<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/ X / Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2001.
or
/ / 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: 0-6132
CANTEL MEDICAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1760285
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) 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 X No
----- -----
Number of shares of Common Stock outstanding as of December 7, 2001: 6,054,743.
<Page>
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
October 31, July 31,
ASSETS 2001 2001
----------- ---------
Current assets:
Cash and cash equivalents $ 8,264 $ 5,050
Available-for-sale securities - 1,057
Accounts receivable, net 21,837 11,768
Inventories:
Raw materials 6,385 2,294
Work-in-process 1,895 -
Finished goods 10,101 5,872
----------- ---------
Total inventories 18,381 8,166
----------- ---------
Deferred income taxes 3,567 49
Prepaid expenses and other current assets 1,715 404
----------- ---------
Total current assets 53,764 26,494
Property and equipment, net 23,825 844
Intangible assets, net 8,204 622
Goodwill 15,194 585
Deferred income taxes 5,044 -
Other assets 3,296 3,384
----------- ---------
$109,327 $31,929
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,000 $ -
Accounts payable 6,083 4,115
Compensation payable 2,351 1,337
Other accrued expenses 6,899 2,562
Income taxes payable 1,003 1,811
----------- ---------
Total current liabilities 18,336 9,825
Long-term debt 32,000 -
Deferred income taxes 6,945 77
Other long-term liabilities 1,767 -
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued - -
Common Stock, $.10 par value; authorized 12,000,000
shares; October 31 - 6,227,376 shares issued and
6,053,493 shares outstanding; July 31 - 4,733,159
shares issued and 4,559,276 shares outstanding 623 473
Additional capital 48,399 20,240
Retained earnings 5,247 4,477
Accumulated other comprehensive loss (2,970) (2,143)
Treasury Stock, at cost; October 31 and
July 31 - 173,883 shares (1,020) (1,020)
----------- ---------
Total stockholders' equity 50,279 22,027
----------- ---------
$109,327 $31,929
=========== =========
</Table>
See accompanying notes.
1
<Page>
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
<Table>
<Caption>
Three Months Ended
October 31,
2001 2000
------- -------
Net sales:
Product sales $19,349 $ 7,233
Product service 1,816 1,486
------- -------
Total net sales 21,165 8,719
------- -------
Cost of sales:
Product sales 12,055 4,265
Product service 1,111 799
------- -------
Total cost of sales 13,166 5,064
------- -------
Gross profit 7,999 3,655
Expenses:
Selling 2,630 1,269
General and administrative 3,027 1,080
Research and development 724 199
------- -------
Total operating expenses 6,381 2,548
------- -------
Income before interest expense,
other income and income taxes 1,618 1,107
Interest expense, net 382 4
Other income (7) (7)
------- -------
Income before income taxes 1,243 1,110
Income taxes 473 461
------- -------
Net income $ 770 $ 649
======= =======
Earnings per common share:
Basic $ 0.14 $ 0.15
======= =======
Diluted $ 0.13 $ 0.14
======= =======
</Table>
See accompanying notes.
2
<Page>
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
<Table>
<Caption>
Three Months Ended
October 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 770 $ 649
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 503 139
Amortization and write-off of debt issuance costs 155 -
Changes in assets and liabilities:
Accounts receivable 1,987 2,688
Inventories 76 (1,885)
Prepaid expenses and other current assets (32) (88)
Accounts payable and accrued expenses (4,663) (3,325)
Income taxes (2,235) (145)
-------- --------
Net cash used in operating activities (3,439) (1,967)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (130) (130)
Purchases of available-for-sale securities - (725)
Acquisition of Minntech, net of cash acquired (25,923) -
Cash (used in) provided by discontinued operations (34) 1,289
Proceeds from transfer of discontinued operations - 1,231
Other, net (45) (311)
-------- --------
Net cash (used in) provided by investing activities (26,132) 1,354
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facilities, net of debt
issuance costs 32,625 60
Repayments of credit facilities - (123)
Proceeds from exercise of stock options 160 30
-------- ---------
Net cash provided by (used in) financing activities 32,785 (33)
-------- --------
Increase (decrease) in cash and cash equivalents 3,214 (646)
Cash and cash equivalents at beginning of period 5,050 2,169
-------- ----------
Cash and cash equivalents at end of period $ 8,264 $ 1,523
======== ==========
</Table>
See accompanying notes.
3
<Page>
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, 2001, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
Cantel had two wholly-owned operating subsidiaries at July 31, 2001.
