by Cantel to Minntech's proprietary liquid chemical germicide
manufacturing expertise. Such reasons for the acquisition of Minntech include
all of the significant factors contributing to a purchase price that resulted in
recognition of goodwill.
As a result of the acquisition of Minntech, the Company added two new
business segments in fiscal 2002, the Renal Systems Group (see "Dialysis
Products") and the Filtration Technologies Group (see "Filtration and Separation
Products"), both of which represent significant sources of revenue and
profitability.
TECHNIMED
On November 1, 2001, the Company acquired substantially all of the
assets, business and properties of Technimed Instruments Inc. and Technimed
International Inc. (collectively "Technimed") for approximately $405,000, which
included cash of approximately
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$241,000 and a note payable in three equal annual installments with a present
value of approximately $164,000.
Technimed was a private company based in Montreal, Canada which
services medical equipment, including rigid endoscopes and hand-held surgical
instrumentation.
BIOLAB
On August 1, 2003, the Company acquired all of the issued and
outstanding stock of Biolab, a private company in the water treatment industry
with locations in Oakville, Ontario and Dorval, Quebec. The total consideration
for the transaction, including assumption of debt and estimated transaction
costs, was approximately $7,800,000. Under the terms of the purchase agreement,
the Company may pay additional consideration up to an aggregate of $3,000,000
based upon Biolab achieving specified targets of earnings before interest,
taxes, depreciation and amortization ("EBITDA") during the three year period
ending July 31, 2006. References herein to Biolab include Biolab and its
subsidiaries.
Biolab designs and manufactures ultra-pure water systems for the
medical, pharmaceutical, biotechnology, research and semiconductor industries
and provides services required to produce and maintain high purity water. These
services cover the full spectrum of system support and maintenance from
installation and start-up to performance evaluations and water quality analysis.
In conjunction with the acquisition of Biolab, the Company amended its
existing Canadian working capital credit facility, as described in Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
note 9 to the Company's Consolidated Financial Statements.
MAR COR
On August 1, 2003, the Company acquired all of the issued and
outstanding stock of Mar Cor, a private company in the water treatment industry
based in Skippack, Pennsylvania. The total consideration for the transaction,
including assumption of debt and estimated transaction costs, was approximately
$8,350,000.
Mar Cor is a service-oriented company providing design, installation,
service and maintenance, training and supplies for water and fluid treatment
systems to the medical, research, and pharmaceutical industries. The company's
products and services cover all levels of water filtration including reverse
osmosis systems, storage tanks, pumps and distribution systems, water softening,
deionization and filters.
In conjunction with the acquisition of Mar Cor, the Company amended
its existing U.S. credit facilities to fund the cash consideration paid and
costs associated with the acquisition,
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as described in Management's Discussion and Analysis of Financial Condition and
Results of Operations and in note 9 to the Company's Consolidated Financial
Statements.
The reasons for the acquisitions of Biolab and Mar Cor were as
follows: (i) the overall strategic fit of water treatment with the Company's
existing dialysis and filtration technology businesses; (ii) the opportunity to
grow the Company's existing businesses and the water treatment business by
combining Minntech's sales, marketing, and product development capabilities with
Mar Cor's regional field service organization and Biolab's water treatment
equipment design and manufacturing expertise; (iii) the opportunity to expand
and diversify the Company's infection prevention and control business,
particularly within the pharmaceutical and biotechnology industries; and (iv)
the expectation that the acquisitions would be accretive to the Company's future
earnings per share.
As a result of the acquisitions of Biolab and Mar Cor, the Company
will add a new business segment in fiscal 2004, Water Treatment Products, and
will have additional sources of product service revenue (see "Water Treatment
Products" and "Product Service").
DYPED
On September 26, 2003, the Company acquired the endoscope reprocessing
systems and accessory infection control technologies of Dyped, a private company
based in The Netherlands, for approximately $1,969,000 which included cash of
$484,000 and a note payable of $1,485,000. The Company may pay additional
purchase price of approximately $550,000 over a three year period contingent
upon the achievement of certain research and development objectives. The primary
reason for the acquisition of Dyped was to expand Minntech's technological
capabilities and augment its endoscope reprocessing product line with a new,
fully automated reprocessor designed to be compliant with emerging European
standards and future market requirements.
Since the acquisitions of Biolab, Mar Cor and Dyped occurred in fiscal
2004, the results of operations of Biolab, Mar Cor and Dyped are excluded from
Cantel's operating results for fiscal 2003, 2002 and 2001.
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OPERATING SEGMENTS
The following table gives information as to the percentage of
consolidated net sales accounted for by each operating segment:
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Year Ended July 31,
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2003 2002 2001
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% % %
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Dialysis Products 45.4 45.3 -
Endoscopy and Surgical Products 13.7 14.2 42.3
Endoscope Reprocessing Products 14.1 14.2 26.6
Filtration and Separation Products 11.7 12.0 -
Scientific Products 7.7 7.0 16.8
Product Service 7.4 7.3 14.3
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100.0 100.0 100.0
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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, 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, which
features 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 DIALYZERS
In response to government mandated cost containment measures, in the
late 1970's many United States dialysis centers began cleaning, disinfecting and
reusing dialyzers (artificial kidneys) in a process known as "dialyzer reuse"
instead of discarding them after a single use. Approximately 76% 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 continued to grow in these markets. In order to
further improve support of its Asia/Pacific distributors, Minntech maintains an
Asia/Pacific
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representative office in Singapore.
The growth of dialyzer reuse in Western Europe has been limited.
However, due to recent changes to the reimbursement system in several key
markets, such as Germany, the Company believes that this situation is improving.
Minntech's dialyzer reprocessing products include the Renatron(R)II
Automated Dialyzer Reprocessing System, the Renalog(R)RM 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.
Actril(R) Ready To Use Cold Sterilant, primarily used as a dialysis machine
disinfectant, and Minncare(R) Cold Sterilant, 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, includes a bar-code reader, computer and Renalog(R)RM software system
that provides dialysis centers with automated record keeping and data analysis
capabilities. The Company believes its Renatron(R) systems are faster, easier to
use, and more efficient than competitive automated systems. The Company also
believes that the Renatron(R) systems are the top selling automated dialyzer
reprocessing systems in the world.
Minntech's Renaclear(TM) Dialyzer Cleaning System, the first dedicated
automated dialyzer cleaning 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 may 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.
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Renalin(R)100 is a specially packaged formulation of Minntech's cold
sterilant product. When used with a Renatron(R)II, Renalin(R)100 requires no
premixing, automates the dilution process and reduces staff set-up time and
exposure to vapors. In addition, Renalin(R)100 packaging reduces required
storage space by approximately 66% from traditional Renalin(R).
Minntech manufactures at its Netherlands facility a comprehensive
product line of test strips to measure concentration levels of most
Minntech-produced chemistries. These test strips ensure that the appropriate
concentration of sterilant is maintained throughout the required contact period,
in addition to verifying that all sterilant has been removed from the device or
system prior to patient use.
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. Minntech manufactures a variety of other electronics products on an
OEM basis.
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 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, and since 1994 the principal product has been its Hemocor
HPH(R) hemoconcentrator. The hemoconcentrator line also features the Hemocor
HPH(R) 700, an adult hemoconcentrator, and the Hemocor HPH(R) Mini, a
hemoconcentrator designed specifically for pediatric and neonatal patients.
Minntech currently offers a total of five hemoconcentrator devices to meet the
clinical requirements of neonatal through adult patients.
The entire line of Hemocor HPH(R) (High Performance Hemoconcentrator
products) contains Minntech's proprietary polysulfone hollow 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.
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HEMOFILTERS
The Renaflo(R) hemofilter 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
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 hollow 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. Outside the U.S., Minntech also sells two additional hemofilters from
the Diafilter product line. These filters also use a proprietary polysulfone
hollow fiber membrane.
GAS AND WATER FILTRATION
Minntech's FiberFlo(R) Membrane Degassing System employs 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.
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 Association for the
Advancement of Medical Instrumentation ("AAMI"). The cartridge filters feature
large surface area and fine filtration advantages that are similar to Minntech's
capsule filter line.
Minntech received 510(k) clearance from the United States Food and
Drug Administration ("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 1999, 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.
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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.
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 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 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.
ENDOSCOPY AND SURGICAL PRODUCTS
Carsen's principal source of revenue is from the marketing and
distribution to hospitals throughout 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.
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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 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), and Minntech (endoscope
disinfection equipment).
ENDOSCOPE REPROCESSING PRODUCTS
Minntech manufactures the MediVators DSD-201, for which the original
design and configuration utilized in this product received FDA 510(k) clearance
in March 1994. The DSD-201 is a microprocessor controlled dual asynchronous
endoscope disinfection system. The system will disinfect two endoscopes at a
time, can be used on a broad variety of endoscopes and is programmable by the
user. Minntech also manufactures the MV table top series which are less
expensive single and dual endoscope disinfection units.
Minntech's MediVators product line of endoscope disinfection equipment
and related accessories and supplies are sold to hospitals and clinics through
its distribution agreement with Olympus in the United States and internationally
through various foreign distributors.
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As a result of Minntech's acquisition of Dyped in September 2003,
Minntech will be able to expand its technological capabilities and augment its
endoscope reprocessing product line with an endoscope reprocessing system
designed to be compliant with emerging European standards. Dyped's versatile
design concepts are expected to satisfy the current needs of Minntech's European
customer base and will serve as a modular platform for future generation systems
being developed for the U.S. market.
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.
Minntech 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 channels. In addition, the entire disinfection 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, the Company introduced Rapicide(TM) high-level
disinfectant and sterilant, which obtained FDA 510(k) clearance for a high-level
disinfection claim of five minutes at 35 degrees Celsius. This disinfection
contact time is currently one of the fastest available of any disinfectant
product sold in the United States.
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. and Sony
of Canada Ltd. digital cameras for research microscopy; and
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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 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.
WATER TREATMENT PRODUCTS
As a result of the acquisitions of Biolab and Mar Cor, the Company
will add a new Water Treatment Products business segment in fiscal 2004.
Both Biolab and Mar Cor provide water treatment solutions specific to
their customers' needs from low-volume, wall mounted reverse osmosis systems, to
high-volume, turn-key water treatment systems. Biolab and Mar Cor application
specialists design the equipment to meet each customer's needs and the specific
site conditions.
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Customers in many industries, including the medical, pharmaceutical,
biotechnology, research and semiconductor industries, have varying needs for
high purity water. Due to direct contact with a dialysis patient's bloodstream,
high purity water is a necessity in order for renal dialysis to be effective
without significant side effects to the patient. As evidenced by the fact that
over 95% of renal dialysis centers use some form of water purification, as well
as the occurrence of aluminum intoxication among dialysis patients in the early
1970's, there are multiple issues regarding the use of untreated municipal water
for renal dialysis applications. Inadequate water quality can cause acute and
chronic conditions in dialysis patients which can include bone disease, anemia,
arthritis, carpal tunnel syndrome, nausea, cardio vascular disease and even
death. Treated water is also used by the pharmaceutical and biotechnology
industries in the production process of medication for dosage, the manufacturing
of bulk drugs, and for use in research and analysis laboratories.
Water treatment systems can include any combination of treatment
methods such as (i) carbon filtration which removes chlorine and dissolved
organic contamination by adsorption; (ii) reverse osmosis which is a filtration
process that forces liquid through non-porous or semi-porous membranes to remove
particles, dissolved molecules and ions resulting in ultra-pure water; (iii)
ultra-filtration which purifies water using a membrane similar in design to a
reverse osmosis system except that its pores are slightly larger; (iv)
deionization which is an ion separation platform that requires resin
regeneration (see "Product Service"); and (v) electro-deionization which is a
form of deionization that is based on the conductance of electrical charges.
The combination of both reverse osmosis and electro-deionization
technologies into a single unique water purification system has been trademarked
by Biolab as RODI(R). The RODI(R) system produces United States Pharmacopeia
grade purified water from virtually any potable source water. Biolab's
Biopure(TM) RODI(R) Systems are designed for use in a broad range of
applications including various laboratory uses, biological engineering, tissue
culture, enzyme mechanics, trace metal studies, rinsing of electronic
components, final rinse of surgical instruments prior to sterilization,
glassware rinsing, pharmaceutical preparations, preparation of process chemicals
and cosmetics, preparation of laboratory reagents and quality control procedures
existing throughout the world.
The entire line of Biopure(TM) water purification equipment has been
designed to produce "biologically pure" water for use in industry and specialty
applications such as hemodialysis, humidification, boiler feed and bottling.
Unique features of the equipment include sanitary and semi-sanitary designs that
feature high quality and value added stainless steel components and contain
features that save money, reduce fouling and provide cleaner, safer purified
water. The H2Pro line of Biopure equipment utilizes heat to pasteurize the
equipment thus reducing the amount of chemicals
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consumed and labor required. This heat pasteurization is environmentally
friendly and prevents the formation of dangerous biofilms.
Biolab also offers a full range of pretreatment equipment, lab water
equipment, and a full range of service deionization tanks and equipment.
Mar Cor provides complete turn-key water purification systems for
dialysis, research, pharmaceutical and industrial customers. In addition, Mar
Cor markets its own line of complete bicarbonate mix and distribution systems
and can design and install various types of concentrate acetate delivery systems
and piping distribution systems for all necessary solutions. Mar Cor's water
treatment products include a portable reverse osmosis machine, a bicarbonate
system with central and single mix distribution units, concentration systems
with central acidified concentrate holding tanks, complete water treatment
systems for dialysis, portable water treatment systems for acute dialysis,
support carts and transport systems, exchangeable tanks for deionization and
carbon solutions, and point of use station wall boxes for patient treatment
areas.
Biolab's and Mar Cor's systems meet water quality and good
manufacturing practice standards of the AAMI. Biolab has received FDA 510(k)
clearance for its Biopure(TM) water treatment equipment for healthcare
applications. Mar Cor has received FDA 510(k) clearance for its dialysis water
treatment systems, bicarbonate mix and distribution systems and the Semper
Pure(R) portable reverse osmosis machine.
PRODUCT SERVICE
The majority of the Company's product service revenue and
profitability is generated by Carsen. 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
endoscopy, surgical, endoscope reprocessing 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
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.
Minntech provides a one year warranty for repairs and service of its
MediVators endoscope reprocessing products and its dialysis equipment.
Generally, warranty repairs and service related to the MediVators DSD-201
endoscope disinfection equipment are performed by the distributor and warranty
repairs on the MV tabletop series and dialysis equipment are performed by
Minntech. Minntech performs out of warranty service of its MV endoscope
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reprocessing products and dialysis equipment for which the customer pays
Minntech on a time and materials basis.
Minntech operates dialyzer reprocessing centers in Orlando and Boston
that handle all aspects of dialyzer reprocessing, including compliance with
regulatory requirements and record keeping. Dialyzer reprocessing services
consist of the delivery of dialyzers from dialysis centers by Minntech personnel
to the reprocessing center, where they are cleaned, tested, inspected,
sterilized and returned to their facility within a twenty-four hour period.
Dialyzer reprocessing has traditionally required hemodialysis providers to make
a significant investment in dedicated staff, facilities and capital equipment.
By outsourcing this service to Minntech, providers are able to focus resources
on improved patient care.
As a result of the acquisitions of Biolab and Mar Cor, the Company
will have the following additional sources of product service revenue in fiscal
2004:
RESIN REGENERATION
Resin regeneration is the process in which cylinders (pressure vessels
with an inlet connection and an outlet connection) are assembled, sanitized, and
filled with ion exchange resin, which is processed using hydrochloric acid and
caustic soda. These cylinders are connected to a customer's water supply. As the
supply water passes through the ion exchange resin beads, minerals are removed.
When the electrical charge placed on the resin beads during the regeneration
process is exhausted, the cylinders are exchanged for identical cylinders with
regenerated resin. The cylinders with exhausted resin are returned by service
personnel to Biolab or Mar Cor regeneration plants and the resin is regenerated
for use by the same or another customer. Customers pay Biolab or Mar Cor for
each cylinder replacement.
REPAIRS AND MAINTENANCE
Both Biolab and Mar Cor also offer a variety of services and
maintenance options for its customers' water systems from part replacement to a
complete electronic and mechanical performance check.
DISTRIBUTION AGREEMENTS
OLYMPUS/CARSEN AGREEMENT
The majority of Carsen's sales of endoscopy and surgical products and
scientific products related to precision instruments have been made pursuant to
the Olympus Agreement, and the majority of Carsen's sales of scientific products
related to industrial technology equipment have been made pursuant to the
Olympus Industrial Agreement, under which Carsen has been granted the exclusive
right to distribute the covered Olympus products in
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Canada. All products sold by Carsen pursuant to the agreements bear the
trademark of Olympus or its affiliates. Both Olympus agreements expire 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. There are no minimum purchase requirements
under the Olympus Industrial Agreement.
During the term of the Olympus Agreements 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 Agreements.
The Olympus Agreement imposes minimum purchase obligations on Carsen
with respect to each of endoscopy and surgical products and precision
instruments. The aggregate annual minimum purchase obligations for all such
products is approximately $18.8 million during the contract year ending March
31, 2004. For the contract year ended March 31, 2003, Carsen satisfied the
minimum purchase requirement under the Olympus Agreement.
The Olympus Agreements generally prohibit 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 Agreements and the first year
thereafter.
Subject to an allowance of a 10% shortfall from the minimum purchase
requirements, if Carsen fails to meet such requirements for precision
instruments, then Olympus has the option to terminate or restructure the Olympus
Agreement as it pertains to precision instruments; if Carsen fails to meet such
requirements for endoscopy and surgical products, 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
The MediVators Agreement expired on August 1, 2003 but was extended
until November 7, 2003, under which Olympus is granted the exclusive right to
distribute the majority of the Company's endoscope reprocessing products and
related accessories and supplies in the United States and Puerto Rico.
Minntech and Olympus have reached an agreement in principle to renew this
distribution agreement for three years on substantially similar terms and
expect to execute a formal agreement shortly. All equipment sold by Olympus
pursuant to this agreement bears both the "Olympus" and "MediVators"
trademarks.
The MediVators Agreement provides for minimum purchase projections.
Failure by Olympus to achieve 90% of the minimum purchase projections in any
contract year gives Minntech the option
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to terminate the MediVators Agreement. Net sales to Olympus accounted for 10.4%,
9.5%, and 18.4% of the Company's net sales in fiscal 2003, 2002 and 2001,
respectively.
In addition, the MediVators Agreement stipulates that (i) units are to
be manufactured based upon the receipt of a written purchase order from Olympus
specifying the model and number of units to be manufactured ("completed units");
(ii) completed units must be ready for shipment and segregated in a designated
section of the Company's warehouse reserved only for Olympus; (iii) title to
completed units, including risk of loss, passes to Olympus; (iv) completed units
are insured by Olympus (v) completed units are invoiced to Olympus with 30 day
payment terms and such receivables are generally satisfied within such terms;
(vi) Olympus has no right of return; and (vii) upon notification from Olympus,
completed units are shipped to the Olympus customer, with all shipping costs
borne by Olympus. Minntech has no further performance obligations on completed
units, there are no exceptions or contingencies to Olympus' commitment to accept
and pay for these goods and completed units held for Olympus by Minntech
generally do not exceed three months of anticipated Olympus shipments.
Despite the fact that Olympus historically has not achieved the
minimum purchase projections, the Company has elected not to terminate or
significantly restructure the MediVators Agreement because the Company believes
that Olympus' existing domestic distribution capabilities continue to provide
the Company with the broadest distribution and profit potential for its
endoscope reprocessing products.
