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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended July 31, 1996
Commission File No. 0-6132
CANTEL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-1760285
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1135 Broad Street, Clifton, New Jersey 07013
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(201) 470-8700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
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(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Aggregate market value of registrant's capital stock held by non-affiliates
(based on shares held and the closing price quoted by NASDAQ on October 4,
1996): $15,487,479
Number of shares of common stock outstanding as of the close of
the period covered by this report: 3,888,695
Documents incorporated by reference: Definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934
in connection with the 1996 Annual Meeting of Stockholders of Registrant.
PART I
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.
On March 15, 1996, the Company consummated a merger transaction with
MediVators, a Minnesota company, 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 (the "Merger"). The Merger has been treated as a pooling of interests for
accounting purposes. 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 are restated as though MediVators had
always been consolidated as a wholly-owned subsidiary.
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,
laser distance measurement equipment and related accessories. The consumer
products distributed by Carsen consist of photographic and optical equipment,
including cameras and binoculars, and office equipment including hand-held
dictation equipment, paper shredders, and related accessories.
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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.
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 from continuing operations accounted for by each operating segment
during the indicated periods.
Year Ended July 31,
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1996 1995 1994
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Medical, Infection Control
and Scientific Products:
Medical and Infection
Control Products......... 54.4% 53.3% 49.2%
Scientific Products......... 19.1 16.9 15.7
Product Service............. 12.5 11.8 12.6
Consumer Products............. 14.0 18.0 22.5
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100.0% 100.0% 100.0%
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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 equipment
distributed by Carsen and infection control equipment manufactured and
distributed by MediVators.
Medical Equipment. Carsen's principal source of revenue is from the
distribution of specialized endoscopes, surgical equipment and related
accessories to hospitals in Canada, 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.
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 charged coupling device (CCD) (which functions like a video
camera) that enables a picture to be transmitted electronically to a monitor,
which picture can be viewed by a physician as a medical procedure is being
performed.
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.
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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 laproscope, 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
laproscope 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 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,
needle holders, forceps and other surgical accessories, ambulatory PH and
motility monitoring equipment (which is used for diagnosis of various
gastrointestinal and respiratory disorders), endoscope disinfection equipment,
carts, trolleys and cleaners, insufflators (which deliver and monitor gas to
expand abdominal and other cavities), video monitors and recorders, mavigraphs
(which print "hard" copies of video images) and "cold" light supplies (which
provide light for endoscopy procedures).
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), Argus Medical Company Inc.
(surgical instruments), Sony of Canada Ltd. (monitors, mavigraphs and video
recorders), and MediVators (endoscope disinfection equipment and medical sharps
disposal systems).
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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 new 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. MediVators believes that more
thorough disinfection is achieved through the use of its endoscope disinfection
equipment. 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 a disinfecting process
generally will be selected by hospital personnel based on the object to be
disinfected, the hospital facilities and the disinfectants available.
After manual cleaning, an endoscope is placed in the reservoir of the
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 such 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 toxic chemicals used in the disinfection process and reducing
the risk of
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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. The DSI System 2000 is a larger system that is intended for higher
volume hospital use. The DSI System 40 is a smaller unit primarily suitable for
low volume users, such as medical offices. These systems destroy, decontaminate
and reduce the volume of medical waste; thereby eliminating the potential spread
of infection which occurs during the process of accumulating the medical sharps
waste and transporting it to a central location, the expense of disposable
containers, the expense and liability associated with transportation and
off-site destruction, and the negative environmental impact.
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),
Empix Imaging Inc. high resolution imagers (which transmit images of objects
being viewed to a monitor), CompuCyte Corporation Pathfinder Systems (quality
and efficiency control system for cytologists), Tecan U.S. Inc. microplate
readers and washers (photometric measurement system), 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 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.
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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, similar to the charged coupling device used in
advanced flexible endoscopes, that enable a picture to be transmitted
electronically to a monitor.
Carsen also distributes, under an exclusive distribution agreement
covering the United States, Canada and Mexico, laser meters (devices that use
the travel time of laser pulses as a means of measurement), manufactured by
Jenoptik Technologie GmbH of Germany ("Jenoptik"), designed for determining
distances, vertical angles, target and station heights, as well as speed.
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 video documentation products which
integrate video camera, monitor and VCR in one portable unit; and very long
(10'-30') ultra-thin quartz glass fiberscopes for specialized applications,
particularly in the nuclear power industry. Unrelated to the Olympus business is
a software application, Optiscan PVM, developed by Carsen, and designed to run
in conjunction with Jenoptik laser rangefinders for the measurement of stock
pile volumes, such as wood chips and coal.
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. For
example, Carsen has sold borescopes to an automobile manufacturer to examine the
inside of automobile engines, fiberscopes and laser measurement equipment to the
Canadian customs agency for inspecting vehicles for drugs and other illegal
paraphernalia, and video image scopes to a mining company to inspect rock
formations for cracks and shifting.
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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 for
medical equipment and infection control products and industrial technology
equipment and five years for precision instruments.
The Company also provides out-of-warranty service of these products for
which the customer pays Carsen on a time and materials basis.
MediVators provides a one year warranty for repairs and service of the
infection control products it manufactures. 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) and 35 mm. single lens reflex cameras, binoculars,
slide projectors and screens, light meters, camera luggage and other
photographic products and accessories. Carsen distributes 26 models of the 35
mm. lens shutter cameras, 4 models of the 35 mm. single lens reflex cameras and
7 models of binoculars. Cameras and accessories manufactured by Olympus account
for a substantial portion of the sales of Consumer Products. Carsen also
distributes Olympus Pearlcorder hand-held dictation equipment, paper shredders
and other business products.
There are also two new camera systems, APS (advanced photo systems) and
digital, which are expected to be introduced in fiscal 1997. Four APS camera
models manufactured by Olympus are expected to be available, which utilize an
easier, drop-in cartridge system and offer a selection of print formats. Also
expected to be available from Olympus will be two digital camera models which,
unlike conventional 35 mm. cameras, will digitize and store images on a computer
chip incorporated into the camera. These stored, digitized images can then be
downloaded to a
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computer, where images can then be enhanced, manipulated and printed. There can
be no assurance that these new camera systems will be introduced or will
generate significant revenues.
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.
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 cameras and
a one year warranty for 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, 1998.
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 are approximately $17.2 million and
$18.5 million during the contract years ending March 31, 1997 and 1998,
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
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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, or if Carsen fails to meet
any Olympus credit requirement for sale on open account and does not provide
Olympus with a letter of credit to secure Carsen's payment obligations after
demand by Olympus. Carsen has delivered to Olympus a letter of credit to secure
payment of Carsen's first $500,000 of monthly purchases.
MediVators Agreement. MediVators entered into a three year agreement with
Olympus effective May 1, 1996, under which Olympus was granted the exclusive
right to distribute the 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 will bear both the "Olympus" and "MediVators" trademarks.
This agreement imposes minimum purchase obligations on Olympus. Failure to
achieve the minimum purchase requirement in any year would give MediVators the
right to terminate the agreement.