Its United States subsidiary, MediVators, Inc. ("MediVators") is engaged in the
manufacturing, marketing, distribution and service of infection control
products. Its Canadian subsidiary, Carsen Group Inc. ("Carsen" or "Canadian
subsidiary") is engaged in the marketing, distribution and service of medical
and infection control and scientific products in Canada. On September 7, 2001,
the Company completed its acquisition of Minntech Corporation ("Minntech") which
became a wholly-owned subsidiary of Cantel. Minntech, which is based in the
United States and has operations in the Netherlands, is engaged in the
development, manufacturing and marketing of disinfection/reprocessing systems
for renal dialysis as well as filtration and separation and other products for
medical and non-medical applications.
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, 2001 was derived
from the audited consolidated balance sheet of the Company at that date.
Certain items in the October 31, 2000 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the October 31, 2001 financial statements.
4
<Page>
Note 2. ACQUISITION OF MINNTECH CORPORATION
On September 7, 2001, the Company completed its acquisition of Minntech
Corporation ("Minntech"), a public company based in Plymouth, Minnesota, in a
merger transaction.
Under the terms of the Agreement and Plan of Merger, each share of
Minntech was converted into the right to receive $10.50, consisting of $6.25 in
cash, and .2216 of a share of Cantel common stock having a value of $4.25. With
respect to the stock portion of the consideration, Cantel issued 1,467,592
shares of common stock in the merger. The total consideration for the
transaction, including transaction costs, was approximately $77.9 million
(including cash of $41,392,000, shares of Cantel common stock with a fair market
value of $28,148,000, Cantel's existing investment in Minntech of $725,000 and
transaction costs, including severence obligations, of approximately
$7,600,000). The transaction was accounted for as a purchase and in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 141,"Business Combinations" ("SFAS 141").
In conjunction with the acquisition, on September 7, 2001 Cantel
entered into new credit facilities to fund the financed portion of the cash
consideration paid in the merger and costs associated with the merger, as well
as to replace the Company's existing working capital credit facilities, as
discussed in note 8 to the Condensed Consolidated Financial Statements.
The assets acquired and assumed liabilities were preliminarily
allocated as follows: cash $17,395,000; accounts receivable $12,353,000;
inventories $10,539,000; other current assets $4,809,000; fixed assets
$23,230,000; intangible assets $7,705,000 (with estimated useful lives ranging
from 2-14 years); other noncurrent assets $594,000; current liabilities
$9,750,000; noncurrent deferred compensation $1,767,000; and long-term deferred
income tax liabilities $5,922,000. Current liabilities include an estimated
liability recorded by Minntech of approximately $1,900,000 related to certain
state sales and use tax exposures. Cantel will evaluate this contingency and
reflect any change to the liability balance as an adjustment of the preliminary
purchase price allocation. Additionally, in conjunction with the purchase price
accounting, Cantel reversed the valuation allowance associated with its deferred
tax assets originating from NOL's, resulting in $4,083,000 of net deferred tax
assets. The excess purchase price of $14,609,000 was assigned to goodwill.
Selected unaudited pro forma consolidated statement of income data
assuming that Minntech was included in the Company's results of operations as of
the beginning of the periods ended October 31, 2001 and 2000 is as follows:
5
<Page>
<Table>
<Caption>
Three Months Ended
October 31,
-------------------------
2001 2000
----------- ------------
Net sales $28,990,000 $27,177,000
Net income 339,000 1,910,000
Earnings per share:
Basic $0.06 $0.32
Diluted $0.05 $0.31
Weighted average common shares:
Basic 6,034,000 5,907,000
Diluted 6,551,000 6,138,000
</Table>
This pro forma information is provided for illustrative purposes only,
and does not necessarily indicate what the operating results of the combined
company might have been had the merger actually occurred at these dates, nor
does it necessarily indicate what the combined company's future operating
results will be. Included in these pro forma results of operations was the
adverse impact at Minntech for the three months ended October 31, 2001 of a
$438,000 charge to cost of sales related to the sale of inventories which
carried a step-up in value recorded as part of the purchase accounting, a
foreign currency loss of $184,000, and provisions for two uncollectible accounts
receivable aggregating $199,000; for the three months ended October 31, 2000,
these pro forma results of operations include the positive impact at Minntech of
a $388,000 gain related to the cancellation of a finite risk insurance policy
and a foreign currency gain of $237,000. This information also does not reflect
any cost savings from operating efficiencies or other improvements which may be
achieved by combining the companies.
