0001104659-04-007225.txt : 20040312 0001104659-04-007225.hdr.sgml : 20040312 20040312160750 ACCESSION NUMBER: 0001104659-04-007225 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANTEL MEDICAL CORP CENTRAL INDEX KEY: 0000019446 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 221760285 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31337 FILM NUMBER: 04666253 BUSINESS ADDRESS: STREET 1: OVERLOOK AT GREAT NOTCH STREET 2: 150 CLOVE ROAD CITY: LITTLE FALLS STATE: NJ ZIP: 07424 BUSINESS PHONE: 9734708700 MAIL ADDRESS: STREET 1: OVERLOOK AT GREAT NOTCH STREET 2: 150 CLOVE ROAD CITY: LITTLE FALLS STATE: NJ ZIP: 07424 FORMER COMPANY: FORMER CONFORMED NAME: CANTEL INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STENDIG INDUSTRIES INC DATE OF NAME CHANGE: 19890425 FORMER COMPANY: FORMER CONFORMED NAME: CHARVOZ CARSEN CORP DATE OF NAME CHANGE: 19861215 10-Q 1 a04-3392_110q.htm 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

ý		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 31, 2004.

or

o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		22-1760285
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

150 Clove Road, Little Falls, New Jersey		07424
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code
(973) 890-7220

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Number of shares of Common Stock outstanding as of March 1, 2004: 9,468,095.

PART I - FINANCIAL INFORMATION

ITEM 1. - - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	January 31, 2004			July 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	10,076		$	17,018
Accounts receivable, net of allowance for doubtful accounts of $1,303 at January 31 and $1,126 at July 31	28,128			23,424
Inventories:
Raw materials	6,859			5,187
Work-in-process	3,097			2,118
Finished goods	11,916			10,595
Total inventories	21,872			17,900
Deferred income taxes	3,095			2,780
Prepaid expenses and other current assets	1,975			808
Total current assets	65,146			61,930
Property and equipment, net	23,242			22,161
Intangible assets, net	10,590			6,998
Goodwill	28,181			16,398
Other assets	2,418			2,323
	$	129,577		$	109,810
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	3,000		$	3,000
Accounts payable	8,526			7,398
Compensation payable	2,085			2,372
Other accrued expenses	7,254			4,886
Income taxes payable	447			631
Total current liabilities	21,312			18,287

Long-term debt	22,800			17,750
Deferred income taxes	5,222			1,915
Other long-term liabilities	3,049			1,676

Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued	—			—
Common Stock, $.10 par value; authorized 20,000,000 shares; January 31 - 9,668,832 shares issued and 9,396,815 shares outstanding; July 31 - 9,580,452 shares issued and 9,309,368 shares outstanding	967			958
Additional capital	50,428			49,634
Retained earnings	23,907			19,539
Accumulated other comprehensive income	3,112			1,255
Treasury Stock, at cost; January 31 - 272,017 shares; July 31 - 271,084 shares	(1,220		)	(1,204		)
Total stockholders’ equity	77,194			70,182
	$	129,577		$	109,810

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended January 31,						Six Months Ended January 31,
	2004			2003			2004			2003
Net sales:
Product sales	$	35,771		$	31,974		$	67,676		$	58,482
Product service	5,325			2,453			10,269			4,318
Total net sales	41,096			34,427			77,945			62,800

Cost of sales:
Product sales	22,310			20,391			42,702			36,752
Product service	3,667			1,492			6,951			2,734
Total cost of sales	25,977			21,883			49,653			39,486

Gross profit	15,119			12,544			28,292			23,314

Operating expenses:
Selling	5,001			4,367			9,701			8,256
General and administrative	4,400			2,871			8,574			6,297
Research and development	1,103			1,141			2,173			2,270
Total operating expenses	10,504			8,379			20,448			16,823

Income before interest expense, other income and income taxes	4,615			4,165			7,844			6,491

Interest expense	431			369			860			803
Other income	(15		)	(17		)	(29		)	(40		)

Income before income taxes	4,199			3,813			7,013			5,728

Income taxes	1,626			1,433			2,645			2,079

Net income	$	2,573		$	2,380		$	4,368		$	3,649

Earnings per common share:
Basic	$	0.28		$	0.26		$	0.47		$	0.39

Diluted	$	0.26		$	0.24		$	0.44		$	0.37

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Six Months Ended January 31,
	2004			2003

Cash flows from operating activities
Net income	$	4,368		$	3,649
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,084			1,827
Amortization of debt issuance costs	268			227
Loss on disposal of fixed assets	2			—
Impairment of long-lived assets	153			—
Deferred income taxes	876			596
Changes in assets and liabilities:
Accounts receivable	(192		)	(1,442		)
Inventories	78			883
Prepaid expenses and other current assets	(1,103		)	165
Accounts payable and accrued expenses	(2,543		)	(1,381		)
Income taxes payable	(25		)	(1,423		)
Net cash provided by operating activities	3,966			3,101

Cash flows from investing activities
Capital expenditures	(945		)	(488		)
Proceeds from disposal of fixed assets	18			—
Acquisition of Biolab, net of cash acquired	(7,782		)	—
Acquisition of Mar Cor, net of cash acquired	(7,979		)	—
Acquisition of Dyped, net of cash acquired	(696		)	—
Cash used in discontinued operations	—			(19		)
Other, net	(275		)	(56		)
Net cash used in investing activities	(17,659		)	(563		)

Cash flows from financing activities
Borrowings under term loan facility	4,250			—
Borrowings under revolving credit facilities	4,800			—
Repayments under term loan facility	(1,500		)	(1,250		)
Repayments under revolving credit facilities	(2,500		)	(2,000		)
Proceeds from exercises of stock options	617			256
Net cash provided by (used in) financing activities	5,667			(2,994		)

Effect of exchange rate changes on cash and cash equivalents	1,084			722

(Decrease) increase in cash and cash equivalents	(6,942		)	266
Cash and cash equivalents at beginning of period	17,018			12,565
Cash and cash equivalents at end of period	$	10,076		$	12,831

See accompanying notes.

CANTEL MEDICAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report of Cantel Medical Corp. (the “Company” or “Cantel”) on Form 10-K for the fiscal year ended July 31, 2003 (the “2003 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

The unaudited interim financial statements reflect all adjustments (consisting only of those of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The condensed consolidated balance sheet at July 31, 2003 was derived from the audited consolidated balance sheet of the Company at that date.

Cantel had two wholly-owned operating subsidiaries at July 31, 2003. Minntech Corporation (“Minntech”), which was acquired in September 2001, designs, develops, manufactures, markets and distributes disinfection/sterilization reprocessing systems, sterilants and other supplies for renal dialysis, filtration and separation products for medical and non-medical applications and endoscope reprocessing systems, sterilants and other supplies. The Company’s MediVators, Inc. (“MediVators”) subsidiary, which accounted for the majority of the Company’s endoscope reprocessing business, was combined with Minntech’s existing facilities in September 2002 and was legally merged into Minntech in November 2002. Carsen Group Inc. (“Carsen” or “Canadian subsidiary”) is engaged in the marketing and distribution of endoscopy and surgical, endoscope reprocessing and scientific products in Canada. The Company also provides technical maintenance services for its products.

On August 1, 2003, the Company completed its acquisition of two companies in the water treatment industry, as more fully described in note 3 to the condensed consolidated financial statements. Biolab Equipment Ltd. (“Biolab”), which became a wholly-owned subsidiary of Carsen, designs and manufactures ultra-pure water systems for the medical, pharmaceutical, biotechnology, research and semiconductor industries and provides services required to produce and maintain high purity water. Mar Cor Services, Inc. (“Mar Cor”) which became a wholly-owned subsidiary of Cantel, provides water treatment equipment design, installation, service and maintenance, training and supplies for water and fluid treatment systems to the medical, research, and pharmaceutical industries.

Certain items in the July 31, 2003 financial statements have been reclassified from statements previously presented to conform to the presentation of the January 31, 2004 financial statements. These reclassifications relate to raw material and finished goods inventories, property and equipment and other assets and had no impact upon total current assets or total assets.

Note 2. Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”). SFAS 148 amends the disclosure requirements of SFAS No. 123, “Stock-Based Compensation” (“SFAS 123”) to require prominent disclosure in both annual and interim financial statements about the effects on reported net income of an entity’s method of accounting for stock-based employee compensation. SFAS 148 also provides alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS 123, but does not require a company to use the fair value method.

The Company accounts for its stock option plans using the intrinsic value method under the provisions of Accounting Principal Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under the provisions of APB 25, the Company grants stock options with exercise prices at the fair value of the shares at the date of grant and, accordingly, does not recognize compensation expense. If the Company had elected to recognize compensation expense based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and earnings per share would have been as follows:

	Three Months Ended January 31,						Six Months Ended January 31,
	2004			2003			2004			2003

Net income:
As reported	$	2,573,000		$	2,380,000		$	4,368,000		$	3,649,000
Stock-based employee compensation expense, net of related tax effects	(394,000		)	(301,000		)	(711,000		)	(590,000		)
Pro forma	$	2,179,000		$	2,079,000		$	3,657,000		$	3,059,000
Earnings per common share - basic:
As reported	$	0.28		$	0.26		$	0.47		$	0.39
Pro forma	$	0.23		$	0.22		$	0.39		$	0.33
Earnings per common share - diluted:
As reported	$	0.26		$	0.24		$	0.44		$	0.37
Pro forma	$	0.22		$	0.21		$	0.37		$	0.31

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and the expected life of the option. Because the Company’s

stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

Note 3. Acquisitions

Biolab

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Biolab, a private company in the water treatment industry with historical annual revenues of approximately $10,000,000. Biolab designs and manufactures ultra-pure water systems for the medical, pharmaceutical, biotechnology, research and semiconductor industries and provides services required to produce and maintain high purity water. Biolab has locations in Oakville, Ontario and Dorval, Quebec.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $7,876,000. Under the terms of the purchase agreement, the Company may pay additional consideration at the end of each fiscal year, up to an aggregate of $3,000,000 for the three year period ending July 31, 2006, based upon Biolab achieving specified targets of earnings before interest, taxes, depreciation and amortization (“EBITDA”). As of January 31, 2004, none of the additional consideration had been earned. References herein to Biolab include Biolab and its subsidiaries.

The purchase price was preliminarily allocated to the assets acquired and assumed liabilities as follows: current assets $4,230,000; property and equipment $590,000; intangible assets $1,765,000 including current technology $339,000 (10-year life), customer relationships $664,000 (10-year life) and trademarks and tradenames $762,000 (indefinite life); other assets $5,000; current liabilities $1,966,000; and long-term liabilities $1,181,000. The excess purchase price of $4,433,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, was allocated to the Company’s water treatment and product service operating segments.

In conjunction with the acquisition of Biolab, Carsen amended its existing Canadian working capital credit facility, as discussed in note 9 to the condensed consolidated financial statements.

Mar Cor

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Mar Cor, a private company in the water treatment industry with historical annual revenues of approximately $10,000,000. Mar Cor, based in Skippack, Pennsylvania with locations in Atlanta and Chicago, is a service-oriented company providing design, installation, service and maintenance, training and supplies for water and fluid treatment systems to the medical, research, and pharmaceutical industries.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $8,215,000.

The purchase price was preliminarily allocated to the assets acquired and assumed liabilities as follows: current assets $3,309,000; property and equipment $947,000; intangible assets $1,483,000 including customer relationships $480,000 (10-year life), covenant-not-to-compete $169,000 (3-year life) and trademarks and tradenames $834,000 (indefinite life); other assets $17,000; current liabilities $2,133,000; and long-term liabilities $682,000. The excess purchase price of $5,274,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, was allocated to the Company’s water treatment and product service operating segments.

In conjunction with the acquisition of Mar Cor, the Company amended its existing U.S. credit facilities to fund the cash consideration paid and costs associated with the acquisition, as discussed in note 9 to the condensed consolidated financial statements.

The reasons for the acquisitions of Biolab and Mar Cor were as follows: (i) the overall strategic fit of water treatment with the Company’s existing dialysis and filtration technology businesses; (ii) the opportunity to grow the Company’s existing businesses and the water treatment business by combining Minntech’s sales, marketing, and product development capabilities with Mar Cor’s regional field service organization and Biolab’s water treatment equipment design and manufacturing expertise; (iii) the opportunity to expand and diversify the Company’s infection prevention and control business, particularly within the pharmaceutical and biotechnology industries; and (iv) the expectation that the acquisitions would be accretive to the Company’s future earnings per share.

Dyped

On September 12, 2003, the Company acquired the endoscope reprocessing systems and infection control technologies of Dyped, a private company based in The Netherlands. The total consideration for the transaction, including transaction costs, was approximately $1,812,000 and included a note payable in five annual installments with a present value of approximately $1,211,000 (with a face value of $1,505,000). The Company may pay additional purchase price of approximately $557,000 over a three year period contingent upon the achievement of certain research and development objectives. At January 31, 2004, none of the additional purchase price had been earned. The primary reason for the acquisition of Dyped was to expand Minntech’s technological capabilities and augment its endoscope reprocessing product line with a new, fully automated reprocessor designed to be compliant with emerging European standards and future market requirements.

The purchase price was preliminarily allocated to the assets acquired and assumed liabilities as follows: current assets $503,000; property and equipment $14,000; intangible assets $664,000 including current technology $585,000 (8-year life) and customer relationships $79,000 (4-year life); current liabilities $777,000; and long-term liabilities $232,000. The excess purchase price of $1,640,000 was

assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, was allocated to the Company’s endoscope reprocessing operating segment.

There were no in-process research and development projects acquired in connection with the Biolab, Mar Cor and Dyped acquisitions.

The acquisitions of Biolab, Mar Cor and Dyped contributed $2,587,000, $2,824,000 and $126,000, respectively, to the Company’s net sales for the three months ended January 31, 2004 and $4,570,000, $5,381,000 and $200,000, respectively, for the six months ended January 31, 2004. The acquisitions did not have a significant impact upon net income for the three and six months ended January 31, 2004. Since these acquisitions occurred in fiscal 2004, the results of operations of Biolab, Mar Cor and Dyped were excluded from the Company’s results of operations for the three and six months ended January 31, 2003. Pro forma consolidated statements of income data for the three and six months ended January 31, 2003 have not been presented due to the insignificant impact of these businesses on net income for the three and six months ended January 31, 2004, the expectation that such impact would also be insignificant for the three and six months ended January 31, 2003, and the fact that pre-acquisition operating statement data that are in accordance with generally accepted accounting principles is not available for these acquired businesses.

Certain of the assumed liabilities are subjective in nature. These liabilities have been reflected based upon the most recent information available and principally include certain potential income tax exposures, particularly with respect to Biolab. The ultimate settlement of such liabilities may be for amounts which are different from the amounts presently recorded. Settlements related to income tax exposures, if any, would be adjusted through goodwill.

Note 4. Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company formally adopted SFAS 150 on August 1, 2003, which is the beginning of its 2004 fiscal year. The adoption of SFAS 150 did not have any impact on the Company’s operating results or financial position.

In May 2003, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. The guidance in Issue 00-21 is effective for revenue arrangements entered into in reporting periods (annual or interim) beginning after June 15, 2003.

The Company formally adopted EITF No. 00-21 on August 1, 2003, which is the beginning of its 2004 fiscal year. The adoption of EITF 00-21 had no impact on the Company’s operating results or financial position since the Company has historically recognized revenue under its multiple deliverable arrangements in a manner consistent with the guidance of EITF 00-21.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company formally adopted SFAS 149 on August 1, 2003, which is the beginning of its 2004 fiscal year. The adoption of SFAS 149 did not have any impact on the Company’s financial position or results of operations.

Note 5. Comprehensive Income

The Company’s comprehensive income for the three and six months ended January 31, 2004 and 2003 is set forth in the following table:

	Three Months Ended January 31,					Six Months Ended January 31,
	2004		2003			2004			2003

Net income	$	2,573,000	$	2,380,000		$	4,368,000		$	3,649,000
Other comprehensive income (loss):
Unrealized gain (loss) on currency hedging	257,000		(189,000		)	(173,000		)	(266,000		)
Unrealized gain (loss) on interest rate cap	13,000		12,000			27,000			(7,000		)
Foreign currency translation	677,000		1,555,000			2,003,000			1,956,000
Comprehensive income	$	3,520,000	$	3,758,000		$	6,225,000		$	5,332,000

Note 6. Financial Instruments

The Company accounts for derivative instruments and hedging activities in accordance with SFAS 133, as amended. SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be immediately recognized in earnings.

The Company’s Canadian subsidiary purchases and pays for a substantial portion of its products in United States dollars and sells its products in Canadian dollars, and is therefore exposed to

fluctuations in the rates of exchange between the United States dollar and Canadian dollar. In order to hedge against the impact of such currency fluctuations on the purchases of inventories, Carsen enters into foreign currency forward contracts on firm purchases of such inventories in United States dollars. These foreign currency forward contracts have been designated as cash flow hedge instruments. Total commitments for such foreign currency forward contracts amounted to $12,895,000 (United States dollars) at January 31, 2004 and cover a substantial portion of Carsen’s projected purchases of inventories through July 2004.

In addition, changes in the value of the euro against the United States dollar affect the Company’s results of operations because a portion of the net assets of Minntech’s Netherlands subsidiary are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, Minntech enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedge instruments. There was one such foreign currency forward contract amounting to €4,501,000 at January 31, 2004 which covered certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on February 27, 2004. Under its credit facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time.

In accordance with SFAS 133, all of the Company’s foreign currency forward contracts are designated as hedges. Recognition of gains and losses related to the Canadian hedges is deferred within other comprehensive income until settlement of the underlying commitments, and realized gains and losses are recorded within cost of sales upon settlement. Gains and losses related to the hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. The Company does not hold any derivative financial instruments for speculative or trading purposes.

The Company entered into credit facilities in September 2001, as amended and more fully described in note 9 to the condensed consolidated financial statements, for which the interest rate on outstanding borrowings is variable. In order to protect its interest rate exposure, the Company entered into a three-year interest rate cap agreement expiring on September 7, 2004 which caps the London Interbank Offered Rate (“LIBOR”) at 4.50% on $12,500,000 of the Company’s borrowings. This interest rate cap agreement has been designated as a cash flow hedge instrument. The cost of the interest rate cap, which is included in other assets, was $246,500 and is being amortized to interest expense over the three-year life of the agreement. The difference between its amortized cost and its fair value is recorded as an unrealized loss at January 31, 2004 and is included in accumulated other comprehensive income.

