Item 1. BUSINESS.
GENERAL
The Company, through Carsen Group Inc., its wholly-owned Canadian subsidiary ("Carsen" or "Canadian subsidiary"), is engaged in the marketing and distribution of medical and infection control, scientific and consumer products in Canada. The Company, through MediVators, Inc., its wholly-owned United States subsidiary ("MediVators" or "United States subsidiary"), is engaged in the manufacturing, marketing and distribution of infection control products. The Company also provides servicing of the products it manufactures and distributes. Unless the context otherwise requires, references herein to the "Company" include Cantel Industries, Inc. ("Cantel") and its subsidiaries.
The medical and infection control products distributed by Carsen consist of medical equipment, including flexible and rigid endoscopes, endoscope disinfection equipment, medical sharps disposal systems, surgical equipment and related accessories. The infection control products manufactured and distributed by MediVators consist of endoscope disinfection equipment and supplies and medical sharps disposal systems. The scientific products distributed by Carsen consist of precision instruments, including microscopes and related accessories and certain laboratory equipment and related accessories; and industrial technology equipment, including borescopes, fiberscopes, video image scopes and related accessories. The consumer products distributed by Carsen consist of photographic and optical equipment, including 35 mm., APS (advanced photo systems) and digital cameras and binoculars, hand-held dictation equipment and related accessories.
Carsen distributes the majority of its medical, scientific, and consumer products pursuant to an agreement with Olympus America Inc. (the "Olympus Agreement"), a United States affiliate of Olympus Optical Co. Ltd., a Japanese corporation ("Olympus 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 in Japan and other foreign countries. Unless the context otherwise requires, references herein to "Olympus" include Olympus America Inc. and Olympus Optical, and their affiliates. Carsen, or its predecessor, has been distributing Olympus products in Canada since 1949.
Carsen also distributes other products under separate distribution agreements, including additional medical and infection control, scientific and consumer products and accessories.
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MediVators' endoscope disinfection equipment is distributed in the United States, Central and South America, the Caribbean and the West Indies (excluding Bermuda) by Olympus pursuant to an agreement (the "MediVators Agreement") under which Olympus has been granted exclusive distribution rights in these territories. MediVators' endoscope disinfection equipment is distributed in other countries under other exclusive distribution agreements. MediVators' medical sharps disposal systems are distributed in the United States and internationally pursuant to exclusive distribution agreements.
The following table gives information as to the percentage of consolidated net sales accounted for by each operating segment during the indicated periods.
Year Ended July 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Medical, Infection Control and Scientific Products: Medical and Infection Control Products......... 56.5% 54.4% 53.3% Scientific Products......... 16.6 19.1 16.9 Product Service............. 11.4 12.5 11.8 Consumer Products............. 15.5 14.0 18.0 ------ ------ ------- 100.0% 100.0% 100.0% ------ ------ ------- ------ ------ -------
Medical and Infection Control Products
Medical and Infection Control Products are the Company's major source of revenue and profitability. This segment is comprised of the medical and infection control equipment distributed by Carsen and infection control equipment manufactured and sold by MediVators through its worldwide distribution network.
Medical Equipment. Carsen's principal source of revenue is from the distribution to hospitals throughout Canada of specialized endoscopes, surgical equipment and related accessories, the majority of which are manufactured by Olympus. Olympus is one of the world's leading manufacturers of endoscopes and related products.
An endoscope is a device comprised of an optical 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 of various disorders. Endoscopy enables physicians to study and photograph certain organs and body tissue and, if necessary, to perform a biopsy (removal of a small piece of tissue for microscopic analysis). Many surgical procedures that formerly required a major operation are now performed much more simply by endoscopy, which can often be performed without general anesthesia.
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A flexible endoscope generally consists of fiberoptic image and light carrying bundles contained in a flexible tube, which can be inserted into irregularly shaped organs of a patient's body, such as the large intestine. The viewing end of a flexible fiberoptic endoscope contains an eyepiece and a steering mechanism and is connected to an external light source, which permits a surgeon to view inside a patient's body. The tip of a flexible endoscope inserted into a patient's body contains a lens 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. In an advanced version of the flexible endoscope, known as a flexible video endoscope, the fiberoptic image and light carrying bundles have been replaced by a high resolution solid state image sensor that enables a picture to be transmitted electronically to a monitor, which picture can be viewed by a group of physicians and nurses as a medical procedure is being performed. The flexible video endoscope comprises the majority of Carsen's flexible endoscopy sales.
A rigid endoscope is a straight, narrow viewing 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.
A technology known as minimally invasive surgery requires the use of a rigid endoscope. With the addition of a tiny telescopic lens, a light source and a palm-size video camera, a rigid endoscope utilized for minimally invasive surgery can transmit images of the patient's organs, as well as the instrument being used by the surgeon, to a viewing monitor. Minimally invasive surgery enables a surgeon using an endoscope to operate on a patient through small keyhole type incisions, avoiding, in many cases, the need for open surgery. For example, one type of rigid endoscope known as a laparoscope, enables a surgeon to remove a gall bladder by making four or five small incisions in the abdomen, rather than one larger incision. In this procedure, the surgeon inserts the laparoscope through one of the incisions to view the gall bladder while operating with surgical instruments inserted in other incisions. This procedure can significantly reduce surgical trauma and post-operative pain, with reduced recovery time. Minimally invasive surgery has applications for a growing number of surgical procedures in addition to gall bladder removal, including hernia repair, small bowel resection, lung biopsy and advanced gynecological procedures.
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
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commonly used for urology, gynecology, orthopedics, and general surgery, including minimally invasive surgery.
Carsen also distributes various specialized medical instruments and accessories utilized in both rigid and flexible 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); 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), Argus Medical Company Inc. (surgical instruments), Sony of Canada Ltd. (video monitors, recorders and printers) and MediVators (endoscope disinfection equipment and medical sharps disposal systems).
Infection Control Equipment. MediVators' principal source of revenue is from the manufacturing and distribution of endoscope disinfection equipment and related accessories to hospitals through various distributors in the United States and internationally.
MediVators' primary product is the DSD-91, which received FDA clearance of its 510(k) premarket notification in March 1994, and is a microprocessor controlled dual endoscope disinfection system. The DSD-91 will disinfect two endoscopes at a time, can be used on a broad variety of endoscopes and is programmable by the user. MediVators also manufactures a single scope disinfection unit, the SSD, which is based upon the same design as the DSD-91.
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. 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 microbe contamination. The chemical disinfectant to be used in the disinfecting process generally will be selected by hospital personnel based on the object to be disinfected, the hospital facilities and the disinfectants available.
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After manual cleaning, an endoscope is placed in the reservoir of the DSD-91 disinfector which then disinfects the endoscope by pumping disinfectant throughout the endoscope, including the endoscope's working channels. The disinfector is a delivery system to ensure that the endoscope, including the working channels, will be exposed to the disinfectant for the recommended period of time. The disinfector is operated by medical personnel such as gastrointestinal assistants. Minimal training is required to operate the disinfector. MediVators believes that the use of its endoscope disinfection equipment will result in more thorough disinfection.
MediVators believes its disinfection equipment offers several advantages over manual immersion in disinfectants. The disinfectors are designed to pump disinfectant through all working channels of the endoscope, thus exposing all areas of the endoscope to the disinfectant. This process can also inhibit the build up of residue in the working channels. In addition, the entire disinfecting process can be completed with minimal participation by the operator, freeing the operator for other tasks, reducing the exposure of personnel to the chemicals used in the disinfection process and reducing the risk of infectious diseases. The disinfectors also reduce the risk of inconsistent manual disinfecting.
MediVators also manufactures and distributes medical sharps disposal systems which provide for point-of-use destruction and decontamination of most types of disposable medical sharps waste, such as syringes, scalpels, razors and IV needles. Sales of sharps disposal systems were not significant in fiscal 1997.
Scientific Products
The Scientific Products segment is comprised of the precision instruments and the industrial technology equipment distributed by Carsen and MediVators' MedFab custom plastics fabrication operation.
Precision Instruments. Carsen distributes Olympus microscopes and complementary scientific equipment and accessories. Other precision instruments distributed by the Company include Narishige U.S.A., Inc. micromanipulators (which enable a viewer to manipulate objects being viewed under a microscope); Media Cybernetics, Inc. high resolution image analysis software and hardware; Tecan U.S. Inc. microplate readers, fluorometers and washers (photometric measurement systems); and Sheldon Manufacturing, Inc. incubators, warming ovens and water baths (temperature control instruments) and anaerobic chambers (controlled atmosphere for bacteriology applications), as well as optical accessories such as high contrast optics, objectives (magnifying lenses) and reticules and video calipers (both of which measure objects being viewed under a
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microscope). The products are used in numerous disciplines for the microscopic study of objects and are sold directly to the end user.
