Document/Exhibit Description Pages Size
1: 10-K Annual Report 90 336K
2: EX-3.L Articles of Incorporation/Organization or By-Laws 1 8K
3: EX-3.M Articles of Incorporation/Organization or By-Laws 13 63K
6: EX-10.GG Material Contract 3 15K
4: EX-10.N Material Contract 14 45K
5: EX-10.O Material Contract 12 39K
7: EX-21 Subsidiaries of the Registrant 1 5K
8: EX-23 Consent of Experts or Counsel 1 6K
9: EX-99.1 Miscellaneous Exhibit 1 7K
10: EX-99.2 Miscellaneous Exhibit 1 7K
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, 2002
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-6132
CANTEL MEDICAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 22-1760285
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 Clove Road, Little Falls, New Jersey 07424
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(973) 890-7220
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.10 par value New York Stock Exchange
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. / /
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 3, 2002): $71,101,000
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the close of business on October 3, 2002: 9,260,128
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 2002 Annual Meeting of Stockholders of Registrant.
PART I
ITEM 1. BUSINESS.
GENERAL
Cantel Medical Corp. (the "Company" or "Cantel") is a healthcare
company providing infection prevention and control products, specialized medical
device reprocessing systems and 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'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 products for renal dialysis, and
filtration and separation products for medical and non-medical applications. See
"Acquisitions." The Company's other United States subsidiary MediVators, Inc.
("MediVators"), serves customers worldwide by designing, developing,
manufacturing, marketing and distributing endoscope disinfection equipment and
related accessories and supplies. MediVators has been consolidated into
Minntech's existing facilities and will be legally merged into Minntech during
November 2002. Minntech and MediVators are sometimes collectively referred to as
the "United States subsidiaries." 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 own products, as well as for certain
competitors' products. Unless the context otherwise requires, references herein
to the Company include Cantel and its subsidiaries.
Minntech distributes its products in the United States through its own
distribution network and in many international markets through various third
party distribution agreements. Minntech B.V., Minntech's Netherlands subsidiary,
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.
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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 Optical Co.
Ltd., a Japanese corporation ("Olympus Optical"), under which the Company has
been granted exclusive distribution rights for certain Olympus products in
Canada. Most of such products are manufactured by Olympus Optical and its
affiliates. Unless the context otherwise requires, references herein to
"Olympus" include Olympus America Inc., Olympus Industrial America Inc., and
Olympus Optical, and their affiliates. Carsen, or its predecessor, has been
distributing Olympus products in Canada since 1949. Carsen also distributes
other products under separate distribution agreements, including additional
endoscopy and surgical products, endoscope reprocessing products and scientific
products and accessories.
All of MediVators' endoscope reprocessing products are distributed in
the United States and Puerto Rico by Olympus pursuant to an agreement (the
"MediVators Agreement") under which Olympus has been granted exclusive
distribution rights in these territories. MediVators' endoscope reprocessing
products are distributed in other countries by various third parties under
exclusive distribution agreements.
ACQUISITIONS
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 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 and 2000. The
pro forma impact of the acquisition on the Company's results of operations are
reflected in note 3 to the Company's Consolidated Financial Statements.
Under the terms of the Agreement and Plan of Merger, each share of
Minntech was converted into the right to receive $10.50, consisting of $6.25 in
cash, and 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 stock with a fair market value of $28,144,000, Cantel's existing
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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.
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 Company's Consolidated Financial Statements.
As a result of the acquisition of Minntech, the Company has added two
new business segments, the Renal Systems Group (see Dialysis Products) and the
Filtration and Separation Systems Group (see Filtration and Separation
Products), both of which represent significant sources of revenue and
profitability.
On November 1, 2001, the Company's Canadian subsidiary 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.
Technimed was a private company based in Montreal, Canada which
services medical equipment, including rigid endoscopes and hand-held surgical
instrumentation.
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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:
[Download Table]
YEAR ENDED JULY 31,
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2002 2001 2000
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% % %
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Dialysis Products 45.3 - -
Endoscopy and Surgical 15.5 45.3 41.7
Products *
Endoscope Reprocessing
Products * 13.7 25.2 25.7
Filtration and Separation
Products 12.0 - -
Scientific Products 7.0 16.8 20.0
Product Service 7.3 14.3 14.4
Elimination of inter-
company sales of
Endoscope Reprocessing
Products (0.8) (1.6) (1.8)
------ ----- -----
100.0 100.0 100.0
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* Endoscopy and Surgical Products was formerly described as Medical Products,
and Endoscope Reprocessing Products was formerly described as Infection
Control Products.
DIALYSIS PRODUCTS
CONCENTRATES
Minntech's renal dialysis treatment products include a line of acid
and bicarbonate concentrates used by kidney dialysis centers to prepare
dialysate, a chemical solution that draws waste products from the patient's
blood through a dialyzer membrane during the hemodialysis treatment. The Company
believes it provides the industry's most complete line of these concentrates in
both liquid and powder form for use in virtually all types of kidney dialysis
machines.
In April 2000, Minntech introduced the Renapak 2(TM), an innovative
dry acid concentrate manufacturing system that produces on-demand hemodialysis
concentrates in less than 30 minutes. This product eliminates substantial
freight costs and storage space required for pre-mixed concentrates. Minntech
manufactures and markets the powdered concentrate for the Renapak 2(TM), which
features a convenient quality control and tracking system that allows users to
"peel-and-stick" package labels directly into their concentrate
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manufacturing documentation.
REPROCESSING OF MULTIPLE USE DIALYZERS
In response to government-mandated cost containment measures, in the
late 1970s many United States dialysis centers began cleaning, disinfecting, and
reusing dialyzers (artificial kidneys) in a process known as "dialyzer reuse"
instead of discarding them after a single use. Approximately 80% 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 representative office in Singapore.
The growth of dialyzer reuse in Western Europe has been limited.
However, due to pending changes to the reimbursement system in several key
markets, such as Germany, the Company believes that this situation should
improve.
Minntech's dialyzer reprocessing products include the Renatron(R)II
Automated Dialyzer Reprocessing System, the Renalog(R)III Data Management System
and, the RenaClear(TM) Dialyzer Cleaning System, together with Renalin(R) Cold
Sterilant and Renalin(R)100, both peracetic acid based sterilants that replace
less environmentally friendly high-level disinfectants such as formaldehyde.
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 introduced in 1990, includes a bar-code reader, computer, and
Renalog(R)III software system that provides dialysis centers with automated
record keeping and data analysis capabilities. The Company believes its
Renatron(R) system is faster, easier to use, and more efficient than competitive
automated systems. The Company also believes that the Renatron(R) system is one
of the top selling automated dialyzer reprocessing systems in the world.
In May 2001 Minntech introduced the Renaclear(TM) Dialyzer Cleaning
System, the first dedicated automated dialyzer cleaning system. The system
removes blood and organic debris from difficult-to-clean dialyzers before
reprocessing, a process known
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as "precleaning." Precleaning is common in dialysis units because the practice
can help extend the useful clinical life of a dialyzer. When dialyzers are
precleaned by hand, many dialysis facilities remove the dialyzer header caps
(the end caps of a dialyzer) to more effectively rinse out heavy blood debris.
However, opening the dialyzer in this fashion can increase the risk of
contamination of the dialyzer components and damage to the membrane. The
Renaclear(TM) system features a high-powered fluid injector that cleans dialyzer
headers (the two internal ends of a dialyzer) without requiring removal of the
header caps. The Renaclear(TM) Dialyzer Cleaning System is designed for use with
peracetic acid-based Renaclear(TM) Disinfectant.
Minntech's Renalin(R) Cold Sterilant is a proprietary peracetic
acid-based formula which effectively cleans, disinfects, and sterilizes
dialyzers without the hazardous fumes and disposal problems related to older
glutaraldehyde and formaldehyde reprocessing solutions. The Company believes
Renalin(R) is the leading dialyzer reprocessing solution in the United States.
Renalin(R)100, a specially packaged formulation of Minntech's cold
sterilant product, was introduced in January 2001. When used with a
Renatron(R)II, converted for use with the Renatron(R)100 Series Conversion Kit,
Renalin(R)100 requires no premixing, which automates the dilution process,
reducing staff set-up time and exposure to vapors. In addition, Renalin(R)100
packaging reduces required storage space by 66% from traditional Renalin(R).
Minntech manufactures at its Netherlands facility a comprehensive
product line of test strips to measure concentration levels of all
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.
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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 large adult patients.
The entire line of Hemocor HPH(R) high performance hemoconcentrator
products contains Minntech's proprietary polysulfone fiber. The Hemocor HPH(R)
line also features a unique "no-rinse" design that allows it to be quickly and
efficiently inserted into the bypass circuit at any time during an open-heart
procedure.
HEMOFILTERS
The Renaflo(R) hemofilter 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 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.
GAS AND WATER FILTRATION
In May 2000 Minntech introduced the FiberFlo(R) Membrane Degassing
System, a high-performance hollow fiber module and customized housing for the
addition or removal of gasses from liquid streams. The FiberFlo(R) Membrane
Degassing System was developed for use in pharmaceutical manufacturing,
laboratory, medical, and bioprocessing applications. The polypropylene hollow
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fiber cartridge degas module features easy operation and maintenance, minimizes
energy consumption, and can be used for CO(2) and O(2) removal, humidification,
pH adjustment, oxygenation, and sparging of gases to solutions.
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 1998, is based on the same
high performance hollow fiber technology used in Minntech's polysulfone
FiberFlo(R) HF Cartridge Filter product line. Capsule filters are used in the
cell and tissue engineering industry, bioprocessing, pharmaceutical
manufacturing, food and beverage processing, cosmetic manufacturing, and
electronics industries to filter spores, bacteria, and pyrogens from aqueous
solutions and gases. FiberFlo(R) Capsule Filters are engineered for point-of-use
applications that require very fine filtration. Their hollow fiber design
provides a surface area that is up to six times larger than traditional pleated
capsule filters on the market. The large surface area provides greater capacity
and longer filter life for the customer. FiberFlo(R) Capsule Filters and
Cartridge Filters are available in a variety of styles, sizes, and
configurations to meet a comprehensive range of customer needs and applications.
FiberFlo(R) Cartridge Filters are used in high-purity industrial water
systems to filter spores, bacteria, and pyrogens from the fluids. They are also
used in medical device reprocessing to help health care facilities meet
reprocessing water quality guidelines outlined by the American Association of
Medical Instrumentation (AAMI). The cartridge filters feature large surface area
and fine filtration advantages that are similar to Minntech's capsule filter
line.
DISINFECTANTS AND OTHER
Minntech's Minncare(R) Cold Sterilant is a liquid sterilant product
that is used to sanitize high-purity water treatment systems. Minncare(R) is
based on 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.
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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.
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.
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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 MediVators (endoscope
disinfection equipment).
ENDOSCOPE REPROCESSING PRODUCTS
MediVators' principal source of revenue is from the manufacturing and
sale of endoscope disinfection equipment and related accessories and supplies to
hospitals and clinics through its distribution agreement with Olympus America
Inc. in the United States and internationally through various foreign
distributors.
MediVators' primary products are the DSD-91E and DSD-201, for which
the original design and configuration utilized in both of these products
received FDA 510(k) clearance in March 1994. The DSD-91E and DSD-201 are
microprocessor controlled dual endoscope disinfection systems. Both systems will
disinfect two endoscopes at a time, can be used on a broad variety of endoscopes
and are programmable by the user. MediVators also manufactures the MV series
which are less expensive single and dual endoscope disinfection units.
Although endoscopes generally can be manually cleaned and disinfected,
there are many problems associated with such methods including the lack of
uniform cleaning procedures, personnel exposure to disinfectant fumes and
disinfectant residue levels in the endoscope.
MediVators believes its disinfection equipment offers several
advantages over manual immersion in disinfectants. The disinfectors are designed
to pump disinfectant through all working channels of the endoscope, thus
exposing all areas of the endoscope
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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, MediVators 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 the fastest available on any disinfectant product sold
in the United States. The development of Rapicide(TM) adds an additional
consumable to the MediVators' product line.