Note 3. RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board issued SFAS 141,
"BUSINESS COMBINATIONS" ("SFAS 141") and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" ("SFAS 142"). SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). Upon adoption of SFAS 142, amortization of
goodwill recorded for business combinations consummated prior to July 1, 2001
will cease, and intangible assets acquired prior to July 1, 2001 that do not
meet the criteria for recognition under SFAS 141 will be reclassified to
goodwill. The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. Companies are required to adopt
SFAS 142 for fiscal years beginning after December 15, 2001, but early adoption
is permitted. The Company adopted SFAS 142 on August 1,
6
<Page>
2001, which is the beginning of fiscal 2002. At October 31, 2001, substantially
all of the Company's goodwill relates to the acquisition of Minntech in
September 2001.
Note 4. COMPREHENSIVE INCOME
The Company's comprehensive income for the three months ended October
31, 2001 and 2000 is set forth in the following table:
<Table>
<Caption>
Three Months Ended
October 31,
------------------------
2001 2000
----------- ------------
Net income $ 770,000 $ 649,000
Other comprehensive income (loss):
Unrealized loss on securities - (17,000)
Unrealized (loss) gain on
currency hedging (1,000) 48,000
Foreign currency translation (494,000) (444,000)
----------- ------------
Comprehensive income $ 275,000 $ 236,000
=========== ============
</Table>
At July 31, 2001, the Company had an unrealized gain on securities of $332,000
which was eliminated during the three months ended October 31, 2001 in
connection with the Minntech acquisition purchase accounting. The elimination of
this unrealized gain had no impact upon the Company's results of operations.
Note 5. HEDGING ACTIVITIES
Effective August 1, 2000, the Company adopted SFAS No. 133, as
amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("SFAS No. 133"). SFAS No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If the
derivative is designated as a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against
the change in the fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
the change in fair value of a derivative that is designated as a hedge will
be immediately recognized in earnings.
The Company's Canadian subsidiary purchases and pays for a substantial
portion of its products in United States dollars and is therefore exposed to
fluctuations in the rates of exchange between the United States dollar and
Canadian dollar. In order to hedge against the impact of such currency
fluctuations on the purchases of inventories, Carsen enters into foreign
currency forward contracts on firm purchases of such inventories in United
States dollars. Total commitments for such foreign currency forward contracts
amounted to $750,000 (United States dollars) at October 31, 2001 and covered a
7
<Page>
portion of Carsen's projected purchases of inventories through October 2001.
These foreign currency forward contracts are designated as hedges, and therefore
recognition of gains and losses is deferred within other comprehensive income
until settlement of the underlying commitments. Realized gains and losses are
recorded within cost of sales upon settlement. The Company does not hold any
derivative financial instruments for speculative or trading purposes.
The adoption of SFAS No. 133 on August 1, 2000 did not have a material
impact on operations; however, it resulted in a $107,000 gain being recorded in
other comprehensive income.
Note 6. DISCONTINUED OPERATIONS
On October 6, 2000, Carsen consummated a transaction under an Asset
Purchase Agreement with Olympus America Inc. ("Olympus") pursuant to which
Carsen terminated its consumer products business and sold its inventories of
Olympus consumer products to Olympus. The transaction had an effective date of
July 31, 2000 and was treated as a discontinued operation.
The purchase price for the inventory was $1,026,000, net of adjustments
related to estimated warranty claims and promotional program expenses payable to
Carsen's former customers. During fiscal 2001, Carsen also received additional
consideration from Olympus under the Purchase Agreement, including amounts
related to transition services provided by Carsen subsequent to July 31, 2000.
Such consideration included (i) fixed cash amounts aggregating approximately
$615,000 and (ii) $619,000 representing twelve and one-half percent (12 1/2%) of
Olympus' net sales of consumer products in Canada in excess of $8,000,000 during
the period from August 1, 2000 through March 31, 2001. No additional amounts are
due from Olympus.
At October 31, 2001 and July 31, 2001, remaining liabilities of the
discontinued business were $59,000 and $96,000, respectively (principally
related to compensation), and are included within other accrued expenses.
Note 7. 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.