The precision instruments distributed by Carsen are sold to hospitals for cytology, pathology and histology purposes; government laboratories for research and forensics; universities and other educational institutions for research and teaching purposes; and private and industrial laboratories for bio-technology, geology, pharmacology, metallography, quality control and manufacturing applications.
Industrial Technology Equipment. Carsen distributes three types of industrial technology equipment that are similar to endoscopes, but are designed for a market known as remote visual inspection ("RVI".) RVI is the application of endoscopic technology for industrial uses. These products distributed by Carsen, most of which are manufactured by Olympus, consist of rigid borescopes (devices that are similar to rigid endoscopes), which use a series of relay lenses to transmit an image through a stainless steel insertion tube; fiberscopes (devices that are similar to flexible endoscopes), which use fiberoptic image carrying bundles to transmit images through a flexible insertion tube; and video image scopes, which utilize a small, high resolution solid state image sensor that enables a picture to be transmitted electronically to a monitor.
Carsen also has a number of products under its own trademark, "Optiscan." These products have been sourced from outside suppliers or designed by Carsen. Most Optiscan products currently available complement or enhance the Olympus RVI business. Optiscan products include IVS (integrated video systems) video documentation products which integrate video camera, monitor and VCR in one portable unit; ultra-thin quartz glass fiberscopes for specialized applications, particularly in the nuclear power industry; and IAS (Image Archiving System) which consists of specialized software enabling the user to capture and archive high-resolution digital images. The IAS product has medical, precision and industrial applications.
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 develops new applications for its products, which are then customized by Carsen for such applications, based upon the nature of a company's business.
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Product Service
Carsen operates a service organization at its Markham, Ontario facility that provides warranty and out-of-warranty service and repairs for medical, infection control and scientific products distributed by Carsen. These products bear a product warranty that entitles the purchaser to warranty repairs and service at a nominal or no charge during the warranty period. 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 the out-of-warranty service of these products.
MediVators provides a one year warranty for repairs and service of its infection control products. Generally, warranty repairs and service related to the endoscope disinfection equipment are performed by the distributor for these products. Occasionally, MediVators performs out-of-warranty service of its infection control products for which the customer pays MediVators on a time and materials basis.
Consumer Products
Carsen distributes consumer products in Canada, comprised principally of photographic and optical equipment. This equipment, most of which is manufactured by Olympus, includes 35 mm. lens shutter cameras (also known as "point and shoot" cameras), 35 mm. single lens reflex cameras, APS (advanced photo systems) cameras, digital cameras, binoculars, light meters, and other photographic products and accessories. Carsen also distributes Olympus hand-held dictation equipment and accessories.
Two new camera systems, APS and digital, were introduced in fiscal 1997. The APS camera models utilize an easier, drop-in cartridge system and offer a selection of print formats. Digital cameras, unlike conventional 35 mm. cameras, digitize and store images on a removable memory card inserted into the camera. These stored, digitized images can be downloaded to a computer, where images can then be enhanced, manipulated and printed.
Carsen distributes its consumer products primarily to independent retailers, cooperative buying groups, large retail store chains and major department stores. Carsen also distributes such products to government agencies, school boards, the military, promotional sales organizations and catalog houses and other end-users.
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Carsen operates a service organization at its Markham, Ontario facility, as well as contracts with independent service centers throughout Canada to provide warranty service for the consumer products distributed by Carsen. Pursuant to the Olympus Agreement, Carsen is required to provide warranty service for all Olympus cameras presented to Carsen for service, whether or not such cameras were sold by Carsen. This obligation has not had a material adverse effect on Carsen. Carsen generally provides a two year warranty for 35 mm. and APS cameras and a one year warranty for digital cameras and other consumer products. Carsen also provides out-of-warranty service for its consumer products.
Distribution Agreements
Olympus Agreement. The majority of Carsen's sales of medical, scientific and consumer products have been made pursuant to the Olympus Agreement, under which Olympus has granted Carsen the exclusive right to distribute the covered Olympus products in Canada. All products sold by Carsen pursuant to the agreement bear the "Olympus" trademark. The Olympus Agreement expires on March 31, 2001. Carsen, or its predecessor, has been distributing Olympus products in Canada since 1949.
During the term of the Olympus Agreement, Carsen has agreed that it will not manufacture, distribute, sell or represent for sale in Canada any products which are competitive with the Olympus products covered by the Olympus Agreement.
The Olympus Agreement imposes minimum purchase obligations on Carsen with respect to each of medical equipment, precision instruments, industrial technology equipment and consumer products. The aggregate annual minimum purchase obligations for all such products (excluding digital camera products) are approximately $13.9 million, $15.5 million, $17.3 million and $19.4 million during the contract years ending March 31, 1998, 1999, 2000 and 2001, respectively.
Subject to an allowance of a 10% shortfall from the minimum purchase requirements in certain situations, Olympus has the right to terminate the Olympus Agreement with respect to each product group for which Carsen has failed to meet the minimum purchase requirements. If Carsen fails to meet such requirements for both precision instruments and industrial technology equipment, or for medical equipment, then Olympus has the right to terminate the entire Olympus Agreement. Olympus may also terminate the Olympus Agreement if Carsen breaches its other obligations under the Olympus Agreement.
MediVators Agreement. MediVators has a three year agreement with Olympus which expires on April 30, 1999, under which Olympus was granted the exclusive right to distribute certain endoscope disinfection equipment and related accessories
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in the United States, Central and South America, the Caribbean, and the West Indies (excluding Bermuda). All products sold by Olympus pursuant to this agreement bear both the "Olympus" and "MediVators" trademarks.
This agreement imposes minimum purchase obligations on Olympus. Failure to achieve the minimum purchase requirement in any contract year would give MediVators the right to terminate the agreement.
Marketing
Carsen markets its products for each industry segment through separate, dedicated sales forces comprised primarily of its own employees who are compensated on a salary and commission basis.
MediVators sells its endoscope disinfection equipment and related accessories, both in the United States and internationally, to distributors which generally operate under exclusive distribution agreements. MediVators generally sells its medical sharps disposal systems, both in the United States and internationally, through either exclusive distribution agreements or sales representatives.
Effect of Currency Fluctuations and Trade Barriers
A substantial portion of the Company's products are imported from the Far East and Western Europe, and the Company's business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States and Canada.
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 distributed by the Company. In some areas, the Company competes with manufacturers who distribute and service their own products and have greater financial and technical resources than the Company and, as manufacturers, may have certain other competitive advantages over the Company. The Company believes that the world-wide reputation for the quality and innovation of its products among consumers, the Company's reputation for providing
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quality product service, particularly with respect to medical and infection control products, the numerous customer contacts developed during its lengthy service as a distributor of Olympus products and the distribution arrangement for certain MediVators infection control products with Olympus, give the Company a competitive advantage with respect to certain of its products.
Government Regulation
MediVators' products are subject to regulation by the United States Food and Drug Administration ("FDA"), which regulates the testing, manufacturing, packaging, distribution and marketing of medical devices in the United States, including certain products manufactured by MediVators. Delays in FDA review of proposed new products can significantly delay new product introduction and may result in a product becoming "dated" or losing its market opportunity before it can be introduced. Certain of 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 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 Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act, amended in 1990 and 1997 (the "Act"), also requires 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 makes inspections of medical device manufacturers and may issue reports or citations where the manufacturer has failed to comply with appropriate regulations and procedures. Compliance with the provisions of the Act and the FDA's regulations is time-consuming and expensive. On March 18, 1996, the FDA conducted a routine General Manufacturing Practices inspection and MediVators was found to be in a general state of control and no FD-483 complaint was issued. Federal, state and foreign regulations regarding the manufacture and sale of MediVators' products are subject to change. MediVators cannot predict what impact, if any, such changes might have on its business.
License Agreement
MediVators is a party to an exclusive worldwide license agreement with the Mayo Foundation for Medical Education and Research (the "Mayo Foundation") which grants MediVators a license
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to manufacture and sell certain related patented equipment known as the OTT Disinfector for flexible endoscopes ("OTT Disinfector") and to use certain related proprietary know-how of the Mayo Foundation (the "License Agreement"). The License Agreement expires on December 31, 2005. Under the License Agreement, MediVators must pay a royalty equal to five percent (5%) of the net revenues received by MediVators from sales of the OTT Disinfector and enhancements or improvements to the OTT Disinfector. Although MediVators no longer sells the OTT Disinfector, it pays the Mayo Foundation a royalty on revenues from sales of a successor line of disinfector product developed by MediVators known as the DSD-91. This product does not utilize the patented technology of the OTT Disinfector but did evolve from certain licensed know-how related thereto.