Note 7. Intangibles and Goodwill

The Company’s intangible assets which are subject to amortization consist primarily of technology, customer relationships, non-compete agreements and patents. These intangible assets are being amortized on the straight-line method over the estimated useful lives of the assets ranging from 2-20 years and have a weighted average amortization period of 11 years as of January 31, 2004. Amortization expense related to intangible assets was $258,000 and $612,000 for the three and six months ended January 31, 2004, respectively, and $215,000 and $432,000 for the three and six months ended January 31, 2003, respectively. Intangible assets acquired in conjunction with the Biolab, Mar Cor and Dyped acquisitions are more fully described in note 3 to the condensed consolidated financial statements. The Company’s intangible assets that have indefinite useful lives and therefore are not amortized consist of trademarks and tradenames.

The Company’s intangible assets consist of the following:

	January 31, 2004
	Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	5,832,000	$	(1,016,000	)	$	4,816,000
Customer relationships	3,972,000		(1,122,000		)	2,850,000
Non-compete agreements	447,000		(306,000		)	141,000
Patents and other registrations	134,000		(5,000		)	129,000
	10,385,000		(2,449,000		)	7,936,000
Trademarks and tradenames	2,654,000		—			2,654,000
Total intangible assets	$	13,039,000	$	(2,449,000	)	$	10,590,000

	July 31, 2003
	Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	4,822,000	$	(786,000	)	$	4,036,000
Customer relationships	2,695,000		(876,000		)	1,819,000
Non-compete agreements	279,000		(264,000		)	15,000
Patents and other registrations	114,000		(1,000		)	113,000
	7,910,000		(1,927,000		)	5,983,000
Trademarks and tradenames	1,015,000		—			1,015,000
Total intangible assets	$	8,925,000	$	(1,927,000	)	$	6,998,000

Estimated annual amortization expense of the Company’s intangible assets for the next five years is as follows:

Six month period ending July 31, 2004	$	537,000
Fiscal 2005	1,036,000
Fiscal 2006	1,036,000
Fiscal 2007	971,000
Fiscal 2008	915,000

On July 31, 2003, management performed an impairment study of goodwill and trademarks and tradenames, which related predominantly to its acquisition of Minntech in September 2001, and concluded that such assets were not impaired. During the six months ended January 31, 2004, goodwill increased by $11,347,000 due to the acquisitions of Biolab, Mar Cor and Dyped, as more fully described in note 3 to the condensed consolidated financial statements, and $436,000 due to changes in foreign exchange rates. At the time of the Biolab, Mar Cor and Dyped acquisitions goodwill benchmark impairment studies were performed and such goodwill was not impaired.

Note 8. Warranty

A summary of activity in the warranty reserves follows:

	Three Months Ended January 31,						Six Months Ended January 31,
	2004			2003			2004			2003

Beginning balance	$	396,000		$	280,000		$	353,000		$	344,000
Provisions	289,000			654,000			582,000			756,000
Charges	(173,000		)	(503,000		)	(477,000		)	(669,000		)
Foreign currency translation	1,000			—			2,000			—
Acquisitions	—			—			53,000			—
Ending balance	$	513,000		$	431,000		$	513,000		$	431,000

The warranty provisions and charges during the three and six months ended January 31, 2004 and 2003 relate principally to the Company’s endoscope reprocessing products.

Note 9. Financing Arrangements

In conjunction with the acquisition of Minntech on September 7, 2001, the Company entered into credit facilities to fund the financed portion of the cash consideration paid in the merger and costs associated with the merger, as well as to establish new working capital credit facilities. Such credit facilities included (i) a $25,000,000 senior secured amortizing term loan facility from a consortium of U.S. lenders (the “Term Loan Facility”) used by Cantel to finance a portion of the Minntech acquisition, (ii) a $17,500,000 senior secured revolving credit facility from the U.S. lenders (the “U.S. Revolving Credit Facility”) used by Cantel to finance a portion of the Minntech acquisition as well as being available for future working capital requirements for the U.S. businesses of Cantel, including Minntech (Cantel and Minntech are referred to as the “U.S. Borrowers”) (the Term Loan Facility and the U.S. Revolving Credit Facility are collectively referred to as the “U.S. Credit Facilities”), and (iii) a $5,000,000

(United States dollars) senior secured revolving credit facility for Carsen (the “Canadian Borrower”) with a Canadian bank (the “Canadian Revolving Credit Facility”) available for Carsen’s future working capital requirements (the U.S. Credit Facilities and the Canadian Revolving Credit Facility are collectively referred to as the “Credit Facilities”).

In conjunction with the acquisitions of Biolab and Mar Cor on August 1, 2003, the Company amended its Credit Facilities as follows: i) outstanding borrowings under the Term Loan Facility were reset to $25,000,000 to finance a portion of the Mar Cor acquisition, (ii) Mar Cor was added as a guarantor under the U.S. Credit Facilities and the stock and assets of Mar Cor were pledged as security for such guaranty, (iii) the Canadian Revolving Credit Facility was increased from $5,000,000 to $7,000,000, (iv) Biolab was added as a guarantor under the Canadian Revolving Credit Facility and the stock and assets of Biolab were pledged as security for such guaranty, (v) the maturity dates of the U.S. Credit Facilities were extended to August 1, 2008, (vi) certain financial covenants of the Credit Facilities were modified to reflect the effect of the acquisitions in the Company’s anticipated future operating results and (vii) the Company was permitted to guarantee the lease on Mar Cor’s facility. The maturity date of the Canadian Revolving Credit Facility remains September 7, 2006.

Borrowings under the Credit Facilities bear interest at rates ranging from .75% to 2.00% above the lender’s base rate, or at rates ranging from 2.00% to 3.25% above LIBOR, depending upon the Company’s consolidated ratio of debt to EBITDA. The base rates associated with the U.S. lenders and the Canadian lender were 4.00% and 4.25%, respectively, at January 31, 2004, and the LIBOR rates ranged from 1.12% to 1.50% at January 31, 2004. The margins applicable to the Company’s outstanding borrowings at January 31, 2004 are 1.50% above the lender’s base rate and 2.75% above LIBOR. At January 31, 2004, substantially all of the Company’s outstanding borrowings were under LIBOR contracts. In order to protect its interest rate exposure, the Company entered into a three-year interest rate cap agreement expiring on September 7, 2004 covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. The Credit Facilities also provide for fees on the unused portion of such facilities at rates ranging from ..30% to .50%, depending upon the Company’s consolidated ratio of debt to EBITDA.

The U.S. Credit Facilities provide for available borrowings based upon percentages of the eligible accounts receivable and inventories of Cantel, Minntech and Mar Cor; require the U.S. Borrowers to meet certain financial covenants; are secured by substantially all assets of the U.S. Borrowers and Mar Cor (including a pledge of the stock of Minntech and Mar Cor owned by Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and are guaranteed by Minntech and Mar Cor. As of January 31, 2004, the Company was in compliance with the financial covenants under the Term Loan Facility and the U.S. Revolving Credit Facility, as amended on August 1, 2003.

The Canadian Revolving Credit Facility provides for available borrowings based upon percentages of the eligible accounts receivable and inventories of Carsen and Biolab; requires the Canadian Borrower to meet certain financial covenants; and is secured by substantially all assets of the Canadian Borrower and Biolab. As of January 31, 2004, Carsen was in compliance with the financial covenants under the Canadian Revolving Credit Facility, as amended on August 1, 2003.

At July 31, 2003, the Company had $20,750,000 outstanding under the Term Loan Facility and had no outstanding borrowings under either the U.S. Revolving Credit Facility or the Canadian Revolving Credit Facility. In conjunction with the Mar Cor acquisition on August 1, 2003, the Company borrowed an additional $9,050,000; therefore, immediately after such acquisition, the Company had $29,800,000 outstanding under the U.S. Credit Facilities, including $25,000,000 under the Term Loan Facility. The Biolab acquisition did not require any borrowings under the Canadian Revolving Credit Facility. At January 31, 2004, the Company had $25,800,000 outstanding under its Credit Facilities, including $23,500,000 under the Term Loan Facility. Subsequent to January 31, 2004, the Company repaid an additional $800,000 under its Credit Facilities; therefore, at March 1, 2004, the Company had $25,000,000 outstanding under its Credit Facilities, including $23,500,000 under the Term Loan Facility. Amounts repaid by the Company under the Term Loan Facility may not be re-borrowed.

Aggregate annual required maturities of the Credit Facilities over the next five years are as follows:

Six month period ending July 31, 2004	$	1,500,000
Fiscal 2005	3,000,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	10,300,000
Total	$	25,800,000

All of such maturing amounts reflect the repayment terms under the Credit Facilities, as amended on August 1, 2003. The amount maturing in fiscal 2008 includes the $2,300,000 outstanding at January 31, 2004 under the U.S. Revolving Credit Facility since such amount is required to be repaid prior to the expiration date of this facility.

Note 10. Earnings Per Common Share

Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period.

Diluted earnings per common share are computed based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period.

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended January 31,				Six Months Ended January 31,
	2004		2003		2004		2003
Numerator for basic and diluted earnings per common share:
Net income	$	2,573,000	$	2,380,000	$	4,368,000	$	3,649,000

Denominator for basic and diluted earnings per common share:
Denominator for basic earnings per common share - weighted average number of shares outstanding	9,342,502		9,264,636		9,328,329		9,254,049

Dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period	717,484		572,180		643,675		579,985

Denominator for diluted earnings per common share - weighted average number of shares outstanding and common stock equivalents	10,059,986		9,836,816		9,972,004		9,834,034

Basic earnings per common share	$	0.28	$	0.26	$	0.47	$	0.39

Diluted earnings per common share	$	0.26	$	0.24	$	0.44	$	0.37

Note 11. Income Taxes

The consolidated effective tax rate on operations was 37.7% and 36.3% for the six months ended January 31, 2004 and 2003, respectively. In fiscal 2002, Cantel eliminated the valuation allowances previously existing against its deferred tax assets related to Federal net operating loss carryforwards (“NOLs”) accumulated in the United States. The Company has provided in its results of operations income tax expense for its United States operations at the statutory tax rate; however, actual payment of U.S. Federal income taxes reflects the benefits of the utilization of the NOLs.

The Company’s results of operations for the three and six months ended January 31, 2004 and 2003 also reflect income tax expense for its international subsidiaries at their respective statutory rates. Such international subsidiaries include the Company’s subsidiaries in Canada, the Netherlands and Japan, which had effective tax rates during the six months ended January 31, 2004 of approximately 37.6%, 23.6% and 45.0%, respectively. The higher overall effective tax rate for the six months ended January 31, 2004, as compared with the six months ended January 31, 2003, is principally due to the geographic mix of pretax income and an increase in the Ontario, Canada provincial tax rate enacted on January 1, 2004.

Note 12. Operating Segments

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company has determined its reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by management in analyzing segment performance are net sales and operating income.

The operating segments follow the same accounting policies used for the Company’s condensed consolidated financial statements as described in note 2 to the 2003 Form 10-K.

Operating segment information is summarized below:

	Three Months Ended January 31,						Six Months Ended January 31,
	2004			2003			2004			2003
Net sales:
Dialysis	$	14,631,000		$	15,701,000		$	29,187,000		$	30,054,000
Endoscopy and Surgical	6,783,000			4,430,000			11,819,000			7,478,000
Endoscope Reprocessing	4,905,000			5,629,000			9,529,000			9,410,000
Filtration and Separation	3,369,000			3,858,000			6,888,000			7,195,000
Water treatment	3,502,000			—			5,966,000			—
Scientific	2,581,000			2,356,000			4,287,000			4,345,000
Product Service	5,325,000			2,453,000			10,269,000			4,318,000
Total	$	41,096,000		$	34,427,000		$	77,945,000		$	62,800,000

Operating income (loss):
Dialysis	$	1,973,000		$	2,099,000		$	3,473,000		$	3,762,000
Endoscopy and Surgical	1,463,000			717,000			2,254,000			1,078,000
Endoscope Reprocessing	370,000			315,000			779,000			438,000
Filtration and Separation	762,000			901,000			1,443,000			1,377,000
Water treatment	184,000			—			154,000			—
Scientific	47,000			142,000			(39,000		)	196,000
Product Service	827,000			676,000			1,722,000			1,005,000
	5,626,000			4,850,000			9,786,000			7,856,000
General corporate expenses	(1,011,000		)	(685,000		)	(1,942,000		)	(1,365,000		)
Interest expense and other income	(416,000		)	(352,000		)	(831,000		)	(763,000		)
Income before income taxes	$	4,199,000		$	3,813,000		$	7,013,000		$	5,728,000

The increase in total assets at January 31, 2004 compared with July 31, 2003 was due principally to the acquisitions of Biolab, Mar Cor and Dyped, which impact the Company’s water treatment, product service and endoscope reprocessing operating segments.

Note 13. Legal Proceedings

In the normal course of business, the Company is subject to pending and threatened legal actions. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

In November 2003, the Company received a letter from the bankruptcy trustee of LifeStream International, Inc., a former customer, seeking to recover approximately $1,227,000 in trade payments made by such customer to Minntech within the ninety day period prior to the bankruptcy petition filing date of this former customer. The Company has retained legal counsel for this matter to determine whether there is any merit to the claim. Until such determination is made, the Company will be unable to determine what exposure, if any, may exist related to the ultimate disposition of this claim. Accordingly, the Company has not provided for any potential costs for this matter at January 31, 2004.

In November 2003, HDC Medical Inc., a Kentucky corporation, filed a complaint against Minntech in the United States District Court, Western District of Kentucky (Case No. 3:03W-694-S). The plaintiff alleges that Minntech has violated federal antitrust laws, including the Sherman Act and the Clayton Act. In addition to requesting an injunction enjoining Minntech from continuing in alleged unlawful conduct, the plaintiff seeks an unspecified amount of actual damages, punitive damages, additional and/or treble statutory damages, and costs of suit. The Company believes that the allegations made in the complaint are without merit and it intends to vigorously defend the action. A motion was granted to the Company to transfer the case to the U.S. District Court in Minnesota. The case is expected to be ready for trial on or about July 1, 2005.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Results of Operations

The results of operations reflect the results of Cantel and its wholly-owned subsidiaries.

Reference is made to (i) the impact on the Company’s results of operations of a stronger Canadian dollar against the United States dollar during the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003 (increase in value of approximately 19.5% and 17.3% for the three and six months ended January 31, 2004, respectively, as compared with the three and six months ended January 31, 2003, based upon average exchange rates), (ii) the impact on the Company’s results of operations of a stronger euro against the United States dollar during the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003 (increase in value of approximately 18.6% and 17.2% for the three and six months ended January 31, 2004, respectively, as compared with the three and six months ended January 31, 2003, based upon average exchange rates), (iii) critical accounting policies of the Company, as more fully described elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, (iv) the Company’s acquisitions of Biolab and Mar Cor on August 1, 2003, as more fully described in notes 3 and 9 to the condensed consolidated financial statements, and (v) the Company’s acquisition of Dyped on September 12, 2003 as more fully described in note 3 to the condensed consolidated financial statements.

Biolab, Mar Cor and Dyped are reflected in the Company’s results of operations for the three and six months ended January 31, 2004 from the date of the respective acquisition, and are not reflected in the Company’s results of operations for the three and six months ended January 31, 2003. The acquisitions of Biolab and Mar Cor have added one new operating segment to the Company, water treatment products. Additionally, Biolab and Mar Cor also contribute to the Company’s product service operating segment. Dyped, which contributes to the Company’s endoscope reprocessing operating segment, had an insignificant impact upon the Company’s results of operations for the three and six months ended January 31, 2004. Discussion herein of the Company’s pre-existing business refers to the operations of Cantel, Carsen and Minntech, but excluding the impact of the Biolab and Mar Cor acquisitions. The ensuing discussion should also be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2003 (the “2003 Form 10-K”).

The following table presents net sales and the percentage to the total net sales for each operating segment of the Company:

	Three Months Ended January 31,						Six Months Ended January 31,
	2004			2003			2004			2003
	(Dollar amounts in thousands)
	$		%	$		%	$		%	$		%
Dialysis	$	14,631	35.6	$	15,701	45.6	$	29,187	37.4	$	30,054	47.8
Endoscopy and Surgical	6,783		16.5	4,430		12.9	11,819		15.2	7,478		11.9
Endoscope Reprocessing	4,905		11.9	5,629		16.4	9,529		12.2	9,410		15.0
Filtration and Separation	3,369		8.2	3,858		11.2	6,888		8.8	7,195		11.5
Water treatment	3,502		8.5	—		—	5,966		7.7	—		—
Scientific	2,581		6.3	2,356		6.8	4,287		5.5	4,345		6.9
Product Service	5,325		13.0	2,453		7.1	10,269		13.2	4,318		6.9
	$	41,096	100.0	$	34,427	100.0	$	77,945	100.0	$	62,800	100.0

Net sales increased by $6,669,000, or 19.4%, to $41,096,000 for the three months ended January 31, 2004, from $34,427,000 for the three months ended January 31, 2003. Net sales contributed by Biolab and Mar Cor for the three months ended January 31, 2004 were $5,411,000. Net sales of the Company’s pre-existing business increased by $1,258,000, or 3.7%, to $35,685,000 for the three months ended January 31, 2004, compared with the three months ended January 31, 2003.

Net sales increased by $15,145,000, or 24.1%, to $77,945,000 for the six months ended January 31, 2004, from $62,800,000 for the six months ended January 31, 2003. Net sales contributed by Biolab and Mar Cor for the six months ended January 31, 2004 were $9,951,000. Net sales of the Company’s pre-existing business increased by $5,194,000, or 8.3%, to $67,994,000 for the six months ended January 31, 2004, compared with the six months ended January 31, 2003.

Net sales were positively impacted for the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, by approximately $1,957,000 and $3,171,000, respectively, due to the translation of Carsen’s net sales using a stronger Canadian dollar against the United States dollar. Carsen’s net sales are principally included in the endoscopy and surgical, scientific and product service segments.

In addition, net sales were positively impacted for the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, by approximately $400,000 and $792,000, respectively, due to the translation of Minntech’s Netherlands subsidiary net sales using a stronger euro against the United States dollar. The majority of the net sales of Minntech’s Netherlands subsidiary are included in the dialysis segment.

Increases in the price of the Company’s products did not have a significant effect on net sales for the three and six months ended January 31, 2004.

The increase in net sales of the Company’s pre-existing business for the three and six months ended January 31, 2004 was principally attributable to an increase in sales of endoscopy and surgical products

and product service, partially offset by a decrease in sales of dialysis products and filtration and separation products for the three and six months ended January 31, 2004 and a decrease in sales of endoscope reprocessing products for the three months ended January 31, 2004.