Discontinued Operations
On October 29, 1993, the Company consummated the sale of all of the assets
and transferred certain liabilities of its Seating Division to the German
manufacturer of the seating products for $2,809,000. The Company received
$2,659,000 in cash and a $150,000 promissory note of the purchaser of the
Seating Division which was paid in October 1994. An additional contingent
payment of up to $150,000 could become due on the 90th day following the end of
calendar year 1996, dependent upon the operating results of the Seating
Division.
The sale of the Seating Division has been reflected as a discontinued
operation and is presented separately in the consolidated statements of
operations.
Marketing
Carsen markets its products through a sales organization comprised of
employees and independent sales representatives. Each industry segment in Canada
has a separate, dedicated sales force. Sales persons, who are paid on a salary
and/or commission basis, are, among other things, responsible for identifying
customers and demonstrating products in their respective geographic markets.
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MediVators sells its endoscope disinfection equipment and related
accessories, both in the United States and internationally, through 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. MediVators employs only a small number of sales persons who are
paid on a salary basis.
Effect of Currency Fluctuations and Trade Barriers
A substantial portion of Carsen's products have been imported from the Far
East and Western Europe, and Carsen'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 both 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 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.
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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 agencies, including the Environmental Protection Agency ("EPA"),
Underwriter Laboratories, and comparable agencies in certain foreign countries.
The FDA and other governmental 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 (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 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 unannounced 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.
Regulations affecting the generation, handling and disposal of infectious
waste span many jurisdictions. These wastes are regulated as solid or hazardous
medical wastes under various federal, state and local environmental laws and
regulations. Moreover, many jurisdictions are taking steps to develop specific
regulations for such waste. The United States Congress, with the Medical Waste
Tracking Act of 1988, mandated that a federal program to track such wastes be
implemented by the EPA. Additionally, a substantial majority of states now have
infectious biomedical waste laws and regulations, according to the
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Federal Office of Technology Assessment. Finally, local regulations can
dramatically impact the location and approval of disposal facilities.
The Medical Waste Tracking Act required the EPA to establish regulations
concerning the tracking of all aspects of medical waste treatment and disposal
in designated states. In particular, all regulated medical waste must be
segregated and packaged in specially marked and labeled containers prior to
shipment for disposal off-site. Any regulated medical waste transported off-site
must be accompanied by a Medical Waste Tracking form which identifies the
generator of the waste, intermediate handlers and transporters and the disposal
facility. Under the Act, the hospital or medical facility remains liable for the
contaminated waste throughout this process including the transportation and
destruction of the waste. The Medical Waste Tracking Act has effectively made
disposal of medical waste, including sharps, much more expensive by increasing
the hospital's or medical facility's liability, paperwork and man-hours required
to legally process medical waste. Infectious waste treated on-site is exempted
from the tracking requirements except that hospital's operating incinerators
must report the quantity of the waste burned.
State and local medical waste disposal laws vary. Accordingly, MediVators
is required to present each individual governing body with the efficacy test
results of the DSI Infectious Waste Disposal Systems and to request permission
to distribute in that jurisdiction.
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"). Under the License Agreement, the Mayo
Foundation owns all patent rights and know-how with respect to the OTT
Disinfector. 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. The Mayo Foundation
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has the right to terminate the License Agreement if MediVators fails to pay
minimum royalties of $75,000 per year.
Under the License Agreement, MediVators is obligated to adhere to a
general marketing plan pursuant to which MediVators is to emphasize sales to key
teaching or teaching affiliated hospitals in major markets, attend meetings of
endoscopy professionals, monitor sales activities and performance of sales
representatives, engage an international sales firm with representatives or
distributors in foreign markets and perform other marketing activities. The
License Agreement provides that the Mayo Foundation may terminate such agreement
if MediVators defaults in the payment of any royalty or the making of any
required report, breaches any covenant or makes a false report, and fails to
remedy such default, breach or report within ten days after written notice
thereof from the Mayo Foundation.
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 a license agreement, but
has no patent protection.
Backlog
On October 4, 1996, the Company's consolidated backlog was approximately
$860,000 compared with approximately $1,360,000 on October 5, 1995.
Employees
As of October 4, 1996, the Company employed 139 persons. Of the Company's
employees, 97 are located in Canada and 42 are located in the United States; 15
are executives and/or managers, 40 are engaged in sales, 9 are engaged in
customer service, 20 are engaged in product service, 27 are engaged in
manufacturing, shipping and warehouse functions, 25 perform various
administrative functions and 3 are engaged in research and development.
None of the Company's employees is represented by labor unions. The
Company considers its relations with its employees to be satisfactory.
-15-
Item 2. PROPERTIES.
Carsen leases a building, containing approximately 41,000 square feet,
located in Markham, Ontario. This facility is used for warehouse, service,
showroom and office space for Carsen. The lease, as amended, expires in July
2000, subject to the Company's option to renew for five years. The lease
provides for monthly base rent of approximately $9,400 for the next year and
approximately $10,000 for the remaining three years.
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 three 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 1997, provides for monthly base rent of approximately $3,000.
The Company believes that its facilities are adequate for its current
needs.
Item 3. LEGAL PROCEEDINGS.
In November 1995, the Company was one of 102 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. 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 102 named defendants and prior settling companies, originally estimated at
approximately $30 million (but subsequently estimated by plaintiff's group to be
approximately $42 million, of which they claim to have already expended $10
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. 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 or its liquidity, financial condition or operating
-16-
results. Furthermore, the Company believes that it has defenses to the suit and
that it may have insurance covering such claims in whole or in part, and intends
to vigorously defend itself in this litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
-17-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ National Market under the
symbol "CNTL." The following table sets forth, for the periods indicated, the
high and low 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, 1995
- ------------------------
First Quarter 7 4 5/16
Second Quarter 6 3/4 3 1/4
Third Quarter 6 1/2 4 1/2
Fourth Quarter 7 3/4 5 1/2
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
On October 4, 1996, the closing price of the Company's Common Stock was
$7.25 and the Company had 344 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.
-18-
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 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 previously issued financial
statements are restated as though MediVators had always been consolidated as a
wholly-owned subsidiary. For fiscal 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 and 1992, the data
below has been extracted from the audited consolidated financial statements of
Cantel as of and for each of the fiscal years ended July 31, and the audited
consolidated financial statements of MediVators as of and for each of the
calendar years 1993 and 1992, 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 each of these two years.