Patents and Proprietary Rights
MediVators holds patents on certain of its medical sharps disposal systems which it believes are of material importance to MediVators. However, MediVators does not currently hold any patents with respect to its endoscope disinfection equipment. Its current disinfector product, the DSD-91, utilizes certain know-how developed by the Mayo Foundation pursuant to the License Agreement, but has no patent protection.
Backlog
On October 8, 1997, the Company's consolidated backlog was approximately $1,870,000, compared with approximately $860,000 on October 4, 1996.
Employees
As of October 8, 1997, the Company employed 150 persons. Of the Company's employees, 101 are located in Canada and 49 are located in the United States; 15 are executives and/or managers, 40 are engaged in sales, 8 are engaged in customer service, 26 are engaged in product service, 31 are engaged in manufacturing, shipping and warehouse functions, 23 perform various administrative functions and 7 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.
Item 2. PROPERTIES.
Carsen leases a building, containing approximately 41,000 square feet, located in Markham, Ontario. This facility is used for warehouse, service and office space for Carsen. The lease expires in July 2000, subject to the Company's option to renew for
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five years. The lease provides for monthly base rent of approximately $10,000 for the remainder of the lease term.
MediVators leases approximately 27,500 square feet of commercial space, located in Eagan, Minnesota. This facility is used for manufacturing, warehouse and office space for MediVators. The lease expires on September 30, 2001, subject to the Company's option to renew for five years. The lease provides for monthly base rent of approximately $13,000 for the next two years and approximately $14,000 for the last two years.
The Company leases approximately 2,000 square feet of office space in Clifton, New Jersey, for its executive offices. The lease, which expires in January 2000, provides for monthly base rent of approximately $3,500.
The Company believes that its facilities are adequate for its current needs.
Item 3.
Item 3. LEGAL PROCEEDINGS.
In November 1995, the Company was one of over 100 named defendants in the lawsuit titled "Caldwell Trucking PRP Group v. ADT Automotive, Inc., including Cantel Industries, Inc." (Civ. No. 95-1690 (WGB) brought by nine companies which settled a Comprehensive Environmental Response Compensation and Liability Act claim by the United States Government and the State of New Jersey for contribution to the remediation costs of an alleged hazardous waste site in New Jersey. This lawsuit is currently pending in the United States District Court for the District of New Jersey. The complaint, which relates to alleged septic and/or industrial waste disposed of prior to 1984, seeks total past and future remediation costs from the named defendants and prior settling companies estimated at approximately $20 million, but does not allege any specific offense against the Company at this time. Management of the Company believes that Cantel was not engaged in the production, transportation or dumping of industrial waste at any time. Currently, the Company is participating in an alternative dispute resolution ("ADR") process. The ADR process is expected to conclude during calendar 1998, with proposed allocations to each ADR participant. Although the Company can make no estimate of what its share, if any, of this total potential exposure could be, based on its current knowledge and available information, management believes that the claim will not have a material adverse effect on the Company. Furthermore, notwithstanding the ADR process, the Company believes that it has defenses to the suit and that it may have insurance covering such claims in whole or in part.
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In February 1996, an arbitration proceeding was commenced against MediVators titled "Pioneer Medical, Inc. vs. MediVators, Inc." The plaintiff, a former sales representative of MediVators, alleges an unspecified amount due for future sales of MediVators' products in the plaintiff's former sales territory, as well as other ancillary claims and punitive damages. MediVators has asserted a counterclaim of approximately $25,000 for unpaid products sold to this former sales representative. An arbitration hearing date is tentatively set for November 1997. Recently, the plaintiff commenced a lawsuit against MediVators titled "Pioneer Medical, Inc. vs. MediVators, Inc." in Connecticut State Court alleging claims that appear to be identical to those in the arbitration matter. MediVators has not yet had an opportunity to formally respond to this lawsuit. Management believes that the claims alleged in both the arbitration matter and lawsuit are unmeritorious and intends to vigorously defend itself in these actions, and that the claims will not have a material adverse effect on the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997.
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PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ National Market under the symbol "CNTL." The following table sets forth, for the periods indicated, the high and low bid prices for the Common Stock as reported by NASDAQ.
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.
HIGH LOW ---- ---
Year Ended July 31, 1996 First Quarter 10 1/4 5 7/8 Second Quarter 11 3/8 8 3/4 Third Quarter 10 1/2 6 3/4 Fourth Quarter 11 6 3/4
Year Ended July 31, 1997 First Quarter 8 7 Second Quarter 8 1/2 6 1/2 Third Quarter 9 3/4 5 3/4 Fourth Quarter 6 5
On October 8, 1997, the closing price of the Company's Common Stock was $7.00 and the Company had 318 record holders of Common Stock. A number of such holders of record are brokers and other institutions holding shares of Common Stock in "street name" for more than one beneficial owner.
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Item 6.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The financial data in the following table is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other information incorporated by reference in this Form 10-K. The Merger of Cantel and MediVators on March 15, 1996 has been accounted for as a pooling of interests in accordance with generally accepted accounting principles. Under this accounting treatment, the assets, liabilities, stockholders' equity, results of operations and cash flows of MediVators have been consolidated at their historical amounts for all periods presented and the Company's previously issued financial statements are restated as though MediVators had always been consolidated as a wholly-owned subsidiary. For fiscal 1997, 1996, 1995 and 1994, the data below has been extracted from the audited consolidated financial statements of the Company as of and for each of the years ended July 31. For fiscal 1993, the data below has been extracted from the audited consolidated financial statements of Cantel as of and for the fiscal year ended July 31, 1993 and the audited consolidated financial statements of MediVators as of and for calendar year 1993, except for the weighted average number of common and common equivalent shares and the common shares outstanding which are combined as of July 31 of that year.
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Consolidated Statements of Operations Data: (Amounts in thousands, except per share data)
Year Ended July 31 ------------------------------------------------ 1997 1996 1995 1994 1993 -------- ------- ------- ------- -----------
Net sales................ $34,987 $29,792 $34,125 $32,204 $31,521 Cost of sales............ 23,329 19,433 23,704 21,737 21,491 Gross profit............. 11,658 10,359 10,421 10,467 10,030 Income (loss) from continuing operations before interest expense, income taxes and extraordinary gain (1)............... 2,671 1,216 700 1,276 (162) Interest expense (2)..... 143 258 492 283 159 Income (loss) from con- tinuing operations before income taxes.... 2,528 958 208 993 (321) Income taxes (2)......... 1,432 536 1,001 1,054 1,160 Income (loss) from con- tinuing operations..... 1,096 422 (793) (61) (1,481) Income (loss) from discontinued operations (3)......... - - - 562 (24) Extraordinary gain on extinguishment of debt (4)............ - - - 1,211 - Net income (loss)........ 1,096 422 (793) 1,712 (1,505) Dividends on preferred stocks................. - - - 314 1,185 Net income (loss) attri- butable to common stock 1,096 422 (793) 1,398 (2,690)
Earnings per common share: Primary: Continuing operations.. $ .25 $ .10 $(.21) $(.10) $(.96) Discontinued operations - - - .15 (.01) Extraordinary gain....... - - - .31 - ----- ------ ----- ------ ------ Net income (loss).... $ .25 $ .10 $(.21) $ .36 $(.97) ----- ------ ----- ----- ------ ----- ------ ----- ----- ------ Fully diluted (5): Continuing operations.. $ .25 $ .10 $(.21) $(.10) $(.83) Discontinued operations - - - .15 (.01) Extraordinary gain....... - - - .31 - ----- ------ ----- ----- ------ Net income (loss)........ $ .25 $ .10 $(.21) $ .36 $(.84) ----- ------ ----- ----- ------ ----- ------ ----- ----- ------ Weighted average number of common and common equivalent shares: Primary................. 4,354 4,309 3,739 3,845 2,765 Fully diluted............ 4,354 4,309 3,739 3,889 3,197
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Consolidated Balance Sheet Data: (Amounts in thousands, except per share data)
July 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------ ------- ------- ------- -------
Total assets ............. $18,602 $15,998 $19,823 $18,412 $20,910 Current assets............ 17,009 14,454 17,994 16,328 18,691 Current liabilities (6)... 5,903 3,081 5,271 5,029 7,173 Working capital........... 11,106 11,373 12,723 11,299 11,518 Long-term debt, less current portion(6)...... 1,594 3,419 6,087 4,327 7,989 Stockholders' equity...... 11,017 9,401 8,374 8,885 5,457 Book value per outstanding common share................... $2.64 $2.42 $2.22 $2.39 $1.71 Common shares outstanding............. 4,166 3,889 3,765 3,713 3,198
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(1) Includes for fiscal 1996, costs of $486,000 associated with the Merger. Includes for fiscal 1995, a $903,000 write-down of certain inventory and related assets of MediVators' Disposal Sciences, Inc. subsidiary. Includes for fiscal 1993 a write-off of $135,000 in costs related to the termination of a proposed private placement of securities.