The increase in sales of endoscopy and surgical products was primarily due to improved healthcare funding in Canada, the translation of Carsen’s net sales using a stronger Canadian dollar against the United States dollar, an increase in volume principally during the three months ended October 31, 2003 subsequent to the outbreak of severe acute respiratory syndrome (“SARS”) in the greater Toronto area which prevented the Company’s sales personnel from visiting hospitals during certain periods of the second half of fiscal 2003, enhanced offerings of surgical products and the effect of reorganizing the sales force. Net sales of endoscopy and surgical products increased by 53.1% and 58.1% in U.S. dollars, and 27.7% and 33.9% in their functional Canadian currency, during the three and six months ended January 31, 2004, respectively, as compared with the three and six months ended January 31, 2003. Healthcare funding in Canada is dependent upon governmental appropriations. Canada recently adopted a budget that provides for a significant increase in funding for healthcare. However, the Company cannot ascertain what impact the funding situation or the new budget will have on future sales of endoscopy and surgical products.

Product service sales for the Company’s pre-existing business were $3,416,000, an increase of $963,000, or 39.3% for the three months ended January 31, 2004, as compared with the three months ended January 31, 2003. For the six months ended January 31, 2004, product service sales for the Company’s pre-existing business were $6,284,000, an increase of $1,966,000, or 45.5%, as compared with the six months ended January 31, 2003. The increase in product service sales from the pre-existing business for the three and six months ended January 31, 2004 was primarily attributable to endoscope reprocessing service. The increase in endoscope reprocessing service was due to increased volume related to the increased field population of the Company’s endoscope disinfection equipment in the United States. The increase in product service sales from the pre-existing business for the six months ended January 31, 2004 was also attributable to flexible endoscopy service. The increase in flexible endoscopy service was due primarily to the increase in volume subsequent to the outbreak of SARS during certain periods of the second half of fiscal 2003 and the translation of Carsen’s net sales using a stronger Canadian dollar against the United States dollar. Flexible endoscopy service sales increased by 27.9% in U.S. dollars and 9.0% in their functional Canadian currency during the six months ended January 31, 2004, as compared with the six months ended January 31, 2003. Despite the improvement in sales, the Company’s market share in its flexible endoscopy service business in Canada is substantial; therefore, growth opportunities for this portion of its service business may be limited without the addition of new product servicing opportunities. Product service sales contributed by Biolab and Mar Cor for the three and six months ended January 31, 2004 were $1,909,000 and $3,985,000, respectively.

The decrease in sales of dialysis products of 6.8% and 2.9% for the three and six months ended January 31, 2004, respectively, as

compared with the three and six months ended January 31, 2003, was primarily due to a decrease in demand for the Company’s Renatron (dialysis reprocessing equipment) and Renalin (sterilant) products, as well as competitive pricing pressure related to concentrate products.

The decrease in sales of filtration and separation products of 12.7% and 4.3% for the three and six months ended January 31, 2004, respectively, as compared with the three and six months ended January 31, 2003, was primarily due to the completion of a private label manufacturing contract in fiscal 2003 which was not replaced with a similar contract in fiscal 2004, partially offset by an increase in demand for the Company’s hemoconcentrator product (a device used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery).

The decrease in sales of endoscope reprocessing products of 12.9% for the three months ended January 31, 2004, compared with the three months ended January 31, 2003, was primarily due to a decrease in sales volume for endoscope disinfection equipment in the United States. However, for the six months ended January 31, 2004, sales of endoscope reprocessing products were comparable to the six months ended January 31, 2003 as a result of the increase in sales to the Company’s U.S. distributor during the three months ended October 31, 2003.

Gross profit increased by $2,575,000, or 20.5%, to $15,119,000 for the three months ended January 31, 2004, from $12,544,000 for the three months ended January 31, 2003. Gross profit contributed by Biolab and Mar Cor for the three months ended January 31, 2004 was $1,264,000. Gross profit of the Company’s pre-existing business increased by $1,311,000, or 10.5%, to $13,855,000 for the three months ended January 31, 2004, as compared with the three months ended January 31, 2003.

Gross profit increased by $4,978,000, or 21.4%, to $28,292,000 for the six months ended January 31, 2004, from $23,314,000 for the six months ended January 31, 2003. Gross profit contributed by Biolab and Mar Cor for the six months ended January 31, 2004 was $2,354,000. Gross profit of the Company’s pre-existing business increased by $2,624,000, or 11.3%, to $25,938,000 for the six months ended January 31, 2004, as compared with the six months ended January 31, 2003.

Gross profit as a percentage of net sales for the three months ended January 31, 2004 and 2003 was 36.8% and 36.4%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the three months ended January 31, 2004 and 2003 was 38.8% and 36.4%, respectively.

Gross profit as a percentage of net sales for the six months ended January 31, 2004 and 2003 was 36.3% and 37.1%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the six months ended January 31, 2004 and 2003 was 38.1% and 37.1%, respectively.

The higher gross profit percentage from the Company’s pre-existing business for the three and six months ended January 31, 2004, as compared with the three and six months ended January 31, 2003, was primarily attributable to charges for warranty and slow moving

inventory related to the Company’s endoscope reprocessing products incurred during the three and six months ended January 31, 2003, and favorable Canadian dollar exchange rates during the fiscal 2004 periods. Partially offsetting these increases in gross profit percentage were a lower gross profit percentage in the Company’s dialysis products due to sales mix as well as competitive pricing pressure in the U.S. market for the Company’s line of acid and bicarbonate concentrates used by renal dialysis centers, and a $153,000 impairment charge in the Company’s product service segment to write down certain assets of the Company’s Boston dialyzer reprocessing center based on estimated future undiscounted net cash flows of the center.

The favorable Canadian dollar exchange rates lowered Carsen’s cost of inventory purchased and therefore decreased cost of sales and increased gross profit, by approximately $587,000 and $955,000 for the three and six months ended January 31, 2004, respectively, compared with the three and six months ended January 31, 2003.

During the three and six months ended January 31, 2003, gross profit of the Company’s pre-existing business was adversely impacted by $905,000 and $1,002,000, respectively, in charges for warranty and slow moving inventory related to the Company’s endoscope reprocessing products. The comparable amount of these charges for the three and six months ended January 31, 2004 was approximately $270,000 and $553,000, respectively; therefore, the decrease in these charges of $635,000 and $449,000 increased gross profit percentage of the Company’s pre-existing business by 1.8% and 0.7% for the three and six months ended January 31, 2004, respectively.

Selling expenses as a percentage of net sales were 12.2% and 12.4% for the three and six months ended January 31, 2004, compared with 12.7% and 13.1% for the three and six months ended January 31, 2003. For the three and six months ended January 31, 2004, the decrease in selling expense as a percentage of net sales was primarily attributable to the favorable impact of increased net sales against the fixed component of selling expenses, as well as the inclusion of the lower cost structure related to the Biolab and Mar Cor operations.

General and administrative expenses increased by $1,529,000 to $4,400,000 for the three months ended January 31, 2004, from $2,871,000 for the three months ended January 31, 2003. For the six months ended January 31, 2004, general and administrative expenses increased by $2,277,000 to $8,574,000, from $6,297,000 for the six months ended January 31, 2003. For the three and six months ended January 31, 2004, general and administrative expenses increased principally due to the inclusion of the Marcor and Biolab operations (which contributed $697,000 and $1,296,000 of general and administrative expenses for the three and six months ended January 31, 2004, respectively), a favorable adjustment during the three months ended January 31, 2003 in the amount of $542,000 resulting from the settlement of liabilities initially recorded in conjunction with the Minntech acquisition relating to sales tax, and increases in the cost of commercial insurance and incentive compensation.

Research and development expenses (which include continuing engineering costs) decreased by $38,000 to $1,103,000 for the three months ended January 31, 2004, from $1,141,000 for the three months ended January 31, 2003. For the six months ended January 31, 2004, research and development expenses decreased by $97,000 to $2,173,000, from $2,270,000 for the six months ended January 31, 2003. For the three and six months ended January 31, 2004, research and development expenses decreased principally due to a reduction in continuing engineering associated with the Company’s endoscope reprocessing equipment, partially offset by engineering costs related to continuing development of the Dyped endoscope reprocessing product.

Interest expense increased by $62,000 to $431,000 for the three months ended January 31, 2004, from $369,000 for the three months ended January 31, 2003. For the six months ended January 31, 2004, interest expense increased by $57,000 to $860,000, from $803,000 for the six months ended January 31, 2003. For the three and six months ended January 31, 2004, as compared with the three and six months ended January 31, 2003, interest expense increased principally due to the use of cash to acquire Biolab which reduced interest income, as well as incremental amortization of debt issuance costs associated with the amended credit facilities, partially offset by a decrease in average interest rates.

Income before income taxes increased by $386,000 to $4,199,000 for the three months ended January 31, 2004, from $3,813,000 for the three months ended January 31, 2003. For the six months ended January 31, 2004, income before income taxes increased by $1,285,000 to $7,013,000, from $5,728,000 for the six months ended January 31, 2003.

The consolidated effective tax rate on operations was 37.7% and 36.3% for the six months ended January 31, 2004 and 2003, respectively. In fiscal 2002, Cantel eliminated the valuation allowances previously existing against its deferred tax assets related to the Federal net operating loss carryforwards (“NOLs”) accumulated in the United States. The Company has provided in its results of operations income tax expense for its United States operations at the statutory tax rate; however, actual payment of U.S. Federal income taxes reflects the benefits of the utilization of the NOLs.

Liquidity and Capital Resources

At January 31, 2004, the Company’s working capital was $43,834,000, compared with $43,643,000 at July 31, 2003. This increase in working capital was due to the acquisitions of Biolab and Mar Cor, partially

offset by the overall decrease in cash as described below.

Net cash provided by operating activities was $3,966,000 and $3,101,000 for the six months ended January 31, 2004 and 2003, respectively. For the six months ended January 31, 2004, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, partially offset by a decrease in accounts payable and accrued expenses due to the timing associated with the payment of trade payables, and an increase in prepaid expenses and other current assets. For the six months ended January 31, 2003, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, and a decrease in inventories, partially offset by an increase in accounts receivable and decreases in accounts payable and accrued expenses and income taxes payable.

Net cash used in investing activities was $17,659,000 and $563,000 for the six months ended January 31, 2004 and 2003, respectively. For the six months ended January 31, 2004, the net cash used in investing activities was primarily due to the acquisitions of Biolab, Mar Cor and Dyped. For the six months ended January 31, 2003, the net cash used in investing activities was primarily for capital expenditures.

Net cash provided by financing activities was $5,667,000 for the six months ended January 31, 2004, compared with net cash used in financing activities of $2,994,000 for the six months ended January 31, 2003. For the six months ended January 31, 2004, the net cash provided by financing activities was primarily attributable to borrowings under the Company’s credit facilities related to the acquisition of Mar Cor, partially offset by repayments under the credit facilities. For the six months ended January 31, 2003, the net cash used in financing activities was primarily attributable to repayments under the Company’s credit facilities.

Facilities”).

Borrowings under the Credit Facilities bear interest at rates ranging from .75% to 2.00% above the lender’s base rate, or at rates ranging from 2.00% to 3.25% above LIBOR, depending upon the Company’s consolidated ratio of debt to EBITDA. The base rates associated with the U.S. lenders and the Canadian lender were 4.00% and 4.25%, respectively, at March 1, 2004, and the LIBOR rates ranged from 1.10% to 1.50% at March 1, 2004. The margins applicable to the Company’s outstanding borrowings at March 1, 2004 are 1.50% above the lender’s base rate and 2.75% above LIBOR. At March 1, 2004, all of the Company’s outstanding borrowings were under LIBOR contracts. In order to protect its interest rate exposure, the Company entered into a three-year interest rate cap agreement expiring on September 7, 2004 covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. The Credit Facilities also provide for fees on the unused portion of such facilities at rates ranging from .30% to .50%, depending upon the Company’s consolidated ratio of debt to EBITDA.

Aggregate annual required maturities of the Credit Facilitis over the next five years are as follows:

Six month period ending July 31, 2004	$	1,500,000
Fiscal 2005	3,000,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	10,300,000
Total	$	25,800,000

Aggregate future minimum commitments at January 31, 2004 under noncancelable operating leases for property and equipment are as follows:

Six month period ending July 31, 2004	$	944,000
Fiscal 2005	1,427,000
Fiscal 2006	575,000
Fiscal 2007	284,000
Fiscal 2008	192,000
Thereafter	1,632,000
Total lease commitments	$	5,054,000

The majority of Carsen’s sales of endoscopy and surgical products and scientific products related to microscopy have been made pursuant to a distribution agreement (the “Olympus Agreement”) with Olympus America Inc. (“Olympus”), and the majority of Carsen’s sales of scientific products related to industrial technology equipment have been made pursuant to a distribution agreement with Olympus Industrial America Inc. (the “Olympus Industrial Agreement”), under which Carsen has been granted the exclusive right to distribute the covered Olympus products in Canada. Carsen is subject to a minimum purchase requirement under the Olympus Agreement of $18.8 million during the contract year ending March 31, 2004, which Carsen expects to meet. For

the contract year ended March 31, 2003, Carsen satisfied the minimum purchase requirement under the Olympus Agreement. Both agreements expire on March 31, 2004; however, the Olympus Agreement provides that if Carsen fulfills its obligations thereunder, such Agreement will be extended through March 31, 2006. The parties are obligated to establish new minimum purchase requirements for the extended term.

Effective August 1, 2003, Minntech renewed its distribution agreement with Olympus (the “MediVators Agreement”) which grants Olympus the exclusive right to distribute the majority of the Company’s endoscope reprocessing products and related accessories and supplies in the United States and Puerto Rico. Failure by Olympus to achieve the minimum purchase projections in any contract year gives Minntech the option to terminate the MediVators Agreement. The MediVators Agreement expires on August 1, 2006.

The Company has determined that it will repatriate minimal amounts of existing and future accumulated profits from its international locations until existing domestic NOLs are exhausted, which the Company estimates to be no earlier than fiscal 2005. Notwithstanding this strategy, the Company believes that its current cash position, anticipated cash flows from operations (including its U.S. operations), and the funds available under its revolving credit facilities will be sufficient to satisfy the Company’s cash operating requirements for the foreseeable future based upon its existing operations, including the acquisitions of Biolab, Mar Cor and Dyped. At March 1, 2004, approximately $21,584,000 was available under the revolving credit facilities.

During the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, the average value of the Canadian dollar increased by approximately 19.5% and 17.3%, respectively, relative to the value of the United States dollar. Changes in the value of the Canadian dollar against the United States dollar affect the Company’s results of operations because the Company’s Canadian subsidiary purchases substantially all of its products in United States dollars and sells its products in Canadian dollars. During the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, such strengthening of the Canadian dollar relative to the United States dollar had a positive impact upon the Company’s results of operations. Such currency fluctuations also result in a corresponding change in the United States dollar value of the Company’s assets that are denominated in Canadian dollars.

Under the Canadian Revolving Credit Facility, Carsen has a $25,000,000 (United States dollars) foreign currency hedging facility which is available to hedge against the impact of such currency fluctuations on purchases of inventories. Total commitments for foreign currency forward contracts under this facility amounted to $12,500,000 (United States dollars) at March 1, 2004 and cover a substantial portion of the Canadian subsidiary’s projected purchases of inventories through July 2004. These foreign currency forward contracts have been designated as cash flow hedge instruments. The weighted average exchange rate of the forward contracts open at March 1, 2004 was $1.3890 Canadian dollar per United States dollar, or $.7199

United States dollar per Canadian dollar. The exchange rate published by the Wall Street Journal on March 1, 2004 was $1.3392 Canadian dollar per United States dollar, or $.7467 United States dollar per Canadian dollar.

During the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, the value of the euro increased by approximately 18.6% and 17.2%, respectively, relative to the value of the United States dollar. Changes in the value of the euro against the United States dollar affect the Company’s results of operations because a portion of the net assets of Minntech’s Netherlands subsidiary are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. During the three and six months ended January 31, 2004, such strengthening of the euro relative to the United States dollar had an overall adverse impact upon the Company’s results of operations. Such currency fluctuations also result in a change in the United States dollar value of the Company’s assets that are denominated in euros.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, the Company enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedges. There was one foreign currency forward contract amounting to €3,443,000 at March 1, 2004 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expires on March 31, 2004. Under its Credit Facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three and six months ended January 31, 2004, such forward contracts were effective in offsetting the adverse impact of the strengthening of the euro on the Company’s results of operations.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, as amended, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), all of the Company’s foreign currency forward contracts are designated as hedges. Recognition of gains and losses related to the Canadian hedges is deferred within other comprehensive income until settlement of the underlying commitments, and realized gains and losses are recorded within cost of sales upon settlement. Gains and losses related to the hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts.

For purposes of translating the balance sheet, at January 31, 2004 compared with July 31, 2003, the value of the Canadian dollar and the value of the euro increased by approximately 6.0% and 9.6%, respectively, compared to the value of the United States dollar. The total of these currency movements resulted in a foreign currency translation gain of $2,003,000 for the six months ended January 31, 2004, thereby increasing stockholders’ equity.

Changes in the value of the Japanese yen relative to the United States dollar during the three and six months ended January 31, 2004 and 2003 did not have a significant impact upon either the Company’s results of operations or the translation of the balance sheet,

primarily due to the fact that the Company’s Japanese subsidiary accounts for a relatively small portion of consolidated net sales, earnings and net assets.

Inflation has not significantly impacted the Company’s operations.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company continually evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

Revenue Recognition

Revenue on product sales (excluding certain sales of endoscope reprocessing equipment in the United States) is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to dialysis, filtration and separation and a portion of endoscope reprocessing products, shipment terms are generally FOB origin for common carrier and FOB destination when the Company’s distribution fleet is utilized. With respect to endoscopy and surgical, water treatment and scientific products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of the Company’s product sales occurs at the time of delivery. In certain instances, primarily with respect to some of the Company’s water treatment products and an insignificant amount of the Company’s sales of dialysis equipment and scientific products, post-delivery obligations such as installation, in-servicing or training are contractually specified; in such instances, revenue recognition is deferred until all of such conditions have been substantially fulfilled such that the products are deemed functional by the end-user. With respect to a portion of endoscopy and surgical, water treatment and scientific product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered.

Sales of a majority of the Company’s endoscope reprocessing equipment to a third party distributor in the United States are recognized on a bill and hold basis. Such sales satisfy each of the following criteria: (i) the risks of ownership have passed to the third party distributor; (ii) the third party distributor must provide a written purchase order committing to the purchase of specified units; (iii) the bill and hold arrangement was specifically requested by the third party distributor for the purpose of minimizing the impact of multiple shipments of the units; (iv) the third party distributor provides specific instructions for shipment to customers, and completed units held by the Company for the third party distributor generally do not exceed three months of anticipated shipments; (v) the Company has no further performance obligations with respect to such units; (vi) completed units are invoiced to the third party distributor with 30 day payment terms and such receivables are generally satisfied within such terms; and (vii) completed units are ready for shipment and segregated in a designated section of the Company’s warehouse reserved only for the third party distributor.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at the Company’s facilities and the products are shipped to customers. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within costs of sales) at the time the sale is recognized.

