<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 January 31, 2002.
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 March 8, 2002: 6,065,243.
<Page>
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
January 31, July 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,520 $ 5,050
Available-for-sale securities -- 1,057
Accounts receivable, net 22,808 11,768
Inventories:
Raw materials 5,759 2,294
Work-in-process 1,677 --
Finished goods 10,163 5,872
--------- ---------
Total inventories 17,599 8,166
--------- ---------
Deferred income taxes 3,936 49
Prepaid expenses and other current assets 1,391 404
--------- ---------
Total current assets 54,254 26,494
Property and equipment, net 23,408 844
Intangible assets, net 8,186 622
Goodwill 15,355 585
Deferred income taxes 4,853 --
Other assets 2,896 3,384
--------- ---------
$ 108,952 $ 31,929
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,250 $ --
Accounts payable 5,525 4,115
Compensation payable 2,475 1,337
Other accrued expenses 5,625 2,562
Income taxes payable 1,123 1,811
--------- ---------
Total current liabilities 16,998 9,825
Long-term debt 31,250 --
Deferred income taxes 6,946 77
Other long-term liabilities 1,862 --
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; January 31 - 6,229,626 shares issued and
6,055,743 shares outstanding; July 31 - 4,733,159
shares issued and 4,559,276 shares outstanding 623 473
Additional capital 48,411 20,240
Retained earnings 7,340 4,477
Accumulated other comprehensive loss (3,458) (2,143)
Treasury Stock, at cost; January 31 and
July 31 - 173,883 shares (1,020) (1,020)
--------- ---------
Total stockholders' equity 51,896 22,027
--------- ---------
$ 108,952 $ 31,929
========= =========
</Table>
See accompanying notes.
1
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CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales:
Product sales $ 30,742 $ 10,978 $ 50,091 $ 18,211
Product service 2,158 1,673 3,974 3,159
-------- -------- -------- --------
Total net sales 32,900 12,651 54,065 21,370
-------- -------- -------- --------
Cost of sales:
Product sales 18,993 6,797 31,048 11,062
Product service 1,266 828 2,377 1,627
-------- -------- -------- --------
Total cost of sales 20,259 7,625 33,425 12,689
-------- -------- -------- --------
Gross profit 12,641 5,026 20,640 8,681
Operating expenses:
Selling 3,774 1,449 6,404 2,718
General and administrative 3,826 1,528 6,853 2,608
Research and development 942 256 1,666 455
-------- -------- -------- --------
Total operating expenses 8,542 3,233 14,923 5,781
-------- -------- -------- --------
Income before interest expense
(income), other income and
income taxes 4,099 1,793 5,717 2,900
Interest expense (income) 749 (10) 1,131 (6)
Other income (36) -- (43) (7)
-------- -------- -------- --------
Income before income taxes 3,386 1,803 4,629 2,913
Income taxes 1,293 815 1,766 1,276
-------- -------- -------- --------
Net income $ 2,093 $ 988 $ 2,863 $ 1,637
======== ======== ======== ========
Earnings per common share:
Basic $ 0.35 $ 0.22 $ 0.50 $ 0.37
======== ======== ======== ========
Diluted $ 0.32 $ 0.21 $ 0.46 $ 0.35
======== ======== ======== ========
</Table>
See accompanying notes.
2
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CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
<Table>
<Caption>
Six Months Ended
January 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,863 $ 1,637
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,500 282
Amortization and write-off of debt issuance costs 268 --
Changes in assets and liabilities:
Accounts receivable 1,061 (278)
Inventories 946 (2,722)
Prepaid expenses and other current assets 191 27
Accounts payable and accrued expenses (2,437) (548)
Income taxes (2,280) 248
-------- --------
Net cash provided by (used in) operating activities 2,112 (1,354)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (549) (225)
Purchases of available-for-sale securities -- (725)
Acquisition of Minntech, net of cash acquired (29,964) --
Acquisition of Technimed (279) --
Cash (used in) provided by discontinued operations (41) 1,258
Proceeds from transfer of discontinued operations -- 1,231
Other, net (76) (359)
-------- --------
Net cash (used in) provided by investing activities (30,909) 1,180
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facilities, net of debt
issuance costs 33,870 390
Repayments under credit facilities (1,775) (515)
Proceeds from exercise of stock options 172 86
-------- --------
Net cash provided by (used in) financing activities 32,267 (39)
-------- --------
Increase (decrease) in cash and cash equivalents 3,470 (213)
Cash and cash equivalents at beginning of period 5,050 2,169
-------- --------
Cash and cash equivalents at end of period $ 8,520 $ 1,956
======== ========
</Table>
See accompanying notes.