(2) Includes for fiscal 1996, a recovery of prior years' federal and provincial income taxes and withholding taxes of approximately $182,000 and interest of approximately $103,000 arising from a negotiated settlement with Revenue Canada of a prior year tax reassessment. Includes for fiscal 1993, an income tax charge of $413,000 related to management's estimated cost to settle this reassessment. Includes for fiscal 1994 and 1993, an interest charge of $34,000 and $120,000, respectively, representing interest on the federal and provincial income taxes and withholding taxes.
(3) Income (loss) from discontinued operations reflects the October 1993 sale of all of the assets, and the transfer of certain liabilities, of the Seating Division previously owned by Cantel, to the German manufacturer of the seating products, as well as the operating results of the Seating Division in periods prior to the sale.
(4) In fiscal 1994, the extraordinary gain on the extinguishment of debt reflects the recognition of the remaining deferred interest benefit arising from Cantel's 1991 debt restructuring with its lending banks and subordinated debenture holders.
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(5) In fiscal 1993, includes the adding back of Cantel Series B Preferred Stock dividends of $100,000 and Cantel Series B Preferred Stock imputed dividends of $152,000 to reflect the conversion of the Series B Preferred Stock into 600,000 shares of Common Stock as of the beginning of the fiscal year.
(6) Current liabilities and long-term debt as of July 31, 1993 include an aggregate of $1,388,000 of deferred interest benefit arising out of Cantel's debt restructuring which was consummated in fiscal 1991.
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Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
The results of operations described hereafter reflect primarily the results of Carsen and MediVators. There was no significant impact upon the Company's results of operations for fiscal 1997 compared with fiscal 1996, or fiscal 1996 compared with fiscal 1995, as a result of translating Canadian dollars into United States dollars.
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.
Year Ended July 31, ---------------------------------------- 1997 1996 1995 ------- ------- ------- (Dollar amounts in thousands) $ % $ % $ % ------- ----- ------- ----- ----- ---
Medical and Infection Control and Scientific Products: Medical and Infection Control Products.............. $19,771 56.5 $16,221 54.4 $18,213 53.3 Scientific Products.............. 5,786 16.6 5,693 19.1 5,756 16.9 Product Service......... 3,999 11.4 3,718 12.5 4,030 11.8 Consumer Products......... 5,431 15.5 4,160 14.0 6,126 18.0 -------- ----- ------- ------ ------ ------ $34,987 100.0 $29,792 100.0 $34,125 100.0 ------- ----- ------- ------ ------- ------ ------- ----- ------- ------ ------- ------
Fiscal 1997 compared with Fiscal 1996
Net sales increased by $5,195,000, or 17.4%, to $34,987,000 in fiscal 1997, from $29,792,000 in fiscal 1996. This increase was principally attributable to the increased sales of Medical and Infection Control Products and Consumer Products. The increased sales of Medical and Infection Control Products was primarily attributable to an increase in demand for both medical products and infection control products. This increase includes the full year impact of the strategic alliance with Olympus America Inc. ("Olympus") for the sale of MediVators' endoscope disinfection equipment, as described in Note 7 to the Consolidated Financial Statements; expansion and improvement of the international distribution of MediVators' infection control products; and the improvement in economic conditions in Canada, where sales of medical products during fiscal 1996 were adversely impacted by certain cost control measures implemented by various provincial governments which decreased or delayed funding to
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hospitals, thereby reducing hospital spending for capital equipment.
Net sales of Consumer Products in fiscal 1997 increased by approximately 31% over fiscal 1996 and represented approximately 16% of the Company's net sales during fiscal 1997, compared with 14% during fiscal 1996. The increased sales of Consumer Products for fiscal 1997 were due primarily to stronger demand from national accounts for certain 35 mm. camera models, where price reductions received from Olympus on such models were partially passed along to customers, as well as the demand for digital cameras, which were introduced during fiscal 1997. As a result, there was a significant reduction in the operating loss generated by Consumer Products during fiscal 1997.
Gross profit increased by $1,299,000, or 12.5%, to $11,658,000 in fiscal 1997, from $10,359,000 in fiscal 1996. The gross profit margin as a percentage of sales decreased to 33.3% in fiscal 1997, from 34.8% in fiscal 1996. The lower gross profit margin for fiscal 1997 was primarily attributable to more competitive sales of medical products and the increased sales of consumer products, which generally have lower profit margins. Partially offsetting these decreases in margin were increased sales volume of medical and infection control products, which generally have higher profit margins, and a more efficient method of repairing endoscopes.
Shipping and warehouse expenses decreased by $89,000 to $590,000 for fiscal 1997, from $679,000 for fiscal 1996. The decrease was attributable to reductions in freight costs, rent and personnel costs.
Selling expenses as a percentage of net sales were 12.6% for fiscal 1997, compared with 14.6% for fiscal 1996. The decrease was attributable to the impact of the increased sales against the fixed portion of these expenses, as well as the elimination of certain variable selling expenses previously associated with the domestic distribution of MediVators' endoscope disinfection equipment.
General and administrative expenses increased by $156,000 to $3,407,000 for fiscal 1997, from $3,251,000 for fiscal 1996. The increase was primarily attributable to increased personnel costs, some of which represent incentive compensation, professional fees and MediVators' relocation expenses.
Research and development expenses increased by $215,000 to $589,000 for fiscal 1997, from $374,000 for fiscal 1996. This increase was substantially due to planned new product development at MediVators.
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Costs associated with the Merger of $486,000 in fiscal 1996 represented expenses incurred in connection with the MediVators acquisition, which was accounted for as a pooling of interests.
Interest expense decreased to $143,000 in fiscal 1997, from $258,000 in fiscal 1996. This decrease was attributable to a decrease in average borrowings and lower average interest rates under the Carsen revolving credit facility, partially offset by increased borrowings under the MediVators revolving credit facility during fiscal 1997. Additionally, during fiscal 1996, there was a recovery of interest at Carsen of approximately $103,000 related to the tax reassessments described in Note 6 to the Consolidated Financial Statements.
Income from operations before income taxes increased by $1,570,000 to $2,528,000 for fiscal 1997, from $958,000 for fiscal 1996.
Income taxes consist primarily of foreign income taxes imposed on the Company's Canadian operations and Canadian withholding taxes on dividends remitted by Carsen to Cantel in the United States. The effective tax rate on Canadian operations was 44.9% and 44.6% for fiscal 1997 and 1996, respectively. However, the consolidated effective tax rate is higher due to the fact that losses generated by the Company's combined U.S. operations cannot be used to offset income generated by the Canadian operations. In addition, income taxes for fiscal 1996 are net of a recovery of $182,000 of taxes related to the tax reassessment described in Note 6 to the Consolidated Financial Statements.
No tax benefits have been recognized on the Company's United States operations as a result of the losses generated in fiscal 1997 and prior years.
Fiscal 1996 compared with Fiscal 1995
Net sales decreased by $4,333,000, or 12.7%, to $29,792,000 in fiscal 1996, from $34,125,000 in fiscal 1995. This decrease was principally attributable to the decreased sales of Medical and Infection Control Products and Consumer Products. The decreased sales of Medical and Infection Control Products in fiscal 1996 was primarily attributable to a decrease in demand for medical products, offset in part by an increase in demand for infection control products. The sales of medical equipment have been adversely impacted in Canada by certain cost control measures implemented by various provincial governments which decreased or delayed funding to hospitals, thereby reducing hospital spending for capital equipment. The new distribution agreement with Olympus America Inc. entered into by MediVators on May 1, 1996, as described in Note 7 to the Consolidated Financial Statements, had a limited effect on net sales of infection control products during
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fiscal 1996. The decreased sales of Consumer Products resulted from lower demand for product, primarily attributable to the loss of national account business.
Although net sales of Consumer Products represented approximately 14%, 18%, and 23% of the Company's net sales during fiscal 1996, 1995 and 1994, respectively, Consumer Products has incurred operating losses for each of the past three fiscal years. The lack of growth and profitability of Consumer Products has resulted principally from lower demand for product. During fiscal 1996 and 1995, the reduced demand and increased operating losses were primarily attributable to the loss of national account business, either through the total loss of customers or the reduction of orders. The Company has undertaken steps to address the current market conditions by restructuring the Consumer Products' sales functions and marketing strategies. Additionally, in fiscal 1997, Olympus extended price reductions on certain camera models in order to make Olympus cameras more price competitive in Canada, where all other significant manufacturers of cameras distribute on a direct basis.