None of the Company’s sales, including the bill and hold sales arrangement, contain right-of-return provisions, and customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by the Company before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a small portion of the Company’s sales of dialysis products. Price protection is not offered by the Company, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of the Company’s products. With respect to certain of the Company’s dialysis product customers, volume rebates and trade-in allowances are provided; such volume rebates and trade-in allowances are provided for as a reduction of sales at the time of revenue recognition.

The majority of the Company’s dialysis products are sold to end-users; the majority of filtration and separation and endoscope reprocessing products are sold to third party distributors; the majority of endoscopy and surgical products are sold directly to hospitals; water treatment products are sold to hospitals, dialysis clinics, pharmaceutical and biotechnology companies and other end-users; scientific products are sold to both hospitals and other end-users; and product service is sold to hospitals, third party distributors and other end-users. Sales to all of these customers follow the Company’s revenue recognition policies.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due to the Company from normal business activities. Allowances for doubtful accounts are reserves for the estimated loss from the inability of customers to make

required payments. The Company uses historical experience as well as current market information in determining the estimate. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories consist of products which are sold in the ordinary course of the Company’s business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, the Company must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, the Company uses historical experience as well as current market information.

Goodwill and Intangible Assets

Certain of the Company’s identifiable intangible assets, including technology, customer relationships, patents and non-compete agreements, are amortized on the straight-line method over their estimated useful lives which range from 2 to 20 years. Additionally, the Company has recorded goodwill and trademarks and tradenames, all of which have indefinite useful lives and are therefore not amortized. All of the Company’s intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. The Company’s management is primarily responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations.

Warranties

The Company provides for estimated costs that may be incurred to remedy deficiencies of quality or performance of the Company’s products at the time of revenue recognition. Most of the Company’s products have a one-year warranty, although a majority of the Company’s endoscope reprocessing equipment in the United States may carry a warranty period of up to fifteen months. The Company records provisions for product warranties as a component of cost of sales based upon an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship of warranty costs to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the cost and availability of parts or the frequency of claims could have a material adverse impact on the Company’s results for the period or periods in which such claims or additional costs materialize. Management reviews its warranty exposure periodically and believes that the warranty reserves are adequate; however, actual claims incurred could differ from original estimates, requiring adjustments to the reserves.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase accounting for business acquisitions. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets will be realized. Additionally, deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. All of such evaluations require significant management judgments.

Business Combinations

Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed. Certain liabilities are subjective in nature. The Company reflects such liabilities based upon the most recent information available.

In conjunction with the Company’s acquisitions, such liabilities principally include certain income tax and sales and use tax exposures, including income tax liabilities related to the Company’s foreign subsidiaries. The ultimate settlement of such liabilities may be for amounts which are different from the amounts recorded.

Other Matters

The Company does not have any off balance sheet financial arrangements.

Forward Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. All forward-looking statements involve risks and uncertainties, including, without limitation, acceptance and demand of new products, the impact of competitive products and pricing, the Company’s ability to successfully integrate and operate acquired and merged businesses and the risks associated with such businesses, and the risks detailed in the Company’s filings and reports with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2003. Such statements are only predictions, and actual events or results may differ materially from those projected.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign currency market risk: A portion of the Company’s products are imported from the Far East and Western Europe, the Company’s United States subsidiary sells a portion of its products outside of the United States, and Minntech’s Netherlands subsidiary sells a portion of its products outside of the European Union. Consequently, the Company’s

business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of various currencies, tariff increases and import and export restrictions, affecting the United States, Canada and the Netherlands.

Carsen imports a substantial portion of its products from the United States and pays for such products in United States dollars. Additionally, a portion of the sales of Biolab are to customers in the United States. Carsen’s and Biolab’s businesses could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of currency exchange, tariff increases and import and export restrictions between the United States and Canada. Additionally, Carsen’s financial statements are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements included within the Company’s 2003 Form 10-K. Fluctuations in the rates of currency exchange between the United States and Canada had a positive impact for the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, upon the Company’s results of operations and stockholders’ equity, as described in Management Discussion and Analysis of Financial Condition and Results of Operations.

In order to hedge against the impact of such currency fluctuations on the purchases of inventories, Carsen enters into foreign currency forward contracts on firm purchases of such inventories in United States dollars. These foreign currency forward contracts have been designated as cash flow hedge instruments. Total commitments for such foreign currency forward contracts amounted to $12,895,000 (United States dollars) at January 31, 2004 and cover a substantial portion of Carsen’s projected purchases of inventories through July 2004.

Changes in the value of the euro against the United States dollar affect the Company’s results of operations because a portion of the net assets of Minntech’s Netherlands subsidiary are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. Additionally, financial statements of the Netherlands subsidiary are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements included within the Company’s 2003 Form 10-K. Fluctuations in the rates of currency exchange between the European Union and the United States had an overall adverse impact for the three and six months ended January 31, 2004, compared with the three and six months ended January 31, 2003, upon the Company’s overall results of operations, and had a positive impact upon stockholders’ equity, as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, the Company enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedge instruments. There was one such foreign currency forward contract amounting to €4,501,000 at January 31, 2004 which covered certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on February 27, 2004. Under its credit facilities, such contracts to purchase euros may not exceed $12,000,000

in an aggregate notional amount at any time. During the three and six months ended January 31, 2004, such forward contracts were effective in offsetting the adverse impact of the strengthening of the euro on the Company’s results of operations.

The functional currency of Minntech’s Japan subsidiary is the Japanese yen. Changes in the value of the Japanese yen relative to the United States dollar during the three and six months ended January 31, 2004 and 2003 did not have a significant impact upon either the Company’s results of operations or the translation of the balance sheet, primarily due to the fact that the Company’s Japanese subsidiary accounts for a relatively small portion of consolidated net sales, earnings and net assets.

Interest rate market risk: The Company has two credit facilities for which the interest rate on outstanding borrowings is variable. Therefore, interest expense is principally affected by the general level of interest rates in the United States and Canada. During the three and six months ended January 31, 2004 and 2003, all of the Company’s outstanding borrowings were under its United States credit facilities. In order to protect its interest rate exposure, the Company has entered into a three-year interest rate cap expiring on September 7, 2004 covering $12,500,000 of borrowings under the Term Loan Facility, which caps LIBOR on this portion of outstanding borrowings at 4.50%. This interest rate cap agreement has been designated as a cash flow hedge instrument. At January 31, 2004, the fair value of such interest rate cap was less than $1,000.

ITEM 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

The Company, under the supervision and with the participation of its Chief Executive Officer and its Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in reports that it files under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission.

The Company has evaluated its internal controls over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1. - Note 13 above.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On December 17, 2003, the Company held its Annual Meeting of Stockholders for the fiscal year ended July 31, 2003 to re-elect Darwin C. Dornbush, Esq. and elect Spencer Foreman, M.D. as directors of the Company, to hold office until the Annual Meeting of Stockholders to be held after the fiscal year ending July 31, 2006. 8,538,639 votes were cast for and 250,212 votes were withheld in the election of Mr. Dornbush, and 8,538,534 votes were cast for and 250,317 votes were withheld in the election of Dr. Foreman.

Stockholders also approved an amendment to the Company’s 1997 Employee Stock Option Plan to permit the grant of options that do not qualify as incentive stock options. 5,276,978 votes were cast for, 1,488,389 votes were against, and 37,722 votes abstained in the approval of the amendment to the Company’s 1997 Employee Stock Option Plan.

Additionally, stockholders approved an amendment to the Company’s 1998 Directors’ Stock Option Plan to provide for automatic grants of options to purchase 15,000 shares of common stock to each newly appointed or elected director. 5,669,470 votes were cast for, 1,093,686 votes were against, and 39,933 votes abstained in the approval of the amendment to the Company’s 1998 Directors’ Stock Option Plan.

Stockholders also ratified the selection of Ernst & Young LLP as the independent auditors of the Company for its fiscal year ending July 31, 2004. 8,751,461 votes were cast for, 29,157 votes were against, and 8,233 votes abstained such ratification.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10(a)	-		Distributor Agreement between Olympus America Inc. and Minntech Corporation dated August 1, 2003.

31.1	-		Certification of Principal Executive Officer.

31.2	-		Certification of Principal Financial Officer.

32	-		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)		Reports on Form 8-K

A report on Form 8-K was filed on December 11, 2003, reporting a press release announcing the Company’s results of operations for the quarter ended October 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CANTEL MEDICAL CORP.

Date: March 11, 2004


	By:				/s/ James P. Reilly
			James P. Reilly, President and Chief Executive Officer (Principal Executive Officer)


	By:			/s/ Craig A. Sheldon
		Craig A. Sheldon,
		Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EX-10.A 3 a04-3392_1ex10da.htm EX-10.A

EXHIBIT 10(a)

DISTRIBUTOR AGREEMENT

BETWEEN

OLYMPUS AMERICA INC.– MEDICAL SYSTEMS GROUP

AND

MINNTECH CORPORATION –

MEDIVATORS REPROCESING SYSTEMS

August 1, 2003

DISTRIBUTOR AGREEMENT

AGREEMENT made as of the 1st day of August, 2003 by and between MINNTECH CORPORATION – MEDIVATORS REPROCESSING SYSTEMS, a company organized and existing under the laws of the State of Minnesota, having its principal office at 14605 28^th Avenue North, Minneapolis, Minnesota 55147 (the “Company”), and OLYMPUS AMERICA INC.- MEDICAL SYSTEMS GROUP, a company organized and existing under the laws of the State of New York, having its principal office at Two Corporate Center Drive, Melville, New York 11747-3157 (“OAI”).

W I T N E S S E T H:

WHEREAS, the Company develops, manufactures, and markets a line of automatic endoscope disinfectors, germicides, and other related products; and

WHEREAS, OAI is a recognized distributor and supplier of medical equipment within the Territory defined in Section 1.22 and OAI wishes to distribute, market, and service the Products defined in Section 1.15 on an exclusive basis within the Territory; and

WHEREAS, OAI wishes to engage in the purchase of the Products from the Company and the resale and service of the Products within the Territory and wishes to be appointed by the Company as the exclusive distributor and semi-exclusive (as set forth in Section 2.5) servicer of the Products within the Territory; and

WHEREAS, the Company is willing to appoint OAI as the exclusive distributor and semi-exclusive servicer of the Products within the Territory on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and promises hereinafter set forth, the parties agree as follows:

ARTICLE 1. DEFINITIONS.

1.1 “Affiliate” shall mean a corporation or other entity that controls, is controlled by or is under common control with, the designated party. “Control” shall mean the ownership, directly or indirectly, through one or more intermediaries, of at least 49% of the shares of stock entitled to vote for the election of directors in the case of a corporation (or comparable officers or representatives of the particular entity), or at least 49% of the interest in profits in the case of a business

entity other than a corporation, except that in any country of incorporation or registration where the maximum permitted by law is less than 49%, such lower maximum permitted percentage shall be substituted.

1.2 “Agreement” shall mean this Distributor Agreement, including the Recitals, Schedules, and Exhibits hereto, as it may be amended or supplemented from time to time in accordance with its terms.

1.3 “Agreement Term” shall have the meaning set forth in Section 8.1.

1.4 “Ancillary Products” shall mean the accessories, consumables, and replacement and repair parts (each manufactured by or for the Company) to and of the Disinfectors. A list of such accessories, consumables, replacement and repair parts, and Rapicide (with corresponding prices for the initial year of the Agreement Term) is attached hereto as Schedule 1.4.

1.5 “Business Day” shall mean any day which is not a Saturday, Sunday, or bank holiday in the State of New York.

1.6 Complaint(s)” shall mean any written, electronic, or oral communication that alleges deficiencies related to the identity, quality, durability, reliability, safety, effectiveness, or performance of a device after it is released for distribution.

1.7 “Design Validation” shall mean establishing by objective evidence that device specifications conform with user needs and intended use(s). (21 C.F.R. Part 820.3(z)(2))

1.8 “Disinfector(s)” shall mean, collectively, the Company’s disinfector products for endoscopes and all accompanying standard accessories, a list of which is attached hereto as Schedule 1.8.

1.9 “Equipment” shall mean Olympus brand endoscopy equipment.

1.10 “FDA” shall mean the United States Food & Drug Administration.

1.11 “Intellectual Property” shall have the meaning set forth in Section 7.6.

1.12 “OAI Enhancements” shall have the meaning set forth in Section 3.16.

1.13 “Post-Agreement Period” shall mean the seven-year period (or shorter period if OAI opts to cease its performance of its Product Customer Service functions in accordance with Section 2.5) following the end of the Agreement Term.

1.14 “Process Validation” shall mean establishing, by objective evidence, that a process consistently produces a result or a product meets its predetermined specifications. (21 C.F.R. Part 820.3(z)(1))

1.15 “Products” shall mean, collectively, the Disinfectors, Rapicide, the Ancillary Products, and all related instruction and service manuals; and Product Changes.

1.16 “Product Changes” shall mean any changes, improvements, alterations, modifications, part substitutions, new applications, and additional specifications to or of the Products or the Products’ labeling that could impact the marketability, safety, or effectiveness of a Product.

1.17 “Product Customer Service” shall have the meaning set forth in Section 2.5.

1.18 “Rapicide” shall mean the liquid chemical germicide marketed and sold by the Company under the name Rapicide™. See also Schedule 1.4.

1.19 “Recall” shall have the meaning set forth in Section 3.10.

1.20 “RMA” shall mean a Return Material Authorization form.

1.21 “SOP” shall mean Standard Operating Procedure.

1.22 “Territory” shall mean the United States of America, Puerto Rico, Guam, and the U.S. Virgin Islands.

1.23 “Verification” shall mean confirmation by examination and provision of objective evidence that specified requirements have been fulfilled. (21 C.F.R. Section 820.3(aa)).

1.24 “90% Amount” shall have the meaning set forth in Section 4.1.

ARTICLE 2. APPOINTMENT OF OAI; PRODUCT CUSTOMER SERVICE.

2.1 Appointment and Acceptance.

(a) Subject to the terms of this Agreement, the Company, to the full extent of its legal rights, hereby appoints OAI, and OAI hereby accepts appointment, as the exclusive distributor and semi-exclusive (as set forth in Section 2.5) servicer of the Products within the Territory during the Agreement Term. Neither the Company nor the Company’s Affiliates shall sell the Products, or products that are substantially similar to or competitive with the Products, directly or indirectly within the Territory to any person or entity other than OAI, or otherwise provide the Products to any other entity which it knows or has reason to know will sell or service the Products within the Territory, provided that OAI is not in default under this Agreement. Notwithstanding the immediately preceding sentence, in the event the Company wishes to distribute a new product, incorporate a Product Change not relating to or resulting from a Product Complaint (a “Modified Product”), or distribute an endoscope disinfection product which is competitive with but not substantially similar to the Disinfector in design, price, features, and quality (a “Competitive Product”), the Company shall grant OAI the right of first negotiation and right of first refusal to become the exclusive distributor of such new product, Modified Product, or Competitive Product, on substantially the same terms and conditions as those contained in this Agreement (subject to good faith negotiation with respect to pricing, purchase projections, and schedules). OAI shall have 90 days from the receipt of a new product proposal, Modified Product proposal, or Competitive Product proposal, which shall be supported with the Company’s formal Phase Zero Review Package (as outlined in Schedule 2.1 attached hereto), to either accept or decline to distribute the proposed new product, Modified Product, or Competitive Product. In the event OAI declines the new product proposal, Modified Product proposal, or Competitive Product proposal, or fails to provide an affirmative decision within the stipulated 90-day period, then the Company shall be entitled to distribute the new product, Modified Product, or Competitive Product directly or via a third party (but only if the distribution arrangement with such third party contains terms and conditions not more beneficial than those offered to OAI therefor). In the event OAI accepts the new product proposal, Modified Product proposal, or Competitive Product proposal, then OAI shall have an additional 90 days from receipt of a previously agreed-upon Project Commercialization Package (as outlined in Schedule 2.1 attached hereto), to introduce and fully commercialize the new product, Modified Product, or Competitive Product. In the event OAI fails to introduce and fully commercialize the new product, Modified Product, or Competitive Product within the stipulated 90-day period, then the Company shall be entitled to distribute the new product, Modified Product, or Competitive Product directly or via a third party

(but only if the distribution arrangement with such third party contains terms and conditions not more beneficial than those offered to OAI therefor).

(b) The Company hereby unconditionally and irrevocably grants to OAI and OAI’s Affiliates, a royalty-free, fully paid-up right and license, including the right to grant sublicenses, under the Company’s Intellectual Property, to use, market, demonstrate, promote, sell, rent, lease, service, distribute, and/or otherwise dispose of (or have others do any of the foregoing on OAI’s behalf) the Products within the Territory. OAI shall (i) have the right to sell and service the Products directly to and for end users or through subdistributors, dealers, and subservicers (which subdistributors, dealers, and subservicers will be subject to the Company’s approval, which approval will not be unreasonably withheld or delayed), (ii) determine all terms and conditions of sale and service to its customers, subdistributors, dealers, and subservicers, including but not limited to prices (except that OAI may not represent and warrant the Products in a manner inconsistent with the way the Company represents and warrants the Products unless OAI receives the Company’s consent to do so, which consent shall not be unreasonably withheld or delayed), (iii) not sell or service the Products outside of the Territory or authorize its subdistributors, dealers, or subservicers to sell or service the Products outside of the Territory, and (iv) not sell the Products to anyone OAI knows or has reason to know will sell the Products outside of the Territory. In the event OAI sells or services the Products through subdistributors, dealers, and/or subservicers, OAI shall require that such subdistributors, dealers, and/or subservicers, comply with the provisions of this Agreement pertinent to subdistributors, dealers, and subservicers.

2.2 Sales & Service Leads. The Company shall forward to OAI any and all sales and service inquiries received from Product customers or potential Product customers in the Territory.

2.3 OAI Sales of Substantially Similar Products. OAI shall not, directly or indirectly, (by itself or with others) sell or distribute products within the Territory that are substantially similar, in price, design, features, and quality, to the Products, provided that the Company is not in default under this Agreement. Notwithstanding the foregoing or anything contained in this Agreement to the contrary, if OAI (by itself or with others) elects to sell or distribute a disinfector that is substantially similar (in price, design, features, and quality) to a Disinfector, OAI shall provide the Company with a minimum of nine (9) months’ written notice prior to marketing such new disinfector. The Company shall have a three (3)-month period, commencing upon its receipt of OAI’s nine-month notice, during which period the Company must notify OAI in writing that the Company will either (a) render OAI’s distribution rights to the

Products non-exclusive or (b) terminate the Agreement Term in accordance with Section 8.2(f). In either event, the restrictions on both parties set forth in Sections 2.1(a) and 2.3 shall be removed.