SCIENTIFIC PRODUCTS
The Scientific Products segment is comprised of the precision
instruments and the industrial technology equipment distributed by Carsen.
PRECISION INSTRUMENTS. Carsen distributes Olympus microscopes and
complementary scientific equipment and accessories. Other instruments
distributed by Carsen include Media Cybernetics, Inc. high resolution image
analysis software and hardware; Narishige U.S.A., Inc. micromanipulators (which
enable a viewer to manipulate objects being viewed under a microscope);
Diagnostic Instruments, Inc. and Sony of Canada Ltd. digital cameras for
research microscopy; and 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
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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.
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, endoscopy 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
a nominal charge or no charge during the warranty period. Generally Carsen, and
not the manufacturer of the product, is responsible for the cost of warranty
repairs. The warranty period for these products is generally one year. The
customer pays Carsen on a time and materials basis for out-of-warranty service
of these products.
MediVators provides a one-year warranty for repairs and service of its
endoscope reprocessing products. Generally, warranty repairs and service related
to the endoscope disinfection equipment are performed by the distributor for
these products. MediVators performs out-of-warranty service of its endoscope
reprocessing products for which the customer pays MediVators on a time and
materials basis.
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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.
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 Olympus has
granted Carsen 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 are approximately $16.9 million and $18.8 million during the contract
years ending March 31, 2003 and 2004, respectively.
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.
- 15 -
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, Olympus has the option to
terminate or restructure the entire Olympus Agreement. Olympus may also
terminate the Olympus Agreement if Carsen breaches its other obligations under
the Olympus Agreement.
MEDIVATORS/OLYMPUS AGREEMENT. MediVators has a four-year agreement
with Olympus America Inc., which expires on August 1, 2003, under which Olympus
is granted the exclusive right to distribute all of MediVators' endoscope
reprocessing products and related accessories and supplies in the United States
and Puerto Rico. MediVators also has a three-year agreement with Olympus Latin
America which expires on July 21, 2005 under which Olympus is granted the
exclusive right to distribute all of MediVators endoscope reprocessing products
and related accessories and supplies in Latin America; to date such agreement
has not produced significant levels of sales in Latin America. All equipment
sold by Olympus pursuant to these agreements bear both the "Olympus" and
"MediVators" trademarks.
The MediVators Agreement provides for minimum purchase projections.
Failure by Olympus to achieve the minimum purchase projections in any contract
year gives MediVators the option to terminate the MediVators Agreement. Net
sales to Olympus accounted for 9.5%, 18.4%, and 15.8% of the Company's net sales
in fiscal 2002, 2001 and 2000, respectively.
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
- 16 -
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.
MARKETING
Minntech markets its products in the United States through a direct
sales force and through distributors. Minntech B.V., Minntech's Netherlands
subsidiary, is the base for its European operations. Minntech Japan K.K.,
Minntech's Japan subsidiary, and Minntech Singapore, a branch office of Minntech
B.V., serve the Asia/Pacific market.
MediVators sells its endoscope reprocessing products in the United
States under an exclusive distribution agreement with Olympus, and
internationally through various foreign distributors.
Carsen markets its products for each business segment through
separate, direct sales forces comprised of its own employees.
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, the Company's United States subsidiaries sell a portion of their
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 and adversely affected by the imposition
of trade barriers, fluctuations in the rates of exchange of various currencies,
tariff increases and import and export restrictions, affecting the United
States, 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, and Carsen's
business could be materially and adversely affected by the imposition of trade
barriers, fluctuations in the rates of currency exchange, tariff increases and
import and export restrictions between the United States and Canada.
Additionally, Carsen's financial statements are translated using the accounting
policies described in note 2 to the Consolidated Financial Statements.
Fluctuations in the rates of currency exchange between the United States and
Canada had an adverse impact in fiscal 2002 compared with fiscal 2001, and in
fiscal 2001 compared with fiscal
- 17 -
2000, 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.
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 2002 upon the
Company's results of operations, 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 since the acquisition of Minntech on September 7, 2001 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 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
have greater financial and technical resources than the Company and are
well-established, with reputations for success in the sale and service of their
products. In addition, certain companies have developed or may be expected to
develop technologies or products that could directly or indirectly compete with
the products manufactured and distributed by the Company. The Company competes
with manufacturers who distribute and service their own products and have
greater financial and technical resources than the Company and, as
manufacturers, may have certain other competitive advantages over the Company.
The Company believes that the world-wide reputation for the quality
and innovation of its products among consumers, the Company's reputation for
providing quality product service, particularly with respect to endoscopy and
surgical and endoscope reprocessing 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.
- 18 -
Two of Minntech's competitors (Fresenius Medical Care AG ("Fresenius")
and HDC Medical, Inc.) have introduced peracetic acid-based dialyzer
reprocessing germicides, entering a market previously dominated by Minntech's
Renalin(R) Cold Sterilant product. However, Renalin(R) remains the only
reprocessing chemical that has been validated for use with the Renatron(R)
dialyzer reprocessing system and cleared for marketing as such under section
510(k) of the Federal Food, Drug and Cosmetic Act. Renalin(R) is also the only
dialyzer reprocessing germicide that carries a sterilization claim in the United
States market. Minntech has informed its Renatron(R) customers that it is unable
to guarantee the integrity, reliability, and chemical interaction of alternative
germicides with the Renatron(R) system. Minntech believes that this validation,
coupled with Minntech's extensive dialyzer reprocessing education,
administration, and technical support services, are strong competitive
advantages for its product. However, the competitive price pressures introduced
by these new germicides has adversely impacted Minntech's current dialyzer
reprocessing chemical market share.
Within the dialysis industry manufacturers have been acquiring chains
of dialysis treatment centers over the past several years. These manufacturers
have a built-in customer base for their products. However, Minntech views its
manufacturer-only status as a competitive market advantage. Minntech believes
that many dialysis treatment providers do not want to purchase hemodialysis
supplies from manufacturers who also provide dialysis service and are, in
effect, their competitors.
Two of the Company's competitors (Gambro Healthcare, Inc. and
Fresenius) 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 Renatron reprocessing equipment 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.
MARKET CONDITIONS
Minntech'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 domestic and foreign governmental 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
- 19 -
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.
GOVERNMENT REGULATION
Many of Minntech's and MediVators' 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 and
MediVators' 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 or MediVators can market new
products in the United States or make significant changes to existing products.
The FDA also has the authority to require a recall or modification of products
in the event of a defect.
The Food, Drug and Cosmetic Act of 1938 and Safe Medical Device Act of
1990, each as amended, also require compliance with specific manufacturing and
quality assurance standards. The regulations also require that each manufacturer
establish a quality assurance program by which the manufacturer monitors the
design and manufacturing process and maintains records which show compliance
with the FDA regulations and the manufacturer's written specifications and
procedures relating to the devices. The FDA inspects medical device
manufacturers for compliance with their Quality Systems Regulations ("QSR's").
Manufacturers that fail to meet the QSR's may be issued reports or citations for
non-compliance. The Company was inspected by the FDA in January 2002 and
November 2000 with no warning letters issued.
In addition, many of Minntech's and MediVators' products must meet the
requirements of the European Medical Device Directive ("MDD") for their sale
into the European Union. In June 2002, Minntech and MediVators were inspected
and received notification that their products continue to meet these
requirements. This certification allows Minntech and MediVators 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 and MediVators' products are subject to change. Neither
Minntech nor MediVators can predict what impact, if any, such changes might have
on their business.
- 20 -
Carsen's endoscopy and surgical products and endoscope reprocessing
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 products may be regulated by other
governmental or private agencies, including Canadian Standards Agency ("CSA").
TPD and other agency clearances generally are required before Carsen can market
new medical products in Canada. TPD also has the authority to require a recall
or modification in the event of defect. In order to market its medical products
in Canada, Carsen is required to hold a Medical Device Establishment License, as
well as certain medical device licenses by product, as provided by TPD. In
addition, Minntech and MediVators have received drug identification numbers and
Carsen has applied to TPD for a drug establishment license which is required
before Carsen can distribute Minntech's and MediVators' sterilant/disinfectant
products in Canada.
PATENTS AND PROPRIETARY RIGHTS
Minntech holds rights under 60 patents worldwide covering its products
or components thereof. At October 3, 2002, Minntech also had a total of 35
pending patent applications in the United States and in foreign countries.
Minntech also holds rights under 248 trademark registrations worldwide and had
44 trademark applications pending as of October 3, 2002.
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.
MediVators' current disinfector products, including the DSD-91E,
DSD-201 and the MV Series tabletop systems, utilize certain know-how developed
within the Company but have no patent protection. MediVators holds rights under
five trademark registrations worldwide and had one trademark application pending
as of October 3, 2002. In addition, MediVators holds rights under two patents
and two pending patent applications covering its 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
- 21 -
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 3, 2002, the Company's consolidated backlog was
approximately $954,000, compared with approximately $1,773,000 on October 5,
2001.
EMPLOYEES
As of October 3, 2002, the Company employed 541 persons. Of the
Company's employees, 381 are located in the United States, 120 are located in
Canada, 31 are located in Europe and 9 are located in the Far East; 26 are
executives and/or managers, 103 are engaged in sales and marketing functions, 33
are engaged in customer service, 46 are engaged in product service, 245 are
engaged in manufacturing, shipping and warehouse functions, 61 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, occupied by Minntech since 1977,
which is used for manufacturing and warehousing operations. The second facility
is a 110,000 square-foot building, representing Minntech's headquarters,
including executive, administrative and sales staffs, and research operations.
This building is also used for manufacturing and warehousing. The third facility
is a 43,000 square-foot building adjacent to Minntech's headquarters and was
purchased in February 2001. This building is used primarily for manufacturing
and warehouse operations. Minntech also owns a 2.3 acre parcel of undeveloped
land adjacent to its headquarters.
Additionally, Minntech owns a 21,000 square-foot building on a 4.4
acre site in Heerlen, The Netherlands. Occupancy commenced in April 1995. The
facility serves as Minntech's European headquarters and is being used as a sales
office, manufacturing facility and warehouse.
- 22 -
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's Columbia, South Carolina warehouse was closed
in December 2001 with all products being consolidated in the Jackson,
Mississippi facility. 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 $14,000, $9,000 and $11,000, respectively.
Minntech leases three facilities in the United States for Minntech's
dialyzer reprocessing centers. These centers include 2,300 square-feet in
Edgewood, Florida; 3,500 square-feet in Boston, Massachusetts; and 3,200
square-feet in Atlanta, Georgia which is not presently being utilized. The
leases for these facilities in Edgewood, Boston and Atlanta provide for monthly
base rent of approximately $2,000, $4,000 and $2,000, respectively.
Minntech also leases a 300 square-foot office space in Tokyo, Japan
and a 1,200 square-foot office space in Singapore. Both locations are being used
as sales offices. Beginning September 2002, Minntech commenced a lease for 2,000
square-feet in Dronfield, England. The facility is being used as a sales office
and service facility.
MediVators leased approximately 27,500 square feet of space located in
Eagan, Minnesota which was used for manufacturing, warehouse and office space.
The option to terminate the lease was exercised effective September 2002. All of
MediVators' operations were consolidated into Minntech's existing facilities.
Carsen leases a building containing approximately 41,000 square feet
located in Markham, Ontario which is used for warehouse, service and office
space. The lease expires in July 2005, subject to the Company's option to renew
for five years. The lease provides for monthly base rent of approximately
$12,000. Additionally, Carsen leases space for two outside service facilities in
Montreal, Quebec and Vancouver, British Columbia containing approximately 4,000
square feet and 800 square feet, respectively.
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.
- 23 -
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.
On May 29, 2002, the Company held the Annual Meeting of Stockholders
for the fiscal year ended July 31, 2001 to re-elect Charles M. Diker, Alan J.