8
<Page>
The following table sets forth the computation of basic and diluted
earnings per common share:
<Table>
<Caption>
Three Months Ended
October 31,
-----------------------
2001 2000
---------- -----------
Numerator for basic and diluted
earnings per common share:
Net income $ 770,000 $ 649,000
========== ===========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 5,442,796 4,438,925
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 517,315 230,716
---------- -----------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 5,960,111 4,669,641
========== ===========
Basic earnings per common share $0.14 $0.15
========== ===========
Diluted earnings per common share $0.13 $0.14
========== ===========
</Table>
Note 8. FINANCING ARRANGEMENTS
In conjunction with the acquisition of Minntech on September 7, 2001, the
Company entered into new credit facilities to fund the financed portion of the
cash consideration paid in the merger and costs associated with the merger, as
well as to replace the Company's existing working capital credit facilities. The
new credit facilities include (i) a $25,000,000 senior secured amortizing term
loan facility from a consortium of U.S. banks (collectively the "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 for future working
capital requirements for the U.S. businesses of Cantel, including Minntech and
MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars)
9
<Page>
senior secured revolving credit facility for Carsen (the "Canadian Borrower")
with a Canadian bank (the "Canadian Revolving Credit Facility") used for
Carsen's future working capital requirements. Each of the Term Loan Facility,
the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility
(collectively the "Credit Facilities") expire on September 7, 2006.
Borrowings under the Credit Facilities bear interest at rates ranging
from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00%
to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the
Company's consolidated ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The base rates associated with the
U.S. Lenders and the Canadian Lender were 5.00% and 4.00%, respectively, at
December 7, 2001, and the LIBOR rate was approximately 2.00% at December 7,
2001. In order to protect its interest rate exposure, the Company has entered
into a three-year interest rate cap agreement covering $12,500,000 of borrowings
under the Term Loan Facility, which caps LIBOR on this portion of outstanding
borrowings at 4.50%. The Credit Facilities also provide for fees on the unused
portion of such facilities at rates ranging from .30% to .50%, depending upon
the Company's consolidated ratio of debt to EBITDA.
The Term Loan Facility and the U.S. Revolving Credit Facility provide
for available borrowings based upon percentages of the U.S. Borrowers' eligible
accounts receivable and inventories; require the U.S. Borrowers to meet certain
financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
are guaranteed by Minntech and MediVators. The Canadian Revolving Credit
Facility provides for available borrowings based upon percentages of the
Canadian Borrower's eligible accounts receivable and inventories; requires the
Canadian Borrower to meet certain financial covenants; and is secured by
substantially all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term
Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility, which
borrowings remain outstanding at October 31, 2001. Such borrowings are at
interest rates of 3.25% above LIBOR.
Note 9. INCOME TAXES
Income taxes for the three months ended October 31, 2001 are
principally comprised of taxes imposed on the Company's Canadian subsidiary, as
well as Minntech's Netherlands subsidiary, each at the respective statutory
income tax rates. For the three months ended October 31, 2000, income taxes
consist primarily of taxes imposed on the Company's Canadian subsidiary. The
consolidated effective tax rate on operations was 38.1% and 41.5% for the three
months ended October 31, 2001 and 2000, respectively.
10
<Page>
For the three months ended October 31, 2000, the consolidated effective
tax rate was lower than the Canadian effective tax rate of 42.5% due to the fact
that income generated by the United States operations was substantially offset
by tax benefits resulting from the utilization of net operating loss
carryforwards ("NOLs"). In conjunction with the purchase accounting for the
acquisition of Minntech, Cantel reversed the valuation allowances previously
existing against its deferred tax assets related to the NOLs accumulated in the
United States. Therefore, for all periods subsequent to September 7, 2001, the
Company will record in its results of operations income tax expense for its
United States subsidiaries at the full statutory tax rate; however, actual
payment of U.S. Federal income taxes will reflect the benefits of the
utilization of the NOLs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The results of operations reflect primarily the results of Carsen,
Minntech and MediVators.
Reference is made to (i) the discontinuance of the Company's Consumer
Products business, as more fully described in note 6 to the Condensed
Consolidated Financial Statements, (ii) the impact on the Company's results of
operations of a weaker Canadian dollar against the United States dollar during
the three months ended October 31, 2001, compared with the three months ended
October 31, 2000 (decrease in value of approximately 4% based upon average
exchange rates), and (iii) the Company's acquisition of Minntech in September
2001, as more fully described in notes 2 and 8 to the Condensed Consolidated
Financial Statements. Discussion herein of the Company's existing business
refers to the operations of Cantel, Carsen and MediVators but excluding the
impact of the Minntech acquisition during the three months ended October 31,
2001. 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, 2001
(the "2001 Form 10-K").