2.4 Hiring of Employees. Neither OAI nor the Company shall hire any employee of the other party during, or for a period of one year after the conclusion of, the employee’s employment with such other party, unless the other party is subject to a change of Control (as defined in Section 1.1) or a proceeding in bankruptcy, dissolution, winding up, reorganization or the arrangement for the appointment of a receiver or trustee. The foregoing restriction shall remain in effect during the Agreement Term and the first year thereafter (the “Sunset Year”). Notwithstanding the preceding sentences, upon conclusion of the Sunset Year, OAI and the Company shall be permitted to immediately hire the other party’s employees (and former employees, regardless of when such employees’ separated from the other party).

2.5 Product Customer Service. OAI and the Company shall maintain a coordinated and comprehensive customer service and support mechanism to respond to (i) customer inquiries regarding the use, operation, and/or maintenance of the Products, and (ii) customer Product service and repair requirements. Product Customer Service shall include, without limitation, the following items:

(a) Telephone Support. The telephone support to be provided by the Company is set forth on Schedule 2.5 attached hereto.

(b) Field Support. The field support to be provided by the Company will include, without limitation, consultations with OAI field service engineers, OAI technical staff, OAI customer service personnel, and OAI product management.

(c) Support Documentation System. Telephone and field support will be documented by the Company through use of the Metrix computer system. The Metrix computer system will also serve as the primary vehicle for the dispatch of OAI field service engineers (dispatch will also be accomplished through e-mail and voice mail messages). The Company shall also record parts requirements and data on the effectiveness of OAI field service engineer (“FSE”) dispatches (e.g., ensuring the parts delivery is prompt and accurate, ensuring that dispatch notification is received and confirmed by the OAI FSE, and validation that the service diagnosis is accurate).

(d) Support Fee. During the initial six (6) months of the Agreement Term, the customer telephone and field support described in Sections 2.5(a), 2.5(b), and 2.5(c) above shall be

charged to OLYMPUS at a monthly rate not to exceed $11,000.00. The monthly rate paid for such support will be reduced by two percent (2%) for every one percentage point difference between the actual Service Level and the targeted Service Level listed on Schedule 2.5. Prior to the end of the initial six-month period of the Agreement Term, the Company and OAI agree to establish a per-call support fee structure (and a corresponding amendment to the rate reduction clause above) that will replace the monthly support rate upon conclusion of such initial six-month period.

(e) Olympus® Model MV® Endoscope Disinfectors (MV®-1 and MV®-2 by Medivators). OAI shall perform all (i) pre-installation, (ii) site evaluation, (iii) installation, and (iv) in-service customer orientation, of and for the MV Disinfectors. The Company shall be responsible for performing all service and repair (in-warranty and out-of-warranty) for the MV Disinfectors. The Company’s labor rate for out-of-warranty service and repairs shall be no more than $145.00 per hour for the initial year of the Agreement Term with increases thereafter limited to five percent (5%) per Agreement Term year. In conjunction with the service and repair of the MV Disinfectors, a “hot swap” program will be in place. The MV Disinfector “hot swap” program will entail, without limitation, disconnection and shipment of the MV Disinfector unit to be repaired, installation of a loaner unit at the customer site, shipment to and re-installation of the repaired unit at the customer site after repair, and disconnection and shipment of the loaner unit back to the Company. With respect to this “hot swap” program, the Company shall bear all costs and expenses for MV Disinfectors that are under warranty, including but not limited to packaging expenses and those items listed in the prior sentence. The Company will pay OAI a flat fee of $300 per “hot swap” of an MV Disinfector in which OAI assists the Company. If OAI is unable to assist the Company in the “hot swap” program, the Company and OAI will mutually select a third-party to perform the service, and the Company shall pay the third-party’s fees, up to the aforementioned $300 flat fee limit per “hot swap” (with the customer to be billed for any additional third-party fees in excess of such $300 flat fee). Repairs of MV Disinfectors shall be warranted for a period of at least 90 days from the date of re-installation. If a repaired MV Disinfector unit fails in any respect within the aforementioned warranty period, all subsequent repairs, loaners, shipping, (re)installation, and shipping materials will be at no charge to OAI or the customer.

(f) OAI Functions. Except as set forth in Sections 2.5, 2.6, 3.7(b), and 7.9, OAI shall be responsible for in-service customer orientation, OAI sales and service training, and repair with respect to and of the Products marketed or sold by OAI within the Territory. Notwithstanding the foregoing, OAI may require the Company to perform complicated repairs of OLYMPUS DSD Disinfectors. During the Post-Agreement Period, OAI shall have

the right, at its option, to either (i) continue to perform these OAI functions for all Product customers existing prior to the end of the Agreement Term or (ii) cease performing these OAI functions, provided that if OAI chooses to cease performance, it must notify the Company of such decision at least 90 days’ prior to the start of the next year of the Post-Agreement Period.

2.6 Reconditioning Disinfectors Units.

(a) In the event a Disinfector unit is returned by a customer due to OAI or customer administrative error (unrelated to the Company), OAI shall bear the reasonable costs and expenses required to disconnect, ship, recondition, package, and/or reinstall such Disinfector unit (collectively, the “Reconditioning Expenses”). If a Disinfector unit is returned because the customer elects not to purchase after an evaluation, OAI and the Company shall bear the Reconditioning Expenses equally. (OAI shall inform the Company in advance of placing a Disinfector unit for evaluation.) If a Disinfector unit is returned because it has failed to perform in accordance with specifications (e.g., component part failure), the Company shall bear the Reconditioning Expenses. The Company shall keep an inventory of all parts required to support the reconditioning of all Disinfector Units that are less than seven years old when returned to the Company. The Company may charge OAI a premium of not more than 5% of the existing transfer cost of a part which is unusual or difficult to acquire. Reconditioned Disinfector units shall have the same warranty as the warranty set forth in Section 7.9. In cases when OAI bears all of the Reconditioning Expenses for an MV Disinfector unit or if an evaluation MV Disinfector unit is drawn from OAI’s demonstration pool for sale in connection with OAI’s normal demonstration pool inventory turnover, a surcharge of $345.00 will be added to the cost of reconditioning to cover the warranty period set forth in Section 7.9. In cases when OAI and the Company share equally the Reconditioning Expenses for an evaluation MV Disinfector unit drawn from OAI’s new or “Class 2” inventory pools, a surcharge of $172.50 will be added to the cost of reconditioning to cover the warranty period set forth in Section 7.9. The Company’s hourly reconditioning labor rate for the initial year of the Agreement Term shall be $100.00. The Company shall only bill OAI for actual hours worked. The Company may increase this rate by no more than 5% per year. Any permitted increases must be communicated to OAI in writing at least 60 days prior to the start of that Agreement Term year. The Company shall provide OAI with an estimate of the Reconditioning Expenses within five (5) Business Days of the Company’s receipt of the Disinfector unit. Within seven (7) Business Days of receipt of this Reconditioning estimate, OAI will either (i) approve the Reconditioning Expense and issue a purchase order for the reconditioning, or (ii) communicate instructions to the Company for disposition of the returned Disinfector unit. The Company shall use its best efforts to complete reconditioning within 15 Business Days after receipt of

an OAI purchase order covering the reconditioning of the Disinfector unit. The Company shall keep records of the Company employees performing the reconditioning, specific dates they were assigned to recondition a Product (by serial number), how long they worked, and what was accomplished during that period. The Company will make this information available to OAI upon request.

(b) During the initial six (6) months of the Agreement Term, the Company will use its best efforts to design and validate a field repair or replacement kit for major cracks in Disinfector basins (DSD and SSD models only). In the event the Company fails to design and validate the field repair or replacement kit during such six-month period, the following protocol to rectify cracked basins will apply until such time as the Company effects a repair kit, retrofit kit, or basin redesign:

(i) In-Warranty DSD/SSD Disinfectors: Upon receipt of notice from a customer that an in-warranty DSD or SSD Disinfector has a cracked basin that has not been caused by inappropriate handling during shipment, customer abuse, or inappropriate repair/installation by an OAI Field Service Engineer or local Biomed Engineer, the Company will ship a replacement unit within two (2) Business Days to the customer from OAI’s segregated new or reconditioned Disinfector inventory. The DSD or SSD Disinfector with the cracked basin will be shipped, together with a duly-issued RMA from the customer, as instructed by OAI, to the Company for reconditioning. In such case, the Company will bear all Reconditioning Expenses. Reconditioning shall be completed within 30 days after the Company’s receipt of the DSD or SSD Disinfector with a cracked basin. Upon completion of reconditioning, the reconditioned unit will be placed into OAI’s segregated reconditioned Disinfector inventory. Failure by the customer to submit the RMA with the shipped Disinfector will not, by itself, void the underlying Disinfector warranty. In such event, the Company will promptly notify OAI that an RMA is required and will hold the Disinfector until a duly-issued RMA is submitted to the Company.

(ii) Out-of-Warranty DSD/SSD Disinfectors: Upon receipt of notice from a customer than an out-of-warranty DSD or SSD Disinfector has a cracked basin that has not been caused by inappropriate handling during shipment, customer abuse, or inappropriate repair/installation by an OAI Field Service Engineer or local Biomed Engineer, the Company will ship a replacement unit within two (2) Business Days to the customer from OAI’s segregated reconditioned Disinfector inventory. The DSD or SSD Disinfector with the cracked basin, together with a duly-issued RMA from the customer, as instructed by OAI, will be shipped to the Company for reconditioning. In such case, the Company shall cap all Reconditioning Expenses for a DSD Disinfector unit with a cracked basin at $2,000 and a SSD

Disinfector unit with a cracked basin at $1,000. Reconditioning shall be completed within 30 days after the Company’s receipt of an OAI purchase order covering the reconditioning of the DSD or SSD Disinfector with a cracked basin. Upon completion of reconditioning, the reconditioned unit will be placed into OAI’s segregated reconditioned Disinfector inventory. In the event a DSD or SSD Disinfector with a cracked basin is shipped to the Company without an RMA, the Company will promptly notify OAI that an RMA is required and will hold the Disinfector until a duly-issued RMA is submitted to the Company.

2.7 SOP for RMA. Within 60 days after the complete execution of this Agreement, OAI and the Company shall establish an SOP with respect to RMA issues covered by Sections 2.6(b), 7.9(a) and 7.9(d).

ARTICLE 3. OBLIGATIONS OF THE COMPANY.

3.1 Testing, Verification, Design Validation, and Process Validation. The Company shall provide complete documentation which demonstrates that those Products which require pre-market notification (“510(k)”) clearance by the FDA have been so cleared. Such documentation shall include, without limitation, specifications, performance testing, Verification protocols and test results, Design Validation protocols and test results, and Process Validation protocols and test results. For those Products deemed by the Company not to require 510(k) clearance, the Company shall provide to OAI documentation to support the decision not to file 510(k)s with the FDA. With respect to the Disinfectors, the Company shall conduct Verification, Design Validation, and Process Validation activities to ensure the performance of the Disinfector, including but not limited to the ability of the Disinfector to perform high-level disinfection and/or sterilization of the Equipment and to safely remove all residual cleaning and disinfecting materials and sterilizing agents from the Equipment. With respect to Rapicide, the Company shall continue to conduct appropriate stability, efficacy, potency, and chemical residual activities to ensure the performance of Rapicide, including but not limited to the ability of Rapicide to perform high-level disinfection and/or sterilization of the Equipment to existing standards and regulations. Subject to Article 10 (Confidential Information) and requirements of law, and in order to make certain representations to the FDA, the Company shall, as and when requested by OAI, provide OAI with the protocols and results of its testing, Verification, Design Validation, and Process Validation efforts with respect to the Products. The Company shall bear its own direct and indirect costs incurred in the performance of its activities hereunder. The Company shall make all reasonable modifications to the Products to render them compatible with the Equipment. OAI shall have no obligation to render any Equipment compatible with the Products.

3.2 OAI Audits. OAI shall have the right, at its cost and expense, to perform periodic audits of the Company (not less than one per annum) with respect to the Products and the quality systems related thereto (including but not limited to Quality System Regulations, 21 C.F.R. Part 820) to (i) determine compliance with the then current published Good Manufacturing Practices regulations promulgated by the FDA, (ii) review in-house bench servicing activities of the Company, and (iii) assess progress made on corrective/preventive actions arising from previous audits. Such audits shall be performed during normal business hours and upon not less than ten days’ prior notice to the Company. Audit frequency shall be determined by OAI based upon, but not limited to, trend analysis of Complaints, the proposed introduction of new products, and/or changes to the Company’s suppliers and/or manufacturing processes that could impact the marketability, safety, or effectiveness of a Product. The parties will cooperate with each other to arrange such visits at mutually convenient times. In addition, upon not less than ten days’ prior notice, OAI personnel may periodically travel to the Company’s facilities, at OAI’s cost and expense, to observe testing, Verification activities, Design Validation activities, and Process Validation activities, receive information with respect thereto, and ensure that the Products are being tested in accordance with Good Laboratory Practices (21 C.F.R. Part 58). Should the audit results indicate that corrective/preventive action is required by the Company, the Company shall use its best efforts to effect corrective/preventive action(s) in a timely manner. The progress and effectiveness of the corrective/preventive action(s) are subject to re-audit by OAI as outlined above. Notwithstanding anything contained in this Agreement to the contrary, the (in)frequency of OAI’s audits shall not relieve the Company of its obligations to comply with Quality System Regulations or any other requirements under this Agreement.

3.3 Approvals and Clearances. The Company shall ensure that the Products are not sold to OAI before all required governmental or private approvals and clearances, including without limitation compliance with UL and §510(k) of the Food, Drug, and Cosmetic Act of 1938 and Safe Medical Device Act of 1990, each as amended, for the sale, lease, distribution or marketing of the Products have been obtained.

3.4 Complaints. The Company shall conduct a complete and documented investigation and shall use its best efforts to fully resolve Complaints regarding the Products (whether such Complaints are received by the Company directly, or via OAI, OAI’s Affiliates, or a third party) in accordance with the requirements for Complaint handling as defined and promulgated by the FDA in the then current published Good Manufacturing Practices regulations (21 C.F.R. Part 820) or any other

applicable law, rule, or regulation. OAI shall promptly forward to the Company all such Product Complaints received by OAI. Product Complaints received or generated by OAI shall be communicated by OAI to the Company via telecopy and/or U.S. Mail. Any and all Medical Device Reports (MDR) Reportable Events shall be filed with the FDA (with a copy to OAI) by the Company in accordance with all applicable laws, rules, and regulations (including but not limited to 21 C.F.R. Part 803). The Company shall give OAI prompt notice and copies of all Product Complaints received by the Company directly or via third parties. All such Complaint investigations shall be performed and completed promptly but in no event later than 30 days from receipt of the Complaint by the Company. If as a result of the Company’s investigation a Product Change is necessary, the Company will perform and document such Product Change (i) in accordance with this Agreement, (ii) at no charge to OAI, and (iii) in consultation with OAI. OAI shall have the right to review all Product Changes and corrective actions resulting from a Complaint investigation. If OAI reviews such Product Changes and/or corrective actions and reasonably determines that such Product Changes and/or corrective actions will likely result in incompatibility/ineffectiveness of the Product(s) with respect to the Equipment and/or the compromise of the Products’ safety, then OAI will give the Company notice of such findings with an attendant 30 days to develop a plan to resolve such incompatibility/ineffectiveness. If the Company fails to develop such a plan during such 30-day period, OAI may, in addition to all other rights and remedies at law or in equity or otherwise, unilaterally terminate the Agreement Term and all pending purchase orders pursuant to Section 8.2(c), provided notice of such termination is given within 30 days of the end of the 30-day plan development period.

3.5 Special Investigations; Inquiries. If any government, health or other regulatory authorities or private standards boards in the Territory require any clinical or other investigations to be performed with respect to the Products and the quality systems related thereto (including but not limited to Quality System Regulations, 21 C.F.R. Part 820), and the Company has not performed such investigations or if, for any reason, such authorities will not accept the results of the Company’s investigations, then the Company shall use its best efforts in promptly undertaking and completing such investigations. Each Party agrees to notify the other of any formal or informal inquiries relating to the Products by the FDA or any other regulatory agency, any private standards board, or any state or Federal government. Included in such notification shall be a copy of the Form 483 (in the case of an FDA inquiry) or other similar document left by or subsequently sent by the inquirer.

3.6 Product Changes. The Company shall, prior to the implementation of a Product Change, promptly obtain all approvals

and clearances, if any, required to manufacture the Product(s) and sell the Product(s) (as changed, modified, or added) within the Territory. All Product Changes, regardless of whether initiated by OAI or the Company and regardless of whether relating to or resulting from a Product Complaint, shall be implemented in accordance with an SOP which details a procedure including, without limitation, Engineering Change Requests and Engineering Change Orders. The Company shall decide whether a particular Product Change requires that a Pre-market Submission be filed with the FDA, including without limitation a 510(k) notification or PMA application. A change of a supplier by the Company shall not constitute a Product Change, provided that the Company has performed Process Validation and Design Validation (in accordance with the FDA Guidance document, “Validation and Documentation Inspection Guide” dated 1993) with respect to the new supplier and the new materials supplied. Process changes that could impact the marketability, safety, or effectiveness of a Product, are also subject to Process Validation activities. The Company shall provide copies of, and OAI shall have the opportunity to review, all Design Validation and Process Validation protocols (for changes in supplier and/or process) and test results prior to the implementation of same by the Company. All Product Changes developed by the Company shall be owned by the Company.

3.7 Documentation & Training. The Company shall furnish to OAI, without additional charge and for the duration of the Agreement Term and for a period of two years thereafter, the following:

(a) Documentation. All technical information, documentation and test data necessary to inventory, market, sell, ship, repair and maintain the Products within the Territory. Such materials shall be consistent with similar information furnished to other distributors of the Products and/or similar products manufactured by the Company. In addition, the Company shall furnish to OAI, at least two weeks prior to the introduction of a new product, a complete parts pricing list. The Company hereby grants to OAI a fully-paid, non-transferable license for the Agreement Term to copy or otherwise reproduce all or portions of the Company’s brochures, or to incorporate portions of the Company-copyrighted material in Product brochures or advertising material composed by OAI, provided that (i) OAI shall submit such materials composed by OAI which incorporate the Company-copyrighted material to the Company for prior written approval, which approval shall not be unreasonably withheld or delayed, and (ii) OAI uses such materials solely to fulfill its obligations under this Agreement. Such reproduction will not apply to proprietary and confidential information and will be subject to all applicable copyright laws.