3
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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
and other products for renal dialysis as well as filtration and separation
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 January 31, 2001 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the January 31, 2002 financial statements.
4
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Note 2. ACQUISITIONS
On September 7, 2001, the Company completed its acquisition of
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 No. 141,
"BUSINESS COMBINATIONS" ("SFAS 141"). Minntech is reflected in the Company's
results of operations for the three months ended January 31, 2002, for the
portion of the six months ended January 31, 2002 subsequent to its acquisition
on September 7, 2001, and is not reflected in the results of operations for the
three and six months ended January 31, 2001.
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 purchase price was preliminarily allocated to the assets acquired
and assumed liabilities 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 net operating loss carryforwards ("NOLs"), 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
5
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operations as of the beginning of the periods ended January 31, 2002 and 2001 is
as follows:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $32,900,000 $32,595,000 $61,890,000 $59,772,000
Net income 2,093,000 1,926,000 2,432,000 3,836,000
Earnings per share:
Basic $ 0.35 $ 0.33 $ 0.40 $ 0.65
Diluted $ 0.32 $ 0.31 $ 0.37 $ 0.62
Weighted average
common shares:
Basic 6,054,000 5,914,000 6,045,000 5,910,000
Diluted 6,578,000 6,201,000 6,565,000 6,168,000
</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 six months ended January 31, 2002 of a
$423,000 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 and a
provision for an uncollectible account receivable aggregating $102,000; for the
six months ended January 31, 2001, 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. These items principally impacted the three
months ended October 31 for each of the respective periods. This information
also does not reflect any cost savings from operating efficiencies or other
improvements which may be achieved by combining the companies.
On November 1, 2001, the Company's Canadian subsidiary acquired
substantially all of the assets, business and properties of Technimed
Instruments Inc. and Technimed International Inc. (collectively "Technimed") for
approximately $405,000, which included cash of approximately $241,000 and a note
payable in three equal annual installments with a present value of approximately
$164,000. This transaction was accounted for as a purchase and in accordance
with the provisions of SFAS 141.
The purchase price was preliminarily allocated to the assets acquired
and assumed liabilities as follows: current assets $148,000; fixed assets
$30,000; intangible assets $172,000; and current liabilities $105,000. The
excess purchase price of $160,000 was assigned to goodwill. The acquisition of
Technimed had an insignificant impact upon operations for the three and six
months ended January 31, 2002.
6
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Technimed was a private company based in Montreal, Canada which
services medical equipment, including rigid endoscopes and hand-held surgical
instrumentation.
Note 3. RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board issued 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,
2001, which is the beginning of fiscal 2002. At January 31, 2002, 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 and six months ended
January 31, 2002 and 2001 is set forth in the following table:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 2,093,000 $ 988,000 $ 2,863,000 $ 1,637,000
Other comprehensive income
(loss):
Unrealized gain on securities -- 88,000 -- 71,000
Unrealized loss on currency
hedging (106,000) (122,000) (107,000) (74,000)
Unrealized loss on
interest rate cap (44,000) -- (44,000) --
Foreign currency translation (338,000) 347,000 (832,000) (97,000)
----------- ----------- ----------- -----------
Comprehensive income $ 1,605,000 $ 1,301,000 $ 1,880,000 $ 1,537,000
=========== =========== =========== ===========
</Table>
At July 31, 2001, the Company had an unrealized gain on securities of $332,000
which was eliminated during the six months ended January 31, 2002 in connection
with the Minntech acquisition purchase accounting. The elimination of this
unrealized gain had no impact upon the Company's results of operations.
7
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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 $16,548,000 (United States dollars) at January 31, 2002 and covered
substantially all of Carsen's projected purchases of inventories through July
2002.
The Company also has new credit facilities for which the interest rate
on outstanding borrowings is variable, as discussed in note 8 to the Condensed
Consolidated Financial Statements. 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 its credit
facilities.
The foreign currency forward contracts and the interest rate cap 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 related to the foreign currency forward
contracts are recorded within cost of sales upon settlement. Realized gains and
losses related to the interest rate cap are recorded within interest expense.
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.
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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 January 31, 2002 and July 31, 2001, remaining liabilities of the
discontinued business were $52,000 and $96,000, respectively, 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.