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 under the Purchase Agreement.
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.
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MARKETING
Minntech markets its dialysis and filtration and separation products
through a direct sales force and through distributors. Minntech B.V., Minntech's
Netherlands subsidiary, is the base for its European operations with a branch
office in the United Kingdom. Minntech Japan K.K., Minntech's Japan subsidiary,
and Minntech Singapore, a branch office of Minntech B.V., serve the Asia/Pacific
market.
Minntech sells its MediVators endoscope reprocessing products in the
United States and Puerto Rico under an exclusive distribution agreement with
Olympus, and internationally either directly or through various foreign
distributors.
Carsen markets its products for each business segment through
separate, direct sales forces comprised of its own employees.
Biolab and Mar Cor market their products and services through direct
sales forces, product catalogs, and beginning in fiscal 2004 through Minntech's
direct sales force.
Most of the Company's direct sales forces are compensated on a salary
and commission basis.
EFFECT OF CURRENCY FLUCTUATIONS AND TRADE BARRIERS
A portion of the Company's products are imported from the Far East and
Western Europe, Minntech sells a portion of its products outside of the United
States, and Minntech's Netherlands subsidiary sells a portion of its products
outside of the European Union. Consequently, the Company's business could be
materially 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, Canada and The Netherlands.
Carsen imports a substantial portion of its products from the United
States and pays for such products in United States dollars. Additionally, a
portion of the sales of Carsen's Biolab subsidiary are to customers in the
United States. Carsen's and Biolab's businesses could be materially 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 a positive impact in fiscal 2003 compared with fiscal
2002, and had an adverse impact in fiscal 2002 compared with fiscal 2001, 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.
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Financial statements of the Netherlands subsidiary are translated
using the accounting policies described in note 2 to the Consolidated
Financial Statements. Fluctuations in the rates of currency exchange between
the European Union and the United States had an adverse impact in fiscal 2003
compared with fiscal 2002 upon the Company's overall results of operations
and stockholders' equity, as described in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The functional currency of Minntech's Japan subsidiary is the
Japanese yen. Changes in the value of the Japanese yen relative to the United
States dollar during fiscal 2003 and 2002 did not have a significant impact
upon either the Company's results of operations or the translation of the
balance sheet, primarily due to the fact that the Company's Japanese
subsidiary accounts for a relatively small portion of consolidated net sales,
earnings and net assets.
COMPETITION
The Company believes that the world-wide reputation for the quality
and innovation of its products among customers, the Company's reputation for
providing quality product service, particularly with respect to endoscopy and
surgical, endoscope reprocessing and water treatment products, the numerous
customer contacts developed during its lengthy service as a distributor of
Olympus products and the distribution arrangement for certain MediVators
endoscope reprocessing products with Olympus, give the Company a competitive
advantage with respect to certain of its products.
The Company distributes substantially all of its products in highly
competitive markets, which contain many products available from nationally and
internationally recognized competitors of the Company. Many of such competitors,
including manufacturers who distribute and service their own products, have
greater financial and technical resources than the Company, are well-established
with reputations for success in the sale and service of their products and may
have certain other competitive advantages over the Company. 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.
Several of Minntech's competitors sell peracetic acid-based dialyzer
reprocessing germicides, 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,
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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 its product.
However, the competitive price pressures introduced by these competing
germicides have adversely impacted Minntech's current dialyzer reprocessing
chemical market share.
Within the dialysis industry, certain manufacturers of dialyzers have
been acquiring chains of dialysis treatment centers over the past several years.
These manufacturers have a built-in customer base for their products, which
include concentrate. 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.
Two of the Company's competitors (Gambro Healthcare, Inc. and
Fresenius Medical Care AG) have made public disclosures of their intent to
increase the use of single-use dialyzers which, at some dialysis centers owned
by these companies, could impact Minntech's reprocessing equipment and
sterilants at such centers. Presently, the utilization of single-use dialyzers
continues to be significantly more expensive than dialyzer reuse and, as such,
the number of Minntech supplied reuse programs is not expected to decrease
significantly.
The Company's market share in its flexible endoscope business in
Canada is substantial. The Company believes that its reputation for providing
quality flexible endoscope products and related service gives the Company a
competitive advantage. However, the competitive price pressure introduced by a
particular competitor who also manufactures its own products may continue to
adversely impact the gross profit percentage and market share of the Company's
Canadian flexible endoscope business.
MARKET CONDITIONS
The Company's ability to sell its products depends in part on the
extent to which reimbursement for the cost of these products and related
treatments are available to patients under government health programs, private
health insurance, managed care organizations, workers' compensation insurers,
and other similar programs. Over the past decade, the cost of healthcare has
risen significantly, and there have been numerous proposals by legislators,
regulators, and third-party health care payors to curb these costs. In addition,
certain health care providers are moving towards a managed care system in which
the providers contract to provide comprehensive health care for a fixed cost per
person. Moreover, hospitals and other health care providers have become
increasingly price competitive and, in some instances, have put pressure on
medical suppliers to lower their prices.
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GOVERNMENT REGULATION
Many of 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. Certain of 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 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. Minntech was inspected by the FDA in January 2002 and November
2000 with no warning letters issued.
In addition, many of Minntech's products must meet the requirements of
the European Medical Device Directive ("MDD") for their sale into the European
Union. In June 2003, Minntech was inspected and received notification that its
products continue to meet these requirements. This certification allows 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 Minntech's products are subject to change. Minntech
cannot predict what impact, if any, such changes might have on its business.
Mar Cor's resin regeneration operations, reverse osmosis systems
installations, manufacturing of bicarbonate systems and the Semper Pure(R)
portable reverse osmosis machine are subject to regulation by the FDA, which
regulates the design, testing and marketing of these devices in the United
States. The FDA inspected Mar Cor in April 2003 and February 2002 with no
warning letters issued.
Carsen's endoscopy and surgical products and endoscope reprocessing
products, as well as Biolab's manufacturing facility and many of its products,
are subject to regulation by Health Canada - Therapeutic Products Directorate
("TPD"), which regulates the distribution and marketing of medical devices in
Canada. Certain of Carsen's and Biolab's products may be regulated by other
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governmental or private agencies, including Canadian Standards Agency ("CSA").
TPD and other agency clearances generally are required before Carsen or Biolab
can market new medical products in Canada. The Health Products and Food Branch
Inspectorate ("HPFBI") governs problem reporting, modification and recalls.
HPFBI also has the authority to require a recall or modification in the event of
defect. In order to market their medical products in Canada, Carsen and Biolab
are required to hold a Medical Device Establishment License, as well as certain
medical device licenses by product, as provided by HPFBI.
PATENTS AND PROPRIETARY RIGHTS
Minntech holds rights under 58 patents worldwide covering its products
or components thereof. At October 2, 2003, Minntech also had a total of 31
pending patent applications in the United States and in foreign countries.
Minntech also holds rights under 261 trademark registrations worldwide and had
61 trademark applications pending as of October 2, 2003.
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.
Biolab's and Mar Cor's current products utilize certain know-how
developed within each company but most have no patent protection. As of October
2, 2003, Biolab holds rights under three trademark registrations and Mar Cor
holds rights under two trademark registrations. In addition, Mar Cor holds
rights under two patents covering certain products or components thereof.
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 the Company's
existing patents will afford protection against competitors with similar
inventions, nor can there be any assurance that the Company's patents will not
be infringed. Competitors may also obtain patents that the Company would need to
license or design around. These factors also tend to limit the value of the
Company's existing patents. Consequently, in certain instances, the Company may
consider trade secret protection to be a more effective method of maintaining
its proprietary positions.
BACKLOG
On October 2, 2003, the Company's consolidated backlog (exclusive of
backlog generated by Mar Cor and Biolab) was approximately $1,067,000, compared
with approximately $954,000 on October 3, 2002.
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EMPLOYEES
As of October 2, 2003, the Company employed 679 persons. Of the
Company's employees, 449 are located in the United States, 177 are located in
Canada, 46 are located in Europe and 7 are located in the Far East; 41 are
executives and/or managers, 118 are engaged in sales and marketing functions, 34
are engaged in customer service, 98 are engaged in product service, 270 are
engaged in manufacturing, shipping and warehouse functions, 91 perform various
administrative functions and 27 are engaged in research and development.
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.
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 building 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 43,000 square-foot
building which is used primarily for manufacturing and warehouse operations.
Minntech also owns a 2.3 acre parcel of undeveloped land adjacent to its
headquarters.
Additionally, Minntech owns a 21,000 square-foot building on a 4.4
acre site in Heerlen, The Netherlands. The facility serves as Minntech's
European headquarters and is being used as a sales office, manufacturing
facility and warehouse.
Minntech leases two facilities which serve as warehouse and
distribution hubs for the dialysis business, including a 31,000 square-foot
facility in Middletown, Pennsylvania and a 30,000 square-foot building in
Jackson, Mississippi. Minntech also leases a 22,000 square-foot facility located
in Plymouth, Minnesota which serves as a warehouse. The leases for the
Middletown, Jackson and Plymouth facilities provide for monthly base rent of
approximately $14,500, $8,000 and $12,000, respectively.
Minntech also leases three facilities in Edgewood, Florida, Boston,
Massachusetts and Atlanta, Georgia for Minntech's dialyzer reprocessing centers,
as well as office and sales space in Tokyo, Japan, Singapore and Dronfield,
England.
Carsen leases a building containing approximately 41,000 square feet
located in Markham, Ontario representing Carsen's headquarters, including
administrative and sales staff, warehousing and service. The lease expires in
July 2005, subject to the Company's option to renew for five years. The lease
provides for
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monthly base rent of approximately $12,000. Additionally, Carsen leases space
for two service facilities in Montreal, Quebec and Vancouver, British Columbia
containing approximately 4,000 square feet and 800 square feet, respectively.
Biolab leases approximately 13,000 square feet of space located in
Dorval, Quebec and 13,700 square feet of space located in Oakville, Ontario.
Both locations are being used for sales and administrative offices,
manufacturing, warehousing, and regeneration plants. The leases for these
facilities in Dorval and Oakville provide for monthly base rent of approximately
$5,700 and $3,000, respectively.
Mar Cor leases approximately 22,500 square feet of space located in
Skippack, Pennsylvania which is being used for its headquarters, warehousing and
as a regeneration plant. The lease provides for monthly base rent of
approximately $14,300, which has been guaranteed by Cantel for a period of six
and one-half years effective August 1, 2003.
Additionally, Mar Cor leases space in Downers Grove, Illinois,
Norcross, Georgia, Manassas Park, Virginia, Goshen, New York and Orion Township,
Michigan. Both the Downers Grove, Illinois and Norcross, Georgia facilities
serve as warehouses and regeneration plants. The Manassas Park, Virginia,
Goshen, New York and Orion Township, Michigan facilities serve as warehouses.
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.
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.
There was no submission of matters to a vote during the three months
ended July 31, 2003.
- 28 -
<Page>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Commencing May 29, 2002, the Company's Common Stock began trading on
the New York Stock Exchange under the symbol "CMN." Previously, the Company's
Common Stock traded on the NASDAQ National Market under the symbol "CNTL."
In May 2002, the Company issued 3,143,000 additional shares in
connection with a three-for-two stock split effected in the form of a 50% stock
dividend paid on May 14, 2002 to stockholders of record on May 7, 2002.
The following table sets forth, for the periods indicated, the high
and low closing prices for the Common Stock as reported by the New York Stock
Exchange or NASDAQ (adjusted for the stock split).
<Table>
<Caption>
HIGH LOW
---- ---
YEAR ENDED JULY 31, 2003
First Quarter $ 16.25 $ 9.80
Second Quarter 14.26 10.50
Third Quarter 13.65 11.40
Fourth Quarter 14.39 12.95
YEAR ENDED JULY 31, 2002
First Quarter $ 16.76 $ 11.76
Second Quarter 16.33 12.55
Third Quarter 18.53 14.17
Fourth Quarter 19.50 14.54
</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 2, 2003, the closing price of the Company's Common Stock
was $13.76 and the Company had 408 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.
- 29 -
<Page>
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.
Minntech is reflected in the Consolidated Statement of Income Data for fiscal
2003, the portion of fiscal 2002 subsequent to its acquisition on September 7,
2001, and is not reflected in the results of operations for all other periods
presented. The information below excludes Biolab, Mar Cor and Dyped for all
periods presented.
CONSOLIDATED STATEMENTS OF INCOME DATA
(Amounts in thousands, except per share data)
<Table>
<Caption>
Year Ended July 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Net sales ....................... $ 129,257 $ 119,994 $ 48,995 $ 41,297 $ 37,820
Cost of sales (1) ............... 81,063 73,518 29,979 25,569 24,530
Gross profit .................... 48,194 46,476 19,016 15,728 13,290
Income from continuing ..........
operations before .............
interest expense (income) .....
and income taxes (1) .......... 13,541 13,306 6,965 5,141 3,867
Interest expense (income) ....... 1,326 2,176 (42) 225 271
Income from continuing ..........
operations before ............
income taxes ................. 12,215 11,130 7,007 4,916 3,596
Income taxes .................... 4,305 3,978 2,851 2,085 1,936
Income from continuing
operations ................... 7,910 7,152 4,156 2,831 1,660
Income (loss) from
discontinued operations ...... - - 225 (147) (291)
--------- --------- --------- --------- ---------
Net income ...................... $ 7,910 $ 7,152 $ 4,381 $ 2,684 $ 1,369
========= ========= ========= ========= =========
Earnings per common share:
Basic: (1) (2) ................
Continuing operations ....... $ 0.85 $ 0.81 $ 0.62 $ 0.43 $ 0.25
Discontinued operations ..... - - 0.03 (0.02) (0.04)
--------- --------- --------- --------- =========
Net income .................. $ 0.85 $ 0.81 $ 0.65 $ 0.41 $ 0.21
========= ========= ========= ========= =========
Diluted: (1) (2) ..............
Continuing operations ....... $ 0.80 $ 0.74 $ 0.56 $ 0.42 $ 0.24
Discontinued operations ..... - - 0.03 (0.02) (0.04)
--------- --------- --------- --------- =========
Net income .................. $ 0.80 $ 0.74 $ 0.59 $ 0.40 $ 0.20
========= ========= ========= ========= =========
Weighted average number
of common and common
equivalent shares:(2)
Basic ......................... 9,268 8,882 6,707 6,618 6,592
Diluted ....................... 9,849 9,714 7,365 6,719 6,887
</Table>
- 30 -
<Page>
CONSOLIDATED BALANCE SHEETS DATA
(Amounts in thousands, except per share data)
<Table>
<Caption>
July 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Total assets ............ $ 109,810 $ 107,814 $ 31,929 $ 24,955 $ 23,726
Current assets .......... 61,930 58,138 26,494 21,701 20,462
Current liabilities ..... 18,287 20,314 9,825 7,570 7,521
Working capital ......... 43,643 37,824 16,669 14,131 12,941
Long-term debt .......... 17,750 25,750 - 125 1,567
Stockholders' equity .... 70,182 57,911 22,027 17,163 14,545
Book value per
outstanding common
share(2) .............. $ 7.54 $ 6.28 $ 3.22 $ 2.58 $ 2.18
Common shares
outstanding(2) ........ 9,309 9,221 6,839 6,658 6,661
</Table>
- ----------
(1) Includes for fiscal 1999 costs of $467,000 associated with the
discontinuance of MediVators' medical sharps disposal business, of which
$452,000 pertained to an inventory write-off and was therefore recorded to
cost of sales. The charge of $467,000 reduced basic and diluted earnings
per share from continuing operations by $0.07. Without this charge, basic
and diluted earnings per share from continuing operations for fiscal 1999,
as adjusted, would have been $0.32 and $0.31, respectively.
(2) Per share and share amounts for fiscal 1999 through 2001 have been
adjusted to reflect a three-for-two stock split effected in the form of a
50% stock dividend paid in May 2002. Such adjustments are consistent with
the fiscal 2003 and 2002 presentation.
- 31 -
<Page>
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
Minntech (including MediVators) and Carsen.
Reference is made to (i) the impact on the Company's results of
operations of a stronger Canadian dollar against the United States dollar during
fiscal 2003, compared with fiscal 2002 (increase in value of approximately 5.2%
during 2003, as compared to fiscal 2002, based upon average exchange rates),
(ii) the impact on the Company's results of operations of a stronger euro
against the United States dollar during fiscal 2003, compared with fiscal 2002
(increase in value of approximately 16.9% during fiscal 2003, as compared to
fiscal 2002, based upon average exchange rates), (iii) critical accounting
policies of the Company, as more fully described elsewhere in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, (iv)
3,143,000 additional shares issued in connection with a three-for-two stock
split effected in the form of a 50% stock dividend paid to stockholders in May
2002, as more fully described in note 1 to the Consolidated Financial
Statements, (v) the Company's acquisition of Minntech in September 2001, as more
fully described in Item 1, "Business", and in notes 1 and 3 to the Consolidated
Financial Statements, (vi) the merger of the Company's MediVators, Inc.
subsidiary into Minntech in November 2002, which subsidiary accounted for the
majority of the Company's endoscope reprocessing business, and (vii) the
Company's acquisitions of Biolab and Mar Cor in August 2003, and Dyped in
September 2003, as more fully described in Item 1, "Business", and in notes 1
and 3 to the Consolidated Financial Statements. Since the Biolab, Mar Cor and
Dyped acquisitions occurred subsequent to the end of fiscal 2003, these
acquisitions had no impact upon the Company's results of operations for any of
the years presented.
Minntech is reflected in the Company's results of operations for
fiscal 2003 and the portion of fiscal 2002 subsequent to its acquisition on
September 7, 2001, and is not reflected in the results of operations for fiscal
2001. The acquisition of Minntech added two new operating segments to the
Company, Dialysis Products and Filtration and Separation Products. Additionally,
Minntech also contributes to the Company's Product Service operating segment.
Discussion herein of the Company's pre-existing businesses refers to the
operations of Cantel, Carsen and MediVators, but excluding the impact of the
Minntech acquisition.
- 32 -
<Page>
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,
---------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------
(Dollar amounts in thousands)
$ % $ % $ %
---------------------------------------------------------------------
Dialysis Products $ 58,708 45.4 $ 54,404 45.3 $ - -
Endoscopy and
Surgical Products 17,681 13.7 17,086 14.2 20,725 42.3
Endoscope Reprocessing
Products 18,293 14.1 16,983 14.2 13,045 26.6
Filtration and
Separation Products 15,115 11.7 14,408 12.0 - -
Scientific Products 9,897 7.7 8,344 7.0 8,214 16.8
Product Service 9,563 7.4 8,769 7.3 7,011 14.3
--------- --------- --------- --------- --------- ---------
$ 129,257 100.0 $ 119,994 100.0 $ 48,995 100.0
========= ========= ========= ========= ========= =========
</Table>
FISCAL 2003 COMPARED WITH FISCAL 2002
Net sales increased by $9,263,000, or 7.7%, to $129,257,000 in fiscal
2003, from $119,994,000 in fiscal 2002. Net sales contributed by Minntech
(excluding MediVators) for fiscal 2003 and 2002 were $76,386,000 and
$71,938,000, respectively. Net sales of the Company's pre-existing businesses
increased by $4,815,000, or 10.0%, to $52,871,000 for fiscal 2003, from
$48,056,000 for fiscal 2002.
Net sales were positively impacted in fiscal 2003 compared with fiscal
2002 by approximately $2,108,000 due to the translation of Carsen's net sales
using a stronger Canadian dollar against the United States dollar. Carsen's net
sales are principally included in the endoscopy and surgical, scientific and
product service segments.