Hirschfield and Bruce Slovin as directors of the Company, to hold office until
the Annual Meeting of Shareholders to be held after the fiscal year ending July
31, 2004. 8,244,996 votes were cast for and 101,101 votes were withheld in the
election of Messrs. Diker and Slovin, and 8,031,889 votes were cast for and
314,208 votes were withheld in the election of Mr. Hirschfield.
Stockholders also approved an amendment to the Company's Certificate
of Incorporation to increase the authorized number of shares of Common Stock
from 12,000,000 to 20,000,000. 8,016,490 votes were cast for, 319,260 votes were
against, and 10,347 votes abstained in the approval of the amendment to the
Company's Certificate of Incorporation.
- 24 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of May 29, 2002, the Company's Common Stock trades 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.
[Download Table]
HIGH LOW
------- -------
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
YEAR ENDED JULY 31, 2001
First Quarter $ 6.92 $ 4.96
Second Quarter 7.92 5.25
Third Quarter 12.68 8.17
Fourth Quarter 19.50 10.53
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 3, 2002, the closing price of the Company's Common Stock
was $11.44 and the Company had 423 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.
- 25 -
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 2002 Consolidated Statement of Income Data for 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.
CONSOLIDATED STATEMENTS OF INCOME DATA(1):
(Amounts in thousands, except per share data)
[Enlarge/Download Table]
Year Ended July 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Net sales.................. $ 119,994 $ 48,995 $ 41,297 $ 37,820 $ 30,389
Cost of sales(2)........... 73,518 29,979 25,569 24,530 19,392
Gross profit............... 46,476 19,016 15,728 13,290 10,997
Income from continuing
operations before
interest expense (income)
and income taxes(2)...... 13,306 6,965 5,141 3,867 3,104
Interest expense (income).. 2,176 (42) 225 271 179
Income from continuing
operations before
income taxes............ 11,130 7,007 4,916 3,596 2,925
Income taxes............... 3,978 2,851 2,085 1,936 1,287
Income from continuing
operations.............. 7,152 4,156 2,831 1,660 1,638
Income (loss) from
discontinued operations - 225 (147) (291) 57
--------- --------- --------- --------- ---------
Net income................. $ 7,152 $ 4,381 $ 2,684 $ 1,369 $ 1,695
========= ========= ========= ========= =========
Earnings per common share:
Basic:(2)(3)............
Continuing operations.. $ 0.81 $ 0.62 $ 0.43 $ 0.25 $ 0.26
Discontinued operations - 0.03 (0.02) (0.04) 0.01
--------- --------- --------- --------- ---------
Net income............. $ 0.81 $ 0.65 $ 0.41 $ 0.21 $ 0.27
========= ========= ========= ========= =========
Diluted: (2)(3)..........
Continuing operations . $ 0.74 $ 0.56 $ 0.42 $ 0.24 $ 0.24
Discontinued operations - 0.03 (0.02) (0.04) 0.01
--------- --------- --------- --------- ---------
Net income............. $ 0.74 $ 0.59 $ 0.40 $ 0.20 $ 0.25
========= ========= ========= ========= =========
Weighted average number
of common and common
equivalent shares:(3)
Basic.................. 8,882 6,707 6,618 6,592 6,360
Diluted................ 9,714 7,365 6,719 6,887 6,726
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CONSOLIDATED BALANCE SHEETS DATA:
(Amounts in thousands, except per share data)
[Enlarge/Download Table]
July 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total assets............... $ 107,814 $ 31,929 $ 24,955 $ 23,726 $ 21,475
Current assets............. 58,138 26,494 21,701 20,462 18,378
Current liabilities........ 20,314 9,825 7,570 7,521 5,191
Working capital............ 37,824 16,669 14,131 12,941 13,187
Long-term debt............. 25,750 - 125 1,567 3,004
Stockholders' equity....... 57,911 22,027 17,163 14,545 13,226
Book value per
outstanding common
share(3)................. $ 6.28 $ 3.22 $ 2.58 $ 2.18 $ 2.02
Common shares
outstanding(3)........... 9,221 6,839 6,658 6,661 6,551
----------
(1) Consolidated statements of income data for fiscal 1998 through 2001 have
been reclassified from amounts previously reported to reflect shipping and
warehouse expenses in cost of sales. Such reclassifications are consistent
with the fiscal 2002 presentation and had no impact upon earnings.
(2) 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.
(3) Per share and share amounts for fiscal 1998 through 2001 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 fiscal 2002 presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
The results of continuing operations reflect primarily the results of
Minntech, MediVators and Carsen .
Reference is made to (i) the discontinuance of the Company's Consumer
Products business, as more fully described in Item 1, "Business," and in note 8
to the Consolidated Financial Statements, (ii) the impact on the Company's
results of operations of a weaker Canadian dollar against the United States
dollar during fiscal 2002 compared with fiscal 2001 and during fiscal 2001
compared with fiscal 2000 (decrease in value of approximately 3% during each of
the above periods), (iii) critical accounting policies of the Company, as more
fully described in note 2 to the Consolidated Financial Statements, as well as
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, and (v) the Company's acquisition of Minntech
in September 2001, as more fully described in Item 1, "Business," and in notes 3
and 9 to the Consolidated Financial Statements.
Minntech is reflected in the Company's results of operations for 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 or fiscal 2000.
The acquisition of Minntech has 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.
- 28 -
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.
[Enlarge/Download Table]
Year Ended July 31,
---------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------
(Dollar amounts in thousands)
$ % $ % $ %
--------- ----- --------- ----- --------- -----
Dialysis Products $ 54,434 45.3 $ - - $ - -
Endoscopy and
Surgical Products * 18,636 15.5 22,209 45.3 17,216 41.7
Endoscope Reprocessing
Products * 16,419 13.7 12,348 25.2 10,641 25.7
Filtration and
Separation Products 14,377 12.0 - - - -
Scientific Products 8,344 7.0 8,214 16.8 8,254 20.0
Product Service 8,726 7.3 7,011 14.3 5,946 14.4
Elimination of inter-
company sales of
Endoscope Reprocessing
Products (942) (0.8) (787) (1.6) (760) (1.8)
--------- ----- --------- ----- --------- -----
$ 119,994 100.0 $ 48,995 100.0 $ 41,297 100.0
========= ===== ========= ===== ========= =====
* Endoscopy and Surgical Products was formerly described as Medical Products,
and Endoscope Reprocessing Products was formerly described as Infection
Control Products.
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
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
- 29 -
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 marketshare in Canada.
The Company believes that it has the opportunity to continue
increasing its marketshare in the endoscope reprocessing segment. The majority
of its product service segment is located in Canada where the Company's
marketshare 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 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 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%
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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.
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 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 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,
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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. Such international subsidiaries include the Company's
subsidiaries in Canada, the Netherlands and Japan, which 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 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.
FISCAL 2001 COMPARED WITH FISCAL 2000
Net sales increased by $7,698,000, or 18.6%, to $48,995,000 in fiscal
2001, from $41,297,000 in fiscal 2000. Net sales were adversely impacted in
fiscal 2001 compared with fiscal 2000 by approximately $1,381,000 due to the
translation of Carsen's net sales using a weaker Canadian dollar against the
United States dollar.
This increase in net sales was attributable to the increased sales of
the Company's endoscopy and surgical products, endoscope reprocessing products
and product service business segments. For fiscal 2001, the increased sales of
endoscopy and surgical products were due primarily to an increase in demand, a
portion of which was attributable to the introduction of new flexible endoscopy
products, and selling price increases. The increased sales of endoscope
reprocessing products were primarily attributable to an increase in demand for
endoscope reprocessing products in the United States. The increased sales of
product service were primarily attributable to an increase in demand and
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selling price increases.
Gross profit increased by $3,288,000, or 20.9%, to $19,016,000 in
fiscal 2001, from $15,728,000 in fiscal 2000. Gross profit was adversely
impacted in fiscal 2001 compared with fiscal 2000 by approximately $509,000 due
to the translation of Carsen's gross profit using a weaker Canadian dollar
against the United States dollar.
Gross profit as a percentage of net sales increased to 38.8% in fiscal
2001, from 38.1% in fiscal 2000. The higher gross profit percentage for fiscal
2001 was primarily attributable to a buy-in of endoscopes prior to receiving a
supplier price increase, which endoscopes were sold during fiscal 2001; selling
price increases in endoscopy and surgical products and product service; and
favorable sales mix associated with product service and scientific products.
Partially offsetting these increases in gross profit percentage was the adverse
impact of a weaker Canadian dollar relative to the United States dollar, since
the Company's Canadian subsidiary purchases substantially all of its products in
United States dollars and sells its products in Canadian dollars.
Selling expenses as a percentage of net sales were 11.6% for fiscal
2001, compared with 12.6% for fiscal 2000. The decrease in selling expenses as a
percentage of net sales was primarily attributable to the effect of the
increased sales against the fixed portion of selling expenses.
General and administrative expenses increased by $867,000 to
$5,410,000 for fiscal 2001, from $4,543,000 for fiscal 2000. The increase
reflects additional personnel and increases in incentive compensation, profit
sharing contributions, rent and amortization of computer software.
Research and development expenses increased by $113,000 to $949,000
for fiscal 2001, from $836,000 for fiscal 2000. This increase was primarily due
to additional personnel required for new products including the DSD-201 and
Rapicide(TM).
Interest income was $42,000 in fiscal 2001, compared with interest
expense of $225,000 in fiscal 2000. This change in interest was attributable to
interest income earned on cash and cash equivalents during fiscal 2001, compared
with interest expense on outstanding borrowings during fiscal 2000.
Income from continuing operations before income taxes increased by
$2,091,000, or 42.5%, to $7,007,000 for fiscal 2001, from $4,916,000 for fiscal
2000.
Income taxes consist primarily of taxes imposed on the
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Company's Canadian operations. The effective tax rate on Canadian operations was
41.6% and 43.9% for fiscal 2001 and 2000, respectively. For fiscal 2001 and
2000, the consolidated effective tax rate is lower than the Canadian effective
tax rate due to the fact that income generated by the United States operations
is substantially offset by tax benefits resulting from the utilization of net
operating loss carryforwards for federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2002, the Company's working capital was $37,824,000,
compared with $16,669,000 at July 31, 2001. This increase in working capital was
primarily due to the acquisition of Minntech.
Net cash provided by operating activities was $11,302,000, $1,342,000
and $4,668,000 for fiscal 2002, 2001 and 2000, respectively. 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. In fiscal
2000, net cash provided by operating activities was primarily due to income from
continuing operations after adjusting for depreciation and amortization and
deferred income taxes, and decreases in inventories and accounts receivable.
Net cash used in investing activities was $31,541,000 in fiscal 2002,
compared with net cash provided by investing activities of $1,135,000 in fiscal
2001 and net cash used in investing activities of $1,392,000 in fiscal 2000. 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 the
discontinued operations, partially offset by purchases of available-for-sale
securities, professional fees related to the Minntech acquisition (such fees are
included within other, net) and capital expenditures. In fiscal 2000, net cash
used in investing activities was primarily due to an increase in the net assets
related to the discontinued operations and capital expenditures. During fiscal
2003, the Company anticipates an increase in the level of its capital
expenditures, primarily at Minntech.
Net cash provided by financing activities was $27,754,000
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in fiscal 2002 and $404,000 in fiscal 2001, compared with net cash used in
financing activities of $1,641,000 in fiscal 2000. In fiscal 2002, net cash
provided by financing activities was primarily attributable to borrowings under
the Company's new 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 the exercise of stock options. In fiscal 2000,
net cash used in financing activities was primarily due to net repayments under
a prior credit facility.
At July 31, 2001, the Company had a credit facility which provided for
(i) a $2,500,000 revolving credit facility for Cantel and MediVators, (ii) a
$5,000,000 (United States dollars) revolving credit facility for Carsen and
(iii) a $12,500,000 acquisition facility available to Cantel and MediVators for
permitted acquisitions in the United States. At July 31, 2001, the Company had
no outstanding borrowings under this credit facility.