9
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The following table sets forth the computation of basic and diluted
earnings per common share:
<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator for basic and diluted
earnings per common share:
Net income $2,093,000 $ 988,000 $2,863,000 $1,637,000
========== ========== ========== ==========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 6,054,488 4,446,011 5,748,642 4,442,468
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 523,725 286,921 520,156 257,485
---------- ---------- ---------- ----------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 6,578,213 4,732,932 6,268,798 4,699,953
========== ========== ========== ==========
Basic earnings per common share $ 0.35 $ 0.22 $ 0.50 $ 0.37
========== ========== ========== ==========
Diluted earnings per common share $ 0.32 $ 0.21 $ 0.46 $ 0.35
========== ========== ========== ==========
</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 (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
10
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(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 4.75% and 3.75%, respectively, at
March 8, 2002, and the LIBOR rate was approximately 2.0% at March 8, 2002. 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 in
connection with the acquisition of Minntech. At January 31, 2002, the Company
had $33,500,000 outstanding under its credit facilities, including $24,500,000
under the Term Loan Facility. Amounts repaid by the Company under the Term Loan
Facility may not be re-borrowed. Outstanding borrowings are at interest rates of
3.25% above LIBOR.
Note 9. INCOME TAXES
The consolidated effective tax rate on operations was 38.2% and 43.8%
for the six months ended January 31, 2002 and 2001, respectively. 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
statutory tax rate; however, actual payment of U.S. Federal income taxes will
reflect the benefits of the utilization
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of the NOLs.
For the six months ended January 31, 2001, income taxes consist
primarily of taxes imposed on the Company's Canadian subsidiary. For the six
months ended January 31, 2001, the consolidated effective tax rate was higher
than the Canadian effective tax rate of 42.5% due to state income tax expense
incurred by the United States operations, notwithstanding the fact that income
generated by the United States operations was substantially offset by Federal
tax benefits resulting from the utilization of 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 and six months ended January 31, 2002, compared with the three and six
months ended January 31, 2001 (decrease in value of approximately 4% for these
periods 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. Minntech is reflected in the
Company's results of operations for the three months ended January 31, 2002, for
the portion of the six months ended January 31, 2002 subsequent to its
acquisition on September 7, 2001, and is not reflected in the results of
operations for the three and six months ended January 31, 2001. Discussion
herein of the Company's pre- existing business refers to the operations of
Cantel, Carsen and MediVators, but excluding the impact of the Minntech
acquisition, during the three and six months ended January 31, 2002. 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:
12
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<Table>
<Caption>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------------------------------- ----------------------------------------------
2002 2001 2002 2001
---------------------------------------------- ----------------------------------------------
(Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ------- -------- ------- -------- ------- -------- -------
Dialysis Products $ 15,500 47.1 $ -- -- $ 24,956 46.2 $ -- --
Endoscopy and Surgical
Products* 5,595 17.0 5,691 45.0 8,625 16.0 9,350 43.7
Endoscopy Reprocessing
Products* 3,728 11.3 3,248 25.7 6,807 12.6 5,606 26.2
Filtration and Separation
Products 4,053 12.3 -- -- 6,347 11.7 -- --
Scientific Products 2,060 6.3 2,245 17.7 3,773 7.0 3,582 16.8
Product Service 2,158 6.6 1,673 13.2 3,974 7.3 3,159 14.8
Elimination of intercompany
sales of Endoscopy
Reprocessing Products (194) (0.6) (206) (1.6) (417) (0.8) (327) (1.5)
-------- ------- -------- ------- -------- ------- -------- -------
$ 32,900 100.0 $ 12,651 100.0 $ 54,065 100.0 $ 21,370 100.0
======== ======= ======== ======= ======== ======= ======== =======
</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 $20,249,000, or 160.1%, to $32,900,000 for the
three months ended January 31, 2002, from $12,651,000 for the three months ended
January 31, 2001. Net sales contributed by Minntech for the three months ended
January 31, 2002 were $20,148,000; without the Minntech acquisition, net sales
of the Company's pre-existing businesses would have increased by $101,000, or
0.8%, to $12,752,000 for the three months ended January 31, 2002, from
$12,651,000 for the three months ended January 31, 2001.
Net sales increased by $32,695,000, or 153.0%, to $54,065,000 for the
six months ended January 31, 2002, from $21,370,000 for the six months ended
January 31, 2001. Net sales contributed by Minntech for the six months ended
January 31, 2002 were $32,425,000; without the Minntech acquisition, net sales
of the Company's pre-existing businesses would have increased by $270,000, or
1.3%, to $21,640,000 for the six months ended January 31, 2002, from $21,370,000
for the six months ended January 31, 2001.
Net sales were adversely impacted for the three and six months ended
January 31, 2002, compared with the three and six months ended January 31, 2001,
by approximately $436,000 and $729,000, respectively, 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 pre-existing businesses for the
three and six months ended January 31, 2002 was principally attributable to
endoscopy reprocessing products and product service, partially offset by a
decrease in sales of endoscopy and surgical products. The increased sales of
endoscopy reprocessing products and
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product service, and the decrease in sales of endoscopy and surgical products,
was primarily due to demand.