In addition, net sales were positively impacted in fiscal 2003
compared with fiscal 2002 by approximately $1,285,000 due to the translation of
Minntech's Netherlands subsidiary net sales using a stronger euro against the
United States dollar. The majority of the net sales of Minntech's Netherlands
subsidiary are included in the dialysis segment.
Increases in the price of the Company's products during fiscal 2003
did not have a significant effect on 2003 net sales.
The increase in sales of the Company's pre-existing businesses was
attributable to an increase in sales of scientific products, endoscope
reprocessing products, product service and endoscopy and surgical products. The
increase in sales of scientific products was primarily due to an increase in
volume of approximately 18.6% for microscopy, imaging and industrial products.
The increase in sales of endoscope reprocessing products was
- 33 -
<Page>
primarily due to an increase in volume of approximately 5.0% in the United
States for endoscope disinfection equipment and related consumables. The
increase in sales of product service was primarily due to increased volume
related to the increased field population of the Company's endoscope
disinfection equipment in the marketplace. The increase in sales of endoscopy
and surgical products was primarily due to the translation of Carsen's net sales
using a stronger Canadian dollar against the United States dollar.
Sales of endoscopy and surgical products continue to be adversely
impacted by healthcare funding issues in Canada as well as intensified
competition, which competition the Company expects to continue. Healthcare
funding in Canada is dependent upon governmental appropriations. Although Canada
recently adopted a budget that provides for a significant increase in funding
for diagnostic healthcare products, the Company cannot ascertain what impact the
funding situation or the new budget will have on future sales of endoscopy and
surgical products. Additionally, the sale of endoscopy and surgical products
during fiscal 2003 has been adversely impacted by the outbreak of severe acute
respiratory syndrome ("SARS") in the greater Toronto area which prevented the
Company's sales personnel from visiting hospitals. The Company's endoscopy and
surgical business could be materially and adversely affected by a future
outbreak of SARS in Canada.
The Company believes that it has the opportunity to continue
increasing market share in all of its existing operating segments with the
exception of the product service segment. The majority of the Company's existing
product service segment (excluding the additional product service revenue to be
provided by Biolab and Mar Cor in fiscal 2004) pertains to the servicing of
flexible endoscopes in Canada. The Company's market share in its flexible
endoscope service business in Canada is substantial; therefore, growth
opportunities for its existing service business may be limited without the
addition of new product servicing opportunities.
The increase in sales of the Company's dialysis products and
filtration and separation products is due to the inclusion of the Minntech
operations for the entire 2003 fiscal year, as compared to a partial period
(since the date of the acquisition) for fiscal 2002. This increase in sales of
dialysis products was partially offset by a decrease in volume of the Company's
Renatron(R) reprocessing product. This increase in sales of the Company's
filtration and separation products was partially offset by a decrease in volume
of the Company's hemofilters due to the loss of a major European distributor, as
well as the decrease in volume of hemoconcentrators as a result of the medical
community moving towards an alternative medical procedure that does not require
the use of a hemoconcentrator. If the Company had owned Minntech for the entire
2002 fiscal year, the decrease in volume of Renatrons, hemofilters, and
hemoconcentrators in fiscal 2003, as compared to fiscal 2002, would have been
approximately 16.4%, 61.5%, and 17.0%, respectively. The Company does not expect
sales of Renatrons and
- 34 -
<Page>
hemofilters to increase in fiscal 2004 and anticipates a continuing decline in
the sales of hemoconcentrators. However, the Company believes that overall sales
of both dialysis products and filtration and separation products may increase
during fiscal 2004 due to increased sales of other products within these
segments.
Gross profit increased by $1,718,000, or 3.7%, to $48,194,000 in
fiscal 2003, from $46,476,000 in fiscal 2002. Gross profit contributed by
Minntech (excluding MediVators) for fiscal 2003 and 2002 was $30,048,000 and
$29,059,000, respectively. Gross profit of the Company's pre-existing businesses
increased by $729,000, or 4.2%, to $18,146,000 for fiscal 2003, from $17,417,000
in fiscal 2002.
Gross profit as a percentage of net sales was 37.3% in fiscal 2003,
compared with 38.7% for fiscal 2002. Gross profit as a percentage of sales of
the Company's pre-existing businesses for fiscal 2003 and 2002 was 34.3% and
36.2%, respectively. During fiscal 2003, gross profit of the Company's
pre-existing businesses was adversely impacted by $1,520,000 in charges for
warranty and slow moving inventory related to the Company's endoscope
reprocessing products, which charges were incurred predominantly in the second
quarter. The comparable amount of these charges in fiscal 2002 was approximately
$650,000; therefore, the increase in these charges of $870,000 reduced gross
profit percentage by 0.7% for fiscal 2003. The Company does not expect a level
of warranty expense in the future similar to fiscal 2003. Minntech's gross
profit as a percentage of sales (excluding MediVators) for fiscal 2003 and 2002
was 39.3% and 40.4%, respectively.
The lower gross profit percentage from the Company's pre-existing
businesses for fiscal 2003, as compared with fiscal 2002, was primarily
attributable to the charges for warranty and slow moving inventory related to
the Company's endoscope reprocessing products; sales mix as well as an increase
in the cost to manufacture the current models of the Company's endoscope
reprocessing equipment; an increased cost structure in Carsen's product service
business to support anticipated increases in sales that did not occur; continued
competition in endoscopy and surgical and scientific products; and manufacturing
overhead associated with MediVators' relocation into Minntech's facilities.
Partially offsetting these decreases in gross profit percentage were favorable
Canadian dollar exchange rates which lowered Carsen's cost of inventory
purchased and therefore decreased cost of sales by approximately $378,000 in
fiscal 2003 compared to fiscal 2002.
With respect to Minntech, the decrease in gross profit percentage was
due primarily to sales mix of dialysis products, particularly with respect to
decreased sales of the Renatron reprocessing product, as well as unfavorable
overhead absorption. Partially offsetting these decreases in gross profit
percentage was a $427,000 charge to cost of sales in fiscal 2002 related to the
sale of inventories which carried a step-up in value as a result of purchase
accounting.
- 35 -
<Page>
Selling expenses as a percentage of net sales were 13.4% for fiscal
2003, compared with 12.3% for fiscal 2002. The increase in selling expenses as a
percentage of net sales was primarily attributable to an increase in personnel
and expanded marketing efforts at Minntech to support worldwide sales, and the
inclusion of the higher selling cost structure related to the Minntech
operations for the entire 2003 fiscal year, as compared to a partial period
(since the date of the acquisition) for fiscal 2002.
General and administrative expenses decreased by $1,744,000 to
$12,816,000 for fiscal 2003, from $14,560,000 for fiscal 2002, principally due
to favorable adjustments in the amounts of $823,000 and $155,000 resulting from
the settlement of liabilities initially recorded in conjunction with the
Minntech acquisition relating to sales tax and severance, respectively;
efficiencies realized as a result of the Minntech acquisition, including the
subsequent relocation of the MediVators operations into Minntech's facilities; a
decrease in bad debt expense due to significant charges incurred in the prior
year; and a reduction in incentive compensation and the cost of employee benefit
programs. Partially offsetting these decreases were the inclusion of the
Minntech operations for the entire 2003 fiscal year, as compared to a partial
period (since the date of the acquisition) for fiscal 2002; an increase in the
cost of commercial insurance; foreign exchange losses associated with
translating certain foreign denominated assets into functional currencies; and a
$249,000 pre-acquisition workers' compensation claim that was recently assessed
on the Company by the state of Minnesota due to the bankruptcy of Minntech's
former insurance carrier.
Research and development expenses (which include continuing
engineering costs) increased by $677,000 to $4,528,000 for fiscal 2003, from
$3,851,000 for fiscal 2002, principally due to expanded activities in Minntech's
(including MediVators) dialysis, filtration and separation, and endoscope
reprocessing segments, as well as the inclusion of the Minntech operations for
the entire 2003 fiscal year, as compared to a partial period (since the date of
the acquisition) for fiscal 2002.
Interest expense decreased by $850,000 to $1,326,000 for fiscal 2003,
from $2,176,000 for fiscal 2002, as a result of lower average outstanding
borrowings and lower interest rates during fiscal 2003. Additionally, during
fiscal 2002 there was a $95,000 write-off of fees in connection with a prior
credit facility. Partially offsetting these decreases were outstanding
borrowings under the Company's credit facilities for the entire 2003 fiscal
year, as compared to a partial period (since the date of the acquisition) for
fiscal 2002.
Income from continuing operations before income taxes increased by
$1,085,000 to $12,215,000 for fiscal 2003, from $11,130,000 for fiscal 2002.
- 36 -
<Page>
The consolidated effective tax rate on operations was 35.2% and 35.7%
for fiscal 2003 and 2002, respectively. In conjunction with the purchase
accounting for the acquisition of Minntech, Cantel eliminated the valuation
allowances previously existing against its deferred tax assets related to the
Federal net operating loss carryforwards ("NOLs") accumulated in the United
States. Therefore, for all periods subsequent to September 7, 2001, the Company
has provided in its results of operations income tax expense for its United
States operations at the statutory tax rate; however, actual payment of U.S.
Federal income taxes reflects the benefits of the utilization of the NOLs. At
July 31, 2003, such NOLs were approximately $13,154,000.
The Company's results of operations for fiscal 2003 and 2002 also
reflect income tax expense for its international subsidiaries at their
respective statutory rates. The Company's international subsidiaries in Canada,
The Netherlands and Japan had effective tax rates during fiscal 2003 of
approximately 37.5%, 24.3% and 45.0%, respectively. The lower overall effective
tax rate for fiscal 2003, as compared to fiscal 2002, is principally due to the
geographic mix of pretax income, a reduction in the Canadian statutory tax rate,
and an overall reduction in the estimated U.S. state tax rate. For fiscal 2004,
the Company's overall tax rate is expected to be primarily affected by the
geographic mix of pretax income.
FISCAL 2002 COMPARED WITH FISCAL 2001
Net sales increased by $70,999,000, or 144.9%, to $119,994,000 in
fiscal 2002, from $48,995,000 in fiscal 2001. Net sales contributed by Minntech
(excluding MediVators) for fiscal 2002 were $71,938,000; without the Minntech
acquisition, net sales of the Company's pre-existing businesses would have
decreased by $939,000, or 1.9%, to $48,056,000 for fiscal 2002. Net sales were
adversely impacted in fiscal 2002 compared with fiscal 2001 by approximately
$1,113,000 due to the translation of Carsen's net sales using a weaker Canadian
dollar against the United States dollar.
The decrease in sales of the Company's pre-existing businesses was
attributable to the decreased sales of endoscopy and surgical products,
partially offset by an increase in sales of endoscope reprocessing products and
product service. The decrease in sales of endoscopy and surgical products was
due to a decrease in demand, including the adverse impact of healthcare funding
issues in Canada as well as intensified competition which the Company expects to
continue. Healthcare funding in Canada is dependent upon governmental
appropriations and the Company cannot ascertain what impact the funding
situation will have on future sales of endoscopy and surgical products and
scientific products. The increase in sales of endoscope reprocessing products
was primarily due to an increase in demand in the United States. The increase in
sales of product service was primarily due to an increase in demand and market
share in Canada.
- 37 -
<Page>
The Company believes that it has the opportunity to continue
increasing its market share in the endoscope reprocessing segment. The majority
of its product service segment is located in Canada where the Company's market
share in its flexible endoscope service business is substantial; therefore,
growth opportunities for its existing service business may be limited without
the addition of new product servicing opportunities.
Gross profit increased by $27,460,000, or 144.4%, to $46,476,000 in
fiscal 2002, from $19,016,000 in fiscal 2001. Gross profit contributed by
Minntech (excluding MediVators) for fiscal 2002 was $29,059,000; without the
impact of the Minntech acquisition, gross profit of the Company's pre-existing
businesses would have decreased by $1,599,000, or 8.4%, to $17,417,000 for
fiscal 2002.
Gross profit as a percentage of net sales was 38.7% in fiscal 2002,
compared with 38.8% in fiscal 2001. During fiscal 2002, gross profit was
adversely impacted by a $427,000 charge to cost of sales related to the sale of
inventories which carried a step-up in value recorded as a result of purchase
accounting; such charge reduced gross profit percentage by 0.4% for fiscal 2002.
Minntech's (excluding MediVators) gross profit as a percentage of net sales was
40.4% for fiscal 2002; without the impact of the Minntech acquisition, gross
profit as a percentage of net sales for fiscal 2002 would have been 36.2%.
The lower gross profit percentage from the Company's pre-existing
businesses for fiscal 2002, as compared with fiscal 2001, was primarily
attributable to the adverse impact of a weaker 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; a higher gross profit percentage in 2001 due to a
buy-in of endoscopes prior to receiving a supplier price increase (such
endoscopes were sold during fiscal 2001); increased competition in endoscopy and
surgical products; and sales mix associated with endoscope reprocessing products
and product service, including the increased manufacturing and warranty costs
associated with the Company's new DSD-201 endoscope reprocessing unit.
Selling expenses as a percentage of net sales were 12.3% for fiscal
2002, compared with 11.6% for fiscal 2001. Without the impact of the Minntech
acquisition, selling expenses as a percentage of net sales would have been 13.4%
for fiscal 2002. The increase in selling expenses as a percentage of net sales
from the Company's pre-existing businesses was primarily attributable to lower
than expected sales at Carsen, an increase in personnel at Carsen and expanded
marketing efforts to support MediVators' domestic sales of endoscope
reprocessing products.
- 38 -
<Page>
General and administrative expenses increased by $9,150,000 to
$14,560,000 for fiscal 2002, from $5,410,000 for fiscal 2001. General and
administrative expenses incurred by Minntech (excluding MediVators) for fiscal
2002 were $8,536,000; without the Minntech acquisition, general and
administrative expenses of the Company's pre-existing businesses would have
increased by $614,000 for fiscal 2002, principally due to the addition of
business development personnel and related expenses and costs associated with
the Company's listing of its Common Stock on the New York Stock Exchange.
Research and development expenses increased by $2,902,000 to
$3,851,000 for fiscal 2002, from $949,000 for fiscal 2001. Research and
development expenses incurred by Minntech (excluding MediVators) for fiscal 2002
were $2,637,000; without the Minntech acquisition, research and development
expenses of the Company's pre-existing businesses would have increased by
$265,000 for fiscal 2002, principally due to costs related to MediVators' new
endoscope reprocessing unit. The Company anticipates research and development
expenses to increase in fiscal 2003 primarily due to costs associated with two
specific projects; however, such increase is not expected to exceed 15.0%
relative to the fiscal 2002 level of research and development expenses (assuming
that Minntech had been included in the Company's results of operations for all
of fiscal 2002).
Interest expense was $2,176,000 for fiscal 2002, compared with
interest income of $42,000 for fiscal 2001. This change in interest was
attributable to the Company's borrowings under its new credit facilities entered
into during September 2001 to fund a portion of the Minntech acquisition.
Income from continuing operations before income taxes increased by
$4,123,000, or 58.8%, to $11,130,000 for fiscal 2002, from $7,007,000 for fiscal
2001.
The consolidated effective tax rate on operations was 35.7% and 40.7%
for fiscal 2002 and 2001, respectively. In conjunction with the purchase
accounting for the acquisition of Minntech, Cantel eliminated the valuation
allowances against its deferred tax assets related to the NOLs accumulated in
the United States. Therefore, for all periods subsequent to September 7, 2001,
the Company has provided in its results of operations income tax expense for its
United States operations at the statutory tax rate; however, actual payment of
U.S. Federal income taxes will reflect the benefits of the utilization of the
NOLs.
The Company's results of operations for fiscal 2002 also reflect
income tax expense for its international subsidiaries at their respective
statutory rates. The Company's international subsidiaries in Canada, The
Netherlands and Japan had effective tax rates during fiscal 2002 of
approximately 38.7%, 26.5% and 44.8%, respectively. The operations of the
Company's subsidiaries in The Netherlands and Japan were part of the Minntech
acquisition and are
- 39 -
<Page>
therefore included in the Company's results of operations only since
September 7, 2001.
For fiscal 2001, income taxes consist primarily of taxes imposed on
the Company's Canadian subsidiary which had an effective tax rate of
approximately 41.6%. The consolidated effective tax rate in fiscal 2001 was
lower than the Canadian effective tax rate due to the fact that income generated
by the United States operations was substantially offset by Federal tax benefits
resulting from the utilization of NOLs.
In fiscal 2003, the Company expects a reduction in its Canadian
effective tax rate due to enacted reductions in both Canadian Federal and
provincial income tax rates. However, the Company's overall effective tax rate
for fiscal 2003 is subject to the progressive tax rate structure in The
Netherlands, as well as changes caused by the geographic mix of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2003, the Company's working capital was $43,643,000,
compared with $37,824,000 at July 31, 2002. This increase primarily reflects
increases in cash and cash equivalents and decreases in accrued expenses and
income taxes payable. Cash and cash equivalents increased due to earnings
generated from continuing operations, partially offset by repayments under the
Company's U.S. credit facilities, as indicated on the Consolidated Statements of
Cash Flows. Accrued expenses decreased due primarily to the settlement of
liabilities initially recorded in conjunction with the Minntech acquisition,
including an accrual for sales and use taxes. Income taxes decreased due to
geographic mix and the timing of tax payments.
Net cash provided by operating activities was $11,828,000, $11,302,000
and $1,342,000 for fiscal 2003, 2002 and 2001, respectively. In fiscal 2003, 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 accounts receivable, partially offset by
decreases in accounts payable and accrued expenses and income taxes payable. In
fiscal 2002, 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 accounts receivable and
inventories, partially offset by decreases in accounts payable and accrued
expenses and income taxes payable. 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.
Net cash used in investing activities was $1,600,000 and $31,721,000
in fiscal 2003 and 2002, respectively, as compared with net cash provided by
investing activities of $1,186,000 in fiscal
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2001. In fiscal 2003, net cash used in investing activities was primarily for
capital expenditures. In fiscal 2002, net cash used in investing activities was
primarily for the acquisition of Minntech and capital expenditures. In fiscal
2001, net cash provided by investing activities was primarily due to proceeds
from 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.
Net cash used in financing activities was $7,327,000 in fiscal 2003,
compared with net cash provided by financing activities of $27,754,000 in fiscal
2002 and $404,000 in fiscal 2001. In fiscal 2003, net cash used in financing
activities was primarily due to repayments under the Company's credit
facilities. In fiscal 2002, net cash provided by financing activities was
primarily attributable to borrowings under the Company's credit facilities for
the Minntech acquisition, net of related debt issuance costs, partially offset
by repayments under these credit facilities. In fiscal 2001, net cash provided
by financing activities was primarily due to proceeds from exercises of stock
options.
In conjunction with the acquisition of Minntech on September 7, 2001,
the Company entered into 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.
Such credit facilities included (i) a $25,000,000 senior secured amortizing term
loan facility from a consortium of 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 being available for future working capital requirements
for the U.S. businesses of Cantel, including Minntech (Cantel and Minntech are
referred to as the "U.S. Borrowers") (the Term Loan Facility and the U.S.
Revolving Credit Facility are collectively referred to as the "U.S. Credit
Facilities"), 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") available for Carsen's future
working capital requirements (the U.S. Credit Facilities and the Canadian
Revolving Credit Facility are collectively referred to as the "Credit
Facilities").
