<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 April 30, 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 June 7, 2002: 9,165,702.
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PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
<Table>
<Caption>
April 30, July 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,909 $ 5,050
Available-for-sale securities -- 1,057
Accounts receivable, net 23,908 11,768
Inventories:
Raw materials 6,545 2,294
Work-in-process 1,780 --
Finished goods 9,315 5,872
--------- ---------
Total inventories 17,640 8,166
--------- ---------
Deferred income taxes 3,936 49
Prepaid expenses and other current assets 1,425 404
--------- ---------
Total current assets 55,818 26,494
Property and equipment, net 22,987 844
Intangible assets, net 7,994 622
Goodwill 15,357 585
Deferred income taxes 4,474 --
Other assets 3,062 3,384
--------- ---------
$ 109,692 $ 31,929
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,500 $ --
Accounts payable 5,401 4,115
Compensation payable 2,471 1,337
Other accrued expenses 5,532 2,562
Income taxes payable 1,860 1,811
--------- ---------
Total current liabilities 17,764 9,825
Long-term debt 28,500 --
Deferred income taxes 6,866 77
Other long-term liabilities 1,791 --
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued -- --
Common Stock, $.10 par value; authorized 20,000,000
shares; April 30 - 9,427,192 shares issued and
9,157,077 shares outstanding; July 31 - 7,099,738
shares issued and 6,838,914 shares outstanding 943 710
Additional capital 48,397 20,003
Retained earnings 9,654 4,477
Accumulated other comprehensive loss (3,031) (2,143)
Treasury Stock, at cost; April 30 - 270,115 shares;
July 31 - 260,824 shares (1,192) (1,020)
--------- ---------
Total stockholders' equity 54,771 22,027
--------- ---------
$ 109,692 $ 31,929
========= =========
</Table>
See accompanying notes.
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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 Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales:
Product sales $ 30,964 $ 11,417 $ 81,055 $ 29,628
Product service 2,232 1,559 6,206 4,718
-------- -------- -------- --------
Total net sales 33,196 12,976 87,261 34,346
-------- -------- -------- --------
Cost of sales:
Product sales 18,650 7,281 49,698 18,343
Product service 1,396 863 3,773 2,490
-------- -------- -------- --------
Total cost of sales 20,046 8,144 53,471 20,833
-------- -------- -------- --------
Gross profit 13,150 4,832 33,790 13,513
Operating expenses:
Selling 3,991 1,410 10,395 4,128
General and administrative 3,856 1,340 10,709 3,948
Research and development 1,073 248 2,739 703
-------- -------- -------- --------
Total operating expenses 8,920 2,998 23,843 8,779
-------- -------- -------- --------
Income from continuing operations
before interest expense
(income), other income and
income taxes 4,230 1,834 9,947 4,734
Interest expense (income) 586 (1) 1,717 (7)
Other income (26) -- (69) (7)
-------- -------- -------- --------
Income from continuing operations
before income taxes 3,670 1,835 8,299 4,748
Income taxes 1,356 694 3,122 1,970
-------- -------- -------- --------
Income from continuing operations 2,314 1,141 5,177 2,778
Gain on disposal of
discontinued operations -- 225 -- 225
-------- -------- -------- --------
Net income $ 2,314 $ 1,366 $ 5,177 $ 3,003
======== ======== ======== ========
Earnings per common share:
Basic:
Continuing operations $ 0.25 $ 0.17 $ 0.59 $ 0.42
Discontinued operations -- 0.03 -- 0.03
-------- -------- -------- --------
Net income $ 0.25 $ 0.20 $ 0.59 $ 0.45
======== ======== ======== ========
Diluted:
Continuing operations $ 0.23 $ 0.15 $ 0.54 $ 0.39
Discontinued operations -- 0.03 -- 0.03
-------- -------- -------- --------
Net income $ 0.23 $ 0.18 $ 0.54 $ 0.42
======== ======== ======== ========
</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>
Nine Months Ended
April 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 5,177 $ 2,778
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Income from discontinued operations -- 225
Depreciation and amortization 2,563 416
Amortization of debt issuance costs 376 --
Changes in assets and liabilities:
Accounts receivable 29 (189)
Inventories 977 (1,993)
Prepaid expenses and other current assets 19 11
Accounts payable and accrued expenses (3,805) (1,941)
Income taxes (1,236) 700
-------- --------
Net cash provided by operating activities 4,100 7
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,077) (335)
Purchases of available-for-sale securities -- (725)
Acquisition of Minntech, net of cash acquired (28,846) --
Acquisition of Technimed (279) --
Cash (used in) provided by discontinued operations (39) 814
Proceeds from transfer of discontinued operations -- 2,350
Other, net 99 (507)
-------- --------
Net cash (used in) provided by investing activities (30,142) 1,597
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facilities, net of debt
issuance costs 34,070 --
Repayments under credit facilities (4,475) (125)
Proceeds from exercise of stock options 306 169
-------- --------
Net cash provided by financing activities 29,901 44
-------- --------
Increase in cash and cash equivalents 3,859 1,648
Cash and cash equivalents at beginning of period 5,050 2,169
-------- --------
Cash and cash equivalents at end of period $ 8,909 $ 3,817
======== ========
</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.