Gross profit increased by $7,615,000, or 151.5%, to $12,641,000 for the
three months ended January 31, 2002, from $5,026,000 for the three months ended
January 31, 2001. Gross profit contributed by Minntech for the three months
ended January 31, 2002 was $8,141,000; without the Minntech acquisition, gross
profit of the Company's pre-existing businesses would have decreased by
$526,000, or 10.5%, to $4,500,000 for the three months ended January 31, 2002,
from $5,026,000 for the three months ended January 31, 2001.
Gross profit increased by $11,959,000, or 137.8%, to $20,640,000 for
the six months ended January 31, 2002, from $8,681,000 for the six months ended
January 31, 2001. Gross profit contributed by Minntech for the six months ended
January 31, 2002 was $12,830,000; without the Minntech acquisition, gross profit
of the Company's pre-existing businesses would have decreased by $871,000, or
10.0%, to $7,810,000 for the six months ended January 31, 2002, from $8,681,000
for the six months ended January 31, 2001.
Gross profit as a percentage of sales for the three months ended
January 31, 2002 and 2001 was 38.4% and 39.7%, respectively. Minntech's gross
profit as a percentage of sales was 40.4% for the three months ended January 31,
2002; without the impact of the Minntech acquisition, gross profit as a
percentage of sales for the three months ended January 31, 2002 would have been
35.3%.
Gross profit as a percentage of sales for the six months ended January
31, 2002 and 2001 was 38.2% and 40.6%, respectively. During the six months ended
January 31, 2002, gross profit was adversely impacted by a $423,000 charge to
cost of sales related to the sale of inventories which carried a step-up in
value recorded as a result of purchase accounting; such charge reduced gross
profit percentage by 0.8% for the six months ended January 31, 2002. Minntech's
gross profit as a percentage of sales was 39.6% for the six months ended January
31, 2002; without the impact of the Minntech acquisition, gross profit as a
percentage of sales for the six months ended January 31, 2002 would have been
36.1%.
The lower gross profit percentage from the Company's pre-existing
businesses for the three and six months ended January 31, 2002, as compared with
the three and six months ended January 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 and six months ended
January 31, 2001 due to a buy-in of endoscopes prior to receiving a supplier
price increase, a majority of which endoscopes were sold during the three and
six months ended January 31, 2001; and sales mix associated with endoscopy
reprocessing products.
14
<Page>
Selling expenses as a percentage of net sales were 11.5% and 11.8% for
the three and six months ended January 31, 2002, compared with 11.5% and 12.7%
for the three and six months ended January 31, 2001. Without the impact of the
Minntech acquisition, selling expenses as a percentage of net sales for the
three and six months ended January 31, 2002 would have been 13.4% and 14.5%,
respectively. For the three and six months ended January 31, 2002, the increase
in selling expenses as a percentage of net sales from the Company's pre-existing
businesses was primarily attributable to lower than expected sales at Carsen, an
increase in personnel at Carsen and an increase in personnel and expanded
marketing efforts at MediVators to support domestic sales.
General and administrative expenses increased by $2,298,000 to
$3,826,000 for the three months ended January 31, 2002, from $1,528,000 for the
three months ended January 31, 2001. For the six months ended January 31, 2002,
general and administrative expenses increased by $4,245,000 to $6,853,000, from
$2,608,000 for the six months ended January 31, 2001. General and administrative
expenses incurred by Minntech for the three and six months ended January 31,
2002 were $2,327,000 and $4,022,000, respectively; without the Minntech
acquisition, general and administrative expenses of the Company's pre-existing
businesses would have decreased by $29,000 for the three months ended January
31, 2002 and increased by $223,000 for the six months ended January 31, 2002.
The increase during the six months ended January 31, 2002 was principally due to
the addition of two business development personnel and related expenses.
Research and development expenses increased by $686,000 to $942,000 for
the three months ended January 31, 2002, from $256,000 for the three months
ended January 31, 2001. For the six months ended January 31, 2002, research and
development expenses increased by $1,211,000 to $1,666,000, from $455,000 for
the six months ended January 31, 2001. Research and development expenses
incurred by Minntech for the three and six months ended January 31, 2002 were
$623,000 and $1,063,000, respectively; without the Minntech acquisition,
research and development expenses of the Company's pre-existing businesses would
have increased by $63,000 and $148,000, respectively, for the three and six
months ended January 31, 2002, principally due to costs related to MediVators'
new endoscope reprocessing unit.