Gross profit decreased by $62,000, or 0.6%, to $10,359,000 in fiscal 1996, from $10,421,000 in fiscal 1995. The gross profit margin as a percentage of sales increased to 34.8% in fiscal 1996, from 30.5% in fiscal 1995. The higher gross profit margin was principally attributable to a provision for slow-moving infection control inventory recorded in fiscal 1995, the sales mix in all divisions, the decreased sales of Consumer Products which generally have lower profit margins and a more efficient method of repairing endoscopes. These margin increases were partially offset by price increases received from Olympus, a portion of which could not be passed on through higher selling prices.
Shipping and warehouse expenses decreased by $107,000 to $679,000 for fiscal 1996, from $786,000 for fiscal 1995. The decrease was attributable to reductions in freight costs, rent and personnel costs.
Selling expenses as a percentage of net sales were 14.6% for fiscal 1996, compared with 14.8% for fiscal 1995. The impact of the reduced sales against the fixed portion of these expenses was offset in part by a reduction in fixed selling expenses.
General and administrative expenses decreased by $269,000 to $3,251,000 for fiscal 1996, from $3,520,000 for fiscal 1995. The decrease was primarily attributable to a cost reduction program implemented at Carsen, as well the write-down of certain MediVators' assets to their estimated net realizable value in fiscal 1995.
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Costs associated with the Merger of $486,000 in fiscal 1996 represented expenses incurred in connection with the MediVators acquisition, which was accounted for as a pooling of interests.
Interest expense decreased to $258,000 in fiscal 1996, from $492,000 in fiscal 1995. This decrease is due to a recovery of interest of approximately $103,000 related to the tax reassessments described in Note 6 to the Consolidated Financial Statements and a decrease in average borrowings and lower average interest rates under the Canadian revolver.
Income from operations before income taxes increased by $750,000 to $958,000 for fiscal 1996 from $208,000 for fiscal 1995.
Income taxes represent taxes imposed on the Company's Canadian operations and Canadian withholding taxes on dividends remitted by Carsen to Cantel in the United States. In addition, income taxes for fiscal 1996 are net of a recovery of $182,000 of taxes related to the tax reassessment described in Note 6 to the Consolidated Financial Statements.
No tax benefits have been recognized on the Company's United States operations as a result of the losses generated in fiscal 1996 and prior years.
Liquidity and Capital Resources
At July 31, 1997, the Company's working capital was $11,106,000, compared with $11,373,000 at July 31, 1996. This decrease primarily reflects increases in accounts payable and income taxes payable, partially offset by increases in accounts receivable and inventories. Accounts receivable and accounts payable at July 31, 1997 reflect increased sales and related product purchases during the month of July 1997.
Net cash provided by operating activities was $1,623,000 for fiscal 1997 and $2,133,000 for fiscal 1996, compared with net cash used in operating activities of $2,059,000 for fiscal 1995. In fiscal 1997, the net cash provided by operating activities was primarily due to net income after adjusting for depreciation and increases in accounts payable and accrued expenses and income taxes payable, partially offset by increases in accounts receivable and inventories. In fiscal 1996, the net cash provided by operating activities was primarily due to net income after adjusting for depreciation and a decrease in accounts receivable, partially offset by a decrease in accounts payable and accrued expenses. The net cash used in operating activities in fiscal 1995 was primarily due to a net loss after adjusting for depreciation, an increase in accounts receivable and a decrease in
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income taxes payable, partially offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activities was $373,000, $142,000 and $134,000 in fiscal 1997, 1996 and 1995, respectively.
Net cash used in financing activities was $1,276,000 in fiscal 1997 and $2,108,000 in fiscal 1996, compared with net cash provided by financing activities of $1,495,000 in fiscal 1995. These changes were principally due in fiscal 1997 and 1996 to the reduction of long-term debt, partially offset by proceeds from the exercise of stock options and warrants, and in fiscal 1995 due to an increase in outstanding borrowings under the Canadian revolving credit facility.
The Company has two credit facilities, a $5,000,000 revolving credit facility for Carsen, and a $2,000,000 revolving credit facility for MediVators.
Pursuant to the terms of the Carsen revolving credit facility, borrowings under such facility must be paid in full no later than December 31, 1999. Borrowings outstanding at July 31, 1997 and 1996 are in Canadian dollars and bear interest at rates ranging from lender's Canadian prime rate to .75% above the prime rate, depending upon Carsen's debt to equity ratio. At July 31, 1997, the lender's Canadian prime rate was 4.75% and Carsen's outstanding borrowings bear interest at such prime rate. Subsequent to July 31, 1997, the lender's prime rate increased to 5.25% and Carsen's outstanding borrowings will bear interest at a rate of .25% above such prime rate. A commitment fee on the unused portion of this facility is payable in arrears at a rate of .25% per annum, with interest on borrowings payable monthly. There were $798,000 of borrowings outstanding under this facility at July 31, 1997.
Pursuant to the terms of the MediVators' revolving credit facility, borrowings under such facility must be paid in full no later than December 3, 1998. Borrowings bear interest at 1.5% above the lender's United States prime rate. The lender's prime rate was 8.5% at July 31, 1997. A commitment fee on the unused portion of this facility is payable in arrears at a rate of .5% per annum, with interest on borrowings payable monthly. There were $755,000 of borrowings outstanding under this facility at July 31, 1997.
Each of the credit facilities provide for restrictions on available borrowings based primarily upon percentages of eligible accounts receivable and inventories; require the subsidiary to meet certain financial covenants; are secured by substantially all assets of the subsidiary; and are guaranteed by Cantel.
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A decrease in the value of the Canadian dollar against the United States dollar could adversely affect the Company because the Company's Canadian subsidiary purchases substantially all of its products in United States dollars and sells its products in Canadian dollars. Such adverse currency fluctuations could also result in a corresponding adverse change in the United States dollar value of the Company's assets that are denominated in Canadian dollars. Under the Carsen credit facility the Company's Canadian subsidiary has a $15,000,000 (U.S. dollars) foreign exchange hedging facility which is available to be used to minimize future adverse currency fluctuations as they relate to purchases of inventories.
The Company's Canadian subsidiary had foreign exchange forward contracts at October 8, 1997 aggregating $9,000,000 (U.S. dollars) to hedge against possible declines in the value of the Canadian dollar which would otherwise result in higher inventory costs. Such contracts represent the Canadian subsidiary's projected purchases of inventories for the months of February 1998 through July 1998.
The average exchange rate of the contracts open at October 8, 1997 was $1.3574 Canadian dollar per United States dollar, or $.7367 United States dollar per Canadian dollar. The exchange rate published by the Wall Street Journal on October 8, 1997 was $1.3723 Canadian dollar per United States dollar, or $.7287 United States dollar per Canadian dollar.
The Company believes that its anticipated cash flow from operations and the funds available under the revolving credit facilities will be sufficient to satisfy the Company's cash operating requirements for the foreseeable future based upon the current level of operations. At October 8, 1997, approximately $5,500,000 was available under the credit facilities.
As of July 31, 1997, the Company had net operating loss carryforwards for United States income tax purposes ("NOLs") of approximately $16,350,000 which will expire through July 31, 2012. Of this amount, approximately $4,350,000 represents NOLs accumulated by MediVators prior to the Merger, which may only be used against the future earnings of MediVators and are subject to annual limitations due to the ownership change.
In addition, the Company and its Canadian subsidiary cannot file consolidated tax returns, for Canadian or United States income tax purposes. Therefore, neither net losses sustained by the Company in the United States nor the NOLs can be utilized to reduce Canadian federal or provincial income taxes payable by the Canadian subsidiary on its taxable income nor can losses sustained by the Canadian subsidiary, if any, be used to offset taxable income earned by the Company in the United States. This has resulted in the payment of income taxes by the Company in
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Canada, notwithstanding net losses sustained by the Company in the United States.
Inflation has not significantly impacted the Company's operations.
Item 8.
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.
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.
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 1997 Annual Meeting of Stockholders of Registrant.
Item 11.
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 1997 Annual Meeting of Stockholders of Registrant.
Item 12.
Item 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT.
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 1997 Annual Meeting of Stockholders of Registrant.
Item 13.
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 1997 Annual Meeting of Stockholders of Registrant.
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PART IV
Item 14.
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, 1997.