The following table gives information as to the net sales and the
percentage to the total net sales accounted for by each operating segment of the
Company. Minntech is reflected in net sales for the portion of the three months
ended October 31, 2001 subsequent to its acquisition on September 7, 2001, and
is not reflected in net sales for the three months ended October 31, 2000.
11
<Page>
<Table>
<Caption>
Three Months Ended
October 31,
2001 2000
--------------------------------
(Dollar amounts in thousands)
$ % $ %
-------- ------ -------- ------
Dialysis Products $ 9,456 44.7 $ - -
Endoscopy and Surgical Products* 3,030 14.3 3,659 42.0
Endoscopy Reprocessing Products* 3,079 14.5 2,358 27.0
Filtration and Separation Products 2,294 10.8 - -
Scientific Products 1,713 8.1 1,337 15.3
Product Service 1,816 8.6 1,486 17.0
Elimination of intercompany sales of
Endoscopy Reprocessing Products (223) (1.0) (121) (1.3)
-------- ------ -------- ------
$21,165 100.0 $ 8,719 100.0
</Table>
* Endoscopy and Surgical Products was formerly described as Medical
Products, and Endoscopy Reprocessing Products was formerly described as
Infection Control Products.
Net sales increased by $12,446,000, or 142.7%, to $21,165,000 for the
three months ended October 31, 2001, from $8,719,000 for the three months ended
October 31, 2000. Net sales contributed by Minntech for the three months ended
October 31, 2001 were $12,277,000; without the Minntech acquisition, net sales
of the Company's existing businesses would have increased by $169,000, or 1.9%,
to $8,888,000 for the three months ended October 31, 2001, from $8,719,000 for
the three months ended October 31, 2000. Net sales of the existing businesses
were adversely impacted for the three months ended October 31, 2001, compared
with the three months ended October 31, 2000, by approximately $292,000 due to
the translation of Carsen's net sales using a weaker Canadian dollar against the
United States dollar.
The increase in sales of the Company's existing businesses was
principally attributable to endoscopy reprocessing products and scientific
products, partially offset by a decrease in sales of endoscopy and surgical
products. The increased sales of endoscopy reprocessing products was primarily
due to an increase in international demand. The increased sales of scientific
products was primarily due to an increase in demand. The decrease in sales of
endoscopy and surgical products was primarily due to a decrease in demand.
Gross profit increased by $4,344,000, or 118.9%, to $7,999,000 for the
three months ended October 31, 2001, from $3,655,000 for the three months ended
October 31, 2000. Gross profit contributed by Minntech for the three months
ended October 31, 2001 was $4,689,000; without the Minntech acquisition, gross
profit of the Company's existing businesses would have decreased by $345,000, or
9.4%, to $3,310,000 for the three months ended October 31, 2001, from $3,655,000
for the three months ended October 31, 2000.
12
<Page>
Gross profit as a percentage of sales for the three months ended
October 31, 2001 was 37.8% compared with 41.9% for the three months ended
October 31, 2000. During the three months ended October 31, 2001, Minntech's
gross profit was adversely impacted by a $438,000 charge to cost of sales
related to the sale of inventories which carried a step-up in value recorded as
part of the purchase accounting; such charge reduced gross profit percentage by
2.1% for the three months ended October 31, 2001. Minntech's gross profit as a
percentage of sales was 38.2% for the period from the acquisition date through
October 31, 2001. Without the impact of the Minntech acquisition, gross profit
as a percentage of sales for the three months ended October 31, 2001 would have
been 37.2%. The lower gross profit percentage from the Company's existing
businesses for the three months ended October 31, 2001 was primarily
attributable to the adverse impact of a weaker Canadian dollar relative to the
United States dollar, since the Company's Canadian subsidiary purchases
substantially all of its products in United States dollars and sells its
products in Canadian dollars; a high gross profit percentage for the three
months ended October 31, 2000 due to a buy-in of endoscopy and surgical products
inventories during fiscal 2000 prior to receiving a supplier price increase, a
majority of which inventories were sold during the three months ended October
31, 2000; and sales mix associated with endoscopy reprocessing products.