-19-
Consolidated Statements of Operations Data:
(Amounts in thousands, except per share data)
Year Ended July 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales................ $29,792 $ 34,125 $ 32,204 $ 31,521 $ 30,259
Cost of sales .................. 19,433 23,704 21,737 21,491 19,784
Gross profit ................... 10,359 10,421 10,467 10,030 10,475
Income (loss) from con-
tinuing operations before
interest expense, income
taxes and extraordinary
gain (1) ..................... 1,216 700 1,276 (162) 1,077
Interest expense (2) ........... 258 492 283 159 6
Income (loss) from con-
tinuing operations
before income taxes .......... 958 208 993 (321) 1,071
Income taxes (2) ............... 536 1,001 1,054 1,160 1,051
Income (loss) from con-
tinuing operations ........... 422 (793) (61) (1,481) 20
Income (loss) from
discontinued operations (3) .. -- -- 562 (24) 763
Extraordinary gain on
extinguishment of debt (4) ... -- -- 1,211 -- --
Net income (loss) .............. 422 (793) 1,712 (1,505) 783
Dividends on preferred
stocks ....................... -- -- 314 1,185 890
Net income (loss) attri-
butable to common stock ...... 422 (793) 1,398 (2,690) (107)
Earnings per common share:
Primary:
Continuing operations ........ $ .10 $ (.21) $ (.10) $ (.96) $ (.34)
Discontinued operations ...... -- -- .15 (.01) .30
Extraordinary gain ........... -- -- .31 -- --
-------- -------- -------- -------- --------
Net income (loss) .......... $ .10 $ (.21) $ .36 $ (.97) (.04)
======== ======== ======== ======== ========
Fully diluted (5):
Continuing operations ........ $ .10 $ (.21) $ (.10) $ (.83) $ (.34)
Discontinued operations ...... -- -- .15 (.01) .30
Extraordinary gain ........... -- -- .31 -- --
-------- -------- -------- -------- --------
Net income (loss) .......... $ .10 $ (.21) $ .36 $ (.84) $ (.04)
======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares:
Primary ....................... 4,309 3,739 3,845 2,765 2,524
Fully diluted ................. 4,309 3,739 3,889 3,197 2,524
-20-
Consolidated Balance Sheet Data:
(Amounts in thousands, except per share data)
July 31,
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total assets ................. $15,998 $19,823 $18,412 $20,910 $23,901
Current assets ............... 14,454 17,994 16,328 18,691 21,339
Working capital .............. 11,373 12,723 11,299 11,518 14,704
Current liabil-
ities (6) .................. 3,081 5,271 5,029 7,173 6,635
Long-term debt, less
current portion(6) ......... 3,419 6,087 4,327 7,989 9,761
Stockholders' equity ......... 9,401 8,374 8,885 5,457 7,126
Book value per
outstanding common
share ...................... $ 2.42 $ 2.22 $ 2.39 $ 1.71 $ 2.74
Common shares
outstanding ................ 3,889 3,765 3,713 3,198 2,596
- ----------
(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. Includes for
fiscal 1992 a write-off of $175,000 in expenses related to the termination
of a proposed public offering 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.
-21-
(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.
(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 and 1992
include an aggregate of $1,388,000 and $1,972,000, respectively, of
deferred interest benefit arising out of Cantel's debt restructuring which
was consummated in fiscal 1991.
-22-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Continuing Operations
The results of continuing operations described hereafter reflect the
results of Carsen and MediVators. There was no significant impact upon the
Company's results of operations for fiscal 1996 compared with fiscal 1995, or
fiscal 1995 compared with fiscal 1994, as a result of translating Canadian
dollars into United States dollars.
The following table gives information as to the net sales from continuing
operations and the percentage to the total net sales accounted for by each
operating segment of the Company.
Year Ended July 31,
-------------------
1996 1995 1994
-----------------------------------------------------
(Dollar amounts in thousands)
$ % $ % $ %
-------- -------- -------- -------- -------- --------
Medical and Infection
Control and Scientific
Products:
Medical and
Infection Control
Products $16,221 54.4 $18,213 53.3 $15,845 49.2
Scientific
Products 5,693 19.1 5,756 16.9 5,041 15.7
Product Service 3,718 12.5 4,030 11.8 4,059 12.6
Consumer Products 4,160 14.0 6,126 18.0 7,259 22.5
------- ----- ------- ----- ------- -----
$29,792 100.0 $34,125 100.0 $32,204 100.0
======= ===== ======= ===== ======= =====
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 the Company's United States subsidiary on May 1,
1996 as described in Note 8 to the Consolidated Financial Statements, had a
limited effect on net
-23-
sales of infection control products during 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 net revenues 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. The Company has also discussed these
issues with Olympus and suggested strategies for making Olympus cameras more
price competitive in Canada, where all other significant manufacturers of
cameras distribute on a direct basis. In fiscal 1997, Olympus has extended price
reductions on certain camera models and is expected to introduce new products.
Even with these developments the Company does not anticipate a significant
increase in national account business, and there can be no assurance that
Consumer Products will return to profitability.
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 as a percentage of net sales were 2.3% for
fiscal 1996 and 1995 respectively. The impact of reduced sales against the fixed
portion of these expenses was offset by a reduction in certain fixed shipping
and warehouse expenses.
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.
-24-
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.
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, compared with
$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 7 to
the Consolidated Financial Statements and a decrease in average borrowings and
lower average interest rates under the Canadian revolver.
Income from continuing 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 7 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.
Fiscal 1995 compared with Fiscal 1994
Net sales increased by $1,921,000, or 6.0%, to $34,125,000 in fiscal 1995,
from $32,204,000 in fiscal 1994. This increase was principally attributable to
the increased sales of Medical and Infection Control Products and Scientific
Products, resulting from increased demand for existing products; the
introduction of new products such as the Olympus B-Max microscope; and increases
in selling prices for certain products, which increases were partially offset by
decreased sales of Consumer Products, resulting from lower demand.
Gross profit decreased by $46,000, or 0.4%, to $10,421,000 in fiscal 1995
from $10,467,000 in fiscal 1994. The gross profit margin decreased as a
percentage of net sales to 30.5% in fiscal 1995, from 32.4% in fiscal 1994. The
lower gross profit margin for fiscal 1995 reflects a provision for slow-moving
-25-
infection control inventory, the reduction in the selling prices of certain
camera models in Consumer Products to meet competition; supplier price
increases, of which only a portion was passed along to customers; and changes in
product mix.
Shipping and warehouse expenses as a percentage of net sales were 2.3% for
fiscal 1995, compared with 2.2% for fiscal 1994. This percentage increase was
principally attributable to higher occupancy costs, including insurance,
utilities and property tax, and increased costs of packing and shipping
supplies.
Selling expenses as a percentage of net sales were 14.8% for fiscal 1995,
compared with 13.9% for fiscal 1994. Although selling expenses as a percentage
of net sales increased as a result of additional personnel costs in the sales
and product management functions and related travel expenses, this increase was
offset in part by higher levels of sales against the fixed portion of these
expenses.
General and administrative expenses increased by $35,000 to $3,520,000 for
fiscal 1995 from $3,485,000 for fiscal 1994. This increase was principally
attributable to higher personnel costs, including termination pay for several
former employees, an increase in professional fees and a write-down of certain
MediVators assets to their estimated net realizable value in fiscal 1995, which
increases were partially offset by a decrease in foreign exchange losses which
resulted from translating the Company's Canadian subsidiary's United States
dollar denominated loans into Canadian dollars at the period-end exchange rates
during the first quarter of fiscal 1994. In October 1993, the Company began
borrowing in Canadian dollars which eliminated such foreign exchange losses.
Interest expense increased to $492,000 in fiscal 1995 as compared with
$283,000 in fiscal 1994. This increase principally reflects interest at market
rates on borrowings outstanding under Carsen's revolving credit facility, which
was consummated on October 29, 1993 and an increase in average Canadian interest
rates. Prior to October 29, 1993, the Company reported substantially reduced
interest expense on its outstanding borrowings as a result of the 1991 debt
restructuring.
Income from continuing operations before income taxes and extraordinary
gain decreased by $785,000 to $208,000 for fiscal 1995 from $993,000 for fiscal
1994.