The Company issued 3,143,000 additional shares in connection with a
three-for-two stock split effected in the form of a 50% stock dividend paid on
May 14, 2002 to stockholders of record on May 7, 2002. The effect of the stock
split has been recognized retroactively in the stockholders' equity accounts in
the Condensed Consolidated Balance Sheets, and all share data in the Condensed
Consolidated Statements of Income, Notes to Condensed Consolidated Financial
Statements, and
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Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Certain items in the April 30, 2001 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the April 30, 2002 financial statements.
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 a fraction of a share of Cantel common stock having a value of $4.25.
With respect to the stock portion of the consideration, Cantel issued
approximately 2,201,000 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
April 30, 2002, for the portion of the nine months ended April 30, 2002
subsequent to its acquisition on September 7, 2001, and is not reflected in the
results of operations for the three and nine months ended April 30, 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,
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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 operations as of
the beginning of the periods ended April 30, 2002 and 2001 is as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $33,196,000 $32,574,000 $95,086,000 $92,346,000
Income from contin-
uing operations 2,314,000 378,000 4,746,000 4,214,000
Earnings per share:
Basic $ 0.25 $ 0.04 $ 0.52 $ 0.47
Diluted $ 0.23 $ 0.04 $ 0.48 $ 0.45
Weighted average
common shares:
Basic 9,108,000 8,907,000 9,080,000 8,879,000
Diluted 9,963,000 9,617,000 9,884,000 9,405,000
</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 the beginning of
each of these periods, nor does it necessarily indicate what the combined
company's future operating results will be. 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 nine
months ended April 30, 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 April 30, 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 nine months ended
April 30, 2002 and 2001 is set forth in the following table:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 2,314,000 $ 1,366,000 $ 5,177,000 $ 3,003,000
Other comprehensive income
(loss):
Unrealized gain on securities -- 101,000 -- 172,000
Unrealized (loss) gain on
currency hedging (138,000) 18,000 (245,000) (56,000)
Unrealized loss on
interest rate cap (26,000) -- (70,000) --
Foreign currency translation 591,000 (381,000) (241,000) (478,000)
----------- ----------- ----------- -----------
Comprehensive income $ 2,741,000 $ 1,104,000 $ 4,621,000 $ 2,641,000
=========== =========== =========== ===========
</Table>
At July 31, 2001, the Company had an unrealized gain on securities of
$332,000 which was eliminated during the nine months ended April 30, 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 $14,750,000 (United States dollars) at April 30, 2002 and cover a
portion of Carsen's projected purchases of inventories through January 2003.
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.
8
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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 April 30, 2002 and July 31, 2001, remaining liabilities of the
discontinued business were $54,000 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.
As described in note 1 to the Condensed Consolidated Financial
Statements, the calculations of weighted average common shares and earnings per
share for all periods presented reflect the May 2002 stock split.