In conjunction with the acquisition of Minntech on September 7, 2001,
the Company entered into new credit facilities to fund the financed portion of
the cash consideration paid in the merger and costs associated with the merger,
as well as to replace the Company's existing working capital credit facilities.
The new credit facilities include (i) a $25,000,000 senior secured amortizing
term loan facility from a consortium of 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 and
MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars)
senior secured revolving credit facility for Carsen (the "Canadian Borrower")
with a Canadian bank (the "Canadian Revolving Credit Facility") available for
Carsen's future working capital requirements. Each of the Term Loan Facility,
the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility
(collectively the "Credit Facilities") expire on September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates ranging
from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00%
to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the
Company's consolidated ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The base rates associated with the
U.S. lenders and the Canadian lender were 4.75% and 4.50%, respectively, at
October 3, 2002, and the LIBOR rates ranged from 1.66% to 1.80% at October 3,
2002. The margins applicable to the Company's
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outstanding borrowings at October 3, 2002 are 1.5% above the lender's base rate
and 2.75% above LIBOR. 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 Term Loan Facility and the U.S. Revolving Credit Facility provide
for available borrowings based upon percentages of the U.S. Borrowers' eligible
accounts receivable and inventories; require the U.S. Borrowers to meet certain
financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
are guaranteed by Minntech and MediVators. The Canadian Revolving Credit
Facility provides for available borrowings based upon percentages of the
Canadian Borrower's eligible accounts receivable and inventories; requires the
Canadian Borrower to meet certain financial covenants; and is secured by
substantially all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term
Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility in
connection with the acquisition of Minntech. At July 31, 2002, the Company had
$28,500,000 outstanding under its Credit Facilities, including $23,500,000 under
the Term Loan Facility. Subsequent to July 31, 2002, the Company repaid an
additional $1,000,000 under its Credit Facilities; therefore, at October 3,
2002, the Company had $27,500,000 outstanding under its credit facilities,
including $23,000,000 under the Term Loan 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:
[Download Table]
Year Ending July 31,
2003 $ 2,750,000
2004 4,500,000
2005 6,500,000
2006 7,750,000
2007 7,000,000
Thereafter -
------------
Total $ 28,500,000
============
The amount maturing in fiscal 2007 includes the remaining
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$5,000,000 presently outstanding under the revolving credit facilities since
such amount is required to be repaid prior to the expiration date of such
facilities.
Aggregate future minimum rental commitments at July 31, 2002 under
operating leases for property and equipment are as follows:
[Download Table]
Year Ending July 31,
2003 $ 1,060,000
2004 779,000
2005 486,000
2006 97,000
2007 19,000
-----------
Total rental commitments $ 2,441,000
===========
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 has determined to be
approximately through fiscal 2004. 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 payment of remaining liabilities from the Minntech acquisition. At
October 3, 2002, approximately $12,479,000 was available under the revolving
credit facilities.
During fiscal 2002 compared with fiscal 2001, the average value of the
Canadian dollar decreased by approximately 3% 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. Such currency
fluctuations also result in a corresponding change in the United States dollar
value of the Company's assets that are denominated in Canadian dollars.
Under the Canadian Revolving Credit Facility, Carsen has a $20,000,000
(United States dollars) foreign currency hedging facility which is available to
hedge against the impact of such currency fluctuations on purchases of
inventories. Total commitments for foreign currency forward contracts under this
facility amounted to $6,774,000 (United States dollars) at October 3, 2002 and
cover a portion of the Canadian subsidiary's projected purchases of inventories
through February 2003. The weighted average exchange rate of the forward
contracts open at October 3,
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2002 was $1.5739 Canadian dollar per United States dollar, or $.6353 United
States dollar per Canadian dollar. The exchange rate published by the Wall
Street Journal on October 3, 2002 was $1.5921 Canadian dollar per United States
dollar, or $.6281 United States dollar per Canadian dollar.
Since the acquisition of Minntech on September 7, 2001 until the end
of fiscal 2002, the value of the euro increased by approximately 8% 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 the portion of fiscal 2002 subsequent to the
Minntech acquisition, such strengthening of the euro relative to the United
States dollar had an adverse impact upon the Company's 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. There was one foreign currency
forward contract amounting to EURO 4,500,000 at October 3, 2002 which covers a
portion of the net assets of Minntech's Netherlands subsidiary which are
denominated in United States dollars. Such contract expires on October 31, 2002.
Under its Credit Facilities, such contracts to purchase euros may not exceed
$12,000,0000 in an aggregate notional amount at any time.
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS 133"). 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 is 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, 2002
compared to September 7, 2001, the value of the euro increased by approximately
8% compared to the value of the United States dollar, thereby causing a decrease
in the negative cumulative foreign currency translation adjustment during such
period. Partially offsetting this change was a 3% decrease in the
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value of the Canadian dollar relative to the value of the United States dollar
at July 31, 2002 compared to July 31, 2001, which caused an increase to the
negative cumulative foreign currency translation adjustment during fiscal 2002.
The net impact of these currency movements was an overall decrease in the
negative cumulative foreign currency translation adjustment during fiscal 2002
of $352,000, thereby increasing stockholders' equity.
Changes in the value of the Japanese yen relative to the United States
dollar since the acquisition of Minntech on September 7, 2001 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.
As of July 31, 2002, the Company had NOLs for domestic tax reporting
purposes of approximately $13,076,000 which expire through July 31, 2021. The
valuation allowance related to the Company's NOLs was reversed in connection
with the purchase price allocation for the Minntech acquisition, based upon an
assessment of the combined companies expected future results of operations.
In addition, the Company and its foreign subsidiaries cannot file
consolidated tax returns for United States income tax purposes. Therefore, the
Company's NOLs in the United States cannot be utilized to reduce federal or
provincial income taxes payable by the foreign subsidiaries on their taxable
income. This has resulted in the payment of income taxes by the Company in
Canada and the Netherlands, notwithstanding NOLs utilized, or net losses
sustained, by the Company in the United States.
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
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are not readily apparent from other sources. Actual results may differ from
these estimates.
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 is recognized as products are shipped to
customers or when title passes, net of provisions for sales allowances and
similar items. Domestic sales of endoscope reprocessing equipment are of a bill
and hold nature as more fully described in note 11 to the Consolidated Financial
Statements. Revenue on service sales is recognized when repairs are completed
and the products are shipped to customers.
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.
DEFERRED TAX ASSETS AND LIABILITIES
The Company recognizes deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases 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
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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 the amounts recorded are appropriately stated. All of such
evaluations require significant management judgments.
LONG-LIVED ASSETS
Certain of the Company's identifiable intangible assets, such as
current technology and customer base, are amortized on the straight-line method
over their estimated useful lives. Additionally, the Company has recorded
goodwill and trademarks and tradenames, all of which have indefinite useful
lives and are therefore not amortized. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, and goodwill is reviewed for impairment at
least annually in accordance with Statement of Financial Accounting Standard No.
142, "GOODWILL AND OTHER INTANGIBLE ASSETS."
BUSINESS COMBINATIONS
During fiscal 2002, the Company's acquisition of Minntech required
significant estimates and judgments related to the fair value of assets acquired
and liabilities assumed. Certain of the liabilities are subjective in nature.
These liabilities have been reflected in the purchase accounting based upon the
most recent information available, and 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 presently
recorded.
OTHER MATTERS
The Company does not have any off balance sheet financial
arrangements.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. All forward-looking
statements involve risks and uncertainties, including, without limitation,
acceptance and demand of new products, the impact of competitive products and
pricing, the Company's ability to successfully integrate and operate acquired
and merged businesses and the risks associated with such businesses, and the
risks detailed in the Company's filings and reports with the Securities and
Exchange Commission. Such
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statements are only predictions, and actual events or results may differ
materially from those projected.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign currency market risk: A portion of the Company's products are
imported from the Far East and Western Europe, the Company's United States
subsidiaries sell a portion of their 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 and
adversely affected by the imposition of trade barriers, fluctuations in the
rates of exchange of various currencies, tariff increases and import and export
restrictions, affecting the United States, 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, and Carsen's
business could be materially and adversely affected by the imposition of trade
barriers, fluctuations in the rates of currency exchange, tariff increases and
import and export restrictions between the United States and Canada.
Additionally, Carsen's financial statements are translated using the accounting
policies described in Note 2 to the Consolidated Financial Statements.
Fluctuations in the rates of currency exchange between the United States and
Canada had an adverse impact in fiscal 2002 compared with fiscal 2001, and in
fiscal 2001 compared with fiscal 2000, upon the Company's results of operations
and stockholders' equity, as described in Management Discussion and Analysis of
Financial Condition and Results of Operations.
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 2002 upon the
Company's results of operations, 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 since the acquisition of Minntech on September 7, 2001 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
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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 2002, 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%. At July 31, 2002, the fair value of such
interest rate cap is $52,000.
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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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 2002 Annual Meeting of Stockholders of the Registrant.
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 2002 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 2002 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 2002 Annual Meeting of Stockholders of the Registrant.
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report
on Form 10-K for the fiscal year ended July 31, 2002.
1. CONSOLIDATED FINANCIAL STATEMENTS:
(i) Report of Independent Auditors.
(ii) Consolidated Balance Sheets as of July 31, 2002 and 2001.
(iii) Consolidated Statements of Income for the years ended
July 31, 2002, 2001 and 2000.
(iv) Consolidated Statements of Changes in Stockholders'
Equity for the years ended July 31, 2002, 2001 and 2000.
(v) Consolidated Statements of Cash Flows for the years
ended July 31, 2002, 2001 and 2000.
(vi) Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
(i) Schedule II - Valuation and Qualifying Accounts for
the years ended July 31, 2002, 2001 and 2000.
All other financial statement schedules are omitted since they
are not required, not applicable, or the information has been included in the
Consolidated Financial Statements or Notes thereto.
3. EXHIBITS:
2(a) - Asset Purchase Agreement between Carsen Group Inc. and
Olympus America Inc. dated as of October 6, 2000, among Registrant, Carsen Group
Inc. and Olympus America Inc. (Incorporated by reference to Exhibit (2) of
Registrant's Current Report on Form 8-K dated October 23, 2000 [ the "2000
8-K"]).
2(b) - Agreement and Plan of Merger dated as of May 30, 2001 by
and among Cantel Medical Corp., Canopy Merger Corp. and
- 45 -
Minntech Corporation. (Incorporated by reference to Exhibit (2) of Registrant's
Current Report on Form 8-K dated May 31, 2001.)
3(a) - Registrant's Restated Certificate of Incorporation dated
July 20, 1978. (Incorporated herein by reference to Exhibit 3(a) to Registrant's
1981 Annual Report on Form 10-K.)
3(b) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on February 16, 1982. (Incorporated herein by reference to
Exhibit 3(b) to Registrant's 1982 Annual Report on Form 10-K.)
3(c) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on May 4, 1984. (Incorporated herein by reference to
Exhibit 3(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1984.)
3(d) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on August 19, 1986. (Incorporated herein by reference to
Exhibit 3(d) of Registrant's 1986 Annual Report on Form 10-K.)
3(e) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on December 12, 1986. (Incorporated herein by reference to
Exhibit 3(e) of Registrant's 1987 Annual Report on Form 10-K [the "1987 10-K"].)
3(f) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on April 3, 1987. (Incorporated herein by reference to
Exhibit 3(f) of Registrant's 1987 10-K.)
3(g) - Certificate of Change of Registrant, filed on July 12,
1988. (Incorporated herein by reference to Exhibit 3(g) of Registrant's 1988
Annual Report on Form 10-K.)
3(h) - Certificate of Amendment of Certificate of Incorporation
of Registrant filed on April 17, 1989. (Incorporated herein by reference to
Exhibit 3(h) to Registrant's 1989 Annual Report on Form 10-K.)
3(i) - Certificate of Amendment of Certificate of Incorporation
of Registrant, filed on May 10, 1999. (Incorporated herein by reference to
Exhibit 3(i) to Registrant's 2000 Annual 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.)
- 46 -
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.