The provisions for income taxes in fiscal 1995 and 1994 represent taxes
imposed on the Company's Canadian operations and, in 1995, Canadian withholding
taxes on dividends remitted by Carsen to Cantel in the United States.
-26-
No tax benefits have been recognized on the Company's United States
operations as a result of the losses generated in fiscal 1995 and prior years.
Income from discontinued operations of $562,000 in fiscal 1994 principally
reflects the gain on the sale of all of the assets and the transfer of certain
liabilities of the Seating Division to the German manufacturer of the seating
products.
During fiscal 1994, the Company paid in full its outstanding United States
bank debt and refinanced its Canadian bank debt with a Canadian bank and
recognized $1,211,000, which represents the remaining deferred interest benefit
from the Company's 1991 debt restructuring with its lending banks and
subordinated debenture holders, as an extraordinary gain on the extinguishment
of debt.
Dividends on preferred stock of $314,000 for fiscal 1994, represent
non-cash imputed dividends of approximately $205,000 and cash dividends payable
of $109,000 on the Series A Preferred Stock.
Liquidity and Capital Resources
At July 31, 1996, the Company's working capital was $11,373,000, compared
with $12,723,000 at July 31, 1995. This decrease primarily reflects a decrease
in accounts receivable, partially offset by a decrease in accounts payable, both
of which were high at July 31, 1995 due to increased sales in July 1995. The
decrease in working capital was partially attributable to a reduction of
long-term debt, which decreased from $6,087,000 at July 31, 1995 to $3,419,000
at July 31, 1996.
Net cash provided by operating activities was $2,133,000 for fiscal 1996,
compared with net cash used in operating activities of $2,059,000 for fiscal
1995 and net cash provided by operating activities of $168,000 for fiscal 1994.
In fiscal 1996, the net cash provided by operating activities was primarily due
to income from continuing operations after adjusting for depreciation and a
decrease in accounts receivable, partially offset by a decrease in accounts
payable. The net cash used in operating activities in fiscal 1995 was primarily
due to a loss from continuing operations after adjusting for depreciation, an
increase in accounts receivable and a decrease in income taxes payable,
partially offset by an increase in accounts payable. The net cash provided by
operating activities in fiscal 1994 was primarily due to income from continuing
operations after adjusting for depreciation and a decrease in accounts
receivable, partially offset by a decrease in accounts payable.
-27-
Net cash used in investing activities was $142,000 in fiscal 1996 and
$134,000 in fiscal 1995, compared with net cash provided by investing activities
of $2,055,000 in fiscal 1994 which was due primarily to proceeds from the sale
of discontinued operations.
Net cash used in financing activities was $2,108,000 in fiscal 1996,
compared with net cash provided by financing activities of $1,495,000 in fiscal
1995 and net cash used in financing activities of $2,202,000 in fiscal 1994.
These changes were principally due in fiscal 1996 to the reduction of long-term
debt, partially offset by proceeds from the exercise of stock options, in fiscal
1995 due to an increase in outstanding borrowings under the Canadian revolving
credit facility, and in fiscal 1994 due to a refinancing and reduction of
long-term debt partially offset by proceeds from the sale of stock by MediVators
prior to the Merger.
The Company has two credit facilities, a $7,500,000 revolving credit
facility for Carsen, and a $2,000,000 revolving credit facility for MediVators,
which was entered into on May 27, 1996.
Pursuant to the terms of the Carsen revolving credit facility, the
borrowing availability is subject to a potential reduction on January 1, 1998 to
an amount which will be agreed to by both Carsen and the lender and borrowings
must be paid in full no later than December 31, 1998. Borrowings outstanding at
July 31, 1996 and 1995 are in Canadian dollars and bear interest at .75% above
the lender's Canadian 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.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings must be paid in full no later than December 3, 1998. Borrowings bear
interest at 1.5% above the lender's U.S. prime rate. 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.
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.
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
-28-
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 15, 1996 aggregating $12,000,000 (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 through April 30, 1997.
The average exchange rate of the contracts open at October 15, 1996 was
$1.3587 Canadian dollar per United States dollar, or $.7360 United States dollar
per Canadian dollar. The exchange rate published by the Wall Street Journal on
October 7, 1996 was $1.3544 Canadian dollar per United States dollar, or $.7383
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 4, 1996, $4,120,000 was
available under the credit facilities.
As of July 31, 1996, the Company had net operating loss carryforwards for
United States income tax purposes ("NOLs") of approximately $15,389,000 which
will expire through July 31, 2011. Of this amount, approximately $4,300,000
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 Canada, notwithstanding net losses sustained by
the Company in the United States.
-29-
Inflation has not significantly impacted the Company's operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements, which is Item 14(a), and
the Consolidated Financial Statements and schedule attached to this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its accountants on
accounting or financial disclosure.
-30-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A promulgated under the Securities Exchange Act of 1934 in connection with the
1996 Annual Meeting of Stockholders of Registrant.
Item 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A promulgated under the Securities Exchange Act of 1934 in connection with the
1996 Annual Meeting of Stockholders of Registrant.
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
1996 Annual Meeting of Stockholders of Registrant.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A promulgated under the Securities Exchange Act of 1934 in connection with the
1996 Annual Meeting of Stockholders of Registrant.
-31-
PART IV
Item 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K for the fiscal year ended July 31, 1996.
1. Consolidated Financial Statements:
(i) Reports of Independent Auditors.
(ii) Consolidated Balance Sheets as of July 31, 1996 and 1995.
(iii) Consolidated Statements of Operations for the years
ended July 31, 1996, 1995, and 1994.
(iv) Consolidated Statements of Changes in Stockholders'
Equity for the years ended July 31, 1996, 1995, and 1994.
(v) Consolidated Statements of Cash Flows for the years ended
July 31, 1996, 1995, and 1994.
(vi) Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules:
(i) Schedule II - Valuation and Qualifying Accounts for the
years ended July 31, 1996, 1995, and 1994.
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
-32-
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.)
-33-
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 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".)
-34-
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) - 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) - Stock Option Agreement, dated as of March 15, 1996 ,
between the Registrant and Donald L. Sturtevant.
10(r) - Employment Agreement, dated as of March 15, 1996
between the Registrant and Donald L. Sturtevant.
10(s) - Loan and Security Agreement dated as of May 27, 1996
among MediVators, Inc., Disposal Sciences, Inc. and National Canada Finance
Corp.
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: A Current Report on Form 8-K/A dated March 15,
1996, which amended a report on Form 8-K and a report on Form 8-K/A previously
filed, was filed during the
-35-
three months ended July 31, 1996, reporting an event under Item 2 of Form 8-K
related to the Registrant's acquisition of MediVators, Inc. The financial
statements included in the Form 8-K/A were: (i) Consolidated Financial
Statements of MediVators for the fiscal years ended December 31, 1994 and
December 31, 1993 (incorporated by reference), (ii) Consolidated Financial
Statements of MediVators for the nine months ended September 30, 1995
(incorporated by reference), (iii) Audited Consolidated Financial Statements of
MediVators for the fiscal years ended July 31, 1995 and July 31, 1994, (iv)
unaudited pro forma combined condensed statements of operations of the Company
for the fiscal years ended July 31, 1995, 1994 and 1993 and the three month
periods ended October 31, 1995 and 1994, and the unaudited pro forma combined
condensed balance sheet of the Company as at October 31, 1995 (incorporated by
reference), and (v) unaudited pro forma combined condensed statements of
operations of the Company for the six month periods ended January 31, 1996 and
1995, and the unaudited pro forma combined condensed balance sheet of the
Company as at January 31, 1996.