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 Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
---------- ------------- ---------- -------------
Numerator for basic and diluted
earnings per common share:
Income from continuing operations $2,314,000 $ 1,141,000 $5,177,000 $ 2,778,000
Income from discontinued operations -- 225,000 -- 225,000
---------- ------------- ---------- -------------
Net income $2,314,000 $ 1,366,000 $5,177,000 $ 3,003,000
========== ============= ========== =============
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 9,107,817 6,705,004 8,781,028 6,677,166
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 855,063 709,029 804,425 525,162
---------- ------------- ---------- -------------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 9,962,880 7,414,033 9,585,453 7,202,328
========== ============= ========== =============
Basic earnings per common share:
Continuing operations $ 0.25 $ 0.17 $ 0.59 $ 0.42
Discontinued operations -- 0.03 -- 0.03
---------- ------------- ---------- -------------
Net income $ 0.25 $ 0.20 $ 0.59 $ 0.45
========== ============= ========== =============
Diluted earnings per common share:
Continuing operations $ 0.23 $ 0.15 $ 0.54 $ 0.39
Discontinued operations -- 0.03 -- 0.03
---------- ------------- ---------- -------------
Net income $ 0.23 $ 0.18 $ 0.54 $ 0.42
========== ============= ========== =============
</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.
10
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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 4.25%, respectively, at June
7, 2002, and the LIBOR rate was approximately 2.0% at June 7, 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 April 30, 2002, the Company had
$31,000,000 outstanding under its credit facilities, including $24,000,000 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. At June 7, 2002, $12,572,000 was available under the credit
facilities.
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Note 9. INCOME TAXES
The consolidated effective tax rate on operations was 37.6% and 41.5%
for the nine months ended April 30, 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 nine months ended April 30, 2001, income taxes consist
primarily of taxes imposed on the Company's Canadian subsidiary. For the nine
months ended April 30, 2001, the consolidated effective tax rate was lower than
the Canadian effective tax rate of 42.9% due to 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 nine months ended April 30, 2002, compared with the three and nine
months ended April 30, 2001 (decrease in value of approximately 3% and 4% for
the three and nine months ended April 30, 2002, respectively, 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 April 30, 2002, for the portion of the
nine months ended April 30, 2002 subsequent to its acquisition on September 7,
2001, and is not reflected in the results of operations for the three and nine
months ended April 30, 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. 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").
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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:
<Table>
<Caption>
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------------------------------- ----------------------------------------------
2002 2001 2002 2001
--------------------- --------------------- --------------------- ---------------------
(Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ------- -------- ------- -------- ------- -------- -------
Dialysis Products $ 14,777 44.5 $ -- -- $ 39,733 45.5 $ -- --
Endoscopy and Surgical
Products* 4,995 15.1 5,651 43.5 13,620 15.6 15,001 43.7
Endoscopy Reprocessing
Products* 5,108 15.4 3,801 29.3 11,915 13.7 9,407 27.4
Filtration and Separation
Products 4,023 12.1 -- -- 10,370 11.9 -- --
Scientific Products 2,354 7.1 2,125 16.4 6,127 7.0 5,707 16.6
Product Service 2,232 6.7 1,559 12.0 6,206 7.1 4,718 13.7
Elimination of intercompany
sales of Endoscopy
Reprocessing Products (293) (0.9) (160) (1.2) (710) (0.8) (487) (1.4)
-------- ------- -------- ------- -------- ------- -------- -------
$ 33,196 100.0 $ 12,976 100.0 $ 87,261 100.0 $ 34,346 100.0
======== ======= ======== ======= ======== ======= ======== =======
</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 $20,220,000, or 155.8%, to $33,196,000 for the
three months ended April 30, 2002, from $12,976,000 for the three months ended
April 30, 2001. Net sales contributed by Minntech for the three months ended
April 30, 2002 were $19,985,000; without the Minntech acquisition, net sales of
the Company's pre-existing businesses would have increased by $235,000, or 1.8%,
to $13,211,000 for the three months ended April 30, 2002.