3(m) - Registrant's By-Laws adopted April 24, 2002.
10(a) - Registrant's 1991 Employee Stock Option Plan, as
amended. (Incorporated herein by reference to Exhibit 10(a) to Registrant's 1991
Annual Report on Form 10-K [the "1991 10-K"].)
10(b) - Form of Stock Option Agreement under Registrant's 1991
Employee Stock Option Plan. (Incorporated herein by reference to Exhibit 10(b)
to Registrant's 1991 10-K.)
10(c) - Registrant's 1991 Directors' Stock Option Plan.
(Incorporated herein by reference to Exhibit 10(c) to Registrant's 1991 10-K.)
10(d) - Form of Stock Option Agreement under the Registrant's
1991 Directors Stock Option Plan. (Incorporated herein by reference to Exhibit
10(d) to Registrant's 1991 10-K.)
10(e) - Agreement between Carsen Group Inc. and Olympus America
Inc., dated April 1, 1994. (Incorporated by reference to Exhibit 10(g) to
Registrant's 1994 Annual Report on Form 10-K.)
10(f) - Stock Option Agreement, dated as of October 17, 1996 ,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(v) to Registrant's 1996 Annual Report on Form 10-K.)
10(g) - Registrant's 1997 Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10(s) to Registrant's 1997 Annual Report
on Form 10-K [the "1997 10-K"].)
10(h) - Form of Incentive Stock Option Agreement under
Registrant's 1997 Employee Stock Option Plan. (Incorporated by reference to
Exhibit 10(t) to Registrant's 1997 10-K.)
10(i) - First Amendment to Distribution Agreement between
Olympus America Inc. and Carsen Group Inc., dated as of August 26, 1997, among
Registrant and Olympus America Inc. (Incorporated by reference to Exhibit 10(y)
of Registrant's 1997 10-K.)
- 47 -
10(j) - Stock Option Agreement, dated as of October 16, 1997,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(x) of Registrant's 1998 Annual Report on Form 10-K [the "1998
10-K"].)
10(k) - Form of Non-Plan Stock Option Agreement between the
Registrant and Darwin C. Dornbush. (Incorporated by reference to Exhibit 10(y)
to Registrant's 1998 10-K.)
10(l) - Stock Option Agreement, dated as of October 5, 1998,
between the Registrant and John W. Rowe. (Incorporated by reference to Exhibit
10(z) to Registrant's 1998 10-K.)
10(m) - Non-Competition Agreement, dated as of March 16, 1998,
between the Registrant, Christopher C. Lutz and Bonolyn L. Lutz. (Incorporated
by reference to Exhibit 10(aa) of Registrant's 1998 10-K.)
10(n) - Employment Agreement, dated as of November 1, 2001,
between Minntech Corporation and Roy K. Malkin.
10(o) - Employment Agreement, dated as of November 1, 2001,
between the Registrant and Craig A. Sheldon.
10(p) - Distributor Agreement dated as of August 1, 1999, among
MediVators, Inc. and Olympus America Inc. - Endoscope Division. (Incorporated by
reference to Exhibit 10(ee) to Registrant's 1999 Annual Report on Form 10-K [the
"1999 10-K"].)
10(q) - Stock Option Agreement, dated as of October 30, 1998,
between the Registrant and Charles M. Diker. (Incorporated by reference to
Exhibit 10(ff) to Registrant's 1999 10-K.)
10(r) - Stock Option Agreement, dated as of March 10, 2000,
between the Registrant and John W. Rowe. (Incorporated by reference to Exhibit
10(gg) to Registrant's 1999 10-K.)
10(s) - Second Amendment to Distribution Agreement between
Olympus America Inc. and Carsen Group Inc. dated as of October 6, 2000, among
Carsen Group Inc. and Olympus America Inc. (Incorporated by reference to Exhibit
(1) of Registrant's 2000 8-K).
10(t) - Registrant's 1998 Director's Stock Option Plan.
(Incorporated herein by reference to Exhibit 10(gg) to Registrant's 2000 10-K.)
10(u) - 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.)
- 48 -
10(v) - 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(w) - 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(x) - Employment Agreement, dated as of November 1, 2000,
between the Registrant and Joseph L. Harris. (Incorporated herein by reference
to Exhibit 10(a) to Registrant's April 30, 2001 Quarterly Report on Form 10-Q.)
10(y) - Stock Option Agreement, dated as of November 1, 2000
between the Registrant and Joseph L. Harris. (Incorporated herein by reference
to Exhibit 4.2 to Registrant's Form S-8 dated March 19, 2001.)
10(z)- 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(aa)- 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(bb)- 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(cc) - 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.)
10(dd) - 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(ee) - 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"].)
- 49 -
10(ff) - 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(gg) - Third Amendment to Distribution Agreement between
Olympus America Inc. and Carsen Group Inc. dated as of April 1, 2001, among
Carsen Group Inc. and Olympus America Inc.
10(hh) - Employment Agreement, dated as of August 1, 1998,
between the Registrant and James P. Reilly. (Incorporated by reference to
Exhibit 10(aa) of Registrant's 1999 10-K.)
21 - Subsidiaries of Registrant.
23 - Consent of Ernst & Young LLP.
99.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification 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, 2002.
- 50 -
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, 2002 By: /s/ James P. Reilly
--------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
By: /s/ Craig A. Sheldon
---------------------
Craig A. Sheldon, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Charles M. Diker Date: October 29, 2002
----------------------------
Charles M. Diker, a Director
and Chairman of the Board
/s/ Alan J. Hirschfield Date: October 29, 2002
----------------------------
Alan J. Hirschfield, a Director
and Vice Chairman of the Board
/s/ Robert L. Barbanell Date: October 29, 2002
----------------------------
Robert L. Barbanell, a Director
/s/ Joseph M. Cohen Date: October 29, 2002
----------------------------
Joseph M. Cohen, a Director
/s/ Darwin C. Dornbush Date: October 29, 2002
----------------------------
Darwin C. Dornbush, a Director
/s/ Morris W. Offit Date: October 29, 2002
----------------------------
Morris W. Offit, a Director
/s/ James P. Reilly Date: October 29, 2002
----------------------------
James P. Reilly, a Director and President
/s/ John W. Rowe Date: October 29, 2002
----------------------------
John W. Rowe, a Director
/s/ Fred L. Shapiro Date: October 29, 2002
----------------------------
Fred L. Shapiro, a Director
/s/ Bruce Slovin Date: October 29, 2002
----------------------------
Bruce Slovin, a Director
- 51 -
CERTIFICATIONS
I, James P. Reilly, certify that:
1. I have reviewed this annual report on Form 10-K of Cantel Medical Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: October 29, 2002
By: /s/ James P. Reilly
-------------------
James P. Reilly, President and Chief
Executive Officer (Principal Executive
Officer)
I, Craig A. Sheldon, certify that:
1. I have reviewed this annual report on Form 10-K of Cantel Medical Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: October 29, 2002
By: /s/ Craig A. Sheldon
---------------------
Craig A. Sheldon, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
- 52 -
CANTEL MEDICAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002
CONTENTS
[Download Table]
Report of Independent Auditors ................................1
Financial Statements
Consolidated Balance Sheets ..............................2
Consolidated Statements of Income ........................3
Consolidated Statements of Changes
in Stockholders' Equity ...............................4
Consolidated Statements of Cash Flows ....................5
Notes to Consolidated Financial Statements ...............6
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, 2002 and 2001 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, 2002. 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, 2002 and 2001 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 2002, 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 20, 2002
CANTEL MEDICAL CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
JULY 31,
2002 2001
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,565 $ 5,050
Available-for-sale securities - 1,057
Accounts receivable, net of allowance for doubtful accounts
of $1,041 in 2002 and $62 in 2001 23,054 11,768
Inventories 17,331 8,166
Deferred income taxes 3,670 49
Prepaid expenses and other current assets 1,518 404
--------- ---------
Total current assets 58,138 26,494
Property and equipment, at cost:
Land, building and improvements 13,206 -
Furniture and equipment 13,940 2,185
Leasehold improvements 533 541
--------- ---------
27,679 2,726
Less accumulated depreciation and amortization (4,695) (1,882)
--------- ---------
22,984 844
Intangible assets, net 7,788 622
Goodwill 16,376 585
Other assets 2,528 3,384
--------- ---------
$ 107,814 $ 31,929
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,750 $ -
Accounts payable 6,288 4,115
Compensation payable 2,722 1,337
Accrued expenses 6,347 2,562
Income taxes payable 2,207 1,811
--------- ---------
Total current liabilities 20,314 9,825
Long-term debt 25,750 -
Deferred income taxes 2,058 77
Other long-term liabilities 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 2002 - 9,491,118 shares, outstanding 2002 -
9,221,003 shares; issued 2001 - 7,099,738 shares, outstanding
2001 - 6,838,914 shares 949 710
Additional capital 48,740 20,003
Retained earnings 11,629 4,477
Accumulated other comprehensive loss (2,215) (2,143)
Treasury Stock, 2002 - 270,115 shares at cost;
2001 - 260,824 shares at cost (1,192) (1,020)
--------- ---------
Total stockholders' equity 57,911 22,027
--------- ---------
$ 107,814 $ 31,929
========= =========
See accompanying notes.
2
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED JULY 31,
2002 2001 2000
--------- -------- --------
Net sales:
Product sales $ 111,268 $ 41,984 $ 35,351
Product service 8,726 7,011 5,946
--------- -------- --------
Total net sales 119,994 48,995 41,297
--------- -------- --------
Cost of sales:
Product sales 68,345 26,350 22,476
Product service 5,173 3,629 3,093
--------- -------- --------
Total cost of sales 73,518 29,979 25,569
--------- -------- --------
Gross profit 46,476 19,016 15,728
Expenses:
Selling 14,759 5,692 5,208
General and administrative 14,560 5,410 4,543
Research and development 3,851 949 836
--------- -------- --------
Total operating expenses 33,170 12,051 10,587
--------- -------- --------
Income from continuing operations before interest
expense (income) and income taxes 13,306 6,965 5,141
Interest expense (income) 2,176 (42) 225
--------- -------- --------
Income from continuing operations before income taxes 11,130 7,007 4,916
Income taxes 3,978 2,851 2,085
--------- -------- --------
Income from continuing operations 7,152 4,156 2,831
Loss from discontinued operations - - (97)
Gain (loss) on disposal of discontinued operations - 225 (50)
--------- -------- --------
Net income $ 7,152 $ 4,381 $ 2,684
========= ======== ========
Earnings per common share:
Basic:
Continuing operations $ 0.81 $ 0.62 $ 0.43
Discontinued operations - 0.03 (0.02)
--------- -------- --------
Net income $ 0.81 $ 0.65 $ 0.41
========= ======== ========
Diluted:
Continuing operations $ 0.74 $ 0.56 $ 0.42
Discontinued operations - 0.03 (0.02)
--------- -------- --------
Net income $ 0.74 $ 0.59 $ 0.40
========= ======== ========
See accompanying notes.
3
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JULY 31, 2002, 2001 AND 2000
[Enlarge/Download Table]
COMMON STOCK
------------------------- ACCUMULATED TOTAL
NUMBER OF RETAINED OTHER TREASURY STOCK-
SHARES ADDITIONAL EARNINGS COMPREHENSIVE STOCK, HOLDERS'
OUTSTANDING AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) AT COST EQUITY
----------- ---------- ---------- ---------- ------------- ----------- --------
Balance, July 31, 1999 6,660,818 $ 678 $ 19,078 $ (2,588) $ (2,230) $ (393) $ 14,545
Exercises of options 63,504 12 194 (198) 8
Purchases of
Treasury Stock (66,750) (207) (207)
Translation adjustment 133 133
Net income 2,684 2,684
----------- ---------- ---------- ---------- ------------- ----------- --------
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
Unrealized gain on
currency hedging 31 31
Translation adjustment (409) (409)
Net income 4,381 4,381
----------- ---------- ---------- ---------- ------------- ----------- --------
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)
Unrealized gain on
currency hedging 29 29
Translation adjustment 352 352
Net income 7,152 7,152
----------- ---------- ---------- ---------- ------------- ----------- --------
Balance, July 31, 2002 9,221,003 $ 949 $ 48,740 $ 11,629 $ (2,215) $ (1,192) $ 57,911
=========== ========== ========== ========== ============= =========== ========
See accompanying notes.