Interest expense was $749,000 for the three months ended January 31,
2002, compared with interest income of $10,000 for the three months ended
January 31, 2001. For the six months ended January 31, 2002, interest expense
was $1,131,000, compared with interest income of $6,000 for the six months ended
January 31, 2001. This change in interest was attributable to the Company's
borrowings under its new credit facilities during September 2001 in connection
with the Minntech acquisition.
Income from operations before income taxes increased by $1,716,000 to
$4,629,000 for the six months ended January 31, 2002, from
15
<Page>
$2,913,000 for the six months ended January 31, 2001.
The consolidated effective tax rate on operations was 38.2% and 43.8%
for the six months ended January 31, 2002 and 2001, respectively. 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
statutory tax rate; however, actual payment of U.S. Federal income taxes will
reflect the benefits of the utilization of the NOLs.
For the six months ended January 31, 2001, income taxes consist
primarily of taxes imposed on the Company's Canadian subsidiary. For the six
months ended January 31, 2001, the consolidated effective tax rate was higher
than the Canadian effective tax rate of 42.5% due to state income tax expense
incurred by the United States operations, notwithstanding the fact that income
generated by the United States operations was substantially offset by Federal
tax benefits resulting from the utilization of NOLs.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2002, the Company's working capital was $37,256,000,
compared with $16,669,000 at July 31, 2001. The increase in working capital was
due to the acquisition of Minntech.
Net cash provided by operating activities was $2,112,000 for the
six months ended January 31, 2002 compared with net cash used in operating
activities of $1,354,000 for the six months ended January 31, 2001. For the
six months ended January 31, 2002, the net cash provided by operating
activities was primarily due to net income, after adjusting for depreciation
and amortization, and decreases in accounts receivable and inventories,
partially offset by decreases in accounts payable and accrued expenses and
income taxes. For the six months ended January 31, 2001, the net cash used in
operating activities was primarily due to an increase in inventories and a
decrease in accounts payable and accrued expenses, partially offset by net
income, after adjusting for depreciation and amortization.
Net cash used in investing activities was $30,909,000 for the six
months ended January 31, 2002 compared with net cash provided by investing
activities of $1,180,000 for the six months ended January 31, 2001. For the six
months ended January 31, 2002, the net cash used in investing activities was
primarily due to the acquisition of Minntech. For the six months ended January
31, 2001, the net cash provided by investing activities was primarily due to
proceeds from the discontinued operations, partially offset by purchases of
available-for-sale securities.
16
<Page>
Net cash provided by financing activities was $32,267,000 for the six
months ended January 31, 2002 compared with net cash used in financing
activities of $39,000 for the six months ended January 31, 2001. For the six
months ended January 31, 2002, 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 (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.
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 4.75% and 3.75%, respectively, at
March 8, 2002, and the LIBOR rate was approximately 2.0% at March 8, 2002. 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
17
<Page>
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 in
connection with the acquisition of Minntech. At January 31, 2002, the Company
had $33,500,000 outstanding under its credit facilities, including $24,500,000
under the Term Loan Facility. Amounts repaid by the Company under the Term Loan
Facility may not be re-borrowed. Outstanding 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 March 8,
2002, $9,535,000 was available under the credit facilities.
For the six months ended January 31, 2002, compared with the six months
ended January 31, 2001, 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.
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 $19,500,000 (United States dollars) at March 8, 2002 and
cover a portion of Carsen's projected purchases of inventories through January
2003. The weighted average exchange rate of the forward contracts open at March
8, 2002 was 1.5945 Canadian dollar per United States dollar, or $.6272 United
States dollar per Canadian dollar. The exchange rate published by the Wall
Street Journal on March 8, 2002 was $1.5834 Canadian dollar per United States
dollar, or $.6316 United States dollar per Canadian dollar.
For purposes of translating the balance sheet, at January 31, 2002
compared with July 31, 2001, the value of the Canadian dollar decreased by 4%
relative to the value of the United States dollar. This decrease in the value of
the Canadian dollar caused the majority of the $832,000 increase in the negative
cumulative foreign currency translation
18
<Page>
adjustment at January 31, 2002 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. 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 and six months ended January 31, 2002, compared with the three and six
months ended January 31, 2001, 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 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%.
19
<Page>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote during the three months
ended January 31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K
A report on Form 8-K/A, was filed on November 21, 2001, reporting
additional information related to the acquisition of Minntech Corporation.
There were no other reports on Form 8-K filed during the three months
ended January 31, 2002.
20
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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 8, 2002
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