In conjunction with the acquisitions of Biolab and Mar Cor on
August 1, 2003, the Company amended its Credit Facilities as follows: i)
outstanding borrowings under the Term Loan Facility were reset to $25,000,000 to
finance a portion of the Mar Cor acquisition, (ii) Mar Cor was added as a
guarantor under the U.S. Credit Facilities and the stock and assets of Mar Cor
were pledged as security for such guaranty, (iii) the Canadian Revolving Credit
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Facility was increased from $5,000,000 to $7,000,000, (iv) Biolab was added as a
guarantor under the Canadian Revolving Credit Facility and the stock and assets
of Biolab were pledged as security for such guaranty, (v) the maturity dates of
the U.S. Credit Facilities were extended to March 31, 2008, (vi) certain
financial covenants of the Credit Facilities were modified to reflect the effect
of the acquisitions in the Company's anticipated future operating results and
(vii) the Company was permitted to guarantee the lease on Mar Cor's facility.
The maturity date of the Canadian Revolving Credit Facility remains
September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates ranging
from .75% to 2.00% above the lenders' base rate, or at rates ranging from 2.0%
to 3.25% above LIBOR, depending upon the Company's consolidated ratio of debt to
EBITDA. The base rates associated with the U.S. lenders and the Canadian lender
were 4.0% and 4.75%, respectively, at July 31, 2003, and the LIBOR rates ranged
from 1.06% to 1.12% at July 31, 2003. The margins applicable to the Company's
outstanding borrowings at July 31, 2003 were 1.25% above the lenders' base rate
and 2.50% above LIBOR. At July 31, 2003, all of the Company's outstanding
borrowings were under LIBOR contracts. In order to protect its interest rate
exposure, the Company entered into a three year interest rate cap agreement
expiring on September 7, 2004 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 U.S. Credit Facilities provide for available borrowings based upon
percentages of the eligible accounts receivable and inventories of Cantel,
Minntech and Mar Cor; require the U.S. Borrowers to meet certain financial
covenants; are secured by substantially all assets of the U.S. Borrowers and Mar
Cor (including a pledge of the stock of Minntech and Mar Cor owned by Cantel and
65% of the outstanding shares of Carsen and Biolab stock owned by Cantel); and
are guaranteed by Minntech and Mar Cor. As of July 31, 2003, the Company was in
compliance with the financial covenants under the Term Loan Facility and the
U.S. Revolving Credit Facility, as amended on August 1, 2003.
The Canadian Revolving Credit Facility provides for available
borrowings based upon percentages of the eligible accounts receivable and
inventories of Carsen and Biolab; requires the Canadian Borrower to meet certain
financial covenants; and is secured by substantially all assets of the Canadian
Borrower and Biolab. As of July 31, 2003, Carsen was in compliance with the
financial covenants under the Canadian Revolving Credit Facility, as amended on
August 1, 2003.
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 in
connection with the acquisition of
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Minntech. At July 31, 2003, the Company had $20,750,000 outstanding under the
Term Loan Facility and had no outstanding borrowings under either the U.S.
Revolving Credit Facility or the Canadian Revolving Credit Facility.
In conjunction with the Mar Cor acquisition on August 1, 2003, the
Company borrowed an additional $9,050,000; therefore, immediately after such
acquisition, the Company had $29,800,000 outstanding under the U.S. Credit
Facilities, including $25,000,000 under the Term Loan Facility. The Biolab
acquisition did not require any borrowings under the Canadian Revolving Credit
Facility. Amounts repaid by the Company under the Term Loan Facility may not be
re-borrowed.
Aggregate annual required maturities of the Credit Facilities over the
next five years and thereafter are as follows:
<Table>
<Caption>
Year Ending July 31,
2004 $ 3,000,000
2005 3,000,000
2006 5,000,000
2007 6,000,000
2008 12,800,000
Thereafter -
------------
Total $ 29,800,000
============
</Table>
All of such maturing amounts reflect the repayment terms under the
Credit Facilities, as amended on August 1, 2003. The amount maturing in fiscal
2008 includes the $4,800,000 currently outstanding under the U.S. Revolving
Credit Facility since such amount is required to be repaid prior to the
expiration date of this facility.
Aggregate future minimum rental commitments at July 31, 2003
(exclusive of Biolab, Mar Cor, and Dyped) under operating leases for property
and equipment are as follows:
<Table>
<Caption>
Year Ending July 31,
2004 $ 1,374,000
2005 1,001,000
2006 288,000
2007 46,000
2008 5,000
Thereafter -
-----------
Total rental commitments $ 2,714,000
===========
</Table>
The majority of Carsen's sales of endoscopy and surgical products and
scientific products related to microscopy have been made pursuant to the Olympus
Agreement, and the majority of Carsen's sales of scientific products related to
industrial technology equipment have been made pursuant to the Olympus
Industrial Agreement, under which Carsen has been granted the exclusive right to
distribute the covered Olympus products in Canada. Both agreements expire on
March 31, 2004. Carsen is subject to a minimum purchase requirement under the
Olympus
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Agreement of approximately $18.8 million during the contract year ending
March 31, 2004. For the contract year ended March 31, 2003, Carsen satisfied the
minimum purchase requirement under the Olympus Agreement. 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.
The MediVators Agreement expired on August 1, 2003, but was
extended until November 7, 2003, under which Olympus is granted the exclusive
right to distribute the majority of the Company's endoscope reprocessing
products and related accessories and supplies in the United States and Puerto
Rico. Minntech and Olympus have reached an agreement in principle to renew
this distribution agreement for three years on substantially similar terms
and expect to execute a formal agreement shortly. The MediVators Agreement
provides for minimum purchase projections. Failure by Olympus to achieve 90%
of the minimum purchase projections in any contract year gives Minntech the
option to terminate the MediVators Agreement.
The Company has determined that it will repatriate minimal amounts of
existing and future accumulated profits from its international locations until
existing NOLs are exhausted, which the Company estimates to be no earlier than
fiscal 2005. Notwithstanding this strategy, the Company believes that its
current cash position, anticipated cash flows from operations, (including its
U.S. operations) and the funds available under its revolving credit facilities
will be sufficient to satisfy the Company's cash operating requirements for the
foreseeable future based upon its existing operations, including the
acquisitions of Biolab, Mar Cor and Dyped. At October 2, 2003, approximately
$18,309,000 was available under the revolving credit facilities.
During fiscal 2003 compared with fiscal 2002, the average value of the
Canadian dollar increased by approximately 5.2% relative to the value of the
United States dollar. Changes in the value of the Canadian dollar against the
United States dollar affect 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. During fiscal
2003, such strengthening of the Canadian dollar relative to the United States
dollar had a positive impact upon the Company's results of operations. 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 $25,000,000
(United States dollars) foreign currency hedging facility which is available to
hedge against the impact of such currency fluctuations on purchases of
inventories. Total commitments for foreign currency forward contracts under this
facility amounted to $19,650,000 (United States dollars) at October 2, 2003 and
cover approximately 85% of Carsen's projected purchases
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of inventories through July 2004. These foreign currency forward contracts have
been designated as cash flow hedge instruments. The weighted average exchange
rate of the forward contracts open at October 2, 2003 was $1.4139 Canadian
dollar per United States dollar, or $.7072 United States dollar per Canadian
dollar. The exchange rate published by the Wall Street Journal on October 2,
2003 was $1.3412 Canadian dollar per United States dollar, or $.7456 United
States dollar per Canadian dollar.
During fiscal 2003 compared with fiscal 2002, the value of the euro
increased by approximately 16.9% relative to the value of the United States
dollar. Changes in the value of the euro against the United States dollar
affect the Company's results of operations because a portion of the net
assets of Minntech's Netherlands subsidiary are denominated and ultimately
settled in United States dollars but must be converted into its functional
euro currency. During fiscal 2003, such strengthening of the euro relative to
the United States dollar had an adverse impact upon the Company's overall
results of operations. Such currency fluctuations also result in a change in
the United States dollar value of the Company's assets that are denominated
in euros.
In order to hedge against the impact of fluctuations in the value of
the euro relative to the United States dollar, the Company enters into
short-term contracts to purchase euros forward, which contracts are generally
one month in duration. These short-term contracts have been designated as fair
value hedges. There was one foreign currency forward contract amounting to EURO
4,934,000 at October 2, 2003 which covers certain assets and liabilities of
Minntech's Netherlands subsidiary which are denominated in currencies other than
its functional currency. Such contract expires on October 31, 2003. Under its
Credit Facilities, such contracts to purchase euros may not exceed $12,000,000
in an aggregate notional amount at any time.
In accordance with Statement of Financial Accounting Standards No.
133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("SFAS 133"), all of the Company's foreign currency forward contracts are
designated as hedges. Recognition of gains and losses related to the Canadian
hedges is deferred within other comprehensive income until settlement of the
underlying commitments, and realized gains and losses are recorded within cost
of sales upon settlement. Gains and losses related to the hedging contracts to
buy euros forward are immediately realized within general and administrative
expenses due to the short-term nature of such contracts.
For purposes of translating the balance sheet, at July 31, 2003
compared to July 31, 2002, the value of the Canadian dollar and the value of the
euro increased by approximately 12.7% and 15.6%, respectively, compared to the
value of the United States dollar. The total of these currency movements
resulted in a foreign currency translation gain of $3,637,000 for fiscal 2003,
thereby increasing stockholders' equity.
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Changes in the value of the Japanese yen relative to the United States
dollar during fiscal 2003 and 2002 did not have a significant impact upon either
the Company's results of operations or the translation of the balance sheet,
primarily due to the fact that the Company's Japanese subsidiary accounts for a
relatively small portion of consolidated net sales, earnings and net assets.
Inflation has not significantly impacted the Company's operations.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company continually evaluates its estimates. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
With respect to the fiscal 2004 acquisitions of Biolab, Mar Cor and
Dyped, the Company is currently in the process of reviewing and evaluating their
critical accounting policies. Based upon the completion of this process, the
Company may need to enhance its future disclosure to capture all critical
accounting policies for these acquired companies.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements.
REVENUE RECOGNITION
Revenue on product sales (excluding certain sales of endoscope
reprocessing equipment in the United States) is recognized as products are
shipped to customers and title passes. The passing of title is determined based
upon the FOB terms specified for each shipment. With respect to dialysis,
filtration and separation and a portion of endoscope reprocessing products,
shipment terms are generally FOB origin for common carrier and FOB destination
when the Company's distribution fleet is utilized. With respect to endoscopy and
surgical and scientific products, shipment terms may be either FOB origin or
destination. Customer
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acceptance for the majority of the Company's product sales occurs at the time of
delivery. In certain instances, primarily with respect to an insignificant
amount of the Company's sales of dialysis equipment and scientific products,
post-delivery obligations such as installation, in-servicing or training are
contractually specified; in such instances, revenue recognition is deferred
until all of such conditions have been substantially fulfilled such that the
products are deemed functional by the end-user. With respect to a portion of
endoscopy and surgical and scientific product sales, equipment is sold as part
of a system for which the equipment is functionally interdependent or the
customer's purchase order specifies "ship-complete" as a condition of delivery;
revenue recognition on such sales is deferred until all equipment has been
delivered.
Sales of a majority of the Company's endoscope reprocessing equipment
to a third party distributor in the United States are recognized on a bill and
hold basis. Such sales satisfy each of the following criteria: (i) the risks of
ownership have passed to the third party distributor; (ii) the third party
distributor must provide a written purchase order committing to the purchase of
specified units; (iii) the bill and hold arrangement was specifically requested
by the third party distributor for the purpose of minimizing the impact of
multiple shipments of the units; (iv) the third party distributor provides
specific instructions for shipment to customers, and completed units held by the
Company for the third party distributor generally do not exceed three months of
anticipated shipments; (v) the Company has no further performance obligations
with respect to such units; (vi) completed units are invoiced to the third party
distributor with 30 day payment terms and such receivables are generally
satisfied within such terms; and (vii) completed units are ready for shipment
and segregated in a designated section of the Company's warehouse reserved only
for the third party distributor.
Revenue on service sales is recognized when repairs are completed and
the products are shipped to customers. All shipping and handling fees invoiced
to customers, such as freight, are recorded as revenue (and related costs are
included within costs of sales) at the time the sale is recognized.
None of the Company's sales, including the bill and hold sales
arrangement, contain right-of-return provisions, and customer claims for credit
or return due to damage, defect, shortage or other reason must be pre-approved
by the Company before credit is issued or such product is accepted for return.
No cash discounts for early payment are offered except with respect to a small
portion of the Company's sales of dialysis products. Price protection is not
offered by the Company, although advance pricing contracts or required notice
periods prior to implementation of price increases exist for certain customers
with respect to many of the Company's products. With respect to certain of the
Company's dialysis product customers, volume rebates and trade-in allowances are
provided; such volume rebates and trade-in allowances are
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provided for as a reduction of sales at the time of revenue recognition.
The majority of the Company's dialysis products are sold to end-users;
the majority of filtration and separation and endoscope reprocessing products
are sold to third party distributors; the majority of endoscopy and surgical
products are sold directly to hospitals; scientific products are sold to both
hospitals and other end-users; and product service is sold to hospitals, third
party distributors and other end-users. Sales to all of these customers follow
the Company's revenue recognition policies.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consist of amounts due to the Company from normal
business activities. Allowances for doubtful accounts are reserves for the
estimated loss from the inability of customers to make required payments. The
Company uses historical experience as well as current market information in
determining the estimate. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
INVENTORIES
Inventories consist of products which are sold in the ordinary course
of the Company's business and are stated at the lower of cost (first-in,
first-out) or market. In assessing the value of inventories, the Company must
make estimates and judgments regarding reserves required for product
obsolescence, aging of inventories and other issues potentially affecting the
saleable condition of products. In performing such evaluations, the Company uses
historical experience as well as current market information.
GOODWILL AND INTANGIBLE ASSETS
Certain of the Company's identifiable intangible assets, including
technology, customer lists, patents and non-compete agreements, are amortized on
the straight-line method over their estimated useful lives which range from 2 to
20 years. Additionally, the Company has recorded goodwill and trademarks and
tradenames, all of which have indefinite useful lives and are therefore not
amortized. All of the Company's intangible assets and goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and goodwill and intangible
assets with indefinite lives are reviewed for impairment at least annually. The
Company's management is primarily responsible for determining if impairment
exists and considers a number of factors, including third-party valuations, when
making these determinations.
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<Page>
WARRANTIES
The Company provides for estimated costs that may be incurred to
remedy deficiencies of quality or performance of the Company's products at the
time of revenue recognition. Most of the Company's products have a one-year
warranty, although a majority of the Company's endoscope reprocessing equipment
in the United States may carry a warranty period of up to fifteen months. The
Company records provisions for product warranties as a component of cost of
sales based upon an estimate of the amounts necessary to settle existing and
future claims on products sold. The historical relationship of warranty costs to
products sold is the primary basis for the estimate. A significant increase in
third party service repair rates, the cost and availability of parts or the
frequency of claims could have a material adverse impact on the Company's
results for the period or periods in which such claims or additional costs
materialize. Management reviews its warranty exposure periodically and believes
that the warranty reserves are adequate; however, actual claims incurred could
differ from original estimates, requiring adjustments to the reserves.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets and liabilities also
include items recorded in conjunction with the purchase accounting for business
acquisitions. The Company regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. Although realization is not
assured, management believes it is more likely than not that the recorded
deferred tax assets will be realized. Additionally, deferred tax liabilities are
regularly reviewed to confirm that such amounts are appropriately stated. All of
such evaluations require significant management judgments.
BUSINESS COMBINATIONS
Acquisitions require significant estimates and judgments related to
the fair value of assets acquired and liabilities assumed. Certain liabilities
are subjective in nature. The Company reflects such liabilities based upon the
most recent information available.
In conjunction with the acquisition of Minntech in fiscal 2002, such
liabilities principally include certain state sales and use tax and state income
tax exposures, as well as income tax liabilities related to the Company's
foreign subsidiaries. The ultimate settlement of such liabilities may be for
amounts which are different from the amounts recorded.
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OTHER MATTERS
The Company does not have any off balance sheet financial
arrangements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign currency market risk: A portion of the Company's products are
imported from the Far East and Western Europe, Minntech sells a portion of its
products outside of the United States, and Minntech's Netherlands subsidiary
sells a portion of its products outside of the European Union. Consequently, the
Company's business could be materially 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,
Canada and The Netherlands.
Carsen imports a substantial portion of its products from the United
States and pays for such products in United States dollars. Additionally, a
portion of the sales of Carsen's Biolab subsidiary are to customers in the
United States. Carsen's and Biolab's businesses could be materially 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 a positive impact in fiscal 2003 compared with fiscal
2002, and an adverse impact in fiscal 2002 compared with fiscal 2001, upon the
Company's results of operations and stockholders' equity, as described in
Management Discussion and Analysis of Financial Condition and Results of
Operations.
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. These
foreign currency forward contracts have been designated as cash flow hedge
instruments. Total commitments for such foreign currency forward contracts
amounted to $12,721,000 (United States dollars) at July 31, 2003 and cover a
portion of Carsen's projected purchases of inventories through June 2004.
Changes in the value of the euro against the United States dollar
affect the Company's results of operations because a portion of the net assets
of Minntech's Netherlands subsidiary are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
Additionally, financial statements of the Netherlands subsidiary are translated
using the accounting policies described in note 2 to the Consolidated Financial
Statements. Fluctuations in the rates of currency exchange between the European
Union and the United States
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had an adverse impact for fiscal 2003, compared with fiscal 2002, upon the
Company's overall results of operations, and had a positive impact upon
stockholders' equity, as described in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In order to hedge against the impact of fluctuations in the value of
the euro relative to the United States dollar, the Company enters into
short-term contracts to purchase euros forward, which contracts are generally
one month in duration. These short-term contracts have been designated as fair
value hedge instruments. There was one such foreign currency forward contract
amounting to EURO 6,700,000 at July 31, 2003 which covers certain assets and
liabilities of Minntech's Netherlands subsidiary which are denominated in
currencies other than its functional currency. Such contract expired on
August 31, 2003. Under its credit facilities, such contracts to purchase euros
may not exceed $12,000,000 in an aggregate notional amount at any time.
The functional currency of Minntech's Japan subsidiary is the Japanese
yen. Changes in the value of the Japanese yen relative to the United States
dollar during fiscal 2003 and 2002 did not have a significant impact upon either
the Company's results of operations or the translation of the balance sheet,
primarily due to the fact that the Company's Japanese subsidiary accounts for a
relatively small portion of consolidated net sales, earnings and net assets.
Interest rate market risk: The Company has two 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. During fiscal 2003, all of the
Company's outstanding borrowings were under its United States credit
facilities. In order to protect its interest rate exposure, the Company has
entered into a three year interest rate cap expiring on September 7, 2004
covering $12,500,000 of borrowings under the Term Loan Facility, which caps
LIBOR on this portion of outstanding borrowings at 4.50%. This interest rate
cap agreement has been designated as a cash flow hedge instrument. At July
31, 2003, the fair value of such interest rate cap was less than $1,000.
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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ITEM 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified by the SEC and that such information is accumulated and
communicated to the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
The Company, under the supervision and with the participation of its
Chief Executive Officer and its Chief Financial Officer, carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this Annual Report on Form 10-K. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer each
concluded that the Company's disclosure controls and procedures are effective in
providing reasonable assurance that information required to be disclosed by the
Company in reports that it files under the Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
by the rules and forms of the Securities and Exchange Commission.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 in
connection with the 2003 Annual Meeting of Stockholders of the Registrant,
except for the following:
The Company has adopted a Code of Ethics for the Chief Executive
Officer, the Chief Financial Officer and other officers and management personnel
which will be posted on the Company's website, www.cantelmedical.com. The
Company intends to satisfy the disclosure requirement regarding any amendment
to, or a waiver of, a provision of the Code of Ethics for the Chief Executive
Officer, Chief Financial Officer and other officers and management personnel by
posting such information on its website.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 in
connection with the 2003 Annual Meeting of Stockholders of the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 in
connection with the 2003 Annual Meeting of Stockholders of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934 in
connection with the 2003 Annual Meeting of Stockholders of the Registrant.