4
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED JULY 31,
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 7,152 $ 4,156 $ 2,831
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Income (loss) from discontinued operations - 225 (147)
Depreciation and amortization of continuing operations 3,434 553 463
Depreciation and amortization of discontinued operations - - 87
Amortization of debt issuance costs 484 - -
Deferred income taxes 1,139 - 256
Changes in assets and liabilities:
Accounts receivable 1,078 (3,025) 492
Inventories 889 (1,350) 568
Prepaid expenses and other current assets 85 99 379
Accounts payable and accrued expenses (1,934) (489) (68)
Income taxes (1,025) 1,173 (193)
-------- -------- --------
Net cash provided by operating activities 11,302 1,342 4,668
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,590) (367) (320)
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 (58) 773 (909)
Proceeds from transfer of discontinued operations - 2,350 -
Other, net 580 (896) (163)
-------- -------- --------
Net cash (used in) provided by investing activities (31,541) 1,135 (1,392)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings for Minntech acquisition, net of debt issuance costs 32,595 - -
Repayments under term loan facility (1,500) - -
Net repayments under revolving credit facilities (4,000) (125) (1,436)
Capital lease obligations - - (6)
Proceeds from exercises of stock options 659 529 8
Purchases of Treasury Stock - - (207)
-------- -------- --------
Net cash provided by (used in) financing activities 27,754 404 (1,641)
-------- -------- --------
Increase in cash and cash equivalents 7,515 2,881 1,635
Cash and cash equivalents at beginning of year 5,050 2,169 534
-------- -------- --------
Cash and cash equivalents at end of year $ 12,565 $ 5,050 $ 2,169
======== ======== ========
See accompanying notes.
5
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2002, 2001 AND 2000
1. BUSINESS DESCRIPTION
Cantel Medical Corp. ("Cantel") had three wholly-owned operating subsidiaries
(collectively known as the "Company") at July 31, 2002.
On September 7, 2001, the Company completed its acquisition of Minntech
Corporation ("Minntech"), as more fully described in note 3 to the Consolidated
Financial Statements. Minntech designs, develops, manufactures, markets and
distributes disinfection/sterilization reprocessing systems, sterilants and
other supplies for renal dialysis as well as filtration and separation and other
products for medical and non-medical applications. The products are available
through Minntech's distribution network in the United States and in many
international markets.
MediVators, Inc. ("MediVators") designs, develops, manufactures, markets and
distributes endoscope reprocessing products. Minntech and MediVators are
sometimes collectively referred to as the "United States subsidiaries." Carsen
Group Inc. ("Carsen" or "Canadian subsidiary") is engaged in the marketing,
distribution and service of endoscopy and surgical, endoscope reprocessing and
scientific products in Canada.
Effective July 31, 2000, Carsen discontinued its Consumer Products business and
the results of Consumer Products have been presented as a discontinued
operation, as described in note 8 to the Consolidated Financial Statements.
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 Balance Sheets and 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.
6
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 is recognized as products are shipped to customers or
when title passes, net of provisions for sales allowances and similar items.
Domestic sales of endoscope reprocessing equipment are of a bill and hold nature
as more fully described in note 11 to the Consolidated Financial Statements.
Revenue on service sales is recognized when repairs are completed and the
products are shipped to customers.
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 loss. Foreign exchange gains and
losses related to the purchase of inventories are included in cost of sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are carried at fair value, with the unrealized
gain reported as a component of accumulated other comprehensive loss. Securities
at July 31, 2001 consisted exclusively of Minntech common stock purchased for
$725,000 during September 2000. The unrealized gain on such securities during
fiscal 2001 was $332,000 and was eliminated during fiscal 2002 as a result of
the Minntech acquisition. The elimination of this unrealized gain had no impact
upon the Company's results of operations.
7
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and improvements are
capitalized, while maintenance and repair costs are expensed. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
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 3-10 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 2002, 2001 and 2000 was $2,654,000, $410,000 and $402,000, respectively.
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS COMBINATIONS"
("SFAS 141") and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" ("SFAS
142"). SFAS 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life).
Upon adoption of SFAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS 141 will be reclassified to goodwill. The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.
Companies are required to adopt SFAS 142 for fiscal years beginning after
December 15, 2001, but early adoption is permitted. The Company adopted SFAS 142
on August 1, 2001, which was the beginning of fiscal 2002.
Pursuant to SFAS 142, the Company performed a benchmark goodwill impairment
assessment for the goodwill arising from the Minntech acquisition, as more fully
described in note 3 to the Consolidated
8
Financial Statements. Goodwill amortization amounted to $35,000 during each of
fiscal 2001 and 2000.
Intangible assets with finite lives, including technology, customer lists,
patents and non-compete agreements, are stated at cost and amortized on a
straight-line basis over their estimated useful lives of 2 to 20 years.
OTHER ASSETS
Debt issuance costs associated with the credit facilities for the Minntech
merger are amortized to interest expense over the 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 6 and 9
to the Consolidated Financial Statements. As of July 31, 2002 and 2001, such
debt issuance costs, net of related amortization, are included in other assets
and amounted to $1,384,000 and $455,000, respectively. Additionally, other
assets at July 31, 2001 included $1,828,000 of professional fees related to the
Minntech acquisition; such amount was reclassified in conjunction with the
purchase accounting.
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.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets periodically
in accordance with the provisions of SFAS No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF"
("SFAS 121"). Long-lived assets are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable through the estimated undiscounted future cash flows resulting
from the use of these assets. When any such impairment exists, the related
assets will be written down to fair value.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), which establishes financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS 121. SFAS 144 addresses the accounting for a segment of a
business accounted for as a discontinued operation which was not previously
addressed by SFAS 121. In addition, SFAS 144 resolves significant implementation
issues related to SFAS 121. The provisions of SFAS 144 are effective for fiscal
years beginning after December 15,
9
2001. The Company believes that the adoption of SFAS 144 will have no
significant impact on its financial reporting and related disclosures.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS
123"), the Company has elected to follow Accounting Principal Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") and related
interpretations in accounting for its stock option plans. Under APB 25, no
compensation expense is recognized at the time of option grant if the exercise
price of the Company's employee stock option is fixed and equals or exceeds the
fair market value of the underlying common stock on the date of grant.
ADVERTISING COSTS
The Company's policy is to expense advertising costs as they are incurred.
Advertising costs charged to expenses were $146,000, $26,000 and $13,000 for
fiscal 2002, 2001 and 2000, respectively.
INCOME TAXES
The Company accounts for income taxes by the liability method in accordance with
SFAS No. 109 "ACCOUNTING FOR INCOME TAXES" ("SFAS 109"). SFAS 109 requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities.
Approximately $5,112,000 of the undistributed earnings of the Company's foreign
subsidiaries was considered to be indefinitely reinvested at July 31, 2002.
Accordingly, no provision has been recorded for U.S. income taxes that might
result from repatriation.
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.
10
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 the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items in the July 31, 2001 and 2000 financial statements have been
reclassified from amounts previously reported to conform to the presentation of
the July 31, 2002 financial statements. These reclassifications include the
reporting of warehouse and shipping expenses in cost of sales, and the operating
segment classification of sales of MediVators parts from Endoscope Reprocessing
Products to Product Service.
NEW ACCOUNTING PRONOUNCEMENT
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OF 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 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. SFAS 146 would not have had a material
impact on the Company's fiscal 2002 financial position or results of operations.
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 and other products for medical and
non-medical applications. The products are available through
11
Minntech's distribution network in the United States and in many international
markets.
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 (as
adjusted for fractional shares, and included cash of $41,396,000, shares of
Cantel common 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). The transaction was
accounted for as a purchase and in accordance with the provisions of SFAS 141.
Minntech is reflected in the Company's results of operations for 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 and 2000.
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 base $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 price 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.
12
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 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.
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:
[Download Table]
Year Ended July 31,
2002 2001
--------------- ---------------
Net sales $ 127,819,000 $ 127,442,000
Income from continuing
operations 6,721,000 5,241,000
Earnings per share:
Basic $0.74 $0.59
Diluted $0.68 $0.55
Weighted average common shares:
Basic 9,105,000 8,909,000
Diluted 9,937,000 9,566,000
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 each of
these periods, 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
13
cost basis of Minntech's inventories; (ii) amortization of intangible assets
and depreciation and amortization of property and equipment is based upon the
final appraised fair values and estimated useful lives of such assets; (iii)
in accordance with the provisions of SFAS 142, no amortization expense for
the goodwill generated as a result of the merger has been reflected; (iv)
interest expense on the senior bank debt at an effective interest rate of 7%
per annum; and (v) calculation of the income tax effects of the pro forma
adjustments.
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 cosulting expenses associated with the merger. Without
these charges and the related income taxes, pro forma consolidated income
from continuing operations for fiscal 2001 would have been approxiamtely
$6,345,000, and pro forma consolidated basic and diluted earnings per share
would have been $0.71 and $0.66, respectively.
TECHNIMED
On November 1, 2001, the Company's Canadian subsidiary 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 2002.
Technimed was a private company based in Montreal, Canada servicing medical
equipment, including rigid endoscopes and hand-held surgical instrumentation.
4. COMPREHENSIVE INCOME
The Company's comprehensive income for the years ended July 31, 2002, 2001 and
2000 are set forth in the following table:
[Enlarge/Download Table]
Year Ended July 31,
2002 2001 2000
-----------------------------------------------
Net income $ 7,152,000 $ 4,381,000 $ 2,684,000
Other comprehensive income (loss):
Unrealized gain on securities - 332,000 -
Unrealized loss on interest rate cap (121,000) - -
Unrealized gain on currency
hedging 29,000 31,000 -
Foreign currency translation
adjustment 352,000 (409,000) 133,000
------------- ------------- -------------
Comprehensive income $ 7,412,000 $ 4,335,000 $ 2,817,000
============= ============= =============
14
At July 31, 2001, the Company had an unrealized gain on securities of $332,000
which was eliminated during fiscal 2002 in connection with the Minntech
acquisition purchase accounting. The elimination of this unrealized gain had no
impact upon the Company's results of operations.
5. INVENTORIES
A summary of inventories is as follows:
[Download Table]
July 31,
2002 2001
------------ ------------
Raw materials and parts $ 6,661,000 $ 2,294,000
Work-in-process 1,581,000 -
Finished goods 9,089,000 5,872,000
------------ ------------
Total $ 17,331,000 $ 8,166,000
============ ============
6. FINANCIAL INSTRUMENTS
Effective August 1, 2000, the Company adopted SFAS No. 133, as amended,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133").
Because of the Company's minimal use of hedging activities, the adoption of this
statement did not have a significant effect on the financial position or results
of operations of the Company. 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 is therefore exposed to
fluctuations in the rates of exchange between the United States dollar and
Canadian dollar. In order to hedge against the impact of such currency
fluctuations on the purchases of inventories, Carsen enters into foreign
currency forward contracts on firm purchases of such inventories in United
States dollars. Total commitments for such foreign currency forward contracts
15
amounted to $9,800,000 (United States dollars) at July 31, 2002 and cover a
portion of Carsen's projected purchases of inventories through February 2003.
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, the Company enters into short-term
contracts to purchase euros forward. There was one such foreign currency forward
contract amounting to (euro)4,500,000 at July 31, 2002 which covers a portion of
the net assets of Minntech's Netherlands subsidiary which are denominated in
United States dollars. Such contract expired on August 31, 2002. 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 is 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. 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 fair value is recorded as an unrealized loss at July 31,
2002 and is included in other comprehensive income.