(b) Training. Periodic in-person training of OAI’s sales, service and customer support staff at a location selected by OAI. Field service training will be detailed in a formal curriculum which must include, without limitation, required testing and recertification intervals. Each of the Company and OAI will bear the costs and expenses of its respective personnel in connection with such training. Notwithstanding the foregoing, the Company shall hire and maintain, at its sole cost and expense, a Technical Liaison (with a reasonable travel budget) who will interact with appropriate OAI personnel.

3.8 Noninterference. The Company covenants that it shall not interfere with OAI’s rights and obligations as the exclusive distributor and semi-exclusive servicer of the Products as set forth in Article 2.

3.9 Insurance. Commencing on the first date of Product delivery until the expiration of the pertinent statute of limitations, the Company shall maintain Product Liability insurance and Completed Operations insurance with an insurance company each in the amount of $2,000,000 per occurrence, for any injury to persons or property resulting from the manufacture, testing, demonstration, marketing, sale, lease, rental, distribution or use of the Product. OAI shall be named as additional insured and loss payee under such policy and the Company shall cause such policy to be endorsed by the Company’s insurance company and provide evidence of same to OAI. Copies of such policy and any notices thereunder shall be forwarded to OAI along with 30 days’ prior notice of termination or cancellation of such policy.

3.10 Recalls. In the event that any Product defect or regulatory or governmental action requires a Product’s recall as defined at 21 CFR Section 7.3(g) and (h), which includes without limitation a device correction in the field (a “Recall”), or destruction, withholding from the market, or other action that prevents or limits the marketing of the Product, the Company shall bear all costs and expenses of such Recall or other action. OAI shall reasonably assist the Company, at the Company’s cost and expense, in carrying out any such Recall. OAI shall bear the costs and expenses of a Recall if such Recall is the direct result of any act or omission to act attributable principally to OAI. If a Recall is the direct result of acts or omissions to act attributable to both the Company and OAI, or should it prove impossible to assign fault for such Recall, the Company and OAI shall share the costs and expenses of such Recall equally.

3.11 Ancillary Products and Rapicide.

(a) During the Agreement Term and the Post-Agreement Period, the Company agrees to offer for sale to OAI all Ancillary Products and Rapicide. During the Post-Agreement Period, OAI will only (i) sell or provide Ancillary Products and Rapicide in

connection with Product Customer Service to Product customers existing prior to the end of the Agreement Term and (ii) except as provided in the last sentence of Section 4.3, buy Ancillary Products and Rapicide from the Company or the Company’s dealer, distributor or reseller. If OAI ceases performance of its Product Customer Service functions in accordance with the last sentence of Section 2.5(f), the Company need not continue to offer the Ancillary Products and Rapicide for sale to OAI.

(b) During the Post-Agreement Period, the prices charged to OAI for the Ancillary Products and Rapicide shall be as set forth on Schedule 3.11 attached hereto.

(c) The Company shall use its best efforts to stock sufficient inventory of Ancillary Products and Rapicide to support the Disinfector units delivered to OAI’s customers. If and when necessary, the Company shall use its best efforts to ship Ancillary Products and Rapicide overnight, at OAI’s cost (unless overnight shipment is made necessary due to the fault of the Company), in the event OAI does not have such Ancillary Product and Rapicide in stock. In the event the Company is unable to supply such Ancillary Products and Rapicide and obtain another source of supply for OAI, then such inability shall be considered noncompliance with this Section and the Company shall use commercially reasonable efforts, with neither obligation nor charge to OAI, to provide OAI with drawings and other documents required to either manufacture or buy such Ancillary Products and Rapicide and the technical information or any other rights necessary for OAI to manufacture or obtain such Ancillary Products and Rapicide from other sources, together with a non-exclusive license to make or have made such Ancillary Products and Rapicide for the exclusive purpose of supporting Product customers (and, once the Agreement Term has ended, only Product customers existing prior to the end of the Agreement Term) within the Territory. The technical information includes, by example and not by way of limitation (i) manufacturing drawings and specifications of materials and parts comprising the Ancillary Products and Rapicide and components thereof; (ii) manufacturing drawings and specifications covering special tooling and operation thereof; (iii) a detailed list of all commercially available accessories, consumables, parts and components purchased by the Company on the open market, disclosing the model/part number, name and location of the supplier and price lists for the purchase thereof; and (iv) one complete copy of the source code used in the preparation of any software licensed or otherwise acquired by OAI from the Company, provided, however, that such source code shall remain the property of the Company (or third-party owner thereof) and shall be separately licensed to OAI for OAI’s possession and use exclusively for maintenance of OAI’s customers. The aforementioned drawings, documents, and technical information provided to OAI (and all copies thereof)

shall be returned to the Company once the Company is able to supply the Ancillary Products and Rapicide.

3.12 Bottling, Packing, and Marking. The Company shall bottle, pack, and mark the Products in accordance with applicable laws and regulations. The Company shall prominently and permanently affix the OLYMPUS trade name, trademark, colors, and logo (the “OLYMPUS Marks”) and may permanently but less prominently (i.e., location, font, color) affix the Company’s trade name, trademark, and logo (the “Company Marks”) on the Products, all Product packaging, printed materials, labels, and tags as mutually agreed between the parties. Any use by the Company of the OLYMPUS Marks or any trade name, trademark, or logo which is similar to an OLYMPUS Mark, and the goodwill of any business associated with such trade names, trademarks, or logos, shall inure to the benefit of OAI. Upon termination or expiration of the Post-Agreement Period, the Company shall (i) not sell any product (including the Products) which is bottled, packaged, and/or marked in materials containing or with the OLYMPUS marks and (ii) immediately cease any use of the OLYMPUS Marks. Except as expressly set forth herein, (a) the Company shall not have any right to use nor shall the Company acquire any right, title, license, or other interest in the “OLYMPUS” name, or any trade name, trademark, or logo belonging to OAI, including but not limited to the OLYMPUS Marks, and (b) OAI shall not have any right to use nor shall OAI acquire any right, title, license, or other interest in the “MEDIVATORS” name, or any trade name, trademark, or logo belonging to the Company, including but not limited to the Company Marks. The Company hereby grants to OAI the right and license to use the Company Marks in the Territory only with respect to the Products and in accordance with this Agreement and, subject to Section 2.3, such right and license shall be exclusive during the Agreement Term. The Company shall give OAI a reasonable opportunity to review and approve all Product marking.

3.13 Labeling. The Company shall give OAI a reasonable opportunity to review and approve all Product labeling contained on and distributed with the Products and such labeling shall comply with all FDA rules and regulations (including but not limited to 21 C.F.R. Part 801).

3.14 Repair History. In the event a repair to a Product is necessary, the Company shall promptly provide OAI with the repair history of such Product, upon OAI’s request. In addition, the Company shall supply to OAI, upon OAI’s request, an accounting of all Disinfector repair parts shipped or used in order to service units under warranty. The Company shall provide OAI with written monthly reports detailing the Company’s Product Customer Service functions performed. In addition, OAI will provide to the Company, upon the Company’s request, the repair history of Disinfector units sold during the term of the prior Distributor

Agreements between the parties, dated March 12, 1996 and August 1, 1999, respectively.

3.15 Demonstration and Training Units. During the Agreement Term, OAI will have the right to purchase from the Company a reasonable number of Disinfector demonstration and training units as OAI requires, at a price discounted by 30% off of then-current list price. Such demonstration and training units will be marked as such and will not be for re-sale, except in connection with OAI’s normal demonstration pool inventory turnover.

3.16 OAI Product Enhancements.

(a) The Company agrees to evaluate and use commercially reasonable efforts to incorporate OAI’s reasonably conceptualized and documented design changes and/or enhancements to the Products (“OAI Enhancements”). Any increase or reduction in the Company’s manufacturing costs (labor and materials) resulting from OAI Enhancements shall be reflected in reasonable price adjustments. Any engineering/design costs and delivery dates for OAI Enhancements shall be quoted to OAI for its approval and payment. Any related tooling purchased by OAI for the Company’s use in implementing OAI Enhancements shall be owned by OAI and shall be used exclusively for the benefit of OAI. Any and all Intellectual Property relating to OAI Enhancements shall be owned by OAI and the Company shall receive a non-exclusive license to use such OAI Enhancements on the Products for the balance of the Agreement Term (on a royalty-free basis) and for a period of nine months thereafter, provided that (i) use of such license shall not cause the Company to compete with OAI or any OAI Affiliate during the Agreement Term and (ii) the Company remits a mutually agreed-upon royalty (based on the enhanced value of the affected product(s)) to OAI during the nine-month period following the Agreement Term. (The license during the Agreement Term may be granted on a worldwide basis depending on OAI’s evaluation of its impact on OAI’s Affiliates.) The Company shall not use the OAI Enhancements for itself or for any other party for any purpose other than the performance of its obligations hereunder. Product design changes and/or enhancements conceived jointly by OAI and the Company shall be owned by OAI and the Company jointly.

(b) OAI’s audit rights set forth in Section 3.2 shall apply to this Section as well.

3.17 Quality Issues The Company agrees, in compliance with FDA regulations, that it will have an effective and timely program in place for preventing quality problems, identifying and analyzing quality programs, internally communicating such quality problems that are discovered either in-house or in the field, and taking appropriate corrective action(s). This program shall include but not be limited to: establishing appropriate design controls; analyzing processes, work operations, quality audit

reports, quality records, service records, complaints, returned product and other sources of quality data to identify existing and potential causes of nonconforming product or other quality problems; use of appropriate statistical methodology where necessary to detect recurring quality problems; investigating the cause(s) of nonconformities relating to product, processes and the quality system; identifying action(s) needed to correct and prevent recurrence of nonconforming product and other quality problems; verifying or validating the corrective and preventive action to ensure that such action is effective and does not adversely affect the finished device; implementing and recording changes in methods and procedures needed to correct and prevent identified quality problems; ensuring that information related to quality problems or nonconforming product is disseminated to individuals directly responsible for assuring the quality of such product or the prevention of such problems; submitting relevant information on identified quality problems, as well as corrective and preventive actions, for management review; conducting such corrective and preventive actions including product recalls and market withdrawals; and adequately documenting all such activities.

3.18 Quality Dispute Resolution. Within 60 days after the complete execution of this Agreement, OAI and the Company shall establish an SOP with respect to the resolution of disputes that may arise between the parties in connection with the regulatory and quality issues covered by Sections 2.6, 3.1, 3.2. 3.3, 3.4, 3.5, 3.6, 3.7, 3.10, 3.12, 3.13, 3.14, 3.17, 3.20, 3.21, 7.8(b), 7.10, and 7.12.

3.19 Reports.

(a) Weekly Inventory Status. During the Agreement Term, the Company shall submit to OAI’s Manager-Purchasing & Planning (MSG) (with a copy to OAI’s Vice President-Operations), by the first Business Day of each week, a written Weekly Inventory Status Report listing the Disinfector units (new and reconditioned) located in OAI’s segregated section of the Company’s principal shipping facility.

(b) Quarterly Activity. During the Agreement Term, the Company shall submit to OAI’s CDS Senior Manager (with a copy to OAI’s Vice President - Marketing) within 30 days after the end of each calendar quarter, a written report detailing Product shipments, activities of the Company’s Clinical Specialists (e.g., projected Disinfector and Rapicide placements for the next calendar quarter), and competitive activity during the past quarter.

3.20 Rapicide as a Hazardous Material. The Company agrees that it will fully comply with all applicable provisions of 49 C.F.R. Part 171 with respect to all shipments of Rapicide.

3.21 HIPAA. Where applicable, the Company agrees to comply with the Health Insurance Portability and Accountability Act of 1996, P.L. 104-191 (“HIPAA”) and the rules and regulations implemented thereunder. The Company further agrees to (a) comply with all applicable federal, state, and local laws and regulations, including without limitation HIPAA, regarding the confidentiality of patient and/or protected health information (“PHI”), and (b) execute additional documents as required by the “Covered Entity” as defined under and in accordance with HIPAA rules and regulations to ensure the safeguarding of PHI, including but not limited to execution of a Business Associate-Related agreement that must be executed considering the Company’s receipt and/or use of PHI in the work that it performs for OAI. In the event such documentation is not executed, for any reason whatsoever, OAI may terminate the Agreement Term pursuant to Section 8.2(c). The Company agrees to execute any additional documentation that may be required by HIPAA.

ARTICLE 4. OBLIGATIONS OF OAI.

4.1 Purchase Projections. OAI projects that it will, during each year of the Agreement Term, purchase the dollar volume of Products corresponding to such year set forth on Schedule 4.1 attached hereto. If, at the end of an Agreement Term year, it is determined that at least 90% of such year’s purchase projection (the “90% Amount”) has not been met, the Company may terminate the Agreement Term pursuant to Section 8.2(e) or modify OAI’s distribution rights to non-exclusive status. Such decision to terminate or to remove exclusivity must be made within 60 days after the close of the particular Agreement Term year. If during such 60 day period the Company decides to terminate the Agreement Term or remove OAI’s exclusivity, the Company shall give OAI 30 days’ prior written notice. During such 30 day notice period, OAI shall have the right to cure the purchase projection shortfall, and cancel the Company’s decision to terminate or remove exclusivity, by remitting to the Company the amount set forth in Section 8.2(e). Failure by the Company to send such notice during such 60 day period shall mean OAI’s rights under Section 2.1 shall continue on an exclusive basis for at least the ensuing year of the Agreement Term. If the Company elects to remove OAI’s exclusivity in accordance with this Section and OAI fails to revive the exclusivity as set forth in this Section 4.1, then the restrictions on both parties set forth in Section 2.1(a), 2.2, and 2.3 and the foregoing purchase projections shall be canceled. Notwithstanding anything contained herein to the contrary, the aforementioned purchase projections shall not constitute a commitment by OAI to purchase such projected amount of Products and OAI shall not have any liability whatsoever to the Company in the event such projections are not satisfied.

4.2 Scope of Responsibility. During the Agreement Term, OAI shall, at its own cost and expense, use commercially reasonable efforts to sell the Products and perform its Product Customer Service obligations within the Territory. OAI shall keep the Company reasonably informed of market information and OAI’s sales and marketing activities by submitting to the Company, on a quarterly basis, a written report summarizing sales, marketing, and competitive activity. During the Agreement Term, OAI shall not take any action which would impair or diminish the reputation of the Company or the Products. The parties agree that OAI’s marketing, sale, or distribution of changed or improved new products or products substantially similar to the Products in accordance with the provisions of this Agreement, shall not constitute impairment to or diminishment of the reputation of the Company or the Products.

4.3 Alteration of Products. During the Agreement Term and the Post-Agreement Period, OAI shall not alter, modify or substitute components of the Products (except for Product Customer Service performed in the ordinary course of business) or specifications relative thereto without the written consent of the Company, which consent shall not be unreasonably withheld or delayed. In effecting repairs on the Products, OAI shall use only Ancillary Products purchased from or authorized by the Company. However, in the event of an emergency, OAI may purchase Ancillary Products from a third-party retail source.

4.4 Marketing. During the Agreement Term, OAI shall, at its own cost and expense, use commercially reasonable efforts to market the Products in the Territory. OAI shall attend major trade shows relating to the Products. OAI and the Company shall meet semi-annually to review prior activity and to plot future strategy.

4.5 Inventory. OAI shall maintain a working inventory of the Disinfectors adequate, in OAI’s sole and absolute discretion, to handle the reasonably anticipated demand and to render satisfactory Product Customer Service to Disinfector customers.

4.6 Prohibited Sales. During the Agreement Term and the Post-Agreement Period, except as expressly agreed by the Company in writing, OAI shall not (i) sell any Product for resale or for export out of the Territory; (ii) export any Product from the Territory; or (iii) sell any Product to any person, firm or company in the Territory which OAI knows or has reason to believe intends to resell or export the Product out of the Territory.

4.7 Insurance. Commencing on the first date of Product delivery until the expiration of the pertinent statute of limitations, OAI shall maintain comprehensive general liability and automobile liability insurance each in the amount of $2,000,000 per occurrence, and workers’ compensation insurance in

the amount of $1,000,000 per occurrence, covering its activities hereunder as a distributor and servicer of the Products. Evidence of such insurance shall be provided to the Company upon reasonable request.

4.8 Equipment Modifications. OAI will give the Company at least 90 days’ prior notice of modifications to the Equipment that will likely result in incompatibility/ineffectiveness of the Products with respect to the Equipment. The Company shall not be in default hereunder if it is unable to conform the Products to such Equipment modifications.

4.9 HIPAA. Where applicable, OAI agrees to comply with the Health Insurance Portability and Accountability Act of 1996, P.L. 104-191 (“HIPAA”) and the rules and regulations implemented thereunder. OAI further agrees to comply with all applicable federal, state, and local laws and regulations, including without limitation HIPAA, regarding the confidentiality of patient and/or protected health information.

4.10 Sole Remedy. Except as set forth in Sections 4.1 and 9.3, the Company’s sole remedy for the breach by OAI of any of the obligations contained in Sections 4.1, 4.2, 4.4, 4.5, 4.6 and 4.9 shall be termination of the Agreement Term in accordance with Section 8.2(b) or (d), as the case may be.

ARTICLE 5. PURCHASE ORDERS.

5.1 General. During the Agreement Term and, with respect to the Ancillary Products and Rapicide, during the Post-Agreement Period as well, the Company agrees to sell the Products to OAI and OAI may purchase the Products from the Company (if OAI submits a purchase order therefor) and such purchases shall be governed by, in accordance with, and subject to the terms and conditions of this Agreement. In each month of the Agreement Term, OAI shall provide the Company with an estimate of its purchase of Disinfector units for the ensuing three months. This estimate is not a binding guarantee but rather a guide to possible upcoming purchases. OAI will endeavor to purchase the estimated amount. OAI will issue a purchase order for each month by the third Business Day of the month.

5.2 Disinfector Inventory and Delivery. Upon submission by OAI of purchase orders (in accordance with Section 5.5) for Disinfector units, the Company shall, within 30 days, have such Disinfector units physically available in a segregated OAI inventory (not commingled with other product inventory of the Company) at the Company’s principal shipping facility. Such segregated OAI inventory shall be maintained by the Company at no charge to OAI. Upon receipt of shipping instructions by the Company from OAI, the Company shall, within five Business Days,

ship the Disinfector units from the segregated OAI inventory to the OAI customer(s) within the Territory designated by such shipping instructions, provided that OAI has sufficient inventory to cover the order. OAI shall bear the initial shipping costs incurred in delivering brand new or newly-ordered reconditioned Disinfector units to OAI customers. OAI will also bear the shipping costs incurred in delivering replacement units to customers that are needed due to OAI administrative or customer error. OAI may cancel shipping instructions and, at its option, either arrange for pick-up and shipment or receive a credit for Disinfector units whose delivery is more than ten days past due. If the Company incorrectly ships a new Disinfector unit to a customer from the segregated OAI inventory in lieu of a reconditioned Disinfector unit ordered by OAI, the Company shall (provided that the unit does not exhibit any sign of use by the Customer) bear all costs of return, quality control release testing, and repackaging as a new unit. If the unit has been previously used by the customer, then the Company shall issue a $5,000.00 credit to OAI. In any event, if the Company incorrectly ships the wrong class of Product to a Customer, the Company will bear all packing, (de)installation, and shipping charges incurred in correcting such misshipment.