- 53 -
<Page>
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, 2003.
1. CONSOLIDATED FINANCIAL STATEMENTS:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of July 31, 2003 and 2002.
(iii) Consolidated Statements of Income for the years ended
July 31, 2003, 2002 and 2001.
(iv) Consolidated Statements of Changes in Stockholders' Equity
for the years ended July 31, 2003, 2002 and 2001.
(v) Consolidated Statements of Cash Flows for the years ended
July 31, 2003, 2002 and 2001.
(vi) Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
(i) Schedule II - Valuation and Qualifying Accounts for the
years ended July 31, 2003, 2002 and 2001.
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) - 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
- 54 -
<Page>
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 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. (Incorporated herein by reference to
Exhibit 3(k) to Registrant's 2001 Annual Report on Form 10-K [the "2001 10-K"].)
3(l) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on June 7, 2002. (Incorporated herein by reference to Exhibit
3(l) to Registrant's 2002 Annual Report on Form 10-K [the "2002 10-K"].)
3(m) - Registrant's By-Laws adopted April 24, 2002. (Incorporated
herein by reference to Exhibit 3(m) to Registrant's 2002 10-K.)
- 55 -
<Page>
10(a) - Registrant's 1991 Directors' Stock Option Plan. (Incorporated
herein by reference to Exhibit 10(c) to Registrant's 1991 Annual Report on Form
10-K [the "1991 10-K"].)
10(b) - 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(c) - Distribution Agreement between Carsen Group Inc. and Olympus
America Inc., dated April 1, 1994. (Incorporated herein by reference to Exhibit
10(g) to Registrant's 1994 Annual Report on Form 10-K.)
10(d) - Stock Option Agreement, dated as of October 17, 1996, between
the Registrant and Charles M. Diker. (Incorporated herein by reference to
Exhibit 10(v) to Registrant's 1996 Annual Report on Form 10-K.)
10(e) - Registrant's 1997 Employee Stock Option Plan. (Incorporated
herein by reference to Exhibit 10(s) to Registrant's 1997 Annual Report on Form
10-K [the "1997 10-K"].)
10(f) - Form of Incentive Stock Option Agreement under Registrant's
1997 Employee Stock Option Plan. (Incorporated herein by reference to Exhibit
10(t) to Registrant's 1997 10-K.)
10(g) - First Amendment to Distribution Agreement between Olympus
America Inc. and Carsen Group Inc., dated as of August 26, 1997. (Incorporated
herein by reference to Exhibit 10(y) to Registrant's 1997 10-K.)
10(h) - Stock Option Agreement, dated as of October 16, 1997, between
the Registrant and Charles M. Diker. (Incorporated herein by reference to
Exhibit 10(x) to Registrant's 1998 Annual Report on Form 10-K [the "1998
10-K"].)
10(i) - Form of Non-Plan Stock Option Agreement between the Registrant
and Darwin C. Dornbush. (Incorporated herein by reference to Exhibit 10(y) to
Registrant's 1998 10-K.)
10(j) - Stock Option Agreement, dated as of October 5, 1998, between
the Registrant and John W. Rowe. (Incorporated herein by reference to Exhibit
10(z) to Registrant's 1998 10-K.)
10(k) - Employment Agreement, dated as of November 1, 2001, between
Minntech Corporation and Roy K. Malkin. (Incorporated herein by reference to
Exhibit 10(n) to Registrant's 2002 10-K.)
10(l) - Employment Agreement, dated as of November 1, 2001, between
the Registrant and Craig A. Sheldon. (Incorporated herein by reference to
Exhibit 10(o) to Registrant's 2002 10-K.)
- 56 -
<Page>
10(m) - Distributor Agreement dated as of August 1, 1999, between
MediVators, Inc. and Olympus America Inc. - Endoscope Division. (Incorporated
herein by reference to Exhibit 10(ee) to Registrant's 1999 Annual Report on Form
10-K [the "1999 10-K"].)
10(n) - Stock Option Agreement, dated as of October 30, 1998, between
the Registrant and Charles M. Diker. (Incorporated herein by reference to
Exhibit 10(ff) to Registrant's 1999 10-K.)
10(o) - Stock Option Agreement, dated as of March 10, 2000, between
the Registrant and John W. Rowe. (Incorporated herein by reference to Exhibit
10(gg) to Registrant's 1999 10-K.)
10(p) - Second Amendment to Distribution Agreement between Olympus
America Inc. and Carsen Group Inc. dated as of October 6, 2000. (Incorporated
herein by reference to Exhibit (1) of Registrant's Current Report on Form 8-K
dated October 23, 2000.)
10(q) - Registrant's 1998 Directors' Stock Option Plan. (Incorporated
herein by reference to Exhibit 10(gg) to Registrant's 2000 10-K.)
10(r) - 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(s) - 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(t) - 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(u) - 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.
(Incorporated herein by reference to Exhibit 10(aa) to Registrant's 2001 10-K.)
10(v) - Loan Agreement dated as of September 7, 2001 between Carsen
Group Inc. and National Bank of Canada. (Incorporated herein by reference to
Exhibit 10(bb) to Registrant's 2001 10-K.)
10(w) - Stock Option Agreement dated as of September 7, 2001 between
the Registrant and Fred L. Shapiro. (Incorporated herein by reference to Exhibit
10(cc) to Registrant's 2001 10-K.)
10(x) - Minntech Emeritus Director Consulting Plan. (Incorporated
herein by reference to Exhibit 10 to Minntech's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995.)
- 57 -
<Page>
10(y) - Amendment to Emeritus Director Consulting Plan effective
September 26, 1996 (Incorporated herein by reference to Exhibit 10(b) to
Minntech's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.)
10(z) - Minntech Amended and Restated Supplemental Executive
Retirement Plan effective April 1, 2000 (Incorporated herein by reference to
Exhibit 10(m) to Minntech's Quarterly Report on Form 10-Q for the quarter ended
July 1, 2000 [the "Minntech July 2000 10-Q"].)
10(aa) - Employment Agreement between Minntech and Paul E. Helms dated
September 1, 1996, as amended April 1, 1997 (Incorporated herein by reference to
Exhibit 10(r) to Minntech's July 2000 10-Q.)
10(bb) - Third Amendment to Distribution Agreement between Olympus
America Inc. and Carsen Group Inc. dated as of April 1, 2001. (Incorporated
herein by reference to Exhibit 10(gg) to Registrant's 2002 10-K.)
10(cc) - First Amendment to Credit Agreement among Cantel Medical
Corp., the Banks, Financial Institutions and Other Institutional Lenders named
therein, Fleet National Bank and PNC Bank, National Association dated as of
August 1, 2003.
10(dd) - Amended and Restated Loan Agreement between Carsen Group Inc.
and National Bank of Canada dated as of August 1, 2003.
10(ee) - Employment Agreement, dated as of November 14, 2002,
between the Registrant and Seth R. Segel. (Incorporated by reference to
Exhibit 10(a) to Registrant's October 31, 2002 Quarterly Report on Form 10-Q
[the "October 2002 10-Q"].)
10(ff) Stock Option Agreement, dated as of November 14, 2002, between
the Registrant and Seth R. Segel (Incorporated by reference to Exhibit 10(b) to
Registrant's October 2002 10-Q.)
21 - Subsidiaries of Registrant.
23 - Consent of Ernst & Young LLP.
31.1 - Certification of Principal Executive Officer.
31.2 - Certification of Principal Financial Officer.
32 - Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the three months ended
July 31, 2003.
- 58 -
<Page>
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, 2003 By: /s/ James P. Reilly
--------------------------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
By: /s/ Craig A. Sheldon
------------------------------------
Craig A. Sheldon, Senior 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, 2003
- ----------------------------
Charles M. Diker, a Director
and Chairman of the Board
/s/ Alan J. Hirschfield Date: October 29, 2003
- ----------------------------
Alan J. Hirschfield, a Director
and Vice Chairman of the Board
/s/ Robert L. Barbanell Date: October 29, 2003
- ----------------------------
Robert L. Barbanell, a Director
/s/ Joseph M. Cohen Date: October 29, 2003
- ----------------------------
Joseph M. Cohen, a Director
/s/ Darwin C. Dornbush Date: October 29, 2003
- ----------------------------
Darwin C. Dornbush, a Director
Date: October 29, 2003
- ----------------------------
Morris W. Offit, a Director
/s/ James P. Reilly Date: October 29, 2003
- ----------------------------
James P. Reilly, a Director and President
/s/ John W. Rowe Date: October 29, 2003
- ----------------------------
John W. Rowe, a Director
/s/ Fred L. Shapiro Date: October 29, 2003
- ----------------------------
Fred L. Shapiro, a Director
/s/ Bruce Slovin Date: October 29, 2003
- ----------------------------
Bruce Slovin, a Director
- 59 -
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003
<Page>
CONTENTS
<Table>
Report of Independent Auditors............................................F-1
Financial Statements
Consolidated Balance Sheets..........................................F-2
Consolidated Statements of Income....................................F-3
Consolidated Statements of Changes
in Stockholders' Equity...........................................F-4
Consolidated Statements of Cash Flows................................F-5
Notes to Consolidated Financial Statements...........................F-6
</Table>
<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, 2003 and 2002 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, 2003. 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, 2003 and 2002 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2003, 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 26, 2003
F - 1
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
<Table>
<Caption>
JULY 31,
2003 2002
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,018 $ 12,565
Accounts receivable, net of allowance for doubtful accounts
of $1,126 in 2003 and $1,041 in 2002 23,424 23,054
Inventories 17,900 17,331
Deferred income taxes 2,780 3,670
Prepaid expenses and other current assets 808 1,518
---------- ----------
Total current assets 61,930 58,138
Property and equipment, at cost:
Land, building and improvements 13,501 13,206
Furniture and equipment 15,045 13,940
Leasehold improvements 513 533
---------- ----------
29,059 27,679
Less accumulated depreciation and amortization (7,323) (4,695)
---------- ----------
21,736 22,984
Intangible assets, net 6,998 7,788
Goodwill 16,398 16,376
Other assets 2,748 2,528
---------- ----------
$ 109,810 $ 107,814
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,000 $ 2,750
Accounts payable 7,398 6,288
Compensation payable 2,372 2,722
Accrued expenses 4,886 6,347
Income taxes payable 631 2,207
---------- ----------
Total current liabilities 18,287 20,314
Long-term debt 17,750 25,750
Deferred income taxes 1,915 2,058
Other long-term liabilities 1,676 1,781
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
20,000,000 shares; issued 2003 - 9,580,452 shares, outstanding 2003 -
9,309,368 shares; issued 2002- 9,491,118 shares, outstanding 2002 -
9,221,003 shares 958 949
Additional capital 49,634 48,740
Retained earnings 19,539 11,629
Accumulated other comprehensive income (loss) 1,255 (2,215)
Treasury Stock, 2003 - 271,084 shares at cost;
2002 - 270,115 shares at cost (1,204) (1,192)
---------- ----------
Total stockholders' equity 70,182 57,911
---------- ----------
$ 109,810 $ 107,814
========== ==========
</Table>
See accompanying notes.
F - 2
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
<Table>
<Caption>
YEAR ENDED JULY 31,
2003 2002 2001
---------- ---------- ----------
Net sales:
Product sales $ 119,694 $ 111,225 $ 41,984
Product service 9,563 8,769 7,011
---------- ---------- ----------
Total net sales 129,257 119,994 48,995
---------- ---------- ----------
Cost of sales:
Product sales 75,213 68,165 26,350
Product service 5,850 5,353 3,629
---------- ---------- ----------
Total cost of sales 81,063 73,518 29,979
---------- ---------- ----------
Gross profit 48,194 46,476 19,016
Expenses:
Selling 17,309 14,759 5,692
General and administrative 12,816 14,560 5,410
Research and development 4,528 3,851 949
---------- ---------- ----------
Total operating expenses 34,653 33,170 12,051
---------- ---------- ----------
Income from continuing operations before interest
expense (income) and income taxes 13,541 13,306 6,965
Interest expense (income) 1,326 2,176 (42)
---------- ---------- ----------
Income from continuing operations before income taxes 12,215 11,130 7,007
Income taxes 4,305 3,978 2,851
---------- ---------- ----------
Income from continuing operations 7,910 7,152 4,156
Gain on disposal of discontinued operations - - 225
---------- ---------- ----------
Net income $ 7,910 $ 7,152 $ 4,381
========== ========== ==========
Earnings per common share:
Basic:
Continuing operations $ 0.85 $ 0.81 $ 0.62
Discontinued operations - - 0.03
---------- ---------- ----------
Net income $ 0.85 $ 0.81 $ 0.65
========== ========== ==========
Diluted:
Continuing operations $ 0.80 $ 0.74 $ 0.56
Discontinued operations - - 0.03
---------- ---------- ----------
Net income $ 0.80 $ 0.74 $ 0.59
========== ========== ==========
</Table>
See accompanying notes.
F - 3
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JULY 31, 2003, 2002 AND 2001
<Table>
<Caption>
COMMON STOCK TOTAL
------------------------ ACCUMULATED TOTAL COMPRE-
NUMBER OF OTHER TREASURY STOCK- HENSIVE
SHARES ADDITIONAL RETAINED COMPREHENSIVE STOCK, HOLDERS' INCOME
OUTSTANDING AMOUNT CAPITAL EARNINGS INCOME (LOSS) AT COST EQUITY (LOSS)
----------- ---------- ---------- -------- ------------- -------- --------- --------
Balance, July 31, 2000 6,657,572 $ 690 $ 19,272 $ 96 $ (2,097) $ (798) $ 17,163
Exercises of options 181,342 20 731 (222) 529
Unrealized gain on
available-for-sale
securities 332 332 $ 332
Unrealized gain on
currency hedging 31 31 31
Translation adjustment (409) (409) (409)
Net income 4,381 4,381 4,381
--------
Total comprehensive
income for fiscal 2001 $ 4,335
----------- ---------- ---------- -------- ------------- -------- --------- ========
Balance, July 31, 2001 6,838,914 710 20,003 4,477 (2,143) (1,020) 22,027
Exercises of options 181,245 19 812 (172) 659
Issuance for
Minntech acquisition 2,201,082 220 27,925 (332) 27,813
Stock-split fractional
share adjustment (238) -
Unrealized loss on
interest rate cap (121) (121) $ (121)
Unrealized gain on
currency hedging 29 29 29
Translation adjustment 352 352 352
Net income 7,152 7,152 7,152
--------
Total comprehensive
income for fiscal 2002 $ 7,412
----------- ---------- ---------- -------- ------------- -------- --------- ========
Balance, July 31, 2002 9,221,003 949 48,740 11,629 (2,215) (1,192) 57,911
Exercises of options 88,470 9 426 (12) 423
Income tax benefit
from exercises of
stock options 468 468
Fractional share
adjustment for
Minntech acquisition (105) -
Unrealized gain on
interest rate cap 61 61 $ 61
Unrealized loss on
currency hedging (228) (228) (228)
Translation adjustment 3,637 3,637 3,637
Net income 7,910 7,910 7,910
--------
Total comprehensive
income for fiscal 2003 $ 11,380
----------- ---------- ---------- -------- ------------- -------- --------- ========
Balance, July 31, 2003 9,309,368 $ 958 $ 49,634 $ 19,539 $ 1,255 $ (1,204) $ 70,182
=========== ========== ========== ======== ============= ======== =========
</Table>
See accompanying notes.
F - 4
<Page>
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<Table>
<Caption>
YEAR ENDED JULY 31,
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 7,910 $ 7,152 $ 4,156
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Income from discontinued operations - - 225
Depreciation and amortization 3,576 3,434 553
Amortization of debt issuance costs 453 484 -
Deferred income taxes 1,014 1,139 -
Changes in assets and liabilities:
Accounts receivable 952 1,078 (3,025)
Inventories 483 889 (1,350)
Prepaid expenses and other current assets 413 85 99
Accounts payable and accrued expenses (1,309) (1,934) (489)
Income taxes (1,664) (1,025) 1,173
--------- --------- ---------
Net cash provided by operating activities 11,828 11,302 1,342
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,095) (1,590) (367)
Purchases of available-for-sale securities - - (725)
Acquisition of Minntech, net of cash acquired - (30,194) -
Acquisition of Technimed - (279) -
Cash (used in) provided by discontinued operations (19) (58) 773
Proceeds from transfer of discontinued operations - - 2,350
Other, net (486) 400 (845)
--------- --------- ---------
Net cash (used in) provided by investing activities (1,600) (31,721) 1,186
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings for Minntech acquisition, net of debt issuance costs - 32,595 -
Repayments under term loan facility (2,750) (1,500) -
Net repayments under revolving credit facilities (5,000) (4,000) (125)
Proceeds from exercises of stock options 423 659 529
--------- --------- ---------
Net cash (used in) provided by financing activities (7,327) 27,754 404
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 1,552 180 (51)
--------- --------- ---------
Increase in cash and cash equivalents 4,453 7,515 2,881
Cash and cash equivalents at beginning of year 12,565 5,050 2,169
--------- --------- ---------
Cash and cash equivalents at end of year $ 17,018 $ 12,565 $ 5,050
========= ========= =========
</Table>
See accompanying notes.
F - 5
<Page>
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2003, 2002 AND 2001
1. BUSINESS DESCRIPTION
Cantel Medical Corp. ("Cantel") had two wholly-owned operating subsidiaries
(collectively, with Cantel, referred to as the "Company") at July 31, 2003.
Minntech Corporation ("Minntech"), which was acquired in September 2001,
designs, develops, manufactures, markets and distributes
disinfection/sterilization reprocessing systems, sterilants and other supplies
for renal dialysis, filtration and separation products for medical and
non-medical applications and endoscope reprocessing systems, sterilants and
other supplies. The Company's MediVators, Inc. ("MediVators") subsidiary, which
accounted for the majority of the Company's endoscope reprocessing business, was
combined with Minntech's existing facilities in September 2002 and was legally
merged into Minntech in November 2002. Carsen Group Inc. ("Carsen" or "Canadian
subsidiary") is engaged in the marketing and distribution of endoscopy and
surgical, endoscope reprocessing and scientific products in Canada. The Company
also provides technical maintenance services for its products.
On August 1, 2003, the Company completed its acquisition of two companies in the
water treatment industry, as more fully described in note 3 to the Consolidated
Financial Statements. Biolab Equipment Ltd. ("Biolab"), which became a
wholly-owned subsidiary of Carsen, designs and manufactures ultra-pure water
systems for the medical, pharmaceutical, biotechnology, research and
semiconductor industries and provides services required to produce and maintain
high purity water. Mar Cor Services, Inc. ("Mar Cor") which became a
wholly-owned subsidiary of Cantel, provides water treatment equipment design,
installation, service and maintenance, training and supplies for water and fluid
treatment systems to the medical, research, and pharmaceutical industries.