Selling expenses as a percentage of net sales was 12.4% for the three
months ended October 31, 2001, compared with 14.6% for the three months ended
October 31, 2000. Without the impact of the Minntech acquisition, selling
expenses as a percentage of net sales for the three months ended October 31,
2001 would have been 16.0%. For the three months ended October 31, 2001, the
increase in selling expenses as a percentage of net sales from the Company's
existing businesses was primarily attributable to lower than expected sales at
Carsen and an increase in personnel at Carsen.
General and administrative expenses increased by $1,947,000 to
$3,027,000 for the three months ended October 31, 2001, from $1,080,000 for the
three months ended October 31, 2000. Included in general and administrative
expenses for the three months ended October 31, 2001 were provisions at Minntech
for two uncollectible accounts receivable aggregating approximately $199,000.
General and administrative expenses incurred by Minntech for the three months
ended October 31, 2001 were $1,765,000; without the Minntech acquisition,
general and administrative expenses of the Company's existing businesses would
have increased by $182,000 principally due to the addition of business
development personnel and related expenses.
Research and development expenses increased by $525,000 to $724,000 for
the three months ended October 31, 2001, from $199,000 for the three months
ended October 31, 2000. Research and development expenses incurred by Minntech
for the three months ended October 31, 2001 were $440,000; without the Minntech
acquisition, research and
13
<Page>
development expenses of the Company's existing businesses would have increased
by $85,000 principally due to costs related to engineering work on MediVators'
new endoscope reprocessing unit.
Interest expense was $382,000 for the three months ended October 31,
2001, compared with interest expense of $4,000 for the three months ended
October 31, 2000. This change in interest expense was attributable to the
Company's borrowings under its new credit facilities during September 2001 in
connection with the Minntech acquisition as well as a one-time write-off of fees
in connection with the Company's prior credit facility of approximately $95,000.
Income from operations before income taxes increased by $133,000 to
$1,243,000 for the three months ended October 31, 2001, from $1,110,000 for the
three months ended October 31, 2000.
Income taxes for the three months ended October 31, 2001 are
principally comprised of taxes imposed on the Company's Canadian subsidiary, as
well as Minntech's Netherlands subsidiary, each at the respective statutory
income tax rates. For the three months ended October 31, 2000, income taxes
consist primarily of taxes imposed on the Company's Canadian subsidiary. The
consolidated effective tax rate on operations was 38.1% and 41.5% for the three
months ended October 31, 2001 and 2000, respectively.
For the three months ended October 31, 2000, the consolidated effective
tax rate was lower than the Canadian effective tax rate of 42.5% due to the fact
that income generated by the United States operations was substantially offset
by tax benefits resulting from the utilization of net operating loss
carryforwards ("NOLs"). In conjunction with the purchase accounting for the
acquisition of Minntech, Cantel reversed the valuation allowances previously
existing against its deferred tax assets related to the NOLs accumulated in the
United States. Therefore, for all periods subsequent to September 7, 2001, the
Company will record in its results of operations income tax expense for its
United States subsidiaries at the full statutory tax rate; however, actual
payment of U.S. Federal taxes will reflect the benefits of the utilization of
the NOLs.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2001, the Company's working capital was $35,428,000,
compared with $16,669,000 at July 31, 2001. The increase in working capital was
due to the acquisition of Minntech, partially offset by the decrease in working
capital from the Company's existing businesses primarily attributable to a
decrease in accounts receivable, offset by decreases in accounts payable,
accrued expenses and income taxes payable.
Net cash used in operating activities was $3,439,000 for the three
months ended October 31, 2001 and $1,967,000 for the three months ended October
31, 2000. For the three months ended October 31, 2001, the net
14
<Page>
cash used in operating activities was primarily due to decreases in accounts
payable and accrued expenses and income taxes, partially offset by net income,
after adjusting for depreciation and amortization, and a decrease in accounts
receivable. For the three months ended October 31, 2000, the net cash used in
operating activities was primarily due to a decrease in accounts payable and
accrued expenses and an increase in inventories, partially offset by net income,
after adjusting for depreciation and amortization, and a decrease in accounts
receivable.
Net cash used in investing activities was $26,132,000 for the three
months ended October 31, 2001 compared with net cash provided by investing
activities of $1,354,000 for the three months ended October 31, 2000. For the
three months ended October 31, 2001, the net cash used in investing activities
was primarily due to the acquisition of Minntech net assets. For the three
months ended October 31, 2000, the net cash provided by investing activities was
primarily due to proceeds from the transfer of discontinued operations and a
decrease in net assets related to the discontinued operations, partially offset
by purchases of available-for-sale securities.