-36-
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 28, 1996 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 28, 1996
- -------------------------------
Charles M. Diker, a Director
and Chairman of the Board
/s/ James P. Reilly Date: October 28, 1996
- -------------------------------
James P. Reilly, a Director
and President
/s/ Robert L. Barbanell Date: October 28, 1996
- -------------------------------
Robert L. Barbanell, a Director
/s/ Richard L. Bloch Date: October 28, 1996
- -------------------------------
Richard L. Bloch, a Director
/s/ Darwin C. Dornbush Date: October 28, 1996
- -------------------------------
Darwin C. Dornbush, a Director
/s/ Alan J. Hirschfield Date: October 28, 1996
- -------------------------------
Alan J. Hirschfield, a Director
/s/ Morris W. Offit Date: October 28, 1996
- -------------------------------
Morris W. Offit, a Director
/s/ Bruce Slovin Date: October 28, 1996
- -------------------------------
Bruce Slovin, a Director
-37-
C A N T E L I N D U S T R I E S, I N C.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
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 ............................... 8
Notes to Consolidated Financial Statements .......................... 9
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cantel Industries, Inc.
We have audited the accompanying consolidated balance sheet of Cantel
Industries, Inc. as of July 31, 1996 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. Our audit 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 audit.
We conducted our audit 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 audit provides 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, 1996 and the consolidated results of its operations
and its cash flows for the year 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 balance sheet as of July
31, 1995 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows of Cantel Industries, Inc. for each of the
two years in the period 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 total assets, net sales and income
from continuing operations represented $17,399,000, $31,079,000 and $1,001,000
of the respective restated 1995 totals and $29,349,000 and $1,246,000 of the
restated 1994 totals for net sales and income from continuing operations,
respectively. Financial statements of MediVators, Inc. included in the 1995 and
1994 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 balance sheet of Cantel Industries, Inc. as of July
31, 1995 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
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 18, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder of
MediVators, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of stockholders' equity and of cash flows as of and
for each of the two years in the period ended July 31, 1995 (not presented
separately herein) present fairly, in all material respects, the financial
position, results of operations and cash flows of MediVators, Inc. and its
subsidiary as of and for each of the two years in the period 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 audits. We conducted our audits 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 audits provide 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)
July 31,
1996 1995
-----------------------
Assets
Current assets:
Cash $ 682 $ 799
Accounts receivable, net of allowance for
doubtful accounts of $132 in 1996 and
$138 in 1995 5,268 8,392
Inventories 8,196 8,456
Prepaid expenses and other current assets 308 347
------- -------
Total current assets 14,454 17,994
Property and equipment, at cost:
Furniture and equipment 1,796 2,088
Leasehold improvements 697 842
------- -------
2,493 2,930
Less accumulated depreciation and amortization 1,884 2,052
------- -------
609 878
Other assets, including goodwill of $167 in
1996 and 1995 935 951
------- -------
$15,998 $19,823
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,486 $ 3,426
Compensation payable 722 941
Other accrued expenses 792 540
Income taxes payable 81 364
------- -------
Total current liabilities 3,081 5,271
Long-term debt 3,419 6,087
Deferred income taxes 97 91
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued - -
Common Stock, $.10 par value per share;
authorized 7,500,000 shares; issued and
outstanding, 1996 - 3,888,695 shares;
1995 - 3,765,353 shares 389 377
Additional capital 17,088 16,428
Accumulated deficit (6,748) (7,170)
Cumulative foreign currency translation
adjustment (1,328) (1,261)
------- -------
Total stockholders' equity 9,401 8,374
------- -------
$15,998 $19,823
======= =======
See accompanying notes.
4
CANTEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Per Share Data)
Year Ended July 31,
1996 1995 1994
---------------------------
Net sales:
Product sales $26,074 $30,095 $28,145
Product service 3,718 4,030 4,059
------- ------- -------
Total net sales 29,792 34,125 32,204
------- ------- -------
Cost of sales:
Product sales 17,081 21,222 19,189
Product service 2,352 2,482 2,548
------- ------- -------
Total cost of sales 19,433 23,704 21,737
------- ------- -------
Gross profit 10,359 10,421 10,467
------- ------- -------
Expenses:
Shipping and warehouse 679 786 719
Selling 4,353 5,037 4,480
General and administrative 3,251 3,520 3,485
Research and development 374 378 507
Costs associated with the Merger 486 - -
------- ------- -------
Total operating expenses 9,143 9,721 9,191
------- ------- -------
Income from continuing operations
before interest expense, income
taxes and extraordinary gain 1,216 700 1,276
Interest expense 258 492 283
------- ------- -------
Income from continuing operations
before income taxes and
extraordinary gain 958 208 993
Income taxes 536 1,001 1,054
------- ------- -------
Income (loss) from continuing operations
before extraordinary gain 422 (793) (61)
Income on disposal of discontinued
operations - - 562
------- ------- -------
Income (loss) before extraordinary gain 422 (793) 501
Extraordinary gain on extinguishment
of debt - - 1,211
------- ------- -------
Net income (loss) 422 (793) 1,712
Dividends on preferred stock - - 314
------- ------- -------
Net income(loss) attributable to common stock $ 422 $ (793) $ 1,398
======= ======== =======
Earnings per common share:
Primary:
Continuing operations $ 0.10 $ (0.21) $ (0.10)
Discontinued operations - - 0.15
Extraordinary gain on
extinguishment of debt - - 0.31
------- -------- -------
Net income (loss) $ 0.10 $ (0.21) $ 0.36
======= ======== =======
Fully diluted:
Continuing operations $ 0.10 $ (0.21) $ (0.10)
Discontinued operations - - 0.15
Extraordinary gain on
extinguishment of debt - - 0.31
------- -------- -------
Net income (loss) $ 0.10 $ (0.21) $ 0.36
======= ======== =======
See accompanying notes.
5
CANTEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in Thousands, Except Share Data)
Years Ended July 31, 1996, 1995 and 1994
Preferred Stock
Series A Common Stock
-------------------- --------------------
Number of Number of Additional
Shares Amount Shares Amount Capital
--------- ---------- --------- --------- ----------
Balance, July 31, 1993 1,000 $1 3,197,734 $320 $17,248
Repurchase and redemption
of Series A Preferred Stock (1,000) (1) 133,950 13 (3,256)
Exercise of options and
warrants into Common Stock 135,277 14 209
Sales of stock by MediVators
before the Merger 246,392 24 1,852
Compensation expense 8
Translation loss
Net income
Cash dividends payable
Imputed dividends on Series A
Preferred Stock 205
--------- ---------- --------- --------- ----------
Balance, July 31, 1994 - - 3,713,353 371 16,266
Exercise of options
into Common Stock 33,065 4 55
Dividends on MediVators stock
before the Merger 6,989 1 (1)
Issuance of stock by
MediVators before the Merger 12,910 1 98
Expense related to grant of
non-employee options 6
Forfeiture of deferred
compensation (964)
Compensation expense 4
Translation gain
Net loss
--------- ---------- --------- --------- ----------
Balance, July 31, 1995 - - 3,765,353 377 16,428
Exercise of options
into Common Stock 122,985 12 653
Dividends on MediVators stock
before the Merger 357
Compensation expense 7
Translation loss
Net income
--------- ---------- --------- --------- ----------
Balance, July 31, 1996 - - 3,888,695 $389 $17,088
========= ========== ========= ========= ==========
See accompanying notes.