In May 2002, the Company issued 3,143,000 additional shares in connection with a
three-for-two stock split effected in the form of a 50% stock dividend paid on
May 14, 2002 to stockholders of record on May 7, 2002. The effect of the stock
split has been recognized retroactively in the stockholders' equity accounts in
the Consolidated Statements of Changes in Stockholders' Equity, and all share
data in the Consolidated Statements of Income, Notes to Consolidated Financial
Statements, and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
F - 6
<Page>
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. All intercompany transactions and
balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue on product sales (excluding certain sales of endoscope reprocessing
equipment in the United States) is recognized as products are shipped to
customers and title passes. The passing of title is determined based upon the
FOB terms specified for each shipment. With respect to dialysis, filtration and
separation and a portion of endoscope reprocessing products, shipment terms are
generally FOB origin for common carrier and FOB destination when the Company's
distribution fleet is utilized. With respect to endoscopy and surgical and
scientific products, shipment terms may be either FOB origin or destination.
Customer acceptance for the majority of the Company's product sales occurs at
the time of delivery. In certain instances, primarily with respect to an
insignificant amount of the Company's sales of dialysis equipment and scientific
products, post-delivery obligations such as installation, in-servicing or
training are contractually specified; in such instances, revenue recognition is
deferred until all of such conditions have been substantially fulfilled such
that the products are deemed functional by the end-user. With respect to a
portion of endoscopy and surgical and scientific product sales, equipment is
sold as part of a system for which the equipment is functionally interdependent
or the customer's purchase order specifies "ship-complete" as a condition of
delivery; revenue recognition on such sales is deferred until all equipment has
been delivered.
Sales of a majority of the Company's endoscope reprocessing equipment to a third
party distributor in the United States are recognized on a bill and hold basis
as more fully described in note 11 to the Consolidated Financial Statements.
Such sales satisfy each of the following criteria: (i) the risks of ownership
have passed to the third party distributor; (ii) the third party distributor
must provide a written purchase order committing to the purchase of specified
units; (iii) the bill and hold arrangement was specifically requested by the
third party distributor for the purpose of minimizing the impact of multiple
shipments of the units; (iv) the third party distributor provides specific
instructions for shipment to customers, and completed units held by the Company
for the third party distributor generally do not exceed three months of
anticipated shipments; (v) the Company has no further performance obligations
with respect to such units; (vi)
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completed units are invoiced to the third party distributor with 30 day payment
terms and such receivables are generally satisfied within such terms; and (vii)
completed units are ready for shipment and segregated in a designated section of
the Company's warehouse reserved only for the third party distributor.
Revenue on service sales is recognized when repairs are completed and the
products are shipped to customers. All shipping and handling fees invoiced to
customers, such as freight, are recorded as revenue (and related costs are
included within costs of sales) at the time the sale is recognized.
None of the Company's sales, including the bill and hold sales arrangement,
contain right-of-return provisions, and customer claims for credit or return due
to damage, defect, shortage or other reason must be pre-approved by the Company
before credit is issued or such product is accepted for return. No cash
discounts for early payment are offered except with respect to a small portion
of the Company's sales of dialysis products. Price protection is not offered by
the Company, although advance pricing contracts or required notice periods prior
to implementation of price increases exist for certain customers with respect to
many of the Company's products. With respect to certain of the Company's
dialysis product customers, volume rebates and trade-in allowances are provided;
such volume rebates and trade-in allowances are provided for as a reduction of
sales at the time of revenue recognition and amounted to $288,000 and $203,000
in fiscal 2003 and 2002, respectively.
The majority of the Company's dialysis products are sold to end-users; the
majority of filtration and separation and endoscope reprocessing products are
sold to third party distributors; the majority of endoscopy and surgical
products are sold directly to hospitals; scientific products are sold to both
hospitals and other end-users; and product service is sold to hospitals, third
party distributors and other end-users. Sales to all of these customers follow
the Company's revenue recognition policies.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of the Company's foreign subsidiaries 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 the accounts of the foreign subsidiaries is presented as a
component of accumulated other comprehensive income or loss. Foreign exchange
gains and losses related to the purchase of inventories are included in cost of
sales. Foreign exchange gains and losses related to the conversion of foreign
assets and liabilities into foreign subsidiaries' functional currencies are
included in general and administrative expenses.
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<Page>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consist of amounts due to the Company from normal business
activities. Allowances for doubtful accounts are reserves for the estimated loss
from the inability of customers to make required payments. The Company uses
historical experience as well as current market information in determining the
estimate. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
INVENTORIES
Inventories consist of products which are sold in the ordinary course of the
Company's business and are stated at the lower of cost (first-in, first-out) or
market. In assessing the value of inventories, the Company must make estimates
and judgments regarding reserves required for product obsolescence, aging of
inventories and other issues potentially affecting the saleable condition of
products. In performing such evaluations, the Company uses historical experience
as well as current market information.
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
or amortization is removed from the respective accounts and any resulting gain
or loss is included in income. Depreciation and amortization is 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 3-15 years for furniture and equipment, 5-32 years for
buildings and improvements and the life of the lease for leasehold improvements.
Depreciation and amortization expense related to property and equipment for
fiscal 2003, 2002 and 2001 was $2,716,000, $2,654,000 and $410,000,
respectively.
GOODWILL AND INTANGIBLE ASSETS
Certain of the Company's identifiable intangible assets, including technology,
customer lists, patents and non-compete agreements, are amortized on the
straight-line method over their estimated useful lives which range from 2 to 20
years. Additionally, the Company
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has recorded goodwill and trademarks and tradenames, all of which have
indefinite useful lives and are therefore not amortized. All of the Company's
intangible assets and goodwill are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, and goodwill and intangible assets with indefinite lives are
reviewed for impairment at least annually. The Company's management is primarily
responsible for determining if impairment exists and considers a number of
factors, including third-party valuations, when making these determinations. In
performing a review for impairment, management uses a two-step process that
begins with an estimation of the fair value of the intangible assets or, for
goodwill, the related operating segments. The first step is a review for
potential impairment, and the second step measures the amount of impairment, if
any. On July 31, 2003, management concluded that none of the Company's
intangible assets or goodwill were impaired since the individual fair values of
its intangible assets and operating segments exceeded their carrying values.
Prior to fiscal 2002, the Company amortized goodwill. Goodwill amortization
amounted to $35,000 during fiscal 2001.
OTHER ASSETS
Debt issuance costs associated with the credit facilities for the Minntech
merger are amortized to interest expense over the original five-year life of the
credit facilities, except for debt issuance costs related to an interest rate
cap which are amortized over a three year period, as more fully described in
notes 5 and 9 to the Consolidated Financial Statements. As of July 31, 2003 and
2002, such debt issuance costs, net of related amortization, are included in
other assets and amounted to $1,008,000 and $1,384,000, respectively.
Inventories of sales samples which have not turned over within one year and
medical loaners available for customers are also included in other assets and
are carried at the lower of cost or net realizable value.
WARRANTIES
The Company provides for estimated costs that may be incurred to remedy
deficiencies of quality or performance of the Company's products at the time of
revenue recognition. Most of the Company's products have a one year warranty,
although a majority of the Company's endoscope reprocessing equipment in the
United States may carry a warranty period of up to fifteen months. The Company
records provisions for product warranties as a component of cost of sales based
upon an estimate of the amounts necessary to settle existing and future claims
on products sold. The historical relationship of warranty costs to products sold
is the primary basis
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for the estimate. A significant increase in third party service repair rates,
the cost and availability of parts or the frequency of claims could have a
material adverse impact on the Company's results for the period or periods in
which such claims or additional costs materialize. Management reviews its
warranty exposure periodically and believes that the warranty reserves are
adequate; however, actual claims incurred could differ from original estimates,
requiring adjustments to the reserves.
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.
As described in note 1 to the Consolidated Financial Statements, the
calculations of weighted average common shares and earnings per share for all
periods presented reflect the May 2002 stock split.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE" ("SFAS 148"). SFAS 148 amends the
disclosure requirements of SFAS No. 123, "STOCK-BASED COMPENSATION" ("SFAS 123")
to require prominent disclosure in both annual and interim financial statements
about the effects on reported net income of an entity's method of accounting for
stock-based employee compensation. SFAS 148 also provides alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation under SFAS 123, but does not require a company to use the fair
value method.
The Company accounts for its stock option plans using the intrinsic value method
under the provisions of Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations. At July
31, 2003, the Company had three stock option plans in addition to outstanding
non-plan stock options, as more fully described in note 12 to the Consolidated
Financial Statements. Under the provisions of APB 25, the Company grants stock
options with exercise prices at the fair value of the shares at the date of
grant 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, net income and earnings
per share would have been as follows:
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<Table>
<Caption>
Year Ended July 31,
-----------------------------------------------
2003 2002 2001
------------ ------------- -------------
Income from continuing operations:
As reported $ 7,910,000 $ 7,152,000 $ 4,156,000
Stock-based employee compen-
sation expense, net of
related tax effects (1,183,000) (1,215,000) (454,000)
------------- ------------- -------------
Pro forma $ 6,727,000 $ 5,937,000 $ 3,702,000
============= ============= =============
Earnings per common share from continuing operations - basic:
As reported $ 0.85 $ 0.81 $ 0.62
Pro forma $ 0.73 $ 0.67 $ 0.55
Earnings per common share From continuing operations - diluted:
As reported $ 0.80 $ 0.74 $ 0.56
Pro forma $ 0.68 $ 0.61 $ 0.50
</Table>
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 for fiscal
2003, 2002 and 2001: expected dividend yield of 0%; expected stock price
volatility ranging from .31 to .69; risk-free interest rate at date of grant
ranging from 2.27% to 4.74%; 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, except for options granted in fiscal 2003 under
the 1998 Director's Plan or non-plan options. Such options were tax-effected
using the Company's estimated U.S. effective tax rate. The weighted average fair
value of options granted in fiscal 2003, 2002 and 2001 was $4.87, $5.62 and
$7.29 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.
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<Page>
ADVERTISING COSTS
The Company's policy is to expense advertising costs as they are incurred.
Advertising costs charged to expenses were $186,000, $146,000 and $26,000 for
fiscal 2003, 2002 and 2001, respectively.
INCOME TAXES
The Company accounts for income taxes by the liability method as prescribed by
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" ("SFAS 109"). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities. Deferred tax assets and
liabilities also include items recorded in conjunction with the purchase
accounting for business acquisitions. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation allowance based on
historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. Although realization
is not assured, management believes it is more likely than not that the recorded
deferred tax assets will be realized. Additionally, deferred tax liabilities are
regularly reviewed to confirm that such amounts are appropriately stated. All of
such evaluations require significant management judgments.
Approximately $10,468,000 of the undistributed earnings of the Company's foreign
subsidiaries was considered to be indefinitely reinvested at July 31, 2003.
Accordingly, no provision has been recorded for U.S. income taxes that might
result from repatriation of these earnings.
BUSINESS COMBINATIONS
Acquisitions require significant estimates and judgments related to the fair
value of assets acquired and liabilities assumed. Certain liabilities are
subjective in nature. The Company reflects such liabilities based upon the most
recent information available.
In conjunction with the acquisition of Minntech in fiscal 2002, such liabilities
principally include certain state sales and use tax and state income tax
exposures, as well as income tax liabilities related to the Company's foreign
subsidiaries.
The ultimate settlement of such liabilities may be for amounts which are
different from the amounts recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect
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the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain items in the July 31, 2002 and 2001 financial statements have been
reclassified from amounts previously reported to conform to the presentation of
the July 31, 2003 financial statements. These reclassifications relate to the
operating segment classifications of certain sales and related cost of sales and
identifiable assets.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY" ("SFAS 150"). SFAS 150 establishes standards for how a
company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company formally adopted SFAS 150 on August 1, 2003, which is the
beginning of its 2004 fiscal year. The adoption of SFAS 150 did not have any
impact on the Company's financial statements.
In May 2003, the FASB's Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-21, "ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES"
("EITF 00-21"). EITF 00-21 addresses certain aspects of the accounting by a
company for arrangements under which it will perform multiple revenue-generating
activities. The guidance in Issue 00-21 is effective for revenue arrangements
entered into in reporting periods (annual or interim) beginning after June 15,
2003. The Company formally adopted EITF No. 00-21 on August 1, 2003, which is
the beginning of its 2004 fiscal year. The adoption of EITF 00-21 had no impact
on the Company's operating results or financial position since the Company has
historically recognized revenue under its multiple deliverable arrangements in a
manner consistent with the guidance of EITF 00-21.
In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133"). SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The
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Company does not expect the adoption of SFAS 149 to have a significant impact on
the Company's financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46, "CONSOLIDATION
OF VARIABLE INTEREST ENTITIES" ("FIN 46"). FIN 46 requires that if an entity has
a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. For any arrangements entered into prior to January 31,
2003, the FIN 46 provisions are required to be adopted at the beginning of the
first interim or annual period beginning after December 15, 2003. The Company
adopted FIN 46 on February 1, 2003. The adoption of FIN 46 had no impact on the
Company's operating results or financial position as the Company does not have
any variable interest entities.
In November 2002, the FASB issued Interpretation No. 45, "GUARANTOR'S ACCOUNTING
AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of the
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 and the disclosure requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company adopted FIN 45 on January 1,
2003. The adoption of FIN 45 had no significant impact on the Company's
financial position or results of operations. Disclosure requirements of FIN 45
are included in notes 7 and 9 to the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES" ("SFAS 146"). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)."
Under SFAS 146 companies recognize a cost associated with an exit or disposal
activity when a liability has been incurred, while under EITF Issue No. 94-3
companies recognized costs once management implemented a plan to exit an
activity. SFAS 146 also
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introduces discounting the liability associated with the exit or disposal
activity for the time between the cost being incurred and when the liability is
ultimately settled. The Company will adopt the provisions of SFAS 146 if any
exit or disposal activities are initiated in the future.
3. ACQUISITIONS
MINNTECH
On September 7, 2001, the Company completed its acquisition of Minntech, a
public company based in Plymouth, Minnesota, in a merger transaction. Minntech
is a leader in the development, manufacturing, and marketing of
disinfection/sterilization reprocessing systems and sterilants for renal
dialysis as well as filtration and separation 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.
The reasons for the acquisition of Minntech were the: (i) overall strategic fit
between Cantel and Minntech relative to their respective product lines, markets
and distribution channels; (ii) expectation that the merger would be accretive
to Cantel's future earnings per share, increase the liquidity of Cantel's common
stock and better position the Company to utilize its existing net operating loss
carryforwards to offset taxable income generated in the United States; (iii)
potential synergies and efficiencies that could be realized through a
combination of the companies; (iv) complementary nature of the companies'
infection prevention and control and medical device reprocessing products,
thereby giving the combined company an expanded range of products and technology
in medical device reprocessing; (v) opportunity to diversify into non-hospital
markets with a direct non-hospital based sales force, thus enabling the combined
company to take advantage of cross-selling opportunities, joint-product
development, joint-marketing and distribution and other new business
initiatives; (vi) opportunity to further expand internationally, particularly in
Europe and Asia; (vii) potential growth of Minntech's filtration business and
the potential expansion of hemofiltration technologies into emerging therapeutic
blood procedures; (viii) opportunity for Cantel to further expand its business
into the design, manufacture and distribution of proprietary products; (ix)
enhancement of Cantel's research and development capabilities; and (x) access by
Cantel to Minntech's proprietary liquid chemical germicide manufacturing
expertise. Such reasons for the acquisition of Minntech include all of the
significant factors contributing to a purchase price that resulted in
recognition of goodwill.
Under the terms of the Agreement and Plan of Merger, each share of Minntech was
converted into the right to receive $10.50, consisting
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<Page>
of $6.25 in cash, and a fraction of a share of Cantel common stock having a
value of $4.25. With respect to the stock portion of the consideration, Cantel
issued approximately 2,201,000 shares of common stock in the merger. The total
consideration for the transaction, including transaction costs, was
approximately $78,061,000 (as adjusted for fractional shares, and included cash
of $41,396,000, shares of Cantel common stock with a fair market value, based
upon the closing price of Cantel common stock on the date of the acquisition, of
$28,144,000, Cantel's existing investment in Minntech of $725,000 and final
transaction costs, including severance obligations, of approximately
$7,796,000). The transaction was accounted for as a purchase and in accordance
with the provisions of SFAS No. 141, "BUSINESS COMBINATIONS" ("SFAS 141").
Minntech is reflected in the Company's results of operations for fiscal 2003,
the portion of fiscal 2002 subsequent to its acquisition on September 7, 2001,
and is not reflected in the results of operations for fiscal 2001.
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 9
to the Consolidated Financial Statements.
The purchase price was allocated to the assets acquired and assumed liabilities
as follows: cash and cash equivalents $17,395,000; accounts receivable
$12,342,000; inventories $10,205,000; prepaids and other current assets
$7,026,000; property and equipment $22,932,000; intangible assets $7,705,000;
other noncurrent assets $594,000; current liabilities $11,143,000; noncurrent
deferred income tax liabilities $6,430,000; and other long-term liabilities
$1,766,000. Intangible assets acquired of $7,705,000 included the following:
current technology $4,459,000 (14 year life), customer relationships $1,952,000
(7 year life), trademarks and tradenames $1,015,000 (indefinite life) and
covenant-not-to-compete $279,000 (2 year life). The weighted average life of
these intangible assets (excluding such assets with an indefinite life) was
approximately 11.5 years. There were no in-process research and development
projects acquired in connection with the acquisition. Additionally, in
conjunction with the purchase accounting, Cantel reversed the valuation
allowance associated with its deferred tax assets originating from net operating
loss carryforwards ("NOLs"), resulting in $3,583,000 of net deferred tax assets.
The excess purchase price of $15,618,000 was assigned to goodwill.
During July 2002, goodwill was increased from its preliminary allocation by
$1,009,000, due primarily to increases in liabilities for state sales and use
taxes and state income taxes, partially offset by an increase in deferred tax
assets relating to NOLs. Such goodwill, all of which is non-deductible for
income tax
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purposes, was allocated to the Company's operating segments as follows: Dialysis
Products $9,074,000, Filtration and Separation Products $2,655,000 and Endoscope
Reprocessing Products $3,889,000.
Certain of the assumed liabilities are subjective in nature. These liabilities
have been reflected based upon the most recent information available, and
principally include certain state sales and use tax and state income tax
exposures and income tax liabilities related to the Company's foreign
subsidiaries. The ultimate settlement of such liabilities may be for amounts
which are different from the amounts presently recorded. During fiscal 2003, the
Company recorded favorable state sales tax adjustments in the amount of $823,000
related to the settlement of these liabilities; such amounts have been reflected
as a reduction of general and administrative expenses in the accompanying
Consolidated Statements of Income and have been included in the dialysis
operating segment.
Selected unaudited pro forma consolidated statements of income data assuming
that Minntech was included in the Company's results of operations as of the
beginning of the years ended July 31, 2002 and 2001 is as follows:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
------------- ------------- -------------
Net sales $ 129,257,000 $ 127,819,000 $ 127,442,000
Income from continuing
operations 7,910,000 6,721,000 5,241,000
Earnings per share:
Basic $ 0.85 $ 0.74 $ 0.59
Diluted $ 0.80 $ 0.68 $ 0.55
Weighted average common shares:
Basic 9,268,000 9,105,000 8,909,000
Diluted 9,849,000 9,937,000 9,566,000
</Table>
This pro forma information is provided for illustrative purposes only, and does
not necessarily indicate what the operating results of the combined company
might have been had the merger actually occurred at the beginning of fiscal
2001, nor does it necessarily indicate the combined company's future operating
results. This information also does not reflect any cost savings from operating
efficiencies or other improvements which may be achieved by combining the
companies.