1. Consolidated Financial Statements:
(i) Reports of Independent Auditors.
(ii) Consolidated Balance Sheets as of July 31, 1997 and 1996.
(iii) Consolidated Statements of Operations for the years ended July 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Changes in Stockholders' Equity for the years ended July 31, 1997, 1996 and 1995.
(v) Consolidated Statements of Cash Flows for the years ended July 31, 1997, 1996 and 1995.
(vi) Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules:
(i) Schedule II - Valuation and Qualifying Accounts for the years ended July 31, 1997, 1996 and 1995.
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 - Agreement and Plan of Merger dated as of November 14, 1995 by and among MediVators, Inc., Registrant and Cantel Acquisition Corp. (Incorporated herein by reference to
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Annex I of Registrant's Registration Statement on Form S-4, Reg. No. 33-64727.)
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 [the "1989 10-K"].)
3(i) - Registrant's By-Laws adopted June 1, 1976, as amended through the date of this Report. (Incorporated herein by reference to Exhibit 3(d) to Registrant's 1985 Annual Report on Form 10-K.)
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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) - Stock Option Agreement, dated as of June 20, 1990, between the Registrant and James P. Reilly. (Incorporated by reference to Exhibit 10(g) to Registrant's 1990 Annual Report on Form 10-K [the "1990 10-K"].)
10(f) - Stock Option Agreement, dated as of July 25, 1990 between the Registrant and James P. Reilly. (Incorporated by reference to Exhibit 10(q) to Registrant's 1990 10-K.)
10(g) - 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 [the "1994 10-K"].)
10(h) - Form of Registrant's Common Stock Purchase Warrants dated December 27, 1988. (Incorporated herein by reference to Exhibit 10(t) to Registrant's 1989 10-K.)
10(i) - Form of Registrant's Common Stock Purchase Warrants dated July 14, 1989. (Incorporated herein by reference to Exhibit 10(w) to Registrant's 1989 10-K.)
10(j) - Loan Agreement dated as of October 29, 1993 among Registrant, Carsen Group Inc. and National Bank of Canada. (Incorporated herein by reference to Exhibit 10(v) of Registrant's 1993 Annual Report on Form 10-K.)
10(k) - Stock Option Agreement, dated as of February 3, 1994, between the Registrant and Darwin C. Dornbush. (Incorporated herein by reference to Exhibit 10(1) to Registrant's 1995 Annual Report on Form 10-K [the "1995 10-K"].)
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10(l) - Stock Option Agreement, dated as of December 15, 1994, between the Registrant and Robert L. Barbanell. (Incorporated herein by reference to Exhibit 10(m) of Registrant's 1995 10-K.)
10(m) - First Amendment to Loan Agreement, dated as of August 28, 1995, among Registrant, Carsen Group Inc. and National Bank of Canada. (Incorporated herein by reference to Exhibit 10(n) of Registrant's 1995 10-K.)
10(n) - Exclusive License Agreement by and between Mayo Foundation for Medical Education and Research (formerly Mayo Medical Resources) and MediVators regarding the OTT Disinfector dated April 1, 1986, together with the First Amendment thereto dated May 26, 1988 and the Second Amendment thereto dated as of January 1, 1990. (Incorporated herein by reference to Exhibit 10A to MediVators' Registration Statement on Form S-18, File No. 33-41859C.)
10(o) - MediVators' 1991 Stock Option and Compensation Plan as amended. (Incorporated by reference to Exhibit 10P to MediVators' Registration Statement on Form S-3, File No. 33-79764.)
10(p) - MediVators' 1993 Director Stock Option Plan. (Incorporated by reference to Exhibit 10Q to MediVators' Registration Statement on Form S-3, File No. 33-79764.)
10(q) - Loan and Security Agreement dated as of May 27, 1996 among MediVators, Inc., Disposal Sciences, Inc. and National Canada Finance Corp. (Incorporated by reference to Exhibit 10(s) of Registrant's 1996 Annual Report on Form 10-K [the "1996 10-K"].)
10(r) - Stock Option Agreement, dated as of October 17, 1996 , between the Registrant and Charles M. Diker. (Incorporated by reference to Exhibit 10(v) of Registrant's 1996 10-K.)
10(s) - Registrant's 1997 Employee Stock Option Plan.
10(t) - Form of Incentive Stock Option Agreement under Registrant's 1997 Employee Stock Option Plan.
10(u) - Employment Agreement, dated as of December 23, 1996, between the Registrant and Edward E. Meltz.
10(v) - Employment Agreement, dated as of July 11, 1997, between the Registrant and R.M. (Ric) Rumble.
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10(w) - Second Loan Amending Agreement, dated as of April 19, 1996, among Registrant, Carsen Group Inc. and National Bank of Canada.
10(x) - Third Loan Amending Agreement, dated as of March 7, 1997, among Registrant, Carsen Group Inc. and National Bank of Canada.
10(y) - 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.
11 - Computation of Earnings per Share Data.
21 - Subsidiaries of Registrant.
24(a) - Consent of Ernst & Young LLP.
24(b) - Consent of Price Waterhouse LLP.
27 - Financial Data Schedule.
(b) Reports on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CANTEL INDUSTRIES, INC.
Date: October 24, 1997 By: /s/ James P. Reilly ---------------------------- James P. Reilly, President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer)
By: /s/ Craig A. Sheldon ---------------------------- Craig A. Sheldon, Vice President and Controller (Chief 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 24, 1997 - ---------------------------- Charles M. Diker, a Director and Chairman of the Board
/s/ James P. Reilly Date: October 24, 1997 - ---------------------------- James P. Reilly, a Director and President
/s/ Robert L. Barbanell Date: October 24, 1997 - ---------------------------- Robert L. Barbanell, a Director
/s/ Richard L. Bloch Date: October 24, 1997 - ---------------------------- Richard L. Bloch, a Director
/s/ Darwin C. Dornbush Date: October 24, 1997 - ---------------------------- Darwin C. Dornbush, a Director
/s/ Alan J. Hirschfield Date: October 24, 1997 - ---------------------------- Alan J. Hirschfield, a Director
/s/ Morris W. Offit Date: October 24, 1997 - ---------------------------- Morris W. Offit, a Director
/s/ Bruce Slovin Date: October 24, 1997 - ---------------------------- Bruce Slovin, a Director
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CANTEL INDUSTRIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
CONTENTS
Reports of Independent Auditors.................................... 1 Financial Statements Consolidated Balance Sheets........................................ 4 Consolidated Statements of Operations.............................. 5 Consolidated Statements of Changes in Stockholders' Equity......... 6 Consolidated Statements of Cash Flows.............................. 7 Notes to Consolidated Financial Statements......................... 8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Cantel Industries, Inc.
We have audited the accompanying consolidated balance sheets of Cantel Industries, Inc. as of July 31, 1997 and 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. 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 generally accepted auditing standards. 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 Industries, Inc. at July 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. 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.
We previously audited and reported on the consolidated statements of operations, changes in stockholders' equity and cash flows of Cantel Industries, Inc. for the year ended July 31, 1995, as well as the financial statement schedule listed in the Index at Item 14(a), prior to their restatement for the
1996 pooling of interests as described in Note 3. The contribution of Cantel Industries, Inc. to net sales and net income represented $31,079,000 and $1,001,000 of the respective restated 1995 totals. Financial statements of MediVators, Inc. included in the 1995 restated consolidated statements were audited and reported on separately by other auditors. The report of the other auditors who audited these statements appears elsewhere herein. We also have audited, as to combination only, the accompanying consolidated statements of operations, changes in stockholders' equity, and cash flows of Cantel Industries, Inc. for the year ended July 31, 1995, after restatement for the 1996 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 3 to the consolidated financial statements.
ERNST & YOUNG LLP
Princeton, New Jersey September 19, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MediVators, Inc.
In our opinion, the consolidated statements of operations, of stockholders' equity and of cash flows for the year ended July 31, 1995 (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of MediVators, Inc. and its subsidiary for the year ended July 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of MediVators, Inc. for any period subsequent to July 31, 1995.
Price Waterhouse LLP Minneapolis, Minnesota May 3, 1996
CANTEL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes.
CANTEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
CANTEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED JULY 31, 1997, 1996 AND 1995
See accompanying notes.
CANTEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
See accompanying notes.
CANTEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 1997, 1996 and 1995
1. BUSINESS DESCRIPTION
Cantel Industries, Inc. ("Cantel") has two wholly-owned subsidiaries (collectively known as the "Company"). Its Canadian subsidiary, Carsen Group Inc. ("Carsen" or "Canadian subsidiary") is engaged in the marketing, distribution and service of medical and infection control, scientific and consumer products in Canada. Its United States subsidiary, MediVators, Inc. ("MediVators" or "United States subsidiary") was acquired in March 1996 and is engaged in the manufacturing, marketing, distribution and service of infection control products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cantel Industries, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is generally recognized as products are shipped to customers, net of provisions for sales allowances, warranties and similar items.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Assets and liabilities of Carsen are translated into United States dollars at year-end exchange rates; income and expenses are translated using average exchange rates during the year. The cumulative effect of the translation of Carsen's financial statements is presented as a separate component of stockholders' equity. Foreign exchange gains and losses related to the purchase of inventories are included in cost of sales.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and improvements are capitalized, while maintenance and repair costs are expensed. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Depreciation and amortization are provided on either the straight-line method or, for certain furniture and equipment at Carsen, the declining balance method, over the estimated useful lives of the assets which generally range from 3-7 years for furniture and equipment and the life of the lease for leasehold improvements.
OTHER ASSETS
Inventories of sales samples which have not turned over within one year and medical loaners available for customers are included in other assets and are carried at the lower of cost or net realizable value.
STOCK BASED COMPENSATION
As permitted by FASB Statement 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 equals the fair market value of the underlying common stock on the date of grant.
INCOME TAXES
The Company accounts for income taxes by the liability method in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109) "Accounting for Income Taxes".
No income taxes have been provided on the undistributed earnings ($10,740,000 at July 31, 1997) of Carsen since the Company does not intend to repatriate such earnings unless no additional United States taxes would result upon such repatriation.
GOODWILL
Goodwill with respect to Carsen is not being amortized since, in the opinion of management, there has been no diminution of value since acquisition prior to 1970. The carrying value of the goodwill is reviewed if the facts and circumstances suggest that it may be permanently impaired. Such review is based upon the undiscounted expected future operating profit derived from such business. In the event such result is less than the carrying value of the goodwill, the carrying value of the goodwill is reduced to an amount that reflects the expected future benefit.
EARNINGS PER COMMON SHARE
Primary 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 and warrants using the treasury stock method and the average market price for the period.
Fully 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 and warrants using the treasury stock method and the higher of the period-end or average market price for the period.
The following average shares were used for the computation of primary and fully diluted earnings per share:
YEAR ENDED JULY 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Primary.................... 4,354,207 4,308,579 3,739,396 ---------- ---------- ---------- ---------- ---------- ---------- Fully Diluted.............. 4,354,207 4,308,579 3,739,396 ---------- ---------- ---------- ---------- ---------- ----------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
3. ACQUISITION OF MEDIVATORS
On March 15, 1996, the Company consummated a merger transaction with MediVators, a Minnesota corporation, pursuant to an Agreement and Plan of Merger under which MediVators became a wholly-owned subsidiary of the Company, and the stockholders of MediVators received an equity interest of approximately 26.5% in Cantel (without giving effect to outstanding options and warrants to acquire stock of Cantel or MediVators) (the "Merger").
The Merger has been accounted for as a pooling of interests for accounting purposes in accordance with generally accepted accounting principles. Under this accounting treatment, the assets, liabilities, stockholders' equity, results of operations and cash flows of MediVators have been consolidated at their historical amounts for all periods presented and previously issued financial statements of the Company are restated as though MediVators had always been consolidated as a wholly-owned subsidiary.
A reconciliation of consolidated net sales and income (loss) from operations to the respective amounts of each of Cantel and MediVators prior to the Merger is as follows:
In fiscal 1995, a $903,000 provision was recorded to write-down to net realizable value certain assets of MediVators' medical sharps disposal business, the majority of which was slow moving inventory.
4. INVENTORIES
A summary of inventories is as follows:
5. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 revolving credit facility for Carsen, and a $2,000,000 revolving credit facility for MediVators.
Pursuant to the terms of the Carsen revolving credit facility, borrowings under such facility must be paid in full no later than December 31, 1999. Borrowings outstanding at July 31, 1997 and 1996 are in Canadian dollars and bear interest at rates ranging from lender's Canadian prime rate to .75% above the prime rate, depending upon Carsen's debt to equity ratio. At July 31, 1997, the lender's Canadian prime rate was 4.75% and Carsen's outstanding borrowings bear interest at such prime rate. Subsequent to July 31, 1997, the lender's prime rate increased to 5.25% and Carsen's outstanding borrowings will bear interest at a rate of .25% above lender's prime rate. A commitment fee on the unused portion of this facility is payable in arrears at a rate of .25% per annum, with interest on borrowings payable monthly. There were $798,000 and $3,419,000 of borrowings outstanding under this facility at July 31, 1997 and 1996, respectively.
Pursuant to the terms of the MediVators' revolving credit facility, borrowings under such facility must be paid in full no later than December 3, 1998. Borrowings bear interest at 1.5% above the lender's United States prime rate. The lender's prime rate was 8.5% at July 31, 1997. A commitment fee on the unused portion of this facility is payable in arrears at a rate of .5% per annum, with interest on borrowings payable monthly. There were $755,000 of borrowings outstanding under this facility at July 31, 1997 and no borrowings outstanding at July 31, 1996.
Each of the credit facilities provide for restrictions on available borrowings based primarily upon percentages of eligible accounts receivable and inventories; require the subsidiary to meet certain financial covenants; are secured by substantially all assets of the subsidiary; and are guaranteed by Cantel.
6. INCOME TAXES
During fiscal 1996, the Company negotiated a settlement with Revenue Canada which related to a reassessment of federal and provincial income and withholding taxes for the years 1990-1992 which had been paid by the Company under protest. The settlement resulted in the recovery of federal and provincial income and withholding taxes of approximately $182,000 and interest of approximately $103,000.
Deferred income taxes recorded in the consolidated balance sheets at July 31, 1997 and 1996 include deferred tax assets related to net operating loss carryforwards ("NOLs") of $5,559,000 and $5,232,000, respectively, which have been fully offset by valuation allowances, and deferred tax liabilities related to the use of accelerated methods of depreciation for income tax purposes of $88,000 and $97,000, respectively. The valuation allowances have been established equal to the full amount of the deferred tax assets, as the Company was not assured at July 31, 1997 and 1996 that it was more likely than not that a benefit will be realized.
For financial statement and domestic tax reporting purposes, the Company has NOLs of approximately $16,350,000 at July 31, 1997, which expire through July 31, 2012. Of this amount, approximately $4,350,000 represents NOLs accumulated by MediVators prior to the Merger, which may only be used against the future earnings of MediVators and are subject to annual limitations due to the ownership change. The NOLs presented are based upon the tax returns as filed and are subject to examination by the Internal Revenue Service.
The provision (benefit) for income taxes consists of the following:
The components of income (loss) from operations before income taxes are as follows:
7. COMMITMENTS AND CONTINGENCIES DISTRIBUTION AGREEMENTS OLYMPUS AGREEMENT
The majority of Carsen's sales of medical, scientific and consumer products have been made pursuant to an agreement with Olympus America, Inc. ("Olympus") under which Olympus has granted Carsen the exclusive right to distribute the covered Olympus products in Canada. All products sold by Carsen pursuant to the agreement bear the "Olympus" trademark. The Olympus Agreement expires on March 31, 2001.
During the term of the Olympus Agreement, Carsen has agreed that it will not manufacture, distribute, sell or represent for sale in Canada any products which are competitive with the Olympus products covered by the Olympus Agreement.
The Olympus Agreement imposes minimum purchase obligations on Carsen with respect to each of medical equipment, precision instruments, industrial technology equipment and consumer products. The aggregate annual minimum purchase obligations for all such products (excluding digital camera products) are approximately $13.9 million, $15.5 million, $17.3 million and $19.4 million during the contract years ending March 31, 1998, 1999, 2000 and 2001, respectively.
Subject to an allowance of a 10% shortfall from the minimum purchase requirements in certain situations, Olympus has the
right to terminate the Olympus Agreement with respect to each product group for which Carsen has failed to meet the minimum purchase requirements. If Carsen fails to meet such requirements for both precision instruments and industrial technology equipment, or for medical equipment, then Olympus has the right to terminate the entire Olympus Agreement. Olympus may also terminate the Olympus Agreement if Carsen breaches its other obligations under the Olympus Agreement.
MEDIVATORS AGREEMENT
MediVators has a three year agreement with Olympus which expires on April 30, 1999, under which Olympus was granted the exclusive right to distribute certain endoscope disinfection equipment and related accessories in the United States, Central and South America, The Caribbean, and the West Indies (excluding Bermuda). All products sold by Olympus pursuant to this agreement bear both the "Olympus" and "MediVators" trademarks.