Continued......
6
CANTEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in Thousands, Except Share Data)
Years Ended July 31, 1996, 1995 and 1994
Cumulative
Foreign
Currency Total
Accumulated Translation Stockholders'
Deficit Adjustment Equity
----------- ----------- ----------
Balance, July 31, 1993 $(10,992) $ (936) $5,641
Repurchase and redemption
of Series A Preferred Stock 3,217 (27)
Exercise of options and
warrants into Common Stock 223
Sales of stock by MediVators
before the Merger 1,876
Compensation expense 8
Translation loss (439) (439)
Net income 1,712 1,712
Cash dividends payable (109) (109)
Imputed dividends on Series A
Preferred Stock (205) -
--------- --------- ----------
Balance, July 31, 1994 (6,377) (1,375) 8,885
Exercise of options
into Common Stock 59
Dividends on MediVators stock
before the Merger -
Issuance of stock by
MediVators before the Merger 99
Expense related to grant of
non-employee options 6
Forfeiture of deferred
compensation -
Compensation expense 4
Translation gain 114 114
Net loss (793) (793)
--------- --------- ----------
Balance, July 31, 1995 (7,170) (1,261) 8,374
Exercise of options
into Common Stock 665
Dividends on MediVators stock
before the Merger -
Compensation expense 7
Translation loss (67) (67)
Net income 422 422
--------- --------- ----------
Balance, July 31, 1996 $ (6,748) $(1,328) $9,401
========= ========= ==========
See accompanying notes.
7
CANTEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Year Ended July 31,
1996 1995 1994
----------------------------
Cash flows from operating activities
Income (loss) from continuing operations $ 422 $ (793) $ (61)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Discontinued operations - - (94)
Depreciation and amortization of continuing
operations 367 573 464
Depreciation and amortization of discontinued
operations - - 13
Deferred income taxes 7 26 10
Imputed interest 5 21 37
Changes in assets and liabilities:
Accounts receivable 3,124 (2,853) 525
Inventories 260 115 (13)
Prepaid expenses and other current assets 39 266 (110)
Accounts payable and accrued expenses (1,808) 1,046 (753)
Income taxes payable (283) (460) 150
--------------------------
Net cash provided by (used in) operating
activities 2,133 (2,059) 168
--------------------------
Cash flows from investing activities
Additions of property and equipment of continuing
operations (60) (214) (133)
Additions of property and equipment of discontinued
operations - - (4)
Cash provided by discontinued operations - - 88
Proceeds from sale of discontinued operations - - 2,613
Other, net (82) 80 (509)
---------------------------
Net cash (used in) provided by investing
activities (142) (134) 2,055
--------------------------
Cash flows from financing activities
Borrowings under credit facilities 15,855 15,079 14,103
Repayments under credit facilities (18,523) (13,319) (18,320)
Repurchase of Series A Preferred Stock - - (207)
Expenses associated with extinguishment of debt - - (33)
Deferred compensation payments (105) (133) (134)
Proceeds (repayments) of note payable - (240) 290
Proceeds from sales of MediVators stock - 49 1,876
Proceeds from exercise of stock options
and warrants 665 59 223
--------------------------
Net cash (used in) provided by financing
activities (2,108) 1,495 (2,202)
---------------------------
(Decrease) increase in cash (117) (698) 21
Cash at beginning of year 799 1,497 1,476
--------------------------
Cash at end of year $ 682 $ 799 $ 1,497
==========================
Supplemental schedule of non-cash activity
Common stock of MediVators issued in
satisfaction of note payable - $ 50 -
==========================
See accompanying notes.
8
CANTEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 1996, 1995 and 1994
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. Non-cash foreign exchange losses
resulting from translating Carsen's United States dollar denominated loans
9
into Canadian dollars at the period-end exchange rate through October 29, 1993
are included in general and administrative expenses ($103,000 for the year ended
July 31, 1994).
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.
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 ($9,131,000 at
July 31, 1996) 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
10
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. In addition, for fiscal 1994, primary earnings per common
share was calculated reflecting imputed dividends of $205,000 and cash dividends
of $109,000 on the Series A Preferred Stock.
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. Fully diluted earnings
per share for 1994 was computed reflecting imputed dividends of $205,000 and
cash dividends of $109,000 on the Series A Preferred Stock.
The following average shares were used for the computation of primary and fully
diluted earnings per share:
Year Ended July 31,
1996 1995 1994
---------------------------------
Primary 4,308,579 3,739,396 3,845,118
=================================
Fully Diluted 4,308,579 3,739,396 3,888,750
=================================
During the year ended July 31, 1996, the Company incurred $486,000 in costs
associated with the Merger. Without the effect of these merger costs, earnings
per share from continuing operations would have been as follows:
Year Ended July 31,
1996 1995 1994
---------------------------
Primary $0.21 $(0.21) $(0.10)
===========================
Fully Diluted $0.21 $(0.21) $(0.10)
===========================
11
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 company, 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 are restated as though MediVators had always been consolidated as a
wholly-owned subsidiary.
In connection with the Merger, the Company filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission, declared effective on
February 8, 1996, which covered the issuance of the Company's common shares to
the stockholders of MediVators in exchange for shares of MediVators common
stock.
MediVators, a public company prior to the Merger, designs, manufactures, markets
and distributes infection control equipment and supplies used for disinfecting
flexible endoscopes and medical sharps disposal systems.
12
A reconciliation of consolidated net sales and income (loss) from continuing
operations to the respective amounts of each of Cantel and MediVators prior to
the Merger is as follows:
Year Ended July 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
Net sales:
Consolidated-post-Merger $ 12,408,000 $ - $ -
Cantel-pre-Merger 15,155,000 31,079,000 29,349,000
MediVators-pre-Merger 2,446,000 3,473,000 2,950,000
Effect of eliminating
intercompany sales -
pre-Merger (217,000) (427,000) (95,000)
--------------------------------------------
Total consolidated net
sales $ 29,792,000 $ 34,125,000 $ 32,204,000
===========================================
Income (loss) from
continuing operations:
Consolidated-post-Merger $ 565,000 $ - $ -
Cantel-pre-Merger 123,000 1,001,000 1,246,000
MediVators-pre-Merger (254,000) (1,768,000) (1,307,000)
Effect of eliminating
intercompany profit
in inventory-pre-Merger (12,000) (26,000) -
-------------------------------------------
Total consolidated
income (loss) from
continuing operations $ 422,000 $ (793,000) $ (61,000)
============================================
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.
In fiscal 1994, the income on disposal of discontinued operations and
extraordinary gain on extinguishment of debt were entirely attributable to the
pre-merger operations of Cantel.