5.3 Ancillary Product and Rapicide Delivery.

(a) OAI will issue a blanket purchase order for Ancillary Products and/or Rapicide. The Company shall, within 30 days of OAI’s submission of a pick ticket corresponding to such blanket purchase order, deliver such Ancillary Products and/or Rapicide to OAI or the OAI customer(s) within the Territory, as designated by OAI on the pick ticket. OAI shall bear the shipping costs incurred by the Company in delivering the Ancillary Products and/or Rapicide to OAI or OAI’s customers. If delivery of such pick ticket is more than 30 days past due, OAI may, at its option, either (i) cancel the pick ticket for Ancillary Products and/or Rapicide or (ii) elect to proceed with the solution set forth in Section 3.11(c). If OAI or OAI’s customer finds any quantity deficiency in the Ancillary Product and/or Rapicide, OAI may, at its option, (i) require the Company to immediately deliver the difference by air freight at the Company’s expense, or (ii) reduce the purchase price specified in the related pick ticket accordingly. If OAI or OAI’s customer finds an over-shipment of Ancillary Product and/or Rapicide, OAI and/or the OAI customer may store the excess units or bottles (as the case may be) or return the excess units/bottles to the Company, both at the Company’s risk and expense. The Company shall not ship, and OAI shall be entitled to reject as “defective”, Rapicide bottles with a remaining shelf life of three months or less. During the initial six (6) months of the Agreement Term, OAI will pay the Company a flat monthly fee of $8,250.00 in consideration for all order picking, packing, shipping, and administrative fees associated with the shipment of Ancillary Products and Rapicide. Prior to the end of the initial six-month period of the Agreement

Term, the Company and OAI agree to establish a per-pick fee that will replace the flat monthly fee upon conclusion of such initial six-month period.

(b) Upon receipt by OAI of repair parts request documentation from the Company through Metrix, an OAI purchase order will be issued authorizing drop shipment to the customer. OAI shall bear all of the shipping costs incurred by the Company in shipping of the repair parts except for items covered under warranty. All repair parts invoices sent by the Company must contain the following: JDE PO#, Metrix Request ID#, Serial # of the unit, dispatch status, and warranty status. The Company agrees not to ship parts to customers that appear on the customer credit hold list supplied by OAI. The repair parts documentation mentioned above includes, but is not limited to, customer’s purchase order number, repair part requirements, description of the problem, Company resolution, warranty status, and service contract status.

5.4 Title; Risk of Loss. Title to and risk of loss for the Products sold to OAI shall pass to OAI upon (i) placement of the Disinfector units into the segregated OAI inventory at the Company’s principal shipping facility (with respect to the Disinfectors), and (ii) receipt of the Ancillary Products and/or Rapicide by the carrier selected by OAI to deliver the Ancillary Products and/or Rapicide to OAI or OAI’s customers.

5.5 Conditions of Sale. The order terms and conditions set forth in this Agreement shall govern all orders made under this Agreement, and any standard printed order forms or other documents of either party (such as those contained on a quotation, proposal, purchase order, pick ticket, or invoice) shall have no force or effect with respect to such orders unless such form or document specifically states that it is an amendment to this Agreement and is signed by an authorized signatory of each party. Notwithstanding the foregoing, OAI’s purchase orders and pick tickets may indicate the following terms which shall govern: Product quantity, delivery destination and schedule, and a reference to the applicable pricing. OAI shall have no obligation to purchase until it submits a purchase order or pick ticket (as the case may be) to the Company. An OAI purchase order or pick ticket shall be deemed accepted by the Company unless OAI is notified to the contrary in writing by the Company within seven days of the Company’s receipt of such purchase order or pick ticket from OAI. An appropriate policy/procedure will be developed to handle special requests.

5.6 Price.

(a) Pricing. During the first year of the Agreement Term, the prices to be charged to OAI for (i) the Disinfectors shall be fixed as set forth in Schedule 1.8 attached hereto, and (ii) the Ancillary Products and Rapicide shall be fixed as set

forth in Schedule 1.4 attached hereto. During each of the second and third years of the Agreement Term, the Company may only increase the prices for the Products once by no greater than the annual percentage change in the Producer Price Index (“PPI”) (for Disinfectors, PPI Commodity Grouping code number WPU11790524 will be used; for Ancillary Products and Rapicide, PPI Commodity Grouping code number WPU15620101 will be used) per Agreement Term year, unless the cost of major components increases sufficiently to warrant price increases above the foregoing percentage change in PPI limits. In the event the Company wishes to increase prices by more than the foregoing percentage change in PPI limits due to major component increases, the Company shall substantiate and justify such increases to OAI in writing, and OAI will then have the option to locate the components from a third-party at a lower price for the Company’s purchase of such third-party components in order to reduce or eliminate the price increases to OAI. Price increases due to mutually agreed-upon Product additions and/or enhancements will not be limited by the foregoing percentage change in PPI limits. Any permitted annual price increases must be communicated to OAI during the 60 days immediately prior to the start of the Agreement Term year and shall take effect on the first day of such Agreement Term year. In the event the Company is 30 days or more past due in delivering the Products (in accordance with Sections 5.2 and 5.3) the purchase price for such “late” Products shall be reduced by three percent (3%) for each 15-day period such delivery is overdue. Product pricing shall only be adjusted in accordance with this Section 5.6(a) unless otherwise agreed by the parties. Instruction manuals shall be included in the price of the Products. OAI shall be free to set its own Product prices charged to its subdistributors, dealers, and customers.

(b) Payment. OAI shall pay for Disinfector units no later than 30 days from (i) placement by the Company of the Disinfector units in OAI inventory AND (ii) the date of the corresponding invoice. OAI shall pay for all Ancillary Products and Rapicide received and not rejected (within ten days) by OAI or OAI customers no later than 30 days from the date of the Company’s invoice corresponding to such Ancillary Products and Rapicide received and not rejected (within ten days). All payments overdue by more than ten Business Days shall generate a one and one-half percent (1½%) late payment penalty (or the highest rate permitted by law if less than one and one-half percent (1½%) per month) for each month such payment is overdue.

5.7 Upon Termination. Unless OAI decides that it does not want a Disinfector purchase order or shipping instruction filled, any Disinfector purchase order/shipping instruction submitted by OAI but not shipped by the Company prior to the date that notice of termination is delivered hereunder or the date that the Agreement Term otherwise expires, shall be timely delivered to OAI’s segregated inventory at the Company’s principal shipping

facility or the destination points designated by OAI (as the case may be), provided that such termination did not arise from OAI’s default.

ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF OAI.

OAI hereby covenants, represents and warrants to the Company, its successors and permitted assigns that:

6.1 Due Organization. OAI is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, and has the full power and authority to conduct all activities conducted by it under this Agreement.

6.2 Authorization to Execute. The person executing this Agreement on behalf of OAI has been duly authorized to do so by all requisite corporate and other action of OAI, and this Agreement has been duly executed and delivered to the Company by such person.

6.3 Validity of Agreement. This Agreement is the legal, valid and binding obligation of OAI, enforceable in accordance with its terms.

6.4 No Conflict. To the knowledge of OAI, the execution, delivery and performance of this Agreement by OAI does not and will not conflict with or result in a breach of any agreement, instrument or understanding, oral or written, to which OAI is a party. There is no litigation, arbitration or administrative proceeding pending or threatened which would, in any event, conflict with or result in a breach of this Agreement or interfere with OAI’s obligations hereunder.

6.5 Compliance. OAI shall ensure that, in marketing and selling the Products, it shall (i) comply with all applicable laws and regulations and (ii) not engage in any deceptive or misleading practices.

ARTICLE 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby covenants, represents and warrants to OAI, its successors and permitted assigns, and to OAI’s customers that:

7.1 Due Organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Minnesota, and has the full power and authority to conduct all activities conducted by it under this Agreement.

7.2 Authorization to Execute. The person executing this Agreement on behalf of the Company has been duly authorized to do so by all requisite corporate and other action of the Company, and this Agreement has been duly executed and delivered to OAI by such person.

7.3 Validity of Agreement. This Agreement is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms.

7.4 No Conflict. To the knowledge of the Company, the execution, delivery and performance of this Agreement by the Company does not and will not conflict with or result in a breach of any agreement, instrument or understanding, oral or written, to which the Company is a party. There is no litigation, arbitration or administrative proceeding pending or threatened which would, in any event, conflict with or result in a breach of this Agreement or interfere with the Company’s obligations hereunder.

7.5 Right to Use Technology. The Company has the legally enforceable right to use all technology contained within or related to the Products, whether patented or unpatented, for the purposes specified in this Agreement, and such use of such technology does not violate any agreement, instrument or understanding, oral or written, to which the Company is a party.

7.6 Warranty of Non-Infringement. The Products do not incorporate or infringe upon any copyright, patent, trademark, service mark, trade name, trade secret, idea, process, know-how, development, invention, or any other form of intellectual property (collectively “Intellectual Property”) not owned by or licensed to the Company. The Company will promptly notify OAI of any alleged or actual infringement by the Company of any Intellectual Property relating to the Products or their manufacture. Nothing in this Agreement shall be deemed to confer upon either OAI or the Company any right, title, interest, or license, express or implied, to or in any of the other party’s current or future Intellectual Property or in the goodwill now or hereafter associated therewith.

7.7 Right to Sell for Resale; Ability to Deliver. The Company has the right to sell the Products to OAI for resale by OAI in the Territory. The Company has and will have the ability to timely deliver all of the Product units ordered by OAI during the Agreement Term and Post-Agreement Period. The Company shall not be liable for any indirect, special, incidental or consequential damages (including but not limited to lost profits, lost investments, and lost business opportunities) resulting from its failure to timely deliver any Product.

7.8 Product Quality.

(a) The Products to be sold to OAI hereunder shall (i) meet their respective published specifications during the warranty periods set forth in Section 7.9(b) and (ii) be new and free from defects in design, materials, and workmanship.

(b) The Company shall possess a Quality System that adheres to all applicable laws, rules and regulations, including without limitation the practices and regulations of the FDA (including but not limited to current Good Manufacturing Practices as expressed in 21 C.F.R. Part 820). In addition, the Company shall hire and maintain sufficient personnel devoted substantially to process quality control.

7.9 Product Warranty.

(a) With respect to each Product unit sold to OAI and delivered to an OAI customer, the Company shall, at no charge to OAI for parts, labor, and material, replace or render fully operational any non-conforming or defective Product part or material by reason of the breach by the Company of the warranty set forth in Section 7.8(a), provided that any non-conforming or defective Product part or material is returned to the Company, along with a duly-issued RMA, within 30 days of field exchange. Failure to submit the RMA with the returned Product unit will not, by itself, void this warranty. In such event, the Company will promptly notify OAI that an RMA is required and will hold the Product until a duly-issued RMA is submitted to the Company. The Company shall, within 20 days after receipt by the Company of the non-conforming or defective Product part or material, reasonably determine whether the Product part or material is non-conforming or defective, and whether it is covered by this warranty. OAI shall reimburse the Company for the cost of any replacement or repair part delivered by the Company in place of a Product part or material which, within the combined twenty-day period referred to in the preceding sentence, is reasonably determined by the Company not to be (i) non-conforming or defective or (ii) covered by this warranty; provided, that the Company returns to OAI the Product part or material initially sent by OAI. OAI will perform the labor itself or via a third-party service provider with the cost billed back to the Company at OAI’s per hour labor rate set forth on Schedule 7.9 attached hereto, for all labor associated with the repair or replacement of defective or non-conforming Product parts. Notwithstanding the foregoing, the labor cost for a DSD Disinfector in-warranty service call that is not due to a defective or non-conforming Product part shall be borne by OAI.

(b) Except as otherwise agreed in writing by the parties, the warranty period for all (i) Disinfectors shall be the earlier of (x) twelve months after the date the Disinfector unit is installed at the OAI customer’s facility or (y) 15 months after the shipment date; (ii) Ancillary Products and Rapicide shall be 90 days commencing on the date of use by the customer, and shall not be longer than nine (9) months after the shipment date; and (iii) replacement DSD printers shall be six (6) months commencing on the date of use by the customer, and shall not be longer than nine (9) months after the shipment date.

(c) Notwithstanding the foregoing, in the event of failure by the Company to repair or replace non-conforming or defective Product parts, material or units under warranty within the respective time periods set forth in Section 7.9(a), (i) OAI may, at its sole and absolute discretion after informing the Company of its intentions, make such corrections or replace such Product parts, material, or units and charge the Company for the reasonable cost incurred by OAI in doing so and (ii) the Company shall reimburse OAI for any and all reasonable additional costs and expenses incurred by OAI as a result of such failure to repair or replace, which costs and expenses would not have been incurred if not for such failure to repair or replace. Failure of the Company to repair or replace within 30 days shall entitle OAI to a full refund for the affected Product unit(s), provided the affected Product units are returned to the Company in a timely fashion. The foregoing reimbursement plan shall continue until the non-conforming Product parts, material, or units are repaired, replaced, or refunded.

(d) OAI or the OAI customer must receive an RMA from the Company before returning a Disinfector or any major defective part to the Company. OAI will instruct its customers to package, in a commercially reasonable fashion, the Disinfector units to be returned to the Company. Notwithstanding anything contained in this Agreement to the contrary, shipping costs incurred (i) by OAI and risk of loss upon return of Product parts, material, or Disinfector units to the Company for repair or replacement (in accordance with this Section 7.9) shall be borne by the Company and (ii) by the Company and risk of loss upon delivery of the repaired or replacement parts, material, or Disinfector units to OAI shall be borne by the Company.

(e) Inspection, testing, acceptance, or use (or failure to do the same) of the Products on any occasion shall not affect OAI’s rights and the Company’s obligations under this Agreement or any other rights or remedies available to OAI whether at law, in equity, or otherwise, and such warranties, rights, and remedies shall survive such inspection, testing, acceptance, and use.

(f) The foregoing warranty shall not limit or exclude OAI’s other remedies hereunder, at law, or in equity. Notwithstanding the preceding sentence, in no event shall the Company be liable for indirect, incidental, consequential, or special damages, including but not limited to damages for lost profits, lost investments, or lost business opportunities.

7.10 Compliance. The Company has ensured and shall continue to ensure that (i) in manufacturing and selling the Products to OAI, it shall comply with all applicable laws and regulations including, without limitation, the Food Drug and Cosmetic Act of 1938, as amended (the “Act”), and 21 C.F.R.

Part 820; (ii) as of the date of delivery to OAI, the Products shall not be adulterated or misbranded within the meaning of the Act or any similar federal, state or local laws or regulations, or be an article that is prohibited for introduction into interstate commerce under the provisions of the Act; (iii) it will not engage in any deceptive or misleading practices; and (iv) it will obtain and maintain all required governmental and private approvals and clearances (including without limitation compliance with UL and Section 510(k) of the Act).

7.11 Price Warranty. MV Disinfector service contract pricing from the Company to OAI shall be as set forth in Schedule 7.11. The Company warrants that all prices referenced in Sections 2.5(d), 2.5(e), 2.6, 5.3(a), and 5.6(a), and Schedules 1.4, 1.8, 3.11, 7.9, and 7.11 shall be complete and no additional charges of any kind (except for shipping costs) shall be added without OAI’s prior written consent. Examples of additional charges include, but shall not be limited to, packaging, labeling, (re)stocking, storage, insurance, boxing, or crating.

7.12 California Proposition 65. No product supplied under this Agreement contains chemicals determined by the state of California, pursuant to the Safe Drinking Water and Toxic Enforcement Act of 1986, California Health and Safety Code Section 25249.5 et seq (“Proposition 65”), to cause cancer or birth defects or other reproductive harm. Alternatively, if any Product supplied under this Agreement does include such chemicals, such Product will bear warning labeling in full compliance with Proposition 65 or, if such chemicals are in amounts that do not require warning labeling under Proposition 65, the Company will provide OAI with a certification stating that warning labeling is not required as well as the test protocol and test results to support such certification. The Company shall indemnify OAI in accordance with Section 9.2 for any breach of this Section 7.12.

ARTICLE 8. TERM AND TERMINATION.

8.1 Term. This Agreement shall remain in full force and effect commencing on the date first above written and expiring on the third (3^rd) anniversary therefrom (the “Agreement Term”) unless earlier terminated pursuant to Section 8.2. Notwithstanding the foregoing, the Agreement Term may be suspended pursuant to the provisions of Section 11.1 of this Agreement.

8.2 Events of Termination. The Agreement Term may be terminated, without limiting any party’s rights to other remedies (except as set forth in Section 4.10), as follows:

(a) Upon ten days’ written notice by either party (the “Terminating Party”) to the other party (the “Breaching Party”):

(i) if the Breaching Party has not performed or has materially breached its obligations hereunder and if such nonperformance or breach is incapable of cure; or

(ii) if the Breaching Party shall make an assignment for the benefit of its creditors; or

(iii) if the Breaching Party sells or otherwise transfers, singly or in the aggregate, 25% or more of its ownership or assets without the prior written consent of the Terminating Party; or

(iv) in accordance with Section 11.1 (Force Majeure).

The Breaching Party immediately shall notify the Terminating Party in writing of the occurrence of any event of the type described in clauses (a)(ii)and (iii).

(b) Immediately and automatically if any proceeding in bankruptcy, reorganization or arrangement for the appointment of a receiver or a trustee to take possession of any party’s assets or any similar proceeding under the law for relief of creditors shall be instituted by or against such party.

(c) By the Terminating Party upon the expiration of 30 days (or such additional period as the Terminating Party may authorize) after the Breaching Party’s receipt of written notice of its material breach or non-performance of its obligations hereunder and if such breach or non-performance is capable of cure and has not been cured within such 30-day (or additionally authorized) period.

(d) By OAI upon 30 days’ prior written notice to the Company of the rejection of a Product Change or corrective action in accordance with Section 3.4.

(e) By the Company upon 30 days’ prior written notice to OAI of OAI’s failure to meet the 90% Amount in accordance with Section 4.1. However, OAI shall have the right, at is option, to remit to the Company the portion of such Agreement Term year’s shortfall below the 90% Amount attributable to the Company’s documented gross profit (i.e., Product pricing set forth in Section 5.6(a) less cost of goods sold) during such 30 day notice period and thus cure and revive the Agreement Term.

(f) By the Company, upon six (6) months’ prior written notice, in accordance with Section 2.3.

8.3 Rights and Obligations upon Termination. Upon expiration or earlier termination of the Agreement Term, OAI shall have the right to (i) sell all Product units ordered by OAI customers, (ii) within 30 days of the date of termination, sell all Product units in OAI inventory (whether at OAI’s or the Company’s facility), and (iii) provide ongoing Product Customer Service to its customers in accordance with this Agreement.

8.4 Termination or Expiration Damages. Notwithstanding anything contained in this Agreement to the contrary, neither OAI nor the Company shall be liable to the other, or to any other business entity or subdistributor, solely by reason of the expiration or termination of the Agreement Term regardless of the rationale for or propriety of any termination or expiration. The exculpation from liability shall be for any losses or damages of any kind whatsoever, including, but not limited to, direct, indirect, special, consequential or incidental damages sustained by reason of such termination, including but not limited to, any claim for loss of compensation or profits or for loss of prospective compensation or prospective profits in respect of sales of any of the Products or on account of any expenditures, investments, leases, capital improvements or any other commitments made by either party in connection with their respective businesses made in reliance upon or by virtue of this Agreement or otherwise.

8.5 Survival. Sections 2.4, 2.5, 2.6, 3.4, 3.5, 3.7, 3.9, 3.10, 3.11, 3.12 (except for the last sentence only), 3.21, 4.1 (last two sentences only), 4.3, 4.6, 4.7, 4.9, 4,10, 5.1, 5.2 (but only with respect to purchase orders submitted prior to the end of the Agreement Term), 5.3, 5.4, 5.5, 5.6(b), 5.7, 6.3, 6.4, 6.5, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8(a), 7.9, 7.10, 7.11, 7.12, 8.3, 8.4, and 8.5, Articles 9, 10, and 11 (except Section 11.6) and Schedule 3.11 hereof, shall survive the expiration or earlier termination of the Agreement Term. In certain Sections, the survival period will be limited, as applicable, to the Post-Agreement Period or other time-frame set forth in such Sections.

ARTICLE 9. INDEMNIFICATION.

9.1 Company Infringement Indemnity.

(a) Should any aspect of any Product become the subject of any third-party Intellectual Property infringement claim, action, or proceeding, the Company shall, at its option and expense, use its best efforts to (i) obtain a license that would permit OAI to exercise all rights granted to it under this Agreement or (ii) modify the Product to make it non-infringing. During the period of time in which the Company is pursuing the foregoing remedies, OAI may suspend purchases of the Product from

the Company without any liability whatsoever. Notwithstanding the foregoing, should the Company fail to accomplish either one of the foregoing remedies within 60 days, OAI’s remedies shall be limited to (x) the indemnification received from the Company pursuant to this Article 9, (y) the right, in OAI’s sole and absolute discretion, to terminate the Agreement Term without any liability whatsoever, and (z) require the Company to repurchase (at the price paid by OAI plus shipping costs) any portion of or all ordered Product units and OAI’s inventory of Products.

(b) In addition to its obligations under subsection (a) above and provided that the Company receives prompt written notice of any Intellectual Property infringement claim, action, or proceeding that arises out of, results from, or relates to a Product, the Company shall at all times defend, indemnify, and hold harmless OAI, its successors and permitted assigns, and any of its officers, directors, employees, representatives, and/or agents, or each of them, from and against any and all claims, liabilities, losses, costs, damages, and expenses including but not limited to (i) the damages, losses, costs, and expenses payable to the third party claiming Intellectual Property infringement, (ii) all of OAI’s reasonable attorneys’ fees and disbursements, settlement costs, judgments, court costs and expenses incurred by OAI (attorneys’ fees and disbursements only in the event the Company fails to defend), (iii) reimbursement for the cost of Product that can no longer be sold, and (iv) any other direct losses, costs, expenses, and damages incurred by OAI arising out of or resulting from any Intellectual Property infringement claim, action, or proceeding between OAI and any third party. OAI shall give the Company prompt notice upon learning of an Intellectual Property infringement claim, action, or proceeding and provide to the Company, at the Company’s expense, reasonable assistance in connection with a third party Intellectual Property infringement claim, action, or proceeding. The failure of OAI to give prompt notice shall not result in the loss of indemnification unless the Company shall have been materially prejudiced thereby.

(c) OAI shall not be entitled to the foregoing Intellectual Property infringement indemnity from the Company to the extent that the Intellectual Property infringement claim, action, or proceeding arises or results solely from changes to the Product made by OAI without the authorization of the Company.

9.2 Company Product Liability and Other Damage Indemnity.

(a) The Company shall at all times defend, indemnify, and hold harmless OAI, its successors and permitted assigns and any of its officers, directors, employees, representatives, and/or agents, or each of them, from and against any and all claims, liabilities, losses, costs, damages, and expenses, including but not limited to all of OAI’s reasonable attorneys’ fees and disbursements, settlement costs, judgments, court costs

and expenses (attorneys’ fees and disbursements only in the event the Company fails to defend); incurred by OAI in any action or proceeding between OAI and any third party arising out of or resulting from (i) a defect or alleged defect in a Product, including without limitation defects relating to manufacturing, improper testing, or design, or any breach of warranty regarding the Product or any component thereof, (ii) misrepresentations made in connection with the promotion, marketing, sale, distribution, use, safety, or efficacy of the Product based upon information supplied to OAI by the Company, (iii) the contents of any labeling, inserts, instruction manuals, or related documentation prepared by the Company or based upon information supplied to OAI by the Company, or (iv) a Product Recall or other activity described in Section 3.10. OAI shall provide to the Company, at the Company’s expense, reasonable assistance in connection with a third party action or proceeding of the kind described in this Section 9.2(a). In no event shall the Company be liable for indirect, incidental, consequential, or special damages, including but not limited to damages for lost profits, lost investments, or lost business opportunities.

(b) OAI shall not be entitled to the foregoing indemnity from the Company to the extent that the claim, action, or proceeding arises or results solely from (i) unauthorized representations made by OAI regarding the Product which are different than or in addition to the representations made by the Company to OAI, (ii) changes to the Product made by OAI without the authorization of the Company, or (iii) claims regarding the material compatibility of the Equipment after being treated with the Product, provided the Product meets specifications and has not been modified by the Company without OAI’s knowledge and prior written consent.

9.3 OAI Product Liability and Other Damage Indemnity.

(a) OAI shall at all times defend, indemnify, and hold harmless the Company, its successors and permitted assigns and any of its officers, directors, employees, representatives, and/or agents, or each of them, from and against any and all claims, liabilities, losses, costs, damages, and expenses, including but not limited to all of the Company’s reasonable attorneys’ fees and disbursements, settlement costs, judgments, court costs and expenses (attorneys’ fees and disbursements only in the event OAI fails to defend); incurred by the Company in any action or proceeding between the Company and any third party arising out of or resulting from (i) misrepresentations by OAI made in connection with the promotion, marketing, sale, distribution, use, safety, or efficacy of the Products or (ii) the unauthorized contents of any literature, marketing materials, or related materials prepared solely by OAI or (iii) modifications made to the Products by OAI that were not authorized by this Agreement or not otherwise authorized by the Company. The Company shall provide to OAI, at OAI’s expense,

reasonable assistance in connection with a third party action or proceeding of the kind described in this Section 9.3(a). In no event shall OAI be liable for indirect, incidental, consequential, or special damages, including but not limited to damages for lost profits, lost investments, or lost business opportunities.

(b) The Company shall not be entitled to the foregoing indemnity from OAI to the extent that the claim, action, or proceeding arises or results solely from (i) a defect or alleged defect in a Product, including without limitation defects relating to manufacturing, improper testing, or design, or any breach of warranty regarding the Product or any component thereof (except a defect resulting from an unauthorized Product modification made by OAI), (ii) misrepresentations made in connection with the promotion, marketing, sale, distribution, use, safety, or efficacy of the Product based upon information supplied to OAI by the Company, (iii) the contents of any labeling, inserts, instruction manuals, or related documentation prepared by the Company or based upon information supplied to OAI by the Company, or (iv) a Product Recall or other activity described in Section 3.10.

ARTICLE 10. CONFIDENTIAL INFORMATION.

OAI and the Company each recognizes that documents marked “CONFIDENTIAL” or “PROPRIETARY” and disclosed by one party to the other hereunder is of proprietary value to the disclosing party and are to be considered highly confidential (“Confidential Information”). Each party agrees not to disclose such Confidential Information to others (except its employees who reasonably require the Confidential Information for the purposes hereof and who are bound to it by a like obligation of confidentiality), or to use it for purposes outside this Agreement, without the express prior written consent of the other party (which consent shall not be unreasonably withheld or delayed), except that neither party shall be prevented from disclosing that portion of Confidential Information received from the other which (i) can be demonstrated by written records to be known to the recipient at the time of receipt; (ii) was subsequently otherwise legally acquired by such party from a third party having an independent right to disclose the information; (iii) is now or later becomes publicly known without breach of this Agreement by either party; (iv) is required to be disclosed by order of a court, administrative agency, or other governmental body, provided that the recipient has given reasonable advance notice to allow the disclosing party the opportunity to seek a protective order or otherwise prevent or limit such disclosure; or (v) is or has been independently developed by employees of the recipient without reference to the Confidential Information. Each party’s obligation of confidentiality shall be in force during the Agreement Term and any extension thereof and shall extend for a period of five (5)

years from the expiration or early termination of the Agreement Term.

Neither OAI nor the Company shall (i) use or communicate any research results without the other party’s express written consent, and then only for the purposes expressly set forth in such consent, (ii) disseminate any advertisement or other printed material with respect to the Products and the Equipment, without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed, or (iii) disclose the exhibits and schedules to this Agreement to any third party; unless such use, communication, production, dissemination, or disclosure is required under operation of law (in which case the affected party shall be notified in writing in advance and given an opportunity to seek a protective order). Requests for consent under this Article 10 must either be granted or rejected within five Business Days.

ARTICLE 11. MISCELLANEOUS.

11.1 Force Majeure. Each party hereto shall be excused from the performance of its obligations hereunder in the event such performance is prevented by force majeure, and such excuse shall continue for so long as the condition constituting such force majeure and any consequences resulting from such condition continues. In addition, in the event the condition constituting the force majeure causes a substantial inability by either party hereto to manufacture, deliver, sell or otherwise distribute, as the case may be, the Products, the Agreement Term may be suspended for the period of such inability, but not to exceed six months. If the inability goes beyond such six-month period, either party may terminate the Agreement Term in accordance with Section 8.2(a). For the purposes of this Agreement, force majeure shall mean causes beyond either party’s control including acts of God; war, riot or civil commotion; damage to or destruction of production facilities or materials by fire, earthquake, storm or other disaster; strikes or other labor disturbances; epidemic; failure or default of public utilities or common carriers; and other similar acts. Compliance with laws or government regulations shall not constitute a force majeure event.

11.2 Representations; Relationship. No party is authorized on behalf of the other party to make any statements, claims, representations or warranties or to act on behalf of the other party with respect to the Products, or otherwise, except as specifically authorized by this Agreement or in a writing signed by both parties. The relationship created between the Company and OAI by this Agreement shall be that of manufacturer and seller. Neither OAI nor the Company shall be deemed an agent, representative, partner, joint venturer, or employee of the other party. Neither the Company nor OAI shall have the right to enter

into any contracts or commitments or to make any representations or warranties, whether express or implied, in the name of or on behalf of the other party, or to bind the other party in any respect whatsoever, unless agreed to in writing or expressly permitted in this Agreement.

11.3 Assignment; Binding Effect.

(a) Neither party to this Agreement may assign all or any part of its rights and obligations under this Agreement, except to an Affiliate, without the prior written consent of the other party. No permitted assignment by any party pursuant to this Section 11.3(a) shall result in any additional expense to the other party. Any purported assignment in contravention of this Section 11.3(a) shall, at the option of the non-assigning party, be null and void and of no effect.

(b) Except as otherwise provided above, this Agreement will be binding upon and inure to the benefit of the successors and permitted assigns of the parties.

(c) Notwithstanding anything contained in this Agreement to the contrary, all obligations of and restrictions on the parties set forth in this Agreement shall not be deemed obligations of and restrictions on any of the parties’ respective Affiliates, except if this Agreement is assigned to an Affiliate pursuant to Section 11.3(a).

11.4 Notices. Any notice, consent, or other communication required or permitted to be given to either party under this Agreement shall be given in writing and shall be delivered (i) by hand, or (ii) by registered or certified mail, postage prepaid and return receipt requested, or (iii) by confirmed facsimile transmission; addressed to each party at the following address or such other address as may be designated by such party by notice pursuant to this Section 11.4:

To the Company: Minntech Corporation

MediVators Reprocessing Systems

14605 28^th Avenue North

Minneapolis, Minnesota 55447-4822

Fax: 763-553-3387

Attention: President

with a copy to: (a) Dornbush Mensch Mandelstam

& Schaeffer, LLP

747 Third Avenue

New York, New York 10017

Fax: 212-753-7673

Attention: Eric W. Nodiff, Esq.

and

(b) Cantel Medical Corp.

Overlook at Great Notch

150 Clove Road - 9^th Floor

Little Falls, New Jersey 07424

Fax: 973-890-7270

Attention: President

To OAI: Olympus America Inc.-Medical Systems Group

Two Corporate Center Drive

Melville, New York 11747-3157

Fax: 516-844-5442

Attention: Group Vice President and, by
separate copy, General Counsel

(Fax: 516-844-5296)

Any notice, consent, or other communication given in conformity with this Section 11.4 shall be deemed effective when received by the addressee, if delivered by hand or facsimile transmission, and seven days after mailing, if mailed. Notwithstanding the foregoing, all notice, consent, or other communication copies sent hereunder to Cantel Medical Corp. shall be sent as a courtesy and failure by OAI to send notice, consent, or other communication to Cantel Medical Corp. shall not be deemed or construed as defective notice, consent, or other communication hereunder.

11.5 Governing Law; Submission to Jurisdiction. This Agreement and any other documents or instruments related hereto and all transactions hereunder shall be deemed to have been made within and under the laws of the State of New York, including the Uniform Commercial Code of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflict of laws rules thereof. The parties expressly agree that any controversy, dispute or claim with respect to any provision of this Agreement shall be adjudicated exclusively by a court of competent jurisdiction within New York County or Suffolk County, the State of New York, or the Federal District Court for the Southern District or Eastern District of New York, applying New York law without regard to the rules of conflicts of law and the Company and OAI waive any objections either may have and consent to the personal jurisdiction and the designation of a forum or venue of the courts set forth herein, including without limitation waiving a motion to change or transfer venue. Notwithstanding the foregoing, either party may, in any jurisdiction, seek to enforce, collect, or take any other action to effectuate a judgment, order, or decree obtained from a court in New York County or Suffolk County, State of New York or the Federal District Court for the Southern District or Eastern District of New York.

11.6 Execution of Additional Documents. Each party hereto agrees to execute and deliver such documents as may be necessary or desirable to carry out the provisions of this Agreement.

11.7 Entire Agreement. This Agreement constitutes the entire agreement between the Company and OAI with respect to the subject matter hereof. All prior or contemporaneous agreements, proposals, understandings, representations, and communications with respect to the subject matter hereof, whether written or oral, between or involving the Company and OAI hereby are cancelled and superseded, including without limitation the Distributor Agreement between the parties dated August 1, 1999. Notwithstanding the foregoing, such Distributor Agreement shall continue to apply to Products and their corresponding orders shipped by the Company to OAI prior to August 1, 2003. Pending purchase orders placed but not shipped prior to August 1, 2003 shall be governed by this Agreement and not the 1999 Distributor Agreement. This Agreement may be amended or modified only in a writing executed by both parties which states that it is an amendment or modification to this Agreement.

11.8 Severability. If any provision or part thereof of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions or parts thereof of this Agreement shall continue in full force without being impaired or invalidated in any way, to the maximum extent possible consistent with the intent of the parties in entering into this Agreement.

11.9 Taxes. Each party shall be responsible for payment of its own taxes.

11.10 Counterparts. This Agreement may be executed in duplicate counterparts, each of which when so executed shall be deemed to be an original and both of which when taken together shall constitute one and the same instrument.

11.11 No Waiver. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any future breach or failure to perform or of any other provisions of this Agreement.

11.12 Headings. The headings contained herein are for reference only and are not a part of this Agreement and shall not be used in connection with the interpretation of this Agreement.

11.13 Rights and Remedies Cumulative; Direct Damages. All rights and remedies hereunder are cumulative and may be enforced separately or concurrently and from time to time, unless otherwise specifically stated herein. The enforcement of any

particular remedy shall not constitute an election of remedies, and no remedy is exclusive unless specifically stated herein. Except with respect to Section 9.1 and Article 10, neither party shall be liable under this Agreement for any indirect, special, incidental, or consequential damages of any kind, including but not limited to damages for lost profits, lost investments, or lost business opportunities (collectively, “Consequential Damages”). Except with respect to Section 9.1 and Article 10, OAI and the Company hereby agree that direct damages shall not include or contain Consequential Damages.

11.14 Contract Interpretation. Each party hereto acknowledges that it has had ample opportunity to review and comment on this Agreement. This Agreement shall be read and interpreted according to its plain meaning and an ambiguity shall not be construed against either party. It is expressly agreed by the parties that the judicial rule of construction that a document should be more strictly construed against the draftsperson thereof shall not apply to any provision of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

MINNTECH CORPORATION
MEDIVATORS REPROCESSING SYSTEMS


By:	/s/ Roy K. Malkin
Name:		Roy K. Malkin
Title:			President and CEO


OLYMPUS AMERICA INC.
MEDICAL SYSTEMS GROUP


By:			/s/ David McKinley
Name:			David McKinley
Title:			Group Vice President

EX-31.1 4 a04-3392_1ex31d1.htm EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, James P. Reilly, President and Chief Executive Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 11, 2004

By:	/s/ James P. Reilly
James P. Reilly, President and Chief
Executive Officer (Principal Executive Officer)

EX-31.2 5 a04-3392_1ex31d2.htm EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Craig A. Sheldon, Senior Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Cantel Medical Corp.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 11, 2004

By:	/s/ Craig A. Sheldon
Craig A. Sheldon, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32 6 a04-3392_1ex32.htm EX-32

Exhibit 32

CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF

TITLE 18, UNITED STATES CODE)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), the undersigned officers of Cantel Medical Corp. (the “Company”), do hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended January 31, 2004 as filed with the Securities and Exchange Commission (the “Form 10-Q”) that, to the best of their knowledge:

1. The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 11, 2004


	/s/ James P. Reilly

	James P. Reilly
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ Craig A. Sheldon
	Craig A. Sheldon
	Senior Vice President and Chief
	Financial Officer
	(Principal Financial and Accounting Officer)