16
The fair value of the Company's interest rate cap agreement and Carsen's foreign
currency forward contracts is based upon quoted market prices as provided by
financial institutions which are counterparties to the agreements and is as
follows:
[Download Table]
July 31,
2002 2001
--------------------------
Interest rate cap agreement $ 52,000 $ -
Canadian foreign currency
forward contracts 60,000 31,000
As of July 31, 2002 and 2001, 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, 2002, 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.
7. INTANGIBLES AND GOODWILL
The Company's intangible assets which continue to be subject to amortization
consist primarily of technology, customer lists, 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, 2002.
Amortization expense related to intangible assets was $780,000, $143,000 and
$148,000 for fiscal 2002, 2001 and 2000, 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.
The Company's intangible assets consist of the following:
[Download Table]
Year Ended July 31,
2002 2001
----------------------------
Intangible assets with
indefinite useful lives $ 1,015,000 $ -
Intangible assets with
finite lives 7,922,000 992,000
----------- ------------
Total 8,937,000 992,000
Less accumulated amortization
on intangibles with
finite lives (1,149,000) (370,000)
----------- ------------
Total $ 7,788,000 $ 622,000
=========== ============
17
Estimated annual amortization expense of the Company's intangible assets for the
next five fiscal years is as follows:
[Download Table]
Year Ending July 31,
--------------------
2003 $ 865,000
2004 740,000
2005 725,000
2006 725,000
2007 718,000
For 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 August 1, 2002, such goodwill was
reviewed for impairment by an independent appraiser using the methods prescribed
in SFAS 142. Based upon such review, the Company concluded that there was no
impairment of the goodwill.
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.
18
Operating results of the Consumer Products business, including results related
to the disposal of the business, were as follows:
[Download Table]
Year Ended July 31,
2001 2000
----------------------------
Net sales $ - $ 15,825,000
=========== ============
Pretax operating loss $ - $ (164,000)
Income tax benefit - (67,000)
----------- ------------
Loss from discontinued
operations $ - $ (97,000)
=========== ============
Pretax gain on disposal $ 380,000 $ 36,000
Income tax expense 155,000 86,000
----------- ------------
Gain (loss) on disposal $ 225,000 $ (50,000)
=========== ============
At July 31, 2002 and 2001, remaining liabilities of the discontinued business
were $34,000 and $96,000, respectively, and are included within accrued
expenses.
9. FINANCING ARRANGEMENTS
At July 31, 2001, the Company had a credit facility which provided for (i) a
$2,500,000 revolving credit facility for Cantel and MediVators, (ii) a
$5,000,000 (United States dollars) revolving credit facility for Carsen, and
(iii) a $12,500,000 acquisition facility available to Cantel and MediVators for
permitted acquisitions in the United States. At July 31, 2001, the Company had
no outstanding borrowings under this credit facility.
In conjunction with the acquisition of Minntech on September 7, 2001, the
Company entered into new credit facilities to fund the financed portion of the
cash consideration paid in the merger and costs associated with the merger, as
well as to replace the Company's existing working capital credit facilities. The
new credit facilities include (i) a $25,000,000 senior secured amortizing term
loan facility from a consortium of 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 and MediVators (the "U.S.
Borrowers") and (iii) a $5,000,000 (United States dollars) senior secured
revolving credit facility for Carsen (the "Canadian Borrower") with a Canadian
bank (the "Canadian Revolving Credit Facility") available for Carsen's future
working capital requirements. Each of the Term
19
Loan Facility, the U.S. Revolving Credit Facility and the Canadian Revolving
Credit Facility (collectively the "Credit Facilities") expire on September 7,
2006.
Borrowings under the Credit Facilities bear interest at rates ranging from .75%
to 2.00% above the lender's base rate, or at rates ranging from 2.00% to 3.25%
above LIBOR, depending upon the Company's consolidated ratio of debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The base rates
associated with the U.S. lenders and the Canadian lender were 4.75% and 4.50%,
respectively, at July 31, 2002, and the LIBOR rates ranged from 1.81% to 1.83%
at July 31, 2002. The margins applicable to the Company's outstanding borrowings
at July 31, 2002 are 1.5% above the lender's base rate and 2.75% above LIBOR. 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 Term Loan Facility and the U.S. Revolving Credit Facility provide for
available borrowings based upon percentages of the U.S. Borrowers' eligible
accounts receivable and inventories; require the U.S. Borrowers to meet certain
financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
are guaranteed by Minntech and MediVators. The Canadian Revolving Credit
Facility provides for available borrowings based upon percentages of the
Canadian Borrower's eligible accounts receivable and inventories; requires the
Canadian Borrower to meet certain financial covenants; and is secured by
substantially all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term Loan
Facility and $9,000,000 under the U.S. Revolving Credit Facility in connection
with the acquisition of Minntech. At July 31, 2002, the Company had $28,500,000
outstanding under its Credit Facilities, including $23,500,000 under the Term
Loan Facility. Amounts repaid by the Company under the Term Loan Facility may
not be re-borrowed.
20
Aggregate annual required maturities of the Credit Facilities over the next five
years and thereafter are as follows:
[Download Table]
Year Ending July 31,
2003 $ 2,750,000
2004 4,500,000
2005 6,500,000
2006 7,750,000
2007 7,000,000
Thereafter -
-------------
Total $ 28,500,000
=============
The amount maturing in fiscal 2007 includes the remaining $5,000,000 presently
outstanding under the revolving credit facilities since such amount is required
to be repaid prior to the expiration date of such facilities.
10. INCOME TAXES
The provision for income taxes consists of the following:
[Enlarge/Download Table]
Year Ended July 31,
2002 2001 2000
-------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
------------------------ ------------------------ ------------------------
United
States $ 222,000 $ 923,000 $ 200,000 $ - $ 74,000 $ -
Canada 1,755,000 (57,000) 2,651,000 - 2,008,000 3,000
Netherlands 861,000 - - - - -
Japan - 274,000 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total $ 2,838,000 $ 1,140,000 $ 2,851,000 $ - $ 2,082,000 $ 3,000
=========== =========== =========== =========== =========== ===========
The components of income from continuing operations before income taxes are as
follows:
[Download Table]
Year Ended July 31,
2002 2001 2000
------------------------------------------
United States $ 2,883,000 $ 630,000 $ 338,000
Canada 4,390,000 6,377,000 4,578,000
Netherlands 3,248,000 - -
Japan 609,000 - -
------------ ------------ ------------
Total $ 11,130,000 $ 7,007,000 $ 4,916,000
============ ============ ============
21
The effective tax rate differs from the United States statutory tax rate (34%)
due to the following:
[Download Table]
Year Ended July 31,
2002 2001 2000
--------------------------------------------
Expected statutory tax $ 3,784,000 $ 2,382,000 $ 1,671,000
Differential attributable to
foreign operations:
Canada 185,000 483,000 454,000
Netherlands (379,000) - -
Japan 67,000 - -
Utilization of NOLs - (152,000) (100,000)
State and local taxes 381,000 120,000 10,000
Extraterritorial income exclusion (76,000) - -
Other 16,000 18,000 50,000
------------ ------------ ------------
Total $ 3,978,000 $ 2,851,000 $ 2,085,000
============ ============ ============
Deferred income tax assets and liabilities are comprised of the following:
[Download Table]
Year Ended July 31,
2002 2001
------------------------------
Current deferred tax assets:
Accrued expenses $ 1,921,000 $ 257,000
Inventories 1,175,000 33,000
Allowance for doubtful accounts 372,000 9,000
Foreign NOLs 149,000 -
Research and development
credit carryforward 53,000 -
Less: valuation allowance - (250,000)
------------- -------------
Current deferred tax assets $ 3,670,000 $ 49,000
============= =============
Non-current deferred tax assets:
Goodwill $ 352,000 $ -
Other long-term liabilities 1,056,000 -
Domestic NOLs 4,446,000 4,782,000
Less: valuation allowance - (4,782,000)
------------- -------------
5,854,000 -
------------- -------------
Non-current deferred tax liabilities:
Property and equipment (3,053,000) (77,000)
Intangible assets (2,622,000) -
Tax on unremitted foreign earnings (2,237,000) -
------------- -------------
(7,912,000) (77,000)
------------- -------------
Net non-current deferred tax liabilities $ (2,058,000) $ (77,000)
============= =============
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
statutory tax rates are
22
unchanged. Such deferred tax items in the United States are reflected at a
combined U.S. federal and state effective rate of 40%.
At July 31, 2001, the Company had deferred tax assets related to NOLs and
cumulative temporary differences of $5,032,000 which was 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 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
$13,076,000 at July 31, 2002, 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 $5,112,000 of the undistributed earnings of the Company's foreign
subsidiaries was considered to be indefinitely reinvested at July 31, 2002.
Accordingly, no provision has been recorded for U.S. income taxes that might
result from repatriation.
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") (collectively the "Olympus
Agreements"), under which Olympus has granted Carsen the exclusive right to
distribute the covered Olympus products in Canada. All products sold by Carsen
pursuant to the 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,
23
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 are
approximately $16.9 million and $18.8 million during the contract years ending
March 31, 2003 and 2004, respectively.
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
MediVators has a four-year agreement with Olympus America Inc., which expires on
August 1, 2003, under which Olympus is granted the exclusive right to distribute
all of MediVators' endoscope reprocessing products and related accessories and
supplies in the United States and Puerto Rico (the "MediVators Agreement").
MediVators also has a three-year agreement with Olympus Latin America which
expires on July 21, 2005 under which Olympus is granted the exclusive right to
distribute all of MediVators endoscope reprocessing products and related
accessories and supplies in Latin America; to date such agreement has not
produced significant levels of sales in Latin America. All equipment sold by
Olympus pursuant to these agreements bear both the "Olympus" and "MediVators"
trademarks.
The MediVators Agreement provides for minimum purchase projections. Failure by
Olympus to achieve the minimum purchase projections in any contract year gives
MediVators the option to terminate the MediVators Agreement. Net sales to
Olympus accounted for 9.5%, 18.4%, and 15.8% of the Company's net sales in
fiscal 2002, 2001 and 2000, respectively.
24
Sales to Olympus of endoscope disinfection equipment are recognized on a bill
and hold basis based upon the receipt of a written purchase order from Olympus,
the completion date specified in the order, the actual completion of the
manufacturing process and the invoicing of goods. At July 31, 2002 and 2001,
accounts receivable included bill and hold receivables of approximately
$1,659,000 and $867,000, respectively.
LEASE OBLIGATIONS
Aggregate future minimum rental commitments at July 31, 2002 under operating
leases for property and equipment are as follows:
[Download Table]
Year Ending July 31,
2003 $ 1,060,000
2004 779,000
2005 486,000
2006 97,000
2007 19,000
-----------
Total rental commitments $ 2,441,000
===========
Rent expense aggregated $1,310,000, $502,000 and $429,000 for fiscal 2002, 2001
and 2000, respectively, which includes amounts previously allocated to the
discontinued operations.
12. STOCKHOLDERS' EQUITY
An aggregate of 375,000 shares of Common Stock was reserved for issuance or
available for grant under the Company's 1991 Employee Stock Option Plan (the
"1991 Employee Plan"), which expired in fiscal 2001. All options outstanding at
July 31, 2001 under the 1991 Employee Plan have a term of five years and are
exercisable in full. At July 31, 2002, options to purchase 1,875 shares of
Common Stock were outstanding under the 1991 Employee Plan. No additional
options will be granted under the 1991 Employee Plan.
An aggregate of 1,500,000 shares of Common Stock is reserved for issuance or
available for grant under the Company's 1997 Employee Stock Option Plan, as
amended (the "1997 Employee Plan"), through October 15, 2007. Options under the
1997 Employee Plan are granted at no less than 100% of the market price at the
time of the grant, typically become exercisable in four equal annual
installments and expire up to a maximum of ten years from the date of the grant.
At July 31, 2002, options to purchase 918,492 shares of Common Stock were
outstanding under the 1997 Employee Plan and 381,075 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'
25
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, 2002, options to
purchase 121,500 shares of Common Stock were outstanding under the 1991
Directors' Plan. No additional options will be granted under the 1991 Directors'
Plan.