4. Inventories
A summary of inventories is as follows:
July 31,
1996 1995
------------------------
Parts $1,958,000 $1,574,000
Work-in-process 275,000 369,000
Finished Goods 5,963,000 6,513,000
------------------------
Total $8,196,000 $8,456,000
========================
13
5. Discontinued Operations
On October 29, 1993, the Company consummated the sale of all of the assets and
transferred certain liabilities of its Seating Division to the German
manufacturer of the seating products for $2,809,000. The Company received
$2,659,000 in cash and a $150,000 promissory note of the purchaser of the
Seating Division. The promissory note was paid in October 1994. An additional
contingent payment of up to $150,000 could become due on the 90th day following
the end of the calendar year 1996, dependent upon the operating results of the
Seating Division.
6. Financing Arrangements
Simultaneous with the sale of its Seating Division, the Company paid in full its
then outstanding United States bank debt of $1,300,000 plus accrued interest and
refinanced the Company's Canadian credit facility. The remaining deferred
interest benefit of $1,211,000 arising from the Company's 1991 debt
restructuring with its lending banks and subordinated debenture holders was
recognized as an extraordinary gain on extinguishment of debt. Since October 29,
1993, the Company's interest expense reflects a market rate of interest on its
borrowings.
The Company has two credit facilities, a $7,500,000 revolving credit facility
for Carsen, and a $2,000,000 revolving credit facility for MediVators, which was
entered into on May 27, 1996.
Pursuant to the terms of the Carsen revolving credit facility, the borrowing
availability is subject to a potential reduction on January 1, 1998 to an amount
which will be agreed to by both Carsen and the lender and borrowings must be
paid in full no later than December 31, 1998. Borrowings outstanding at July 31,
1996 and 1995 are in Canadian dollars and bear interest at .75% above the
lender's Canadian prime rate. The lender's Canadian prime rate was 6.25% at July
31, 1996. 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 $3,419,000 of borrowings outstanding under this facility at
July 31, 1996.
Pursuant to the terms of the MediVators revolving credit facility, borrowings
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
8.25% at July 31, 1996. 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 no borrowings outstanding under this facility at
July 31, 1996.
14
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.
7. Income Taxes
During fiscal 1994, Carsen received notice of reassessment for federal and
provincial income taxes and withholding taxes from Revenue Canada for the
taxable years 1990 through 1992. This notice was based upon the disallowance as
a deduction for income tax purposes and treatment as a taxable dividend, of all
of the payments made to Cantel by Carsen during this period with respect to a
purchasing fee charged by Cantel for negotiating certain distribution agreements
on behalf of Carsen.
The Company recorded a charge of $413,000 in its income tax provision for fiscal
1993, which represented management's estimated cost to settle this matter as
well as related provincial income taxes for the period. In addition, the Company
provided interest charges of approximately $34,000 and $120,000 in fiscal 1994
and 1993, respectively, which represented interest on the federal and provincial
income taxes and withholding taxes. Such provisions approximated the full amount
of the reassessment for the federal and provincial income and withholding taxes
and the related interest thereon. The federal and provincial income taxes and
the withholding taxes and related interest thereon were paid under protest
during fiscal 1995. During fiscal 1996, the Company negotiated a settlement with
Revenue Canada which resulted in the recovery of federal and provincial income
taxes and withholding taxes of approximately $182,000 and interest of
approximately $103,000. Of these amounts, approximately $218,000 has been
received to date.
Deferred income taxes recorded in the consolidated balance sheets at July 31,
1996 and 1995 include deferred tax assets related to net operating loss
carryforwards ("NOLs") of $5,232,000 and $5,062,000 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
$97,000 and $91,000, 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, 1996 and 1995, 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 $15,389,000 at July 31, 1996, which expire
15
through July 31, 2011. Of this amount, approximately $4,300,000 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 net operating loss carryforwards presented are based
upon the tax returns as filed and are subject to examination by the Internal
Revenue Service.
The provision for income taxes consists of the following:
Year Ended July 31,
1996 1995 1994
--------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
--------------------------------------------------------------
United
States $ 27,000 $ - $ 14,000 $ - $ 2,000 $ -
Canada 502,000 7,000 961,000 26,000 1,042,000 10,000
---------------------------------------------------------------
Total $529,000 $ 7,000 $ 975,000 $26,000 $1,044,000 $10,000
===============================================================
The components of income (loss) from continuing operations before income taxes
are as follows:
Year Ended July 31,
1996 1995 1994
---------------------------------------
United States $ (525,000) $ (2,072,000) $ (1,359,000)
Canada 1,483,000 2,280,000 2,352,000
---------------------------------------
Total $ 958,000 $ 208,000 $ 993,000
=======================================
The effective rate on continuing operations differs from the United States
statutory rate (34%) due to the following:
Year Ended July 31,
1996 1995 1994
-----------------------------------
Expected statutory tax expense $ 326,000 $ 71,000 $ 338,000
Canadian dividend withholding taxes 22,000 12,000 -
Canadian tax settlement (182,000) - -
Differential attributable to
Canadian operations 187,000 212,000 252,000
Benefit not recognized on domestic
operating losses 178,000 704,000 462,000
State and local taxes 5,000 2,000 2,000
-----------------------------------
Total $ 536,000 $1,001,000 $1,054,000
===================================
16
8. 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, 1998.
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 are approximately $17.2 million and
$18.5 million during the contract years ending March 31, 1997 and 1998,
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, or if Carsen fails
to meet any Olympus credit requirement for sale on open account and does not
provide Olympus with a letter of credit to secure Carsen's payment obligations
after demand by Olympus. Carsen has delivered to Olympus a letter of credit to
secure payment of Carsen's first $500,000 of monthly purchases.
MediVators Agreement
MediVators entered into a three year agreement with Olympus effective May 1,
1996, under which Olympus was granted the exclusive right to distribute the
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 will bear both
the "Olympus" and "MediVators" trademarks.
17
This agreement imposes minimum purchase obligations on Olympus. Failure to
achieve the minimum purchase requirement in any year would give MediVators the
right to terminate the agreement.
Revenue on sales to Olympus is 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, 1996, accounts receivable included bill and
hold receivables of approximately $566,000.
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"). Under the License Agreement, the Mayo
Foundation owns all patent rights and know-how with respect to the OTT
Disinfector. 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. The Mayo Foundation has the right to terminate the License
Agreement if MediVators fails to pay minimum royalties of $75,000 per year.
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 $4,137,000 at July 31, 1996, and cover projected
purchases of inventory through September 30, 1996. The fair value of such
contracts at July 31, 1996, based upon current market quotes for contracts with
similar terms, approximated the carrying value of such contracts.
18
Lease Obligations
Aggregate future minimum rental commitments at July 31, l996 under operating
leases for warehouse and office space are as follows:
Year Ended July 31,
1997 $ 288,000
1998 279,000
1999 279,000
2000 279,000
2001 160,000
Thereafter 27,000
---------
Total rental commitments $ 1,312,000
=========
Rent expense aggregated $283,000, $316,000 and $293,000 for fiscal 1996, 1995
and 1994, respectively. Of these amounts, approximately $106,000 in each year
was paid to a director and former officer of MediVators who was previously the
landlord of MediVators' manufacturing, warehouse and office facility.