The results presented in the selected unaudited pro forma consolidated
statements of income data have been prepared using the following assumptions:
(i) cost of sales reflects a step-up in the cost basis of Minntech's
inventories; (ii) amortization of intangible assets and depreciation and
amortization of property and
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equipment is based upon the final appraised fair values and useful lives of such
assets; (iii) in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets" ("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.
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.
TECHNIMED
On November 1, 2001, the Company acquired substantially all of the assets,
business and properties of Technimed Instruments Inc. and Technimed
International Inc. (collectively "Technimed") for approximately $405,000, which
included cash of approximately $241,000 and a note payable in three equal annual
installments with a present value of approximately $164,000. This transaction
was accounted for as a purchase and in accordance with the provisions of SFAS
141.
The purchase price was allocated to the assets acquired and assumed liabilities
as follows: current assets $148,000; property and equipment $30,000; intangible
assets $172,000; current liabilities $105,000; and long-term liabilities
$12,000. The excess purchase price of $172,000 was assigned to goodwill. The
acquisition and subsequent results of Technimed did not have a significant
impact upon the Company's results of operations for fiscal 2003 or 2002.
Technimed was a private company based in Montreal, Canada servicing medical
equipment, including rigid endoscopes and hand-held surgical instrumentation.
BIOLAB
On August 1, 2003, the Company acquired all of the issued and outstanding stock
of Biolab, a private company in the water treatment industry with annual
revenues of approximately $10,000,000. The total consideration for the
transaction, including estimated transaction costs and assumption of debt, was
approximately $7,800,000. Under the terms of the purchase agreement, the Company
may pay additional consideration up to an aggregate of $3,000,000 based upon
Biolab achieving specified targets of earnings before interest, taxes,
depreciation and amortization ("EBITDA") during the three year period ending
July 31, 2006. References herein to Biolab includes Biolab and its subsidiaries.
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In conjunction with the acquisition of Biolab, Carsen amended its existing
Canadian working capital credit facility, as discussed in note 9 to the
Consolidated Financial Statements.
Biolab designs and manufactures ultra-pure water systems for the medical,
pharmaceutical, biotechnology, research and semiconductor industries and
provides services required to produce and maintain high purity water. Biolab has
locations in Oakville, Ontario and Dorval, Quebec.
MAR COR
On August 1, 2003, the Company acquired all of the issued and outstanding stock
of Mar Cor, a private company in the water treatment industry with annual
revenues of approximately $10,000,000. The total consideration for the
transaction, including estimated transaction costs and assumption of debt, was
approximately $8,350,000.
Mar Cor, based in Skippack, Pennsylvania, is a service-oriented company
providing design, installation, service and maintenance, training and supplies
for water and fluid treatment systems to the medical, research, and
pharmaceutical industries.
In conjunction with the acquisition of Mar Cor, the Company amended its existing
U.S. credit facilities to fund the cash consideration paid and costs associated
with the acquisition, as discussed in note 9 to the Consolidated Financial
Statements.
The reasons for the acquisitions of Biolab and Mar Cor were as follows: (i) the
overall strategic fit of water treatment with the Company's existing dialysis
and filtration technology businesses; (ii) the opportunity to grow the Company's
existing businesses and the water treatment business by combining Minntech's
sales, marketing, and product development capabilities with Mar Cor's regional
field service organization and Biolab's water treatment equipment design and
manufacturing expertise; (iii) the opportunity to expand and diversify the
Company's infection prevention and control business, particularly within the
pharmaceutical and biotechnology industries; and (iv) the expectation that the
acquisitions would be accretive to the Company's future earnings per share.
DYPED
On September 26, 2003, the Company acquired the endoscope reprocessing systems
and accessory infection control technologies of Dyped, a private company based
in The Netherlands, for approximately $1,969,000 which included cash of $484,000
and a note payable of $1,485,000. The Company may pay additional purchase price
of approximately $550,000 over a three year period contingent
F - 20
<Page>
upon the achievement of certain research and development objectives. The primary
reason for the acquisition of Dyped was to expand Minntech's technological
capabilities and augment its endoscope reprocessing product line with a new,
fully automated reprocessor designed to be compliant with emerging European
standards and future market requirements.
As the acquisitions of Biolab, Mar Cor and Dyped occurred during fiscal 2004,
these acquisitions had no impact upon the Company's results of operations for
fiscal 2003. The Company has not yet completed its allocation of the purchase
price to the assets acquired and liabilities assumed for these acquisitions.
4. INVENTORIES
A summary of inventories is as follows:
<Table>
<Caption>
July 31,
2003 2002
--------------------------
Raw materials and parts $ 3,855,000 $ 6,661,000
Work-in-process 2,118,000 1,581,000
Finished goods 11,927,000 9,089,000
------------ ------------
Total $ 17,900,000 $ 17,331,000
============ ============
</Table>
5. FINANCIAL INSTRUMENTS
Effective August 1, 2000, the Company adopted SFAS No. 133, as amended. Because
of the Company's minimal use of hedging activities at the time of adoption, the
adoption of this statement did not have a significant effect on the financial
position or results of operations of the Company. SFAS 133 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 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.
The Company's Canadian subsidiary purchases and pays for a substantial portion
of its products in United States dollars and sells its products in Canadian
dollars, and is therefore exposed to
F - 21
<Page>
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. These foreign currency forward contracts have been designated as
cash flow hedge instruments. Total commitments for such foreign currency forward
contracts amounted to $12,721,000 (United States dollars) at July 31, 2003
($9,800,000 at July 31, 2002) and cover a portion of Carsen's projected
purchases of inventories through June 2004.
In addition, changes in the value of the euro against the United States dollar
affect the Company's results of operations because a portion of the net assets
of Minntech's Netherlands subsidiary are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
In order to hedge against the impact of fluctuations in the value of the euro
relative to the United States dollar, Minntech enters into short-term contracts
to purchase euros forward, which contracts are generally one month in duration.
These short-term contracts have been designated as fair value hedge instruments.
There was one such foreign currency forward contract amounting to EURO 6,700,000
at July 31, 2003 which covers certain assets and liabilities of Minntech's
Netherlands subsidiary which are denominated in currencies other than its
functional currency. Such contract expired on August 31, 2003. Under its credit
facilities, such contracts to purchase euros may not exceed $12,000,000 in an
aggregate notional amount at any time.
In accordance with SFAS 133, all of the Company's foreign currency forward
contracts are designated as hedges. Recognition of gains and losses related to
the Canadian hedges is deferred within other comprehensive income until
settlement of the underlying commitments, and realized gains and losses are
recorded within cost of sales upon settlement. Gains and losses related to the
hedging contracts to buy euros forward are immediately realized within general
and administrative expenses due to the short-term nature of such contracts. The
Company does not hold any derivative financial instruments for speculative or
trading purposes.
The Company entered into new credit facilities in September 2001, as more fully
described in note 9, for which the interest rate on outstanding borrowings is
variable. In order to protect its interest rate exposure, the Company entered
into a three year interest rate cap agreement expiring on September 7, 2004
which caps the London Interbank Offered Rate ("LIBOR") at 4.50% on $12,500,000
of the Company's borrowings. This interest rate cap agreement has been
designated as a cash flow hedge instrument. The cost of the interest rate cap,
which is included in other assets, was $246,500 and is being amortized to
interest expense over the three year life of the agreement. The difference
between its amortized cost and its
F - 22
<Page>
fair value is recorded as an unrealized loss at July 31, 2003 and is included in
accumulated other comprehensive income.
The fair values of the Company's interest rate cap agreement and Carsen's
foreign currency forward contracts are based upon quoted market prices as
provided by financial institutions which are parties to the agreements and are
as follows:
<Table>
<Caption>
July 31,
2003 2002
---------------------------
Interest rate cap agreement $ - $ 52,000
Canadian foreign currency
forward contracts $ 12,300,000 $ 9,848,000
</Table>
As of July 31, 2003 and 2002, the carrying amounts for cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short maturity of these instruments. The Company believes that as of July
31, 2003, the fair value of its long-term debt approximates the carrying value
of those obligations based on the borrowing rates which are comparable to market
interest rates.
6. INTANGIBLES AND GOODWILL
The Company's intangible assets which continue to be subject to amortization
consist primarily of technology, customer relationships, non-compete agreements
and patents. These intangible assets are being amortized on the straight-line
method over the estimated useful lives of the assets ranging from 2-20 years and
have a weighted average amortization period of 11 years as of July 31, 2003.
Amortization expense related to intangible assets was $860,000, $780,000 and
$143,000 for fiscal 2003, 2002 and 2001, respectively. Intangible assets
acquired in conjunction with the Minntech acquisition are more fully described
in note 3 to the Consolidated Financial Statements. The Company's intangible
assets that have indefinite useful lives and therefore are not amortized consist
of trademarks and tradenames.
F - 23
<Page>
The Company's intangible assets consist of the following:
<Table>
<Caption>
July 31, 2003
--------------------------------------------
Accumulated
Gross Amortization Net
------------ ------------ ------------
Intangible assets with finite lives:
Technology $ 4,822,000 $ (786,000) $ 4,036,000
Customer relationships 2,695,000 (876,000) 1,819,000
Non-compete agreements 279,000 (264,000) 15,000
Patents and other registrations 114,000 (1,000) 113,000
------------ ------------ ------------
7,910,000 (1,927,000) 5,983,000
Trademarks and tradenames 1,015,000 - 1,015,000
------------ ------------ ------------
Total of all intangible assets $ 8,925,000 $ (1,927,000) $ 6,998,000
============ ============ ============
</Table>
<Table>
<Caption>
July 31, 2002
--------------------------------------------
Accumulated
Gross Amortization Net
------------ ------------ ------------
Intangible assets with finite lives:
Technology $ 4,816,000 $ (425,000) $ 4,391,000
Customer relationships 2,679,000 (522,000) 2,157,000
Non-compete agreements 339,000 (177,000) 162,000
Patents and other registrations 88,000 (25,000) 63,000
------------ ------------ ------------
7,922,000 (1,149,000) 6,773,000
Trademarks and tradenames 1,015,000 - 1,015,000
------------ ------------ ------------
Total of all intangible assets $ 8,937,000 $ (1,149,000) $ 7,788,000
============ ============ ============
</Table>
Estimated annual amortization expense of the Company's intangible assets for the
next five years is as follows:
<Table>
<Caption>
Year Ending July 31,.
-----------------------
2004 $ 733,000
2005 718,000
2006 718,000
2007 710,000
2008 674,000
</Table>
During fiscal 2002, goodwill increased by $15,791,000 primarily due to the
acquisition of Minntech as more fully described in note 3 to the Consolidated
Financial Statements. At the time of the Minntech acquisition a goodwill
benchmark impairment study was performed. On each of July 31, 2003 and August 1,
2002, management performed an impairment study of goodwill and trademarks and
tradenames and concluded that such assets were not impaired.
F - 24
<Page>
7. WARRANTIES
A summary of activity in the warranty reserves follows:
<Table>
<Caption>
July 31,
--------------------------
2003 2002
----------- -----------
Beginning balance $ 344,000 $ 234,000
Provisions 1,246,000 633,000
Charges (1,239,000) (603,000)
Foreign currency translation 2,000 -
Acquisition of Minntech - 80,000
----------- -----------
Ending balance $ 353,000 $ 344,000
=========== ===========
</Table>
The increases to the warranty provisions and charges during fiscal 2003 relate
principally to the Company's endoscope reprocessing products.
8. 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 under the Purchase Agreement.
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. A gain of $225,000, net of $155,000 of income tax expense,
was recorded during fiscal 2001 related to the disposal of the business.
At July 31, 2003 and 2002, remaining liabilities of the discontinued business
were $17,000 and $34,000, respectively, and are included within accrued
expenses.
F - 25
<Page>
9. FINANCING ARRANGEMENTS
In conjunction with the acquisition of Minntech on September 7, 2001, the
Company entered into 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. Such
credit facilities included (i) a $25,000,000 senior secured amortizing term loan
facility from a consortium of 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 being available for future working capital requirements
for the U.S. businesses of Cantel, including Minntech (Cantel and Minntech are
referred to as the "U.S. Borrowers")(the Term Loan Facility and the U.S.
Revolving Credit Facility are collectively referred to as the "U.S. Credit
Facilities"), 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") available for Carsen's future
working capital requirements (the U.S. Credit Facilities and the Canadian
Revolving Credit Facility are collectively referred to as the "Credit
Facilities").
In conjunction with the acquisitions of Biolab and Mar Cor on August 1, 2003,
the Company amended its Credit Facilities as follows: i) outstanding
borrowings under the Term Loan Facility were reset to $25,000,000 to finance
a portion of the Mar Cor acquisition, (ii) Mar Cor was added as a guarantor
under the U.S. Credit Facilities and the stock and assets of Mar Cor were
pledged as security for such guaranty, (iii) the Canadian Revolving Credit
Facility was increased from $5,000,000 to $7,000,000, (iv) Biolab was added
as a guarantor under the Canadian Revolving Credit Facility and the stock and
assets of Biolab were pledged as security for such guaranty, (v) the maturity
dates of the U.S. Credit Facilities were extended to March 31, 2008, (vi)
certain financial covenants of the Credit Facilities were modified to reflect
the effect of the acquisitions in the Company's anticipated future operating
results and (vii) the Company was permitted to guarantee the lease on Mar
Cor's facility. The maturity date of the Canadian Revolving Credit Facility
remains September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates ranging from .75%
to 2.00% above the lenders' base rate, or at rates ranging from 2.0% to 3.25%
above LIBOR, depending upon the Company's consolidated ratio of debt to EBITDA.
The base rates associated with the U.S. lenders and the Canadian lender were
4.0% and 4.75%, respectively, at July 31, 2003, and the LIBOR rates ranged from
1.06% to 1.12% at July 31, 2003. The margins
F - 26
<Page>
applicable to the Company's outstanding borrowings at July 31, 2003 are 1.25%
above the lenders' base rate and 2.50% above LIBOR. At July 31, 2003, all of the
Company's outstanding borrowings were under LIBOR contracts. In order to protect
its interest rate exposure, the Company entered into a three year interest rate
cap agreement expiring on September 7, 2004 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 U.S. Credit Facilities provide for available borrowings based upon
percentages of the eligible accounts receivable and inventories of Cantel,
Minntech and Mar Cor; require the U.S. Borrowers to meet certain financial
covenants; are secured by substantially all assets of the U.S. Borrowers and Mar
Cor (including a pledge of the stock of Minntech and Mar Cor owned by Cantel and
65% of the outstanding shares of Carsen stock owned by Cantel); and are
guaranteed by Minntech and Mar Cor. As of July 31, 2003, the Company was in
compliance with the financial covenants under the Term Loan Facility and the
U.S. Revolving Credit Facility, as amended on August 1, 2003.
The Canadian Revolving Credit Facility provides for available borrowings based
upon percentages of the eligible accounts receivable and inventories of Carsen
and Biolab; requires the Canadian Borrower to meet certain financial covenants;
and is secured by substantially all assets of the Canadian Borrower and Biolab.
As of July 31, 2003, Carsen was in compliance with the financial covenants under
the Canadian Revolving Credit Facility, as amended on August 1, 2003.
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 in connection
with the acquisition of Minntech. At July 31, 2003, the Company had $20,750,000
outstanding under the Term Loan Facility and had no outstanding borrowings under
either the U.S. Revolving Credit Facility or the Canadian Revolving Credit
Facility.
In conjunction with the Mar Cor acquisition on August 1, 2003, the Company
borrowed an additional $9,050,000; therefore, immediately after such
acquisition, the Company had $29,800,000 outstanding under the U.S. Credit
Facilities, including $25,000,000 under the Term Loan Facility. The Biolab
acquisition did not require any borrowings under the Canadian Revolving Credit
Facility. Amounts repaid by the Company under the Term Loan Facility may not be
re-borrowed.
F - 27
<Page>
Aggregate annual required maturities of the Credit Facilities over the next five
years and thereafter are as follows:
<Table>
Year Ending July 31,
2004 $ 3,000,000
2005 3,000,000
2006 5,000,000
2007 6,000,000
2008 12,800,000
Thereafter -
------------
Total $ 29,800,000
============
</Table>
All of such maturing amounts reflect the repayment terms under the Credit
Facilities, as amended on August 1, 2003. The amount maturing in fiscal 2008
includes the $4,800,000 currently outstanding under the U.S. Revolving Credit
Facility since such amount is required to be repaid prior to the expiration date
of this facility.
10. INCOME TAXES
The consolidated effective tax rate on operations was 35.2%, 35.7% and 40.7% for
fiscal 2003, 2002 and 2001, respectively, and reflects income tax expense for
its United States and international operations at their respective statutory
rates.
The provision for income taxes consists of the following:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
-----------------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
-----------------------------------------------------------------------------------------
United States:
Federal $ 356,000 $ 734,000 $ (109,000) $ 763,000 $ 18,000 $ -
State 293,000 120,000 331,000 160,000 182,000 -
Canada 1,973,000 7,000 1,755,000 (57,000) 2,651,000 -
Netherlands 658,000 - 861,000 - - -
Japan 15,000 149,000 - 274,000 - -
------------ ------------ ------------ ------------ ------------ ------------
Total $ 3,295,000 $ 1,010,000 $ 2,838,000 $ 1,140,000 $ 2,851,000 $ -
============ ============ ============ ============ ============ ============
</Table>
The components of income from continuing operations before income taxes are as
follows:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
----------------------------------------
United States $ 3,856,000 $ 2,883,000 $ 630,000
Canada 5,280,000 4,390,000 6,377,000
Netherlands 2,715,000 3,248,000 -
Japan 364,000 609,000 -
------------ ------------ ------------
Total $ 12,215,000 $ 11,130,000 $ 7,007,000
============ ============ ============
</Table>
F - 28
<Page>
The effective tax rate differs from the United States statutory tax rate (34%)
due to the following:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
--------------------------------------------
Expected statutory tax $ 4,153,000 $ 3,784,000 $ 2,382,000
Differential attributable to
foreign operations:
Canada 185,000 185,000 483,000
Netherlands (265,000) (379,000) -
Japan 40,000 67,000 -
Utilization of NOLs - - (152,000)
State and local taxes 261,000 381,000 120,000
Extraterritorial income exclusion (55,000) (76,000) -
Other (14,000) 16,000 18,000
------------ ------------ ------------
Total $ 4,305,000 $ 3,978,000 $ 2,851,000
============ ============ ============
</Table>
Deferred income tax assets and liabilities are comprised of the following:
<Table>
<Caption>
Year Ended July 31,
2003 2002
---------------------------
Current deferred tax assets:
Accrued expenses $ 1,313,000 $ 1,921,000
Inventories 1,235,000 1,175,000
Allowance for doubtful accounts 179,000 372,000
Foreign NOLs - 149,000
Research and development
credit carryforward 53,000 53,000
------------ ------------
Current deferred tax assets $ 2,780,000 $ 3,670,000
============ ============
Non-current deferred tax assets:
Goodwill $ 65,000 $ 352,000
Other long-term liabilities 737,000 1,056,000
Domestic NOLs 4,473,000 4,446,000
------------ ------------
5,275,000 5,854,000
------------ ------------
Non-current deferred tax liabilities:
Property and equipment (2,694,000) (3,053,000)
Intangible assets (2,208,000) (2,622,000)
Cumulative translation adjustment (336,000) -
Tax on unremitted foreign earnings (1,952,000) (2,237,000)
------------ ------------
(7,190,000) (7,912,000)
------------ ------------
Net non-current deferred tax liabilities $ (1,915,000) $ (2,058,000)
============ ============
</Table>
Although deferred tax assets and liabilities have been adjusted for enacted
changes in statutory tax rates, these adjustments were not significant since the
Company's items of deferred tax are substantially in the United States where
Federal statutory tax rates are unchanged. Such deferred tax items in the United
States are reflected at a combined U.S. Federal and state effective rate of 38%.