Net cash provided by financing activities was $32,875,000 for the three
months ended October 31, 2001 compared with net cash used in financing
activities of $33,000 for the three months ended October 31, 2000. For the three
months ended October 31, 2001, the net cash provided by financing activities was
primarily attributable to borrowings under the Company's new credit facilities
related to the Minntech acquisition, net of related debt issuance costs.
In conjunction with the acquisition of Minntech on September 7, 2001, the
Company entered into new credit facilities to fund the financed portion of the
cash consideration paid in the merger and costs associated with the merger, as
well as to replace the Company's existing working capital credit facilities. The
new credit facilities include (i) a $25,000,000 senior secured amortizing term
loan facility from a consortium of U.S. banks (collectively the "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 for future working
capital requirements for the U.S. businesses of Cantel, including Minntech and
MediVators (the "U.S. Borrowers") and (iii) a $5,000,000 (United States dollars)
senior secured revolving credit facility for Carsen (the "Canadian Borrower")
with a Canadian bank (the "Canadian Revolving Credit Facility") used for
Carsen's future working capital requirements. Each of the Term Loan Facility,
the U.S. Revolving Credit Facility and the Canadian Revolving Credit Facility
(collectively the "Credit Facilities") expire on September 7, 2006.
15
<Page>
Borrowings under the Credit Facilities bear interest at rates ranging
from .75% to 2.00% above the lender's base rate, or at rates ranging from 2.00%
to 3.25% above the London Interbank Offered Rate ("LIBOR"), depending upon the
Company's consolidated ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The base rates associated with the
U.S. Lenders and the Canadian Lender were 5.00% and 4.00%, respectively, at
December 7, 2001, and the LIBOR rate was approximately 2.00% at December 7,
2001. In order to protect its interest rate exposure, the Company has entered
into a three-year interest rate cap agreement covering $12,500,000 of borrowings
under the Term Loan Facility, which caps LIBOR on this portion of outstanding
borrowings at 4.50%. The Credit Facilities also provide for fees on the unused
portion of such facilities at rates ranging from .30% to .50%, depending upon
the Company's consolidated ratio of debt to EBITDA.
The Term Loan Facility and the U.S. Revolving Credit Facility provide
for available borrowings based upon percentages of the U.S. Borrowers' eligible
accounts receivable and inventories; require the U.S. Borrowers to meet certain
financial covenants; are secured by substantially all assets of the U.S.
Borrowers (including a pledge of the stock of Minntech and MediVators owned by
Cantel and 65% of the outstanding shares of Carsen stock owned by Cantel); and
are guaranteed by Minntech and MediVators. The Canadian Revolving Credit
Facility provides for available borrowings based upon percentages of the
Canadian Borrower's eligible accounts receivable and inventories; requires the
Canadian Borrower to meet certain financial covenants; and is secured by
substantially all assets of the Canadian Borrower.
On September 7, 2001, the Company borrowed $25,000,000 under the Term
Loan Facility and $9,000,000 under the U.S. Revolving Credit Facility, which
borrowings remain outstanding at October 31, 2001. Such borrowings are at
interest rates of 3.25% above LIBOR.
The Company believes that its current cash position, anticipated cash
flow from operations and the funds available under the new revolving credit
facilities will be sufficient to satisfy the Company's cash operating
requirements for its existing operations for the foreseeable future. At December
7, 2001, $8,872,000 was available under the credit facilities.
For the three months ended October 31, 2001, compared with the three
months ended October 31, 2000, the average value of the Canadian dollar
decreased by 4% relative to the value of the United States dollar. Changes in
the value of the Canadian dollar against the United States dollar affects the
Company's results of operations because the Company's Canadian subsidiary
purchases substantially all of its products in United States dollars and sells
its products in Canadian dollars. Such currency fluctuations also result in a
corresponding change in the United States dollar value of the Company's assets
that are denominated in Canadian dollars.
16
<Page>
Under the Canadian Revolving Credit Facility, Carsen has a
$20,000,000 (United States dollars) foreign currency hedging facility which
is available to be used to hedge against the impact of such currency
fluctuations on the purchases of inventories. Total commitments for foreign
currency forward contracts (a portion of which are outstanding under a prior
Carsen credit facility) amounted to $6,381,000 (United States dollars) at
December 7, 2001 and cover a portion of Carsen's projected purchases of
inventories through July 2002. The weighted average exchange rate of the
forward contracts open at December 7, 2001 was 1.5868 Canadian dollar per
United States dollar, or $.6302 United States dollar per Canadian dollar. The
exchange rate published by the Wall Street Journal on December 7, 2001 was
$1.5725 Canadian dollar per United States dollar, or $.6359 United States
dollar per Canadian dollar.