Net sales increased by $52,915,000, or 154.1%, to $87,261,000 for the
nine months ended April 30, 2002, from $34,346,000 for the nine months ended
April 30, 2001. Net sales contributed by Minntech for the nine months ended
April 30, 2002 were $52,410,000; without the Minntech acquisition, net sales of
the Company's pre-existing businesses would have increased by $505,000, or 1.5%,
to $34,851,000 for the nine months ended April 30, 2002.
Net sales were adversely impacted for the three and nine months ended
April 30, 2002, compared with the three and nine months ended April 30, 2001, by
approximately $260,000 and $988,000, 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 nine months ended April 30, 2002 was principally attributable to
endoscopy reprocessing products and product service,
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partially offset by a decrease in sales of endoscopy and surgical products. The
increased sales of endoscopy reprocessing products and product service, and the
decrease in sales of endoscopy and surgical products, was primarily due to
demand.
Gross profit increased by $8,318,000, or 172.1%, to $13,150,000 for the
three months ended April 30, 2002, from $4,832,000 for the three months ended
April 30, 2001. Gross profit contributed by Minntech for the three months ended
April 30, 2002 was $8,385,000; without the Minntech acquisition, gross profit of
the Company's pre-existing businesses would have decreased by $67,000, or 1.4%,
to $4,765,000 for the three months ended April 30, 2002.
Gross profit increased by $20,277,000, or 150.1%, to $33,790,000 for
the nine months ended April 30, 2002, from $13,513,000 for the nine months ended
April 30, 2001. Gross profit contributed by Minntech for the nine months ended
April 30, 2002 was $21,215,000; without the Minntech acquisition, gross profit
of the Company's pre-existing businesses would have decreased by $938,000, or
6.9%, to $12,575,000 for the nine months ended April 30, 2002.
Gross profit as a percentage of sales for the three months ended April
30, 2002 and 2001 was 39.6% and 37.2%, respectively. Minntech's gross profit as
a percentage of sales was 42.0% for the three months ended April 30, 2002;
without the impact of the Minntech acquisition, gross profit as a percentage of
sales for the three months ended April 30, 2002 would have been 36.1%.
Gross profit as a percentage of sales for the nine months ended April
30, 2002 and 2001 was 38.7% and 39.3%, respectively. During the nine months
ended April 30, 2002, gross profit was adversely impacted by a $427,000 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 0.5% for the nine months ended April 30, 2002. Minntech's
gross profit as a percentage of sales was 40.5% for the nine months ended April
30, 2002; without the impact of the Minntech acquisition, gross profit as a
percentage of sales for the nine months ended April 30, 2002 would have been
36.1%.
The lower gross profit percentage from the Company's pre-existing
businesses for the three and nine months ended April 30, 2002, as compared with
the three and nine months ended April 30, 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 nine months ended
April 30, 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 nine
months ended April 30, 2001; and sales mix associated with endoscopy
reprocessing products.
14
<Page>
Selling expenses as a percentage of net sales were 12.0% and 11.9% for
the three and nine months ended April 30, 2002, compared with 10.9% and 12.0%
for the three and nine months ended April 30, 2001. Without the impact of the
Minntech acquisition, selling expenses as a percentage of net sales for the
three and nine months ended April 30, 2002 would have been 12.6% and 13.8%,
respectively. For the three and nine months ended April 30, 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 $2,516,000 to
$3,856,000 for the three months ended April 30, 2002, from $1,340,000 for the
three months ended April 30, 2001. For the nine months ended April 30, 2002,
general and administrative expenses increased by $6,761,000 to $10,709,000, from
$3,948,000 for the nine months ended April 30, 2001. General and administrative
expenses incurred by Minntech for the three and nine months ended April 30, 2002
were $2,230,000 and $6,252,000, respectively; without the Minntech acquisition,
general and administrative expenses of the Company's pre-existing businesses
would have increased by $286,000 and $509,000, respectively, for the three and
nine months ended April 30, 2002, principally due to the addition of business
development personnel and related expenses.