F - 29
<Page>
Prior to fiscal 2002, the Company had deferred tax assets related to NOLs and
cumulative temporary differences which were fully offset by a valuation
allowance since the Company was not assured at that time that it was more likely
than not that a benefit would be realized. However, the valuation allowance
related to the Company's NOLs and cumulative temporary differences was
eliminated during fiscal 2002 in connection with the purchase accounting for the
Minntech acquisition based upon an assessment of the combined companies expected
future results of operations.
For domestic tax reporting purposes, the Company has NOLs of approximately
$13,154,000 at July 31, 2003, which expire through July 31, 2021. The NOLs
presented are based upon the tax returns as filed and are subject to examination
by the Internal Revenue Service.
Approximately $10,468,000 of the undistributed earnings of the Company's foreign
subsidiaries was considered to be indefinitely reinvested at July 31, 2003.
Accordingly, no provision has been recorded for U.S. income taxes that might
result from repatriation of these earnings.
11. COMMITMENTS AND CONTINGENCIES
DISTRIBUTION AGREEMENTS
OLYMPUS/CARSEN AGREEMENT
The majority of Carsen's sales of endoscopy and surgical products and
scientific products related to precision instruments have been made pursuant
to an agreement with Olympus America Inc. (the "Olympus Agreement"), and the
majority of Carsen's sales of scientific products related to industrial
technology equipment have been made pursuant to an agreement with Olympus
Industrial America Inc. (the "Olympus Industrial Agreement"), under which
Carsen has been granted the exclusive right to distribute the covered Olympus
products in Canada. All products sold by Carsen pursuant to the agreements
bear the trademark of Olympus or its affiliates. Both Olympus agreements
expire 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. There
are no minimum purchase requirements under the Olympus Industrial Agreement.
During the term of the Olympus Agreements 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 Agreements.
The Olympus Agreement imposes minimum purchase obligations on Carsen with
respect to each of endoscopy and surgical products and precision instruments.
The aggregate annual minimum purchase obligations for all such products is
approximately $18.8 million
F - 30
<Page>
during the contract year ending March 31, 2004. For the contract year ended
March 31, 2003, Carsen satisfied the minimum purchase requirement under the
Olympus Agreement.
The Olympus Agreements generally prohibit 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 Agreements and the first year thereafter.
Subject to an allowance of a 10% shortfall from the minimum purchase
requirements, if Carsen fails to meet such requirements for precision
instruments, then Olympus has the option to terminate or restructure the Olympus
Agreement as it pertains to precision instruments; if Carsen fails to meet such
requirements for endoscopy and surgical products, 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
Minntech has a distribution agreement with Olympus (the "MediVators
Agreement") that expired on August 1, 2003 but was extended until November 7,
2003, under which Olympus is granted the exclusive right to distribute the
majority of the Company's endoscope reprocessing products and related
accessories and supplies in the United States and Puerto Rico. Minntech and
Olympus have reached an agreement in principle to renew this distribution
agreement for three years on substantially similar terms and expect to
execute a formal agreement shortly. All equipment sold by Olympus pursuant to
this agreement bears both the "Olympus" and "MediVators" trademarks.
The MediVators Agreement provides for minimum purchase projections. Failure by
Olympus to achieve 90% of the minimum purchase projections in any contract year
gives Minntech the option to terminate the MediVators Agreement. Net sales to
Olympus accounted for 10.4%, 9.5%, and 18.4% of the Company's net sales in
fiscal 2003, 2002 and 2001, respectively.
In addition, the MediVators Agreement stipulates that (i) units are to be
manufactured based upon the receipt of a written purchase order from Olympus
specifying the model and number of units to be manufactured ("completed units");
(ii) completed units must be ready for shipment and segregated in a designated
section of the Company's warehouse reserved only for Olympus; (iii) title to
completed units, including risk of loss, passes to Olympus; (iv) completed units
are insured by Olympus (v) completed units are invoiced to Olympus with 30 day
payment terms and such receivables are generally satisfied within such terms;
(vi) Olympus has no right of return; and (vii) upon notification from Olympus,
completed units are shipped to the Olympus customer, with all shipping costs
borne by Olympus. Minntech has no further
F - 31
<Page>
performance obligations on completed units, there are no exceptions or
contingencies to Olympus' commitment to accept and pay for these goods and
completed units held for Olympus by Minntech generally do not exceed three
months of anticipated Olympus shipments.
Despite the fact that Olympus historically has not achieved the minimum purchase
projections, the Company has elected not to terminate or significantly
restructure the MediVators Agreement because the Company believes that Olympus'
existing domestic distribution capabilities continue to provide the Company with
the broadest distribution and profit potential for its endoscope reprocessing
products.
LEASE OBLIGATIONS
Aggregate future minimum rental commitments at July 31, 2003 (exclusive of
Biolab, Mar Cor and Dyped) under operating leases for property and equipment are
as follows:
<Table>
Year Ending July 31,
2004 $ 1,374,000
2005 1,001,000
2006 288,000
2007 46,000
2008 5,000
Thereafter -
------------
Total rental commitments $ 2,714,000
============
</Table>
Rent expense aggregated $1,339,000, $1,310,000 and $502,000 for fiscal 2003,
2002 and 2001, respectively.
12. STOCKHOLDERS' EQUITY
An aggregate of 1,500,000 shares of Common Stock was 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, 2003, options to purchase 906,685 shares of Common Stock were
outstanding under the 1997 Employee Plan and 326,443 shares were available for
grant.
An aggregate of 300,000 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, 2003, options to purchase 107,250 shares of
Common Stock were outstanding under the 1991 Directors' Plan. No additional
options will be granted under the 1991 Directors' Plan.
F - 32
<Page>
An aggregate of 300,000 shares of Common Stock was reserved for issuance or
available for grant under the Company's 1998 Directors' Stock Option Plan (the
"1998 Directors' Plan"). Options under the 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 1,500 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 750 shares are
granted to each member of the Company's Board, except for employees of the
Company, in attendance at that quarter's regularly scheduled 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, 2003, options to purchase
127,500 shares of Common Stock were outstanding under the 1998 Directors' Plan
and 172,500 shares were available for grant.
The Company also has outstanding 372,750 non-plan options at July 31, 2003 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.
A summary of stock option activity follows:
<Table>
<Caption>
Weighted
Number Average
of shares exercise price
--------- --------------
Outstanding at July 31, 2000 1,151,678 $ 4.18
Granted 272,250 6.73
Canceled (83,233) 5.29
Exercised (203,909) 3.69
---------
Outstanding at July 31, 2001 1,136,786 4.79
Granted 636,828 13.31
Canceled (120,087) 11.37
Exercised (190,535) 4.36
---------
Outstanding at July 31, 2002 1,462,992 8.01
Granted 156,000 11.71
Canceled (15,368) 11.83
Exercised (89,439) 4.87
---------
Outstanding at July 31, 2003 1,514,185 $ 8.54
=========
Exercisable at July 31, 2001 666,222 $ 4.65
=========
Exercisable at July 31, 2002 798,973 $ 5.55
=========
Exercisable at July 31, 2003 950,149 $ 6.75
=========
</Table>
F - 33
<Page>
The following table summarizes additional information related to stock options
outstanding at July 31, 2003:
<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, 2003 (Months) Price at July 31, 2003 Price
- --------------- ---------------- ----------- -------- ---------------- --------
$3.00 - $6.83 791,941 44 $ 4.51 724,183 $ 4.59
$7.75 - $12.32 529,244 41 $ 12.02 122,212 $ 12.12
$12.95 - $19.15 193,000 43 $ 15.53 103,754 $ 15.49
--------- -------
$3.00 - $19.15 1,514,185 43 $ 8.54 950,149 $ 6.75
========= =======
</Table>
13. EARNINGS PER COMMON SHARE
Basic earnings per common share are computed based upon the weighted average
number of common shares outstanding during the period.
Diluted earnings per common share are computed based upon the weighted average
number of common shares outstanding during the period plus the dilutive effect
of common stock equivalents using the treasury stock method and the average
market price for the period.
As described in note 1 to the Consolidated Financial Statements, the
calculations of weighted average common shares and earnings per share for all
periods presented reflect the May 2002 stock split.
F - 34
<Page>
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
------------------------------------------
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 7,910,000 $ 7,152,000 $ 4,156,000
Gain on disposal of discontinued operations - - 225,000
------------ ------------ ------------
Net income $ 7,910,000 $ 7,152,000 $ 4,381,000
============ ============ ============
Denominator for basic and diluted earnings per share:
Denominator for basic earnings per share - weighted average
number of shares outstanding 9,267,625 8,881,743 6,707,435
Dilutive effect of options using the treasury stock method
and the average market price for the year 580,917 832,468 657,832
------------ ------------ ------------
Denominator for diluted earnings per share - weighted
average number of shares and common stock equivalents 9,848,542 9,714,211 7,365,267
============ ============ ============
Basic earnings per share:
Continuing operations $ 0.85 $ 0.81 $ 0.62
Discontinued operations - - 0.03
------------ ------------ ------------
Net income $ 0.85 $ 0.81 $ 0.65
============ ============ ============
Diluted earnings per share:
Continuing operations $ 0.80 $ 0.74 $ 0.56
Discontinued operations - - 0.03
------------ ------------ ------------
Net income $ 0.80 $ 0.74 $ 0.59
============ ============ ============
</Table>
F - 35
<Page>
14. 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 Canadian 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 $579,000, $649,000 and $232,000
for fiscal 2003, 2002 and 2001, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid was $1,275,000, $1,619,000 and $19,000 for fiscal 2003, 2002 and
2001, respectively.
Income tax payments were $4,963,000, $3,531,000 and $1,905,000 for fiscal 2003,
2002 and 2001, respectively.
16. INFORMATION AS TO OPERATING SEGMENTS AND FOREIGN AND DOMESTIC
OPERATIONS
Cantel is a healthcare company providing infection prevention and control
products, specialized medical device reprocessing systems, sterilants,
diagnostic imaging and therapeutic medical equipment primarily focused on
endoscopy, hollow fiber membrane filtration and separation technologies for
medical and non-medical applications, and scientific instrumentation. Through
Minntech, Cantel serves customers worldwide by designing, developing,
manufacturing, marketing and distributing innovative products for the infection
prevention and control industry, including disinfection/sterilization
reprocessing systems, sterilants and other supplies for renal dialysis;
filtration and separation and other products for medical and non-medical
applications; and endoscope reprocessing products. Through Carsen, Cantel
markets and distributes surgical and endoscopy products (including flexible
endoscopes, endoscope disinfection equipment, surgical equipment including rigid
endoscopes, and related accessories), 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 products.
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
F - 36
<Page>
factors used by management in analyzing segment performance are net sales and
operating income.
The Company's segments are as follows: Dialysis Products, including
disinfection/sterilization reprocessing equipment, sterilants, supplies,
concentrates and electronic equipment for hemodialysis treatment of patients
with acute kidney failure or chronic kidney failure associated with end-stage
renal disease; Endoscopy and Surgical Products, including diagnostic and
therapeutic medical equipment such as flexible and rigid endoscopes, surgical
equipment and related accessories that are sold to hospitals; Endoscope
Reprocessing Products, including endoscope disinfection equipment and related
accessories and supplies that are sold to hospitals and clinics; Filtration and
Separation Products, including 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, medical, and
biotechnology industries; Scientific Products, including precision instruments
such as 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 such as
borescopes, fiberscopes and video image scopes that are sold primarily to large
industrial companies; and Product Service, consisting of technical maintenance
service on the Company's products.
As a result of the acquisitions of Biolab and Mar Cor, the Company will add a
new business segment in fiscal 2004, Water Treatment Products, and will have
additional sources of product service revenue. Since the acquisitions of Biolab
and Mar Cor occurred in fiscal 2004, water treatment products and the related
product service revenue are not included in the accompanying segment
information.
The operating segments follow the same accounting policies used for the
Company's Consolidated Financial Statements as described in note 2.
F - 37
<Page>
(a) Information as to operating segments is summarized below:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
--------------------------------------------------
Net sales from continuing operations:
Dialysis Products $ 58,708,000 $ 54,404,000 $ -
Endoscopy and Surgical Products 17,681,000 17,086,000 20,725,000
Endoscope Reprocessing Products 18,293,000 16,983,000 13,045,000
Filtration and Separation Products 15,115,000 14,408,000 -
Scientific Products 9,897,000 8,344,000 8,214,000
Product Service 9,563,000 8,769,000 7,011,000
-------------- -------------- --------------
Total $ 129,257,000 $ 119,994,000 $ 48,995,000
============== ============== ==============
Operating income from continuing operations:
Dialysis Products $ 6,808,000 $ 6,439,000 $ -
Endoscopy and Surgical Products 2,543,000 2,157,000 3,932,000
Endoscope Reprocessing Products 1,196,000 2,024,000 2,231,000
Filtration and Separation Products 3,218,000 3,232,000 -
Scientific Products 696,000 136,000 343,000
Product Service 1,837,000 2,158,000 2,519,000
-------------- -------------- --------------
16,298,000 16,146,000 9,025,000
General corporate expenses (2,757,000) (2,840,000) (2,060,000)
Interest (expense) income (1,326,000) (2,176,000) 42,000
-------------- -------------- --------------
Income from continuing operations before income taxes $ 12,215,000 $ 11,130,000 $ 7,007,000
============== ============== ==============
</Table>
F - 38
<Page>
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
--------------------------------------------------
Identifiable assets:
Dialysis Products $ 42,034,000 $ 48,067,000 $ -
Endoscopy and Surgical Products 10,586,000 7,204,000 10,998,000
Endoscope Reprocessing Products 14,331,000 13,373,000 5,636,000
Filtration and Separation Products 14,857,000 15,922,000 -
Scientific Products 4,522,000 4,437,000 4,592,000
Product Service 4,956,000 4,292,000 2,129,000
General corporate, including cash and cash equivalents 18,524,000 14,519,000 8,574,000
-------------- -------------- --------------
Total $ 109,810,000 $ 107,814,000 $ 31,929,000
============== ============== ==============
Capital expenditures:
Dialysis Products $ 588,000 $ 764,000 $ -
Endoscopy and Surgical Products 15,000 50,000 105,000
Endoscope Reprocessing Products 177,000 199,000 135,000
Filtration and Separation Products 188,000 75,000 -
Scientific Products 8,000 22,000 38,000
Product Service 113,000 267,000 27,000
General corporate 6,000 213,000 62,000
-------------- -------------- --------------
Total $ 1,095,000 $ 1,590,000 $ 367,000
============== ============== ==============
Depreciation and amortization:
Dialysis Products $ 2,152,000 $ 1,967,000 $ -
Endoscopy and Surgical Products 91,000 133,000 153,000
Endoscope Reprocessing Products 389,000 324,000 286,000
Filtration and Separation Products 642,000 728,000 -
Scientific Products 47,000 59,000 56,000
Product Service 228,000 200,000 40,000
General corporate 27,000 23,000 18,000
-------------- -------------- --------------
Total $ 3,576,000 $ 3,434,000 $ 553,000
============== ============== ==============
</Table>
F - 39
<Page>
(b) Information as to geographic areas (including net sales which represent the
geographic area from which the Company derives its net sales from external
customers) is summarized below:
<Table>
<Caption>
Year Ended July 31,
2003 2002 2001
--------------------------------------------------
Net sales from continuing operations:
United States $ 79,360,000 $ 72,668,000 $ 9,934,000
Canada 36,524,000 34,093,000 36,274,000
Asia/Pacific 7,837,000 7,049,000 231,000
Europe/Africa/Middle East 4,429,000 5,079,000 2,556,000
Latin America/South America 1,107,000 1,105,000 -
-------------- -------------- --------------
Total $ 129,257,000 $ 119,994,000 $ 48,995,000
============== ============== ==============
Total long-lived assets:
United States $ 18,393,000 $ 18,931,000 $ 2,863,000
Canada 1,286,000 1,048,000 1,365,000
Asia/Pacific 359,000 494,000 -
Europe 4,446,000 5,039,000 -
-------------- -------------- --------------
Total $ 24,484,000 $ 25,512,000 $ 4,228,000
============== ============== ==============
</Table>
F - 40
<Page>
17. QUARTERLY RESULTS OF CONTINUING OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of continuing operations for
years ended July 31, 2003 and 2002:
<Table>
<Caption>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
2003(1)
Net sales $ 28,373,000 $ 34,427,000 $ 32,848,000 $ 33,609,000
Income from continuing operations before interest expense
(income) and income taxes $ 2,326,000 $ 4,165,000 $ 3,829,000 $ 3,221,000
Income from continuing operations $ 1,269,000 $ 2,380,000 $ 2,223,000 $ 2,038,000
Earnings per share:(2)
Basic $ 0.14 $ 0.26 $ 0.24 $ 0.22
Diluted $ 0.13 $ 0.24 $ 0.23 $ 0.21
2002(1)
Net sales $ 21,165,000 $ 32,900,000 $ 33,196,000 $ 32,733,000
Income from continuing operations before interest expense
(income) and income taxes $ 1,618,000 $ 4,099,000 $ 4,230,000 $ 3,359,000
Income from continuing operations $ 770,000 $ 2,093,000 $ 2,314,000 $ 1,975,000
Earnings per share:(2)(3)
Basic $ 0.09 $ 0.23 $ 0.25 $ 0.22
Diluted $ 0.09 $ 0.21 $ 0.23 $ 0.20
</Table>
(1) The Company's acquisition of Minntech is reflected in the results of
continuing operations for fiscal 2003 and the portion of fiscal 2002
subsequent to its acquisition on September 7, 2001.
(2) The summation of quarterly earnings per share does not equal the fiscal
year earnings per share due to rounding.
(3) Earnings per share for the first and second quarters of fiscal 2002 have
been adjusted from amounts previously reported to reflect a three-for-two
stock split effected in the form of a 50% stock dividend paid in May 2002.
Such adjustments are consistent with the presentation of the third and
fourth quarters of fiscal 2002 and all four quarters of fiscal 2003.
<Page>
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------------------------------------------
BALANCE AT BALANCE
BEGINNING (DEDUCTIONS) TRANSLATION AT END
OF PERIOD ADDITIONS RECOVERIES ADJUSTMENTS OF PERIOD
--------- --------- ---------- ----------- ---------
Allowance for
doubtful accounts:
Continuing operations:
Year ended
July 31, 2003 $1,041,000 $ 220,000 $ (216,000) $ 81,000 $1,126,000
==============================================================
Year ended
July 31, 2002 $ 62,000 $1,278,000(1) $ (322,000) $ 23,000 $1,041,000
==============================================================
Year ended
July 31, 2001 $ 66,000 $ 10,000 $ (13,000) $ (1,000) $ 62,000
==============================================================
Discontinued operations:
Year ended
July 31, 2003 $ - $ - $ - $ - $ -
==============================================================
Year ended
July 31, 2002 $ - $ - $ - $ - $ -
==============================================================
Year ended
July 31, 2001 $ 99,000 $ - $ (99,000) $ - $ -
==============================================================
</Table>
(1) Includes $806,000 recorded in connection with the purchase accounting
for the Minntech acquisition, and $472,000 charged to expense
during fiscal 2002.