Environmental Litigation
In November 1995, the Company was one of 102 named defendants in the lawsuit
titled "Caldwell Trucking PRP Group v. ADT Automotive, Inc., including Cantel
Industries, Inc." 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. The complaint, which related
to alleged septic and/or industrial waste disposed of prior to 1984, seeks total
past and future remediation costs from the 102 named defendants and prior
settling companies, originally estimated at approximately $30 million (but
subsequently estimated by plaintiff's group to be approximately $42 million, of
which they claim to have already expended $10 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. 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 or its
liquidity, financial condition or operating results. Furthermore, the Company
believes that it has defenses to the suit and that it may have insurance
covering such claims in whole or in part, and intends to vigorously defend
itself in this litigation.
19
9. Stockholders' Equity
On October 29, 1993, the Company redeemed all 1,000 issued and outstanding
shares of the Series A Preferred Stock which had previously been issued to the
Company's lending banks in connection with the 1991 debt restructuring,
including any rights the banks may have had to receive warrants and/or dividends
thereunder, for a cash payment of $200,000, the assignment of the $150,000 note
of the purchaser of the Seating Division, which was paid in October 1994, and
the assignment of 50% of the contingent payment of up to $150,000 which could
become due on the 90th day following the end of the calendar year 1996,
dependent upon the operating results of the Seating Division. The banks also
received 133,950 shares of the Company's Common Stock.
During the year ended July 31, 1994, the equivalent of 246,392 shares of Common
Stock were issued by MediVators in connection with two private placements of its
stock.
At July 31, 1996 and 1995, respectively, there was an aggregate of 352,469
warrants outstanding to purchase shares of Common Stock at prices ranging from
$1.50 to $19.45 per share.
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, and 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, 1996, 105,625 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.
20
The exercise price of each option is the fair market value on the date the
option is granted. At July 31, 1996, 40,000 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.
A summary of stock option activity follows:
Year ended July 31,
1996 1995 1994
-----------------------------------
Outstanding at beginning of year 612,717 550,165 588,200
Granted 96,000 119,309 60,000
Canceled (11,500) (16,757) (51,785)
Exercised (124,533) (40,000) (46,250)
-----------------------------------
Outstanding at end of year 572,684 612,717 550,165
==================================
Exercisable at end of year 467,934 537,342 496,915
==================================
Average price of options outstanding $4.53 $4.12 $3.81
==================================
10. 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 $26,000, $53,000 and $40,000 for fiscal
1996, 1995 and 1994, respectively.
11. Supplemental Income Statement and Cash Flow Information
Advertising costs charged to expenses were $295,000, $380,000 and $443,000 for
fiscal 1996, 1995 and 1994, respectively.
Interest paid was $362,000, $488,000 and $434,000 for fiscal 1996, 1995 and
1994, respectively.
Federal, state and foreign income tax payments were $784,000, $949,000 and
$835,000 for fiscal 1996, 1995 and 1994 respectively.
21
12. 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, video
image scopes and laser distance measurement products that are sold primarily to
large industrial companies.
The consumer products distributed by the Company consist of photographic and
optical equipment, including cameras, binoculars, slide projectors and screens,
light meters, camera luggage, and other photographic products and accessories.
The Company also distributes hand-held dictation equipment, paper shredders and
other business products. The consumer products are distributed mostly to
independent retailers, cooperative buying groups, large retail store chains, and
major department stores.
22
(a) Information as to continuing operations in different industries is
summarized below:
Year Ended July 31,
1996 1995 1994
---------------------------------------
Net sales from continuing
operations:
Medical and infection control
and scientific products:
Medical and infection
control products $16,221,000 $18,213,000 $15,845,000
Scientific products 5,693,000 5,756,000 5,041,000
Product service 3,718,000 4,030,000 4,059,000
Consumer products 4,160,000 6,126,000 7,259,000
---------------------------------------
Total $29,792,000 $34,125,000 $32,204,000
=======================================
Operating income (loss) from
continuing operations:
Medical and infection control
and scientific products:
Medical and infection
control products $ 2,101,000 $ 949,000 $ 1,147,000
Scientific products (148,000) (28,000) 18,000
Product service 1,102,000 1,247,000 1,210,000
Consumer products (560,000) (662,000) (309,000)
---------------------------------------
2,495,000 1,506,000 2,066,000
General corporate expenses (793,000) (806,000) (790,000)
Costs associated with the
Merger (486,000) - -
Interest expense (258,000) (492,000) (283,000)
---------------------------------------
Income from continuing
operations before income
taxes and extraordinary
gain $ 958,000 $ 208,000 $ 993,000
=======================================
23
Year Ended July 31,
1996 1995 1994
---------------------------------------
Identifiable assets:
Medical and infection control
and scientific products:
Medical and infection
control products $ 7,992,000 $10,368,000 $ 8,494,000
Scientific products 3,798,000 4,285,000 3,688,000
Product service 1,176,000 1,500,000 1,564,000
Consumer products 2,129,000 2,664,000 2,722,000
General corporate 903,000 1,006,000 1,944,000
---------------------------------------
Total $15,998,000 $19,823,000 $18,412,000
=======================================
Capital expenditures:
Medical and infection control
and scientific products:
Medical and infection
control products $ 36,000 $ 181,000 $ 86,000
Scientific products 7,000 3,000 18,000
Product service 5,000 10,000 7,000
Consumer products 5,000 14,000 12,000
General corporate 7,000 6,000 10,000
---------------------------------------
Total from continuing operations 60,000 214,000 133,000
Discontinued operations - - 4,000
---------------------------------------
Total $ 60,000 $ 214,000 $ 137,000
=======================================
Depreciation and amortization:
Medical and infection control
and scientific products:
Medical and infection
control products $ 175,000 $ 392,000 $ 298,000
Scientific products 143,000 134,000 116,000
Product service 21,000 17,000 17,000
Consumer products 23,000 26,000 29,000
General corporate 5,000 4,000 4,000
---------------------------------------
Total from continuing operations 367,000 573,000 464,000
Discontinued operations - - 13,000
---------------------------------------
Total $ 367,000 $ 573,000 $ 477,000
=======================================
24
(b) Information as to geographic areas is summarized below:
Year Ended July 31,
1996 1995 1994
---------------------------------------
Net sales from continuing
operations:
United States $ 4,646,000 $ 3,098,000 $ 2,855,000
Canada 25,146,000 31,027,000 29,349,000
---------------------------------------
Total $29,792,000 $34,125,000 $32,204,000
=======================================
Operating income (loss) from
continuing operations:
United States $ 148,000 $ (1,725,000) $(1,293,000)
Canada 2,347,000 3,231,000 3,359,000
---------------------------------------
Total $ 2,495,000 $ 1,506,000 $ 2,066,000
=======================================
Total assets:
United States $ 3,180,000 $ 2,602,000 $ 4,646,000
Canada 12,818,000 17,221,000 13,766,000
---------------------------------------
Total $15,998,000 $19,823,000 $18,412,000
=======================================
25
CANTEL INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------
Balance at Balance
Beginning at End
of Period Additions Deductions of Period
---------------------------------------------------
Allowance for
doubtful accounts:
Year ended
July 31, 1996 $138,000 $ 34,000 $ 40,000 $132,000
==================================================
Year ended
July 31, 1995 $152,000 $105,000 $119,000 $138,000
==================================================
Year ended
July 31, 1994 $ 61,000 $119,000 $ 28,000 $152,000
==================================================