Research and development expenses increased by $825,000 to $1,073,000
for the three months ended April 30, 2002, from $248,000 for the three months
ended April 30, 2001. For the nine months ended April 30, 2002, research and
development expenses increased by $2,036,000 to $2,739,000, from $703,000 for
the nine months ended April 30, 2001. Research and development expenses incurred
by Minntech for the three and nine months ended April 30, 2002 were $747,000 and
$1,810,000, respectively; without the Minntech acquisition, research and
development expenses of the Company's pre-existing businesses would have
increased by $78,000 and $226,000, respectively, for the three and nine months
ended April 30, 2002, principally due to costs related to MediVators' new
endoscope reprocessing unit.
Interest expense was $586,000 for the three months ended April 30,
2002, compared with interest income of $1,000 for the three months ended April
30, 2001. For the nine months ended April 30, 2002, interest expense was
$1,717,000, compared with interest income of $7,000 for the nine months ended
April 30, 2001. This change in interest was attributable to the Company's
borrowings under its new credit facilities entered into during September 2001
primarily in connection with the Minntech acquisition.
Income from continuing operations before income taxes increased by
$3,551,000 to $8,299,000 for the nine months ended April 30, 2002, from
$4,748,000 for the nine months ended April 30, 2001.
15
<Page>
The consolidated effective tax rate on operations was 37.6% and 41.5%
for the nine months ended April 30, 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 nine months ended April 30, 2001, income taxes consist
primarily of taxes imposed on the Company's Canadian subsidiary. For the nine
months ended April 30, 2001, the consolidated effective tax rate was lower than
the Canadian effective tax rate of 42.9% due to 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 April 30, 2002, the Company's working capital was $38,054,000,
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 $4,100,000 and $7,000 for
the nine months ended April 30, 2002 and 2001, respectively. For the nine months
ended April 30, 2002, the net cash provided by operating activities was
primarily due to net income, after adjusting for depreciation and amortization,
and a decrease in inventories, partially offset by decreases in accounts payable
and accrued expenses and income taxes. For the nine months ended April 30, 2001,
the net cash provided by operating activities was primarily due to income from
continuing operations, after adjusting for depreciation and amortization,
partially offset by an increase in inventories and a decrease in accounts
payable and accrued expenses.
Net cash used in investing activities was $30,142,000 for the nine
months ended April 30, 2002 compared with net cash provided by investing
activities of $1,597,000 for the nine months ended April 30, 2001. For the nine
months ended April 30, 2002, the net cash used in investing activities was
primarily due to the acquisition of Minntech and capital expenditures. For the
nine months ended April 30, 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.
Net cash provided by financing activities was $29,901,000 and $44,000
for the nine months ended April 30, 2002 and 2001, respectively. For the nine
months ended April 30, 2002, the net cash provided by financing activities was
primarily attributable to borrowings under the Company's new credit facilities
related to the
16
<Page>
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 4.25%, respectively, at June
7, 2002, and the LIBOR rate was approximately 2.0% at June 7, 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.
17
<Page>
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 April 30, 2002, the Company had
$31,000,000 outstanding under its credit facilities, including $24,000,000 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 June 7,
2002, $12,572,000 was available under the credit facilities.
For the nine months ended April 30, 2002, compared with the nine months
ended April 30, 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 amounted to $14,232,000 (United States dollars) at June 7, 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 June
7, 2002 was $1.5873 Canadian dollar per United States dollar, or $.6300 United
States dollar per Canadian dollar. The exchange rate published by the Wall
Street Journal on June 7, 2002 was $1.5330 Canadian dollar per United States
dollar, or $.6523 United States dollar per Canadian dollar.
For purposes of translating the balance sheet, at April 30, 2002
compared with July 31, 2001, the value of the Canadian dollar decreased by 2%
relative to the value of the United States dollar. This decrease in the value of
the Canadian dollar caused the majority of the $241,000 increase in the negative
cumulative foreign currency translation adjustment at April 30, 2002 compared to
July 31, 2001, thereby decreasing stockholders' equity.
18
<Page>
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 nine months ended April 30, 2002, compared with the three and nine
months ended April 30, 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 April 30, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
April 30, 2002.
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: June 13, 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