For purposes of translating the balance sheet, at October 31, 2001
compared with July 31, 2001, the value of the Canadian dollar decreased by 4%
relative to the value of the United States dollar. As a result, at October 31,
2001, the negative cumulative foreign currency translation adjustment was
increased by $494,000 compared to July 31, 2001, thereby decreasing
stockholders' equity.
Inflation has not significantly impacted the Company's operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements. All forward-looking
statements involve risks and uncertainties, including, without limitation,
acceptance and demand of new products, the impact of competitive products and
pricing, the Company's ability to successfully integrate and operate acquired
and merged businesses and the risks associated with such businesses, and the
risks detailed in the Company's filings and reports with the Securities and
Exchange Commission. Such 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 substantial portion of the Company's products
are imported from the Far East and Western Europe, and the Company's United
States subsidiaries sell a portion of their products outside of the United
States. 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 and Canada.
Carsen pays for a substantial portion of its products in United States
dollars, and Carsen's business could be materially and adversely affected by the
imposition of trade barriers, fluctuations in the rates of currency exchange,
tariff increases and import and export restrictions between the United States
and Canada.
17
<Page>
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 2001 Form 10-K. Fluctuations in the rates of currency
exchange between the United States and Canada had an adverse impact for the
three months ended October 31, 2001, compared with the three months ended
October 31, 2000, upon the Company's results of operations and stockholders'
equity, as described in Management Discussion and Analysis of Financial
Condition and Results of Operations.
Interest rate market risk: The Company has two new 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. In order to protect its interest rate exposure,
the Company has entered into a three-year interest rate cap covering $12,500,000
of borrowings under the Term Loan Facility, which caps LIBOR on this portion of
outstanding borrowings at 4.50%.
18
<Page>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 6, 2001, the Company held a Special Meeting of
Stockholders (which also constituted the Annual Meeting of Stockholders for the
fiscal year ended July 31, 2000) to consider and vote upon the proposed issuance
of shares of Cantel common stock in the merger of Canopy Merger Corp., a
wholly-owned subsidiary of Cantel, with and into Minntech Corporation in
accordance with the Agreement and Plan of Merger, dated as of May 30, 2001,
among Cantel, Canopy Merger Corp. and Minntech. 3,379,419 votes were cast for,
2,953 votes were against, and 5,726 votes abstained in the approval of the
issuance of shares of Cantel common stock in the merger. In addition, there were
852,219 broker non-votes.
In addition, Darwin C. Dornbush, Esq., Morris W. Offit and John W.
Rowe, M.D. were re-elected directors of the Company, to hold office until the
Annual Meeting of Shareholders to be held after the fiscal year ending July 31,
2003. 4,232,070 votes were cast for and 8,247 votes were withheld in the
election of Messrs. Dornbush and Rowe and 4,129,170 votes were cast for and
111,147 votes were withheld in the election of Mr. Offit.
Stockholders also approved an amendment to the 1997 Employee Stock
Option Plan, to increase the number of shares reserved for issuance and
available for grant from 700,000 to 1,000,000. 3,351,410 votes were cast for,
28,782 votes were against, and 7,906 votes abstained in the approval of the
amendment to the 1997 Employee Stock Option Plan. In addition, there were
852,219 broker non-votes.
Stockholders also approved an amendment to the Certificate of
Incorporation of the Company to change the current indemnification provision.
4,227,444 votes were cast for, 6,219 votes were against, and 5,726 votes
abstained in the approval of the amendment to the Certificate of Incorporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K
A report on Form 8-K, as amended by a report on Form 8-K/A, was filed
on September 7, 2001, reporting the acquisition of Minntech Corporation.
There were no other reports on Form 8-K filed during the three months
ended October 31, 2001.
19
<Page>
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: December 7, 2001
By: /s/ James P. Reilly
----------------------------------
James P. Reilly, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Craig A. Sheldon
----------------------------------
Craig A. Sheldon,
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
20
<Page>
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: December 7, 2001
By: /s/ James P. Reilly
----------------------------------
James P. Reilly, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Craig A. Sheldon
----------------------------------
Craig A. Sheldon,
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
21