An aggregate of 300,000 shares of Common Stock is reserved for issuance or
available for grant under the Company's 1998 Directors' Stock Option Plan (the
"1998 Directors' Plan"). Options under the 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 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, 2002, options to purchase 91,500 shares of
Common Stock were outstanding under the 1998 Directors' Plan and 208,500 shares
were available for grant.
The Company also has outstanding 329,625 non-plan options at July 31, 2002 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.
In accordance with the provisions of SFAS 123, the Company has elected to follow
APB Opinion 25 and related interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation expense. If the Company
had elected to recognize compensation expense based on the fair value of the
options granted at grant date as prescribed by SFAS 123, income and diluted
earnings per share from continuing operations would have been $5,937,000 and
$0.61, respectively, for fiscal 2002, $3,702,000 and $0.50, respectively, for
fiscal 2001 and $2,458,000 and $0.37, respectively, for fiscal 2000. 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
26
grant using the Black-Scholes option valuation model with the following
assumptions: expected dividend yield of 0%; expected stock price volatility
ranging from .31 to .69; risk-free interest rate at date of grant ranging from
3.59% to 6.10%; and expected weighted average option lives of 1-10 years.
Additionally, all options were considered to be non-deductible for tax purposes
in the valuation model. The weighted average fair value of options granted in
fiscal 2002, 2001 and 2000 was $5.62, $7.29 and $2.65 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.
A summary of stock option activity follows:
[Download Table]
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at July 31, 1999 1,129,733 $ 4.01
Granted 219,750 3.65
Canceled (78,892) 4.05
Exercised (118,913) 1.73
---------
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
=========
Exercisable at July 31, 2000 674,741 $ 4.35
=========
Exercisable at July 31, 2001 666,222 $ 4.65
=========
Exercisable at July 31, 2002 798,973 $ 5.55
=========
27
The following table summarizes additional information related to stock options
outstanding at July 31, 2002:
[Enlarge/Download Table]
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, 2002 (Months) Price At July 31, 2002 Price
--------------- ---------------- ----------- -------- ---------------- --------------
$ 2.33 - $ 6.83 882,317 51 $ 4.55 729,973 $ 4.69
$ 7.75 - $ 12.32 433,425 50 $ 12.27 12,500 $ 10.57
$ 13.49 - $ 19.15 147,250 50 $ 16.24 56,500 $ 15.61
--------- --------
$ 2.33 - $ 19.15 1,462,992 51 $ 8.01 798,973 $ 5.55
========= ========
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.
28
The following table sets forth the computation of basic and diluted earnings per
share:
[Download Table]
Year Ended July 31,
2002 2001 2000
------------- ------------- -------------
Numerator for basic and diluted
earnings per share:
Income from continuing
operations $ 7,152,000 $ 4,156,000 $ 2,831,000
Gain (loss) from
discontinued operations - 225,000 (147,000)
------------- ------------- -------------
Net income $ 7,152,000 $ 4,381,000 $ 2,684,000
============= ============= =============
Denominator for basic and
diluted earnings per share:
Denominator for basic
earnings per share
weighted average number
of shares outstanding 8,881,743 6,707,435 6,617,708
Dilutive effect of options
using the treasury stock
method and the average
market price for the
year 832,468 657,832 101,514
------------- ------------- -------------
Denominator for diluted
earnings per share
weighted average number
of shares and common
stock equivalents 9,714,211 7,365,267 6,719,222
============= ============= =============
Basic earnings per share:
Continuing operations $ 0.81 $ 0.62 $ 0.43
Discontinued operations - 0.03 (0.02)
------------- ------------- -------------
Net income $ 0.81 $ 0.65 $ 0.41
============= ============= =============
Diluted earnings per share:
Continuing operations $ 0.74 $ 0.56 $ 0.42
Discontinued operations - 0.03 (0.02)
------------- ------------- -------------
Net income $ 0.74 $ 0.59 $ 0.40
============= ============= =============
29
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 $424,000, $232,000 and $181,000
for fiscal 2002, 2001 and 2000, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid was $1,619,000, $19,000 and $228,000 for fiscal 2002, 2001 and
2000, respectively.
Income tax payments were $3,531,000, $1,905,000 and $2,082,000 for fiscal 2002,
2001 and 2000, 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 and 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
its United States subsidiaries, Minntech and MediVators, 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 products
for renal dialysis, filtration and separation products for medical and
non-medical applications, and endoscope disinfection equipment. Through its
Canadian subsidiary, 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
30
own products, as well as for certain competitors' 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 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 and certain competitor's products.
The operating segments follow the same accounting policies used for the
Company's consolidated financial statements as described in note 2.
31
(a) Information as to operating segments is summarized below:
[Enlarge/Download Table]
Year Ended July 31,
2002 2001 2000
-----------------------------------------------------
Net sales from continuing
operations:
Dialysis Products $ 54,434,000 $ - $ -
Endoscopy and Surgical Products(1) 18,636,000 22,209,000 17,216,000
Endoscope Reprocessing Products(1) 16,419,000 12,348,000 10,641,000
Filtration and Separation
Products 14,377,000 - -
Scientific Products 8,344,000 8,214,000 8,254,000
Product Service 8,726,000 7,011,000 5,946,000
Elimination of inter-
company sales of
Endoscope Reprocessing
Products (942,000) (787,000) (760,000)
--------------- --------------- ---------------
Total $ 119,994,000 $ 48,995,000 $ 41,297,000
=============== =============== ===============
Operating income from continuing
operations:
Dialysis Products $ 6,439,000 $ - $ -
Endoscopy and Surgical Products(1) 2,440,000 4,277,000 2,909,000
Endoscope Reprocessing Products(1) 1,779,000 1,900,000 1,345,000
Filtration and Separation
Products 3,232,000 - -
Scientific Products 136,000 343,000 531,000
Product Service 2,158,000 2,519,000 2,132,000
Elimination of inter-
company operating
(loss) income of
Endoscope Reprocessing
Products (38,000) (14,000) 1,000
--------------- --------------- ---------------
16,146,000 9,025,000 6,918,000
General corporate expenses (2,840,000) (2,060,000) (1,777,000)
Interest (expense) income (2,176,000) 42,000 (225,000)
--------------- --------------- ---------------
Income from continuing
operations before income taxes $ 11,130,000 $ 7,007,000 $ 4,916,000
=============== =============== ===============
32
[Enlarge/Download Table]
Year Ended July 31,
2002 2001 2000
------------------------------------------------
Identifiable assets:
Dialysis Products $ 48,067,000 $ - $ -
Endoscopy and Surgical Products(1) 7,514,000 11,242,000 7,830,000
Endoscope Reprocessing Products(1) 13,063,000 5,392,000 4,732,000
Filtration and Separation
Products 15,922,000 - -
Scientific Products 4,437,000 4,592,000 5,226,000
Product Service 4,292,000 2,129,000 1,825,000
General corporate, including
cash and cash equivalents 14,519,000 8,574,000 2,247,000
-------------- -------------- --------------
Continuing operations 107,814,000 31,929,000 21,860,000
Discontinued operations - - 3,095,000
-------------- -------------- --------------
Total $ 107,814,000 $ 31,929,000 $ 24,955,000
============== ============== ==============
Capital expenditures:
Dialysis Products $ 764,000 $ - $ -
Endoscopy and Surgical Products(1) 50,000 105,000 83,000
Endoscope Reprocessing Products(1) 199,000 135,000 135,000
Filtration and Separation Products 75,000 - -
Scientific Products 22,000 38,000 41,000
Product Service 267,000 27,000 25,000
General corporate 213,000 62,000 36,000
-------------- -------------- --------------
Continuing operations 1,590,000 367,000 320,000
Discontinued operations - - 76,000
-------------- -------------- --------------
Total $ 1,590,000 $ 367,000 $ 396,000
============== ============== ==============
Depreciation and amortization:
Dialysis Products $ 1,967,000 $ - $ -
Endoscopy and Surgical Products(1) 133,000 153,000 100,000
Endoscope Reprocessing Products(1) 324,000 286,000 286,000
Filtration and Separation
Products 728,000 - -
Scientific Products 59,000 56,000 40,000
Product Service 200,000 40,000 32,000
General corporate 23,000 18,000 5,000
-------------- -------------- --------------
Continuing operations 3,434,000 553,000 463,000
Discontinued operations - - 87,000
-------------- -------------- --------------
Total $ 3,434,000 $ 553,000 $ 550,000
============== ============== ==============
(1) Endoscopy and Surgical Products was formerly described as Medical Products,
and Endoscope Reprocessing Products was formerly described as Infection
Control Products.
33
(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:
[Download Table]
Year Ended July 31,
2002 2001 2000
------------------------------------------------
Net sales from continuing
operations:
United States $ 72,668,000 $ 9,934,000 $ 8,147,000
Canada 34,093,000 36,274,000 30,568,000
Asia/Pacific 7,049,000 231,000 446,000
Europe/Africa/Middle East 5,079,000 2,556,000 2,136,000
Latin America/South America 1,105,000 - -
-------------- -------------- --------------
Total $ 119,994,000 $ 48,995,000 $ 41,297,000
============== ============== ==============
Total assets:
United States $ 75,020,000 $ 10,423,000 $ 5,696,000
Canada 19,257,000 21,506,000 19,259,000
Asia/Pacific 1,072,000 - -
Europe 12,465,000 - -
-------------- -------------- --------------
Total $ 107,814,000 $ 31,929,000 $ 24,955,000
============== ============== ==============
34
17. QUARTERLY RESULTS OF CONTINUING OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of continuing operations for
years ended July 31, 2002 and 2001:
[Enlarge/Download Table]
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
2002(1)
Net sales $ 21,165,000 $ 32,900,000 $ 33,196,000 $ 32,733,000
Income from continuing oper-
ations 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
2001(1)
Net sales $ 8,719,000 $ 12,651,000 $ 12,976,000 $ 14,649,000
Income from continuing oper-
ations before interest
expense(income) and
income taxes $ 1,107,000 $ 1,793,000 $ 1,834,000 $ 2,231,000
Income from continuing
operations $ 649,000 $ 988,000 $ 1,141,000 $ 1,378,000
Earnings per share:(3)
Basic $ 0.10 $ 0.15 $ 0.17 $ 0.20
Diluted $ 0.09 $ 0.14 $ 0.15 $ 0.18
(1) The Company's acquisition of Minntech is reflected in the results of
continuing operations for the portion of fiscal 2002 subsequent to its
acquisition on September 7, 2001, and is not reflected in the results of
continuing operations for fiscal 2001.
(2) The summation of quarterly earnings per share does not equal fiscal 2002
earnings per share due to rounding.
(3) Earnings per share for the first and second quarters of fiscal 2002 and all
four quarters of fiscal 2001 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.
35
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------------------------------------------------
BALANCE AT BALANCE
BEGINNING DEDUCTIONS AT END
OF PERIOD ADDITIONS (RECOVERIES) OF PERIOD
------------------------------------------------------------
Allowance for
doubtful accounts:
Continuing operations:
Year ended
July 31, 2002 $ 62,000 $ 1,278,000(1) $ 299,000 $ 1,041,000
============================================================
Year ended
July 31, 2001 $ 66,000 $ 9,000 $ 13,000 $ 62,000
============================================================
Year ended
July 31, 2000 $ 40,000 $ 39,000 $ 13,000 $ 66,000
============================================================
Discontinued operations:
Year ended
July 31, 2002 $ - $ - $ - $ -
============================================================
Year ended
July 31, 2001 $ 99,000 $ - $ 99,000 $ -
============================================================
Year ended
July 31, 2000 $ 41,000 $ 81,000 $ 23,000 $ 99,000
============================================================
(1) Includes $806,000 recorded in connection with the purchase accounting for
the Minntech acquisition, and $472,000 charged to expense during fiscal
2002.
36
Dates Referenced Herein and Documents Incorporated by Reference
2 Subsequent Filings that Reference this Filing
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