This agreement imposes minimum purchase obligations on Olympus. Failure to achieve the minimum purchase requirement in any contract year would give MediVators the right to terminate the agreement.
Sales to Olympus are recognized on a bill and hold basis based upon the receipt of a written purchase order from Olympus, the completion date specified in the order, the actual completion of the manufacturing process and the invoicing of goods. At July 31, 1997 and 1996, accounts receivable included bill and hold receivables of approximately $401,000 and $566,000, respectively.
LICENSE AGREEMENT
MediVators is a party to an exclusive worldwide license agreement with the Mayo Foundation for Medical Education and Research (the "Mayo Foundation") which grants MediVators a license to manufacture and sell certain related patented equipment known as the OTT Disinfector for flexible endoscopes ("OTT Disinfector") and to use certain related proprietary know-how of the Mayo Foundation (the "License Agreement"). The License Agreement expires December 31, 2005. Under the License Agreement, MediVators must pay a royalty equal to five percent (5%) of the net revenues received by MediVators from sales of the OTT Disinfector and enhancements or improvements to the OTT Disinfector. Although MediVators no longer sells the OTT Disinfector, it pays the Mayo Foundation a royalty on revenue from sales of a successor line of disinfector product developed by MediVators known as the DSD-91. This product does not utilize the patented technology of the OTT Disinfector but did evolve from certain licensed know-how related thereto.
FOREIGN EXCHANGE CONTRACTS
The Company's Canadian subsidiary enters into foreign exchange forward contracts to purchase United States dollars to hedge against currency fluctuations affecting purchases of inventory. Total commitments for such forward contracts amounted to approximately $5,459,000 at July 31, 1997, and cover projected purchases of inventory for the months of July 1997 and May 1998 through July 1998. The fair value of such contracts at July 31, 1997, based upon current market quotes for contracts with similar terms, approximated the carrying value of such contracts.
LEASE OBLIGATIONS
Aggregate future minimum rental commitments at July 31, l997 under operating leases for warehouse and office space are as follows:
Rent expense aggregated $324,000, $283,000 and $316,000 for fiscal 1997, 1996 and 1995, respectively. Of these amounts, approximately $17,000, $106,000 and $106,000 in fiscal 1997, 1996 and 1995, respectively, was paid to a director and former officer of MediVators who was the landlord of MediVators' former manufacturing, warehouse and office facility.
LITIGATION
In November 1995, the Company was one of over 100 named defendants in the lawsuit titled "Caldwell Trucking PRP Group v. ADT Automotive, Inc., including Cantel Industries, Inc." (Civ. No. 95-1690 (WGB) brought by nine companies which settled a Comprehensive Environmental Response Compensation and Liability Act claim by the United States Government and the State of New Jersey for contribution to the remediation costs of an alleged hazardous waste site in New Jersey. This lawsuit is currently pending in the United States District Court for the District of New Jersey. The complaint, which relates to alleged septic and/or industrial waste disposed of prior to 1984, seeks total past and future remediation costs from the named defendants and prior settling companies estimated at approximately $20 million, but does not allege any specific offense against the Company at this time. Management of the Company believes that Cantel was not engaged in the production, transportation or dumping of industrial
waste at any time. Currently, the Company is participating in an alternative dispute resolution ("ADR") process. The ADR process is expected to conclude during calendar 1998, with proposed allocations to each ADR participant. Although the Company can make no estimate of what its share, if any, of this total potential exposure could be, based on its current knowledge and available information, management believes that the claim will not have a material adverse effect on the Company. Furthermore, notwithstanding the ADR process, the Company believes that it has defenses to the suit and that it may have insurance covering such claims in whole or in part.
In February 1996, an arbitration proceeding was commenced against MediVators titled "Pioneer Medical, Inc. vs. MediVators, Inc." The plaintiff, a former sales representative of MediVators, alleges an unspecified amount due for future sales of MediVators' products in the plaintiff's former sales territory, as well as other ancillary claims and punitive damages. MediVators has asserted a counterclaim of approximately $25,000 for unpaid products sold to this former sales representative. An arbitration hearing date is tentatively set for November 1997. Recently, the plaintiff commenced a lawsuit against MediVators titled "Pioneer Medical, Inc. vs. MediVators, Inc." in Connecticut State Court alleging claims that appear to be identical to those in the arbitration matter. MediVators has not yet had an opportunity to formally respond to this lawsuit. Management believes that the claims alleged in both the arbitration matter and lawsuit are unmeritorious and intends to vigorously defend itself in these actions, and that the claims will not have a material adverse effect on the Company.
8. STOCKHOLDERS' EQUITY
The Company's 1991 Employee Stock Option Plan provides for the granting of options to employees to purchase up to 250,000 shares of the Company's Common Stock through January 2, 2001. Options under this 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, 1997, 70,625 shares were available for grant under this plan.
The Company's 1991 Directors' Stock Option Plan provides for the granting of options to directors to purchase up to 200,000 shares of its Common Stock. Options under this plan may be granted to directors only. Under the plan, options to purchase 1,000 shares are granted annually on the last business day of the Company's fiscal year to each member of the Company's Board of Directors. The annual options are exercisable, as to 50% of the number of shares, on the first anniversary of the grant of such options and are exercisable
for the balance of such shares on the second anniversary of the grant of such options. On a quarterly basis, options to purchase 500 shares are granted to each member of the Company's Board, except for employees of the Company, in attendance at that quarter's Board of Directors meeting. The quarterly options are exercisable immediately. The exercise price of each option is the fair market value on the date the option is granted, and the options expire ten years from the date of the grant. At July 31, 1997, 24,000 shares were available for grant under this plan.
The Company also has outstanding non-plan options which have been granted at the market price at the time of grant, are fully exercisable and expire up to a maximum of ten years from the date of grant, and options granted by MediVators prior to the Merger under the MediVators 1991 Stock Option Plan which became fully exercisable as the result of the Merger. No future options will be granted under the MediVators Stock Option Plan.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance with the provisions of SFAS No. 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 No. 123, net income and earnings per share would have been $847,000 and $0.19, respectively, for fiscal 1997 and $316,000 and $0.07, respectively, for fiscal 1996. The pro forma effect on net income for 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model with the followings assumptions: expected dividend yield of 0%; expected stock price volatility of .46; risk-free interest rate at date of grant ranging from 5.18% to 6.59%; and expected weighted average option lives of 4-10 years. The weighted average fair value of options granted during 1997 was $3.90 per share.
A summary of stock option activity follows:
The following table summarizes additional information related to stock options outstanding at July 31, 1997:
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. 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.
There were an aggregate of 74,739 and 352,469 warrants outstanding to purchase shares of Common Stock at July 31, 1997 and 1996, respectively, at prices ranging from $1.50 to $19.45 per share.
9. PROFIT SHARING PLAN
Carsen has a profit-sharing plan for the benefit of eligible employees. Contributions by Carsen are discretionary and aggregate contributions are limited in any year to the amount allowable as a deduction in computing taxable income.
Contributions under the Carsen plan were $47,000, $26,000 and $53,000 for fiscal 1997, 1996 and 1995, respectively.
10. SUPPLEMENTAL INCOME STATEMENT AND CASH FLOW INFORMATION
Advertising costs charged to expenses were $257,000, $295,000 and $380,000 for fiscal 1997, 1996 and 1995, respectively.
Interest paid was $140,000, $362,000 and $488,000 for fiscal 1997, 1996 and 1995, respectively.
Federal, state and foreign income tax payments were $1,080,000, $784,000 and $949,000 for fiscal 1997, 1996 and 1995 respectively.
11. Information as to Operations in Different Industries and Foreign and Domestic Operations
The Company is engaged in the marketing, distribution and service of medical and infection control, scientific and consumer products in Canada, and the manufacturing, marketing, distribution and service of medical and infection control products in the United States.
The medical and infection control and scientific products distributed by the Company consist of medical equipment, including flexible and rigid endoscopes, endoscope disinfection equipment, medical sharps disposal systems, surgical equipment and related accessories that are sold to hospitals; precision instruments, including microscopes and related accessories that are sold to educational institutions, hospitals and government and industrial laboratories; and industrial technology equipment, including borescopes, fiberscopes and video image scopes that are sold primarily to large industrial companies.
The consumer products distributed by the Company consist of photographic and optical equipment, including 35 mm., APS (advanced photo systems) and digital cameras and binoculars, hand-held dictation equipment and related accessories. The consumer products are distributed mostly to independent retailers, cooperative buying groups, large retail store chains and major department stores.
(a) Information as to operations in different industries is summarized below:
(b) Information as to geographic areas is summarized below:
CANTEL INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS