| CANTEL MEDICAL CORP Item 1A RISK FACTORS We are subject to various risks and uncertainties relating to or arising out of the nature of our businesses and general business, economic, financing, legal and other factors or conditions that may affect us |
| We provide the following cautionary discussion of risks and uncertainties relevant to our businesses, which we believe are factors that, individually or in the aggregate, could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual results to differ materially from expected or historical results |
| We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995 |
| You should understand that it is not possible to predict or identify all such factors |
| Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties |
| Our market for dialysis reprocessing products is limited to dialysis centers that reuse dialyzers, which market has been decreasing in the United States |
| Our dialyzer reprocessing products are limited to use by centers that choose to clean, sterilize and reuse dialyzers, rather then discard the dialyzers after a single use |
| Dialysis centers in the United States that reuse dialyzers derive an economic benefit since the per-procedure cost is less when utilizing dialyzer reuse compared with single use and such dialysis clinics generally receive a capitated payment for providing hemodialysis treatment |
| Although current public information is not available to accurately quantify the number of dialysis centers currently employing dialyzer reuse versus single use, it is apparent that the market share of single use dialyzers has been increasing during the past five years relative to reuse dialyzers |
| We believe that approximately 40prca of all dialysis centers in the United States currently reuse dialyzers |
| This compares to approximately 76prca reuse reported by the Centers for Disease Control in 2001 |
| The shift from reuse to single use dialyzers is due in large part to the commitment of Fresenius, the largest dialysis chain in the United States and a manufacturer of single-use dialyzers, to convert all of its reuse dialysis clinics (including newly acquired clinics) to single use facilities |
| On March 31, 2006, Fresenius acquired RCG, a significant customer of our dialysis reuse products |
| As Fresenius 20 ______________________________________________________________________ converts all or substantially all of the dialysis clinics of RCG into single-use facilities, our customer base for dialysis products will continue to decrease |
| This downward trend has resulted in, and will continue to result in, a decrease in revenues and net income in our dialysis segment |
| The continued decrease in dialyzer reuse in the United States in favor of single use dialyzers could have a material adverse effect on our business |
| See “Principal Customers,” “—Competition” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations |
| ” The consolidation of dialysis providers has resulted in greater buying power by certain of our customers, which has caused us to reduce the average selling prices of our dialysis products, thereby reducing net sales and profit margins |
| Such consolidation has also resulted in the loss of dialysate concentrate sales |
| There has been an increasing consolidation in the dialysis industry, marked by the acquisition by certain major dialysis chains of smaller chains and independents |
| Such consolidation of dialysis providers has resulted in greater buying power by certain of our customers, which has caused us to reduce the average selling prices of our dialysis products, thereby reducing net sales and profit margins |
| The acquisition by DaVita, the second largest dialysis chain in the United States, of Gambro US in October 2005 has had the most significant adverse effect in this regard |
| In addition, the DaVita and Fresenius acquisitions have resulted in the loss of low margin dialysate concentrate business since Gambro and Fresenius manufacture dialysate concentrate themselves |
| Consequently, the DaVita and RCG dialysis centers have reduced their purchases of dialysate concentrate from us |
| We recently commenced sales and service of our Medivators endoscope reprocessing systems in the United States on a direct basis |
| There can be no assurance that our direct sales and service program will be successful |
| On August 2, 2006, we commenced the sale and service of our Medivators brand endoscope reprocessing products and related accessories and supplies in the United States on a direct basis |
| Prior to that time, such products were distributed in that territory through Olympus under an exclusive distribution agreement |
| We decided not to renew the agreement with Olympus based on our belief that it would be in our best long term interests to establish our own direct hospital-based distribution system in the United States |
| Our decision to sell direct has necessitated the establishment of new field sales and marketing teams and the expenditure of significant start-up amounts |
| There can be no assurance that our direct sales program will be successful |
| Because a significant portion of our Dental segment net sales comes from a few large customers, any significant decrease in sales to these customers could harm our operating results |
| The distribution network in the United States dental industry is concentrated, with relatively few distributors of consumables accounting for a significant share of the sales volume to dentists |
| Accordingly, net sales and profitability of our Dental segment are highly dependent on its relationships with a limited number of large distributors |
| During fiscal 2006, the top four customers of our Dental segment accounted for approximately 48prca of its net sales, with three of such customers each accounting for 10prca or more of such segment’s net sales |
| We are likely to continue to experience a high degree of customer concentration in this segment |
| We cannot assure you that there will not be a loss or reduction in business from one or more of our major customers |
| In addition, we cannot assure you that net sales from customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period |
| Although we do not anticipate that any of customers of the Dental segment will account for more than 10prca of our Company-wide net sales on a consolidated basis, the loss or a significant reduction of business from any of the major customers of the Dental segment could adversely affect 21 ______________________________________________________________________ our results of operations |
| In addition, because our Dental segment products are sold through third-party distributors, and not directly to end users, we may not be able to control the amount and timing of resources that our distributors devote to our products |
| Government regulation may delay or prevent new product introduction |
| Many of our products are subject to regulation by governmental and private agencies in the United States and abroad, which regulate the testing, manufacturing, packaging, labeling, distribution and marketing of medical supplies and devices |
| Certain international regulatory bodies also impose import restrictions, tariff regulations, duties, and tax requirements |
| Delays in agency review can significantly delay new product introduction and may result in a product becoming “dated” or losing its market opportunity before it can be introduced |
| The FDA and other agency clearances generally are required before we can market new products in the United States or make significant changes to existing products |
| The FDA also has the authority to require a recall or modification of products in the event of a defect |
| The process of obtaining marketing clearances and approvals from regulatory agencies for new products can be time consuming and expensive |
| There is no assurance that clearances or approvals will be granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products |
| Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change |
| We cannot predict what impact, if any, such changes might have on our business |
| In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business |
| For a more detailed discussion on government regulation and related risks, see “—Government Regulation |
| ” Customer acceptance of our products is dependent on our ability to meet changing requirements |
| Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including hospitals, industrial laboratories, doctors, dentists, clinics, government agencies and industrial corporations |
| Any decrease in the level of customer acceptance of our products could have a material adverse effect on our business |
| We distribute our products in highly competitive markets |
| We distribute substantially all of our products in highly competitive markets that contain many products available from nationally and internationally recognized competitors |
| Many of these competitors have significantly greater financial, technical and human resources than us and are well-established |
| In addition, some companies have developed or may be expected to develop technologies or products that could compete with the products we manufacture and distribute or that would render our products obsolete or noncompetitive |
| In addition, our competitors may achieve patent protection, regulatory approval, or product commercialization that would limit our ability to compete with them |
| Although we believe that we compete effectively with all of our present competitors in our principal product groups, there can be no assurance that we will continue to do so |
| These and other competitive pressures could have a material adverse effect on our business |
| Currency fluctuations and trade barriers could adversely affect our results of operations |
| A portion of our dialysis, dental, endoscope reprocessing, and water purification and filtration products are exported and imported to and from the Far East, Western Europe and Canada, and our 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, 22 ______________________________________________________________________ affecting the United States and Canada |
| Our Canadian subsidiaries purchase a portion of their inventories in United States dollars and sell a significant amount of their products in United States dollars and therefore are exposed to foreign exchange gains and losses upon payment of such payables and the collection of such receivables |
| Similarly, such United States denominated assets and liabilities must be converted into their functional Canadian currency when preparing their financial statements, which results in foreign exchange gains and losses |
| Additionally, the results of operations of our Canadian subsidiaries are translated from their functional Canadian currency to United States dollars for purposes of preparing our consolidated financial statements |
| Therefore, our continuing operations could be materially and adversely affected by fluctuations in the value of the Canadian dollar against the United States dollar or by the imposition of trade barriers, tariff increases or import and export restrictions between the United States and Canada |
| Moreover, a decrease in the value of the Canadian dollar could result in a corresponding reduction in the United States dollar value of our assets that are denominated in Canadian dollars |
| Our growth may be dependent on acquiring new businesses We intend to grow, in part, by acquiring businesses |
| The success of this strategy depends upon several factors, including: · our ability to identify and acquire businesses; · our ability to integrate acquired operations, personnel, products and technologies into our organization effectively; · our ability to retain and motivate key personnel and to retain the customers of acquired companies; and · financing for our acquisitions may not be available on terms we find acceptable |
| In addition, we have used our stock as partial consideration for acquisitions |
| Our common stock may not remain at a price at which it can be used as consideration for acquisitions without diluting our existing stockholders, and potential acquisition candidates may not view our stock attractively |
| We also may not be able to sustain the rates of growth that we have experienced in the past, whether by acquiring businesses or otherwise |
| Certain of our businesses are heavily reliant on certain raw materials |
| Although there is a diversity of products produced by our dental segment, many of them are made from paper pulp and resin |
| In addition, many of our products utilize plastic or stainless steel |
| We are therefore exposed to rising raw material prices with no guarantees that such increases in costs can be passed along to our customers |
| As a result of damage caused by recent Hurricane Katrina and Hurricane Rita to many resin suppliers there was a shortage of material in the market for several months during fiscal 2006 |
| However, since we had sufficient resin inventory to meet our requirements we were not adversely affected by the market shortage |
| 23 ______________________________________________________________________ Because we operate in international markets, we are subject to political and economic risks that we do not face in the United States |
| We operate in a global market |
| Global operations are subject to risks, including political and economic instability, general economic conditions, imposition of government controls, the need to comply with a wide variety of foreign and United States export laws, trade restrictions, and the greater difficulty of administering business overseas |
| The markets for many of our products are subject to changing technology |
| The markets for many products we sell, particularly endoscope reprocessing equipment, are subject to changing technology, new product introductions and product enhancements, and evolving industry standards |
| The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete or result in short product life cycles |
| Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products |
| We may be exposed to product liability claims resulting from the use of products we sell and distribute |
| We may be exposed to product liability claims resulting from the products we sell and distribute |
| We maintain general liability insurance that includes product liability coverage, which we believe is adequate for our businesses |
| However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost |
| A partially or completely uninsured successful claim against us could have a material adverse effect on us |
| We use chemicals and other regulated substances in the manufacturing of our products |
| In the ordinary course of certain of our manufacturing processes, we use various chemicals and other regulated substances |
| Although we are not aware of any material claims involving violation of environmental or occupational health and safety laws or regulations, there can be no assurance that such a claim may not arise in the future, which could have a material adverse effect on us |
| We rely on intellectual property and proprietary rights to maintain our competitive position |
| We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade secrets, and proprietary know-how |
| There can be no assurance that any pending or future patent applications will be granted or that any current or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable, invalidated, or circumvented or that the rights will provide a competitive advantage to us |
| There can also be no assurance that our trade secrets or non-disclosure agreements will provide meaningful protection of our proprietary information |
| There can also be no assurance that others will not independently develop similar technologies or duplicate any technology developed by us or that our technology will not infringe upon patents or other rights owned by others |
| If we are unable to retain key personnel, our business could be adversely affected |
| Our success is dependent to a significant degree upon the efforts of key members of our management |
| Although several key personnel are parties to employment agreements, such agreements cannot assure the continued services of such personnel, and the loss or unavailability of any of them could have a material adverse effect on our business |
| James P Reilly, our President and Chief Executive Officer, has advised our Board that he will retire upon the expiration of his employment agreement on July 31, 2007 |
| Reilly but there can be no assurance that we will attract and hire a qualified candidate in a timely manner |
| In addition, our success depends in large part on our ability to attract and retain highly qualified scientific, technical, sales, marketing and other personnel |
| Competition for such personnel is intense and there can be no assurance that we will be able to attract and retain the personnel necessary for the development and operation of our businesses |
| Our stock price has been volatile and may experience continued significant price and volume fluctuations in the future that could reduce the value of outstanding shares |
| The market for our common stock has, from time to time, experienced significant price and volume fluctuations that may have been unrelated to our operating performance |
| Factors such as announcements of variations in our quarterly financial results and new business developments could also cause the market price of our common stock to fluctuate significantly |
| Future issuances of our common stock may affect the market price of our common stock |
| The issuance of additional shares of our common stock may materially and adversely affect the per share market price of our common stock |
| In addition, if we issue additional shares of our common stock, existing holders of our common stock may experience dilution, and that dilution may be substantial |
| Issuances or sales of substantial numbers of additional shares of common stock, including in connection with future acquisitions, if any, or the perception that such issuances or sales could occur, may cause prevailing market prices for our